10KSB 1 v110509_10ksb.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-KSB
 
(Mark One)
 
x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
 
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from                                                    to
 
 
0-51313
 
 
Commission file number
 
 
SKINNY NUTRITIONAL CORP.
 
(Exact name of small business issuer as specified in its charter)
 
 
Nevada
 
23-3100268
 
 
(State of incorporation)
 
(IRS Employer Identification Number)
 
 
 
3 Bala Plaza East, Suite 117
Bala Cynwyd, PA 19004
 
 
(Address of principal executive office)
 
 
(610) 784-2000
 
 
(Issuer’s telephone number)
 
 
Securities registered under Section 12(b) of the Exchange Act: NONE
 
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.001 per share

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
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Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. x

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

The issuer had revenues of $752,825 for the fiscal year ended December 31, 2007.

The aggregate market value of the voting stock held by non-affiliates on December 31, 2007 was approximately $5,214,025 based on the average bid and asked prices of the issuer’s common stock on such date.

As of April 11, 2008, the issuer had 105,113,069 shares of common stock outstanding.
 
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
 
Transitional Small Business Disclosure Format: Yes o No x



SKINNY NUTRTIONAL CORP.
INDEX TO ANNUAL REPORT ON FORM 10-KSB


 
 
PAGE
 
 
 
Part I
 
 
 
 
 
Item 1.
Description of Business
4
Item 2.
Description of Property
27
Item 3.
Legal Proceedings
28
Item 4.
Submission Of Matters To A Vote Of the Security Holders
28
 
 
 
Part II
 
29
 
 
 
Item 5.
Market For Common Equity, Related Stockholder Matters And Small Business Issuer Purchases Of Equity Securities
29
Item 6.
Management's Discussion And Analysis Or Plan Of Operation
30
Item 7.
Financial Statements
39
Item 8.
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
39
Item 8A.
Controls And Procedures
39
 
 
 
Part III
 
40
 
 
 
Item 9.
Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) Of the Exchange Act
40
Item 10.
Executive Compensation
43
Item 11.
Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
46
Item 12.
Certain Relationships And Related Transactions
47
Item 13.
Exhibits
48
Item 14.
Principal Accountant Fees And Services
50
 
 
 
Signatures
 
 
 
3

 
iii

PART I
 
Item 1.  Description of Business
 
Forward Looking Statements

This Report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk factors.” No forward-looking statement is a guarantee of future performance and you should not place undue reliance on any forward-looking statement. Our actual results may differ materially from those projected in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Forward-looking statements contained herein include, but are not limited to, statements relating to:

Our future financial results;

Our future growth and expansion into new markets; and
 
Our future advertising and marketing activities.
 
Except as otherwise required by law, we undertake no obligation to update or revise any forward-looking statement contained in this Annual Report. The safe harbors for forward-looking statements provided by the Securities Litigation Reform Act of 1995 are unavailable to issuers not previously subject to the reporting requirements set forth under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and whose securities are considered to be a “penny stock” and accordingly may not be available to us.
 
As used in this Report, references to the “we,” “us,” “our” refer to Skinny Nutritional Corp. unless the context indicates otherwise.

(a) Business Development

Skinny Nutritional Corp. (“Skinny”), formerly known as Creative Enterprises International, Inc., is the exclusive worldwide licensee of several trademarks for the use of the term “Skinny.” We develop a line of functional beverages, all branded with the name “Skinny” that are marketed and distributed primarily to weight conscious consumers. Our business strategy is to develop a variety of functional beverages utilizing our licensed Skinny trademarks. These trademarks include Skinny Water, Skinny Tea, Skinny Shakes, Skinny Java and others.  In 2004 we began implementing our business plan of marketing and distributing Skinny Water as a dietary supplement. As described in greater detail below, in October 2006 we restructured our supplier relationships and changed our corporate name to Skinny Nutritional Corp. to evidence our focus on marketing and distributing nutritional products branded “Skinny” designed to assist consumers in their weight-management efforts.
 
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We were originally incorporated on June 20, 1984, in the State of Utah as Parvin Energy, Inc. Our name was later changed to Sahara Gold Corporation and on July 26, 1985 we changed our corporate domicile to the State of Nevada and on January 24, 1994 we changed our name to Inland Pacific Resources, Inc. On December 18, 2001, we entered into an agreement and plan of reorganization with Creative Enterprises, Inc., a Delaware corporation, and changed our name to Creative Enterprises International, Inc. This agreement provided that all shares of common stock of the Delaware corporation issued and outstanding on that date be exchanged for shares of common stock issued by the Nevada corporation, which changed its name after the reorganization to Creative Enterprises International, Inc. Prior to the reorganization, we had 32,659,591 shares of common stock outstanding and pursuant to the agreement, we effected a 1 for 16.33 reverse stock split. This reduced the number of outstanding shares to 2,000,000. We then issued an additional 2,500,000 post-split common shares in the acquisition. On September 18, 2002 we filed a registration statement on Form SB-2 with the Securities and Exchange Commission. This registration statement was amended on five occasions and ultimately withdrawn on September 30, 2004 prior to being declared effective by the SEC. The registration statement was filed solely on behalf of certain of our security holders and in conjunction with an offering of warrants to our then-current stockholders and did not attempt to register shares to be sold directly by our company. This filing was withdrawn for a number of reasons. First, the shares of common stock held by the proposed selling security holders became eligible to be resold pursuant to Rule 144(k) and accordingly did not require us to further prosecute the registration statement. In addition, as we were entering into a new line of business shortly after filing the final amendment to the registration statement, the additional expense and effort required was not justified in light of availability of the exemption provided by Rule 144(k). We decided to change our line of business as management subsequently determined that it would not be cost-effective for us to continue to attempt to develop a market in the United States for the products described in that registration statement. In 2004, management was able to negotiate license agreements with Peace Mountain Natural Beverage Corporation (as described below) in order to provide us with the rights to various Skinny trademarks necessary to engage in our present business line. On November 15, 2006, holders of approximately 53% of our issued and outstanding common stock consented in writing to the adoption of resolutions approving, among other, things, the change in our corporate name to “Skinny Nutritional Corp.”

For our 2007 fiscal year, we generated revenues of $752,825 and incurred a net loss of $2,828,745. Since our formation and prior to 2005, our operations were devoted primarily to startup and development activities, including obtaining start-up capital; developing our corporate hierarchy, including establishing a business plan; and identifying and contacting suppliers and distributors of functional beverages and dietary supplements.

Starting in our 2006 fiscal year, we have been able to devote increasing amounts of resources to marketing and sales activities regarding our consumer products, including the procurement of a number of purchase orders from distributors and retailers. This trend continued in our 2007 fiscal year.

(b) Business of the Issuer
 
Overview

We operate our business in the rapidly evolving weight loss and beverage industries and are currently focused on developing, distributing and marketing nutritionally enhanced functional beverages.

Our Skinny Water product, which we originally introduced in 2005, has been reformulated to include three new flavors: Peach, Lemon and Raspberry, and we expect to launch new flavors and new formulations in our second fiscal quarter of 2008.
 
We are currently developing new product extensions and formulations of new functional beverages. Our current business strategy is to develop and maintain our current distribution relationship with Target Corporation, focus in establishing a market for the Skinny Beverages in the United States and generate sales and brand awareness through sampling, street teams, radio, print, television advertising and internet sales as well as building a national sales and distribution network to take our products into retail and direct store delivery (DSD) distribution channels.
 
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Our principal executive offices are located at 3 Bala Plaza East, Suite 117, Bala Cynwyd, Pennsylvania. Our telephone number is (610) 784-2000.

Business Developments in 2007 

Financing Activities

As described in greater detail below under the caption “Liquidity and Capital Resources” during the twelve months ended December 31, 2007 we have raised a total of $1,188,063 in gross proceeds from private transactions with accredited investors. There were three private offerings made during the year; the first, which commenced in December 2006, raised $482,610 during calendar 2007 with 6,435,004 shares being issued. The second offering, which commenced in March 2007, raised $502,202 during calendar 2007 with 6,696,509 shares being issued. The third placement, which commenced in September 2007, raised $203,251 with 2,716,666 shares issued. There were 2,759,390 warrants issued to “Selling Agents” for the private placements of common stock during calendar year 2007.

Selling agents received $106,954 dollars in commissions for private placement of common shares leaving the company with $1,081,109 dollars in net proceeds from private placements. In addition, a total of 9,809,332 shares were also issued to shareholders from prior subscriptions in the form of reset shares required by the convents established in the previous subscription agreements. . We have used the proceeds from these transactions for working capital and the repayment of debt owed to third parties. The securities sold in this financing have not been registered under the Securities Act of 1933, as amended, and were offered and sold in reliance upon the exemption from registration set forth in Section 4(2) thereof and Regulation D, promulgated under the Securities Act. We believe that the investors are “accredited investors” as such term is defined in Rule 501(a) promulgated under the Securities Act.

On March 23, 2007, the holder of a debenture with an outstanding principal amount of $100,000 and $4,274 in accrued interest converted its debt into 2,011,020 shares of common stock. In addition, the holder of a convertible debenture in the aggregate principal amount of $25,000 converted such debenture into common stock in two transactions: in January 2007, such holder converted $12,500 in principal and $1,171 in interest into 273,425 shares of common stock. Thereafter, in April 2007, this holder converted the remaining $12,500 in principal into 250,000 in common shares of stock. Interest of $5,513 was converted to 110,270 common shares on 1/17/07. There were other transactions the converted debt to 14,995 shares of common stock.

In addition, holders of an aggregate principal amount of $2,065,000 of convertible debentures converted such amount into shares of common stock as follows. In the first quarter, holders of principal of $1,750,000 converted such amount into 17,500,000 shares of common stock. Also in the first quarter one debt holder converted $20,000 in debt to 40,000 shares of common stock. In the second quarter two debt holders converted their debt into 400,000 common shares reducing the principal balance by $40,000 dollars. During the fourth quarter an additional conversion of $188,333 in principal and $37,667 in interest were converted into 3,013,333 shares of common stock at a conversion rate of $.075 a share. During December 2007, in a fourth conversion 1,600,000 shares of common stock were issued upon conversion of $66,667 in principal and $13,333 in interest at a conversion rate of $.05 per share. One investor was paid $20,000 dollars in principal and $4,000 dollars in interest to retire his debenture. In addition, we issued an aggregate of 765,000 common stock purchase warrants upon the conversion of outstanding debentures in 2007. Of these warrants, 225,000 warrants are exercisable at $0.20 per share and the remainder are exercisable at $0.50 per share. All warrants expire three years from the date of issuance.

The securities issued upon the conversion of debentures were not registered under the Securities Act of 1933, as amended, and were issued in reliance upon the exemption from registration set forth in Section 3(a)(9) thereof.

Reorganization

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

Further, on October 4, 2006, Mr. Michael R. Reis was appointed as our interim Chief Operating Officer and also elected him as a director. In addition, on October 6, 2006, we appointed Mr. Donald J. McDonald to serve as our new Chief Executive Officer, President and as a member of our board of directors.

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

On October 10, 2006, we entered into an agreement with Jamnica, d.d. and Jana North America, Inc., which agreement is effective as of September 20, 2006, pursuant to which the parties confirmed the termination of the distribution agreement dated July 21, 2004, between Skinny and Jamnica. In the new agreement, the parties agreed to the following arrangements: (a) our obligation to Jamnica, in an amount of $207,321, is eliminated; (b) Jamnica and Jana North American shall pay an amount of $23,125 on our behalf in satisfaction of storage and warehousing fees; (c) receivables due to us from select accounts shall be transferred to Jana North America; and (d) we shall make available to Jana North America all inventory of Jana bottled waters in our possession. In addition, the parties agreed that we will cease use of the Jana trademarks and logos and Jamnica and Jana North America agreed not to use any of our licensed trademarks or logos concerning the our ‘‘Skinny’’ product line. Pursuant to the agreement, we will also provide additional assistance to Jamnica and Jana North America in the transition for the marketing and distribution of the Jana bottled waters. Each of the parties also agreed to release the other from any obligations or claims arising from the distribution agreement.
 
On November 15, 2006, holders of approximately 53% of our issued and outstanding common stock consented in writing to the adoption of resolutions approving (1) amendments to our Articles of Incorporation to (a) change our corporate name to “Skinny Nutritional Corp.” and (b) increase the number of authorized shares of common stock 250,000,000 shares and (2) an amendment to our Employee Stock Option Plan to increase the number of shares of common stock available to be issued there under to 20,000,000 shares. These actions became effective as of December 27, 2006. Also effective as of such date, we granted an aggregate of 10,650,000 options to certain of our employees under our Employee Stock Option Plan.
 
General Business Developments

Recent Private Offering of Securities: The Company has commenced a private offering of up to $2,000,000 of shares of Common Stock at a per share price of $0.04. The shares are being offered to accredited investors only. The shares being offered will not be registered under the Securities Act of 1933, as amended (the “Act”) and will be offered in reliance upon the exemption from registration set forth in Section 4(2) and Regulation D, promulgated under the Act. Such shares may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
 
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The Company intends to engage registered broker-dealers to serve as selling agents (the “Selling Agents”), for the sale of the Units and pay commissions and other compensation to the Selling Agents who procure purchasers of the Units. We will pay and issue to each Selling Agent a warrant (the “Agent Warrants”) to purchase such number of Shares as equals 10% of the total number of Shares actually sold in the Offering to Purchasers procured by each Selling Agent. Agent Warrants shall be exercisable at the per share price of $0.09 for a period of five years from the date of issuance. The Company intends to use the proceeds from the offering for working capital and payment of accrued compensation.

There can be no assurance that the Company will complete the offering on the anticipated terms, or at all. The Company’s ability to complete the offering will depend, among other things, on market conditions. In addition, the Company's ability to complete this offering and its business are subject to risks described in the Company's filings with the Securities and Exchange Commission. This disclosure does not constitute an offer to sell or the solicitation of an offer to buy any the Company’s securities, nor will there be any sale of these securities by the Company in any state or jurisdiction in which the offer, solicitation or sale would be unlawful. The disclosure is being issued pursuant to and in accordance with Rule 135c of the Act.
 
Compensation Matters: On January 12, 2007, our Board of Directors approved modifications in the monthly compensation rates, effective as of January 1, 2007, payable to each of our Chairman and Chief Executive Officer. Each of these executives will now receive a monthly fee of $7,500, plus reimbursement of approved corporate expenses. In addition, on such date, the Board granted to our Chairman options to purchase 3,000,000 shares of common stock pursuant to our Employee Stock Option Plan. These options are exercisable for a period of five years at a per share exercise price of $0.26. Of the options granted, 20% of the total grants amount vest immediately and the balance vests in equal annual installments of 20% on the each anniversary date of the date of grant. On November 28, 2007, our Board of Directors approved additional modifications in the monthly compensation rates, effective December 1, 2007, payable to each our Chairman and Chief Executive Officer. Michael Salaman will receive a monthly fee of $12,500, plus reimbursement of approved corporate expenses including a monthly automobile allowance of $700 dollars. Donald McDonald will receive a monthly fee of $11,667 dollars, plus reimbursement of approved corporate expenses including a monthly automobile allowance of $700 dollars. The Board granted to our Chairman options to purchase 3,000,000 shares of common stock pursuant to our Employee Stock Option Plan. These options are exercisable for a period of three years at a per share exercise price of $0.08. The Board granted to our CEO options to purchase 2,500,000 shares of common stock pursuant to our Employee Stock Option Plan. These options are exercisable for a period of three years at a per share exercise price of $0.08. Also, on this date, our Board authorized an issuance of 2,000,000 restricted shares of common stock to Michael Salaman in consideration for his agreement to personally guarantee the Company’s loan facility from Valley Green Bank.
 
Distribution Agreement: On February 27, 2007, we entered into a Marketing and Distribution Agreement with Geltech Sales, LLC for the national distribution of our Skinny-branded products. The initial term of the Agreement was for three years, and it is renewable in one-year increments. Under the Agreement, Geltech agreed to solicit orders for our products through its distribution channels, which includes mass merchandisers, supermarkets, convenience stores, mass drug stores, as well as establishing distribution agreements with local, regional, and national direct store delivery (DSD) companies. The Agreement is exclusive subject to certain contractually-specified exceptions. Either party may terminate the Agreement upon written notice if the other party is in material breach of any provision thereof, subject to applicable cure periods. Moreover, we may elect to terminate the Agreement if Geltech fails to meet its performance obligations or terminate the Agreement without cause upon sixty (60) days prior written notice. In consideration for Geltech’s services, we agreed to pay Geltech a commission based on the quantity of product sold through its network and agreed to issue to Geltech, or its designees, an aggregate of 1,500,000 common stock purchase warrants. The warrants are exercisable for a seven year period at a price of $0.24 per share. We will have the right to redeem up to 750,000 of the warrants in the event that Geltech does not satisfy the performance requirement of assisting us place product in 20,000 stores within two years from the date we commence selling products under our distribution agreement. In addition, on February 27, 2007, we issued an additional total of 300,000 warrants to two consultants in consideration of the services rendered by such persons in connection with the negotiation and execution of the Agreement. On October 16, 2007, we notified Geltech that we elected to terminate this agreement with Geltech based on performance obligations; resulting in a cancellation of 1,075,000 warrants.
 
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Subsequent Events On March 20, 2008, the Company announced it established an advisory board to provide advice on matters relating to the Company’s products. The Company will seek to appoint up to five individuals to its advisory board. On such date, the Company appointed the following individuals to its advisory board: Pat Croce, Ron Wilson and Michael Zuckerman. The Company also entered into a consulting agreement with Mr. Croce, pursuant to which the Company agreed to issue warrants to purchase 3,000,000 shares of common stock at $.05 per share consideration of his agreement to serve on the Company’s Advisory Board and for providing the marketing services for the Company’s products. In addition to serving on the Advisory Board, Croce agreed to endorse and advertise, through an affiliate, the Company’s products. In additional consideration for his agreement to provide the endorsement and marketing services, the Company agreed to pay a royalty with respect to the sale of its products that he endorses for the duration of his endorsement services. The Company issued each of the other initial members of its advisory board warrants to purchase 1,500,000 shares of Common Stock, exercisable for a period of five years at a price of $0.05. The securities sold in or issued in connection with the financing have not been registered under the Securities Act of 1933, as amended, and were offered and sold in reliance upon the exemption from registration set forth in Section 4(2) thereof. We believe that the investors and the selling agent are “accredited investors”; as such term is defined in Rule 501(a) promulgated under the Securities Act.

During the 2008 fiscal year, we have converted additional convertible debt securities into equity as follows. On January 25, 2008, the Company issued 900,000 shares of common stock and 112,500 common stock purchase warrants upon the conversion of an aggregate amount of $45,000 (inclusive of accrued interest of $15,000) of outstanding convertible debentures. The warrants issued upon conversion of these debentures are exercisable for a period of three years at an exercise price of $0.50 per share. On March 3, 2008, the Company issued 300,000 shares of common stock upon the conversion of an aggregate amount of $15,000 of outstanding convertible debentures. On March 20, 2008, the Company issued 1,125,000 shares of common stock and 112,500 common stock purchase warrants upon the conversion of an aggregate amount of $45,000 (inclusive of accrued interest of $7,500) of outstanding convertible debentures. The warrants issued upon conversion of these debentures are exercisable for a period of three years at an exercise price of $0.50 per share. These securities have not been registered under the Securities Act of 1933, as amended, and are being issued in reliance upon the exemption for registration set forth in Section 3(a)(9) thereof.
 
Our Industry

Weight management is a challenge for a significant portion of the U.S. population. The 2003-2004 National Health and Nutrition Examination Study estimated that 66% of the adult population is overweight and 33% is obese, an increase from 47% and 15%, respectively, in 1976.  According to the U.S. Department of Health and Human Services, overweight or obese individuals are increasingly at risk for diseases such as diabetes, heart disease, certain types of cancer, stroke, arthritis, breathing problems and depression. However, there is evidence that weight loss may reduce the risk of developing these diseases.

In addition to the health risks, there are also cultural implications for those who are overweight or obese. U.S. consumers are inundated with imagery in media, fashion, and entertainment that depicts the thin body as the ideal type. Despite the high percentage of overweight or obese individuals in the U.S., the popularity of dieting would seem to indicate consumers’ desire to be thin. According to Gallup surveys, approximately 62 million people in the United States were on a diet during 2006. Approximately 6 million participated in commercial weight loss programs and 49 million conducted some form of self-directed diet. We believe our products are well positioned to attract both types of dieters.
 
Our products compete in the dietary supplement market and in the case of Skinny Water also as functional beverages. The functional beverage market includes a wide variety of beverages with one or more added ingredients to satisfy a physical or functional need. This category includes: vitamin and herbal enhanced flavored waters, ready-to-drink (RTD) teas, sports drinks, energy drinks, and single-serve (SS) fresh juice. These industries are highly competitive and are subject to continuing changes with respect to the manner in which products are provided and how products are selected. Pressures to reduce the cost of our products because of market forces could adversely impact our revenues.
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Dietary supplements are sold in a variety of forms other than liquids, including tablets, capsules, bars, etc., and consist of vitamins, minerals, hormonal supplements, herbal products and specialty combination formulas. Dietary supplements are also marketed through various channels, including health food stores and mass-market (which may include retail and grocery store chains). As a product, Skinny Water competes with dietary supplements in each of product types mentioned above as well as all of the functional beverages mentioned above.

Our Products 

Our line of products currently consists of three flavors of Skinny Water. Skinny Water, which was introduced in 2005, has been reformulated and was launched in our second fiscal quarter of 2007. Management intends to release additional Skinny Water flavors and formulas in our second quarter of 2008. The company intends to market additional “Skinny” beverages in the future, when it believes that market conditions are favorable.

Skinny Water(R)

Skinny Water is water containing a proprietary, natural appetite suppressant, available in 3 flavors with a natural water appearance. We initially introduced Skinny Water(R) under the “Jana” brand. However, we now currently offer it under its own brand - “Skinny”. To market this product, we rely on the licenses from Peace Mountain and Interhealth. We worked closely with these companies to agree upon the ingredient blend utilized in Skinny Water. We have reformulated Skinny Water in 3 flavors and launched it in our second quarter of 2007. Skinny Water is being bottled at Adirondacks Beverages in upstate New York, a co-packer of functional beverages. We purchase finished product in 24 bottle cases ready for shipment to retailers and distributors anywhere in the U.S.

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

Skinny Water is ephedrine-free and contains no caffeine or sugar. Skinny Water’s formula features the all natural, clinically tested ingredient, Hydroxycitric Acid (“Super CitriMax”) plus a combination of calcium and potassium. Super CitriMax has been shown to suppress appetite and increase fat burning, without stimulating the nervous system when used in conjunction with diet and exercise. Skinny Water also includes Chromate(R) which is a patented form of biologically active niacin-bound chromium called chromium nicotinate or polynicotinate that we also obtain from Interhealth.

On August 1, 2004 we entered into a three year license agreement with Peace Mountain Natural Beverages Corporation pursuant to which we license the exclusive right to bottle and distribute the “Skinny Products” worldwide. Under this agreement, Skinny Products include “Skinny Water”, “Diet Water”, “Skinny Tea”, “Skinny Juice” and “Skinny Shake”. Skinny Water’s proprietary formula has an all-natural appetite suppressant that helps people lose weight when taken in conjunction with diet and exercise. Pursuant to this agreement, we must utilize only ingredients that are generally recognized as safe and must use concentrate and formulations agreed to by Peace Mountain. Our license agreement with Peace Mountain Natural Beverages Corporation is for a three year term and automatically renews for additional one year periods unless terminated, provided that we satisfy the minimum purchase amount specified in the contract or make a $10,000 monthly payment.

On October 4, 2006, we entered into an amendment to our License and Distribution Agreement with Peace Mountain Natural Beverages Corporation. Pursuant to this amendment, we agreed to pay Peace Mountain an amount of $30,000 in two equal monthly installments commencing on the date of the amendment in satisfaction of allegations of non-performance by Peace Mountain. In addition, the parties further agreed to amend and restate the company’s royalty obligation to Peace Mountain, pursuant to which amendment, we will have a minimum royalty obligation to Peace Mountain based on a percentage of wholesale sales with a quarterly minimum of $15,000. Skinny’s rights to the trademarks are in perpetuity as long as it satisfies the quarterly minimum payment of $15,000.
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On June 7, 2004 we entered into an agreement with Interhealth Nutraceuticals Incorporated and obtained the right to sell, market, distribute and package Super CitriMax(R) in bottled liquid dietary supplement products. This right was granted by Interhealth on a non-exclusive basis. We use Super CitriMax(R) in our Skinny Water products Further; we must purchase quantities of Super CitriMax(R) from the manufacturer and are licensed to use InterHealth’s trademarks and logos in marketing products containing Super CitriMax(R). Our agreement with Interhealth will continue unless terminated by either party.

Planned Products

We intend to expand our product line to introduce the following products at such times as management believes that market conditions are appropriate. Products under development or consideration include Java’s, Smoothies and Teas.

Distribution, Sales and Marketing

Marketing and Sales Strategy

Our primary marketing objective is to cost-effectively promote our brand and to build sales of our products through our retailer accounts, distributor relationships, and electronic media. We will use a combination of sampling, radio, online advertising, public relations and promotional/event strategies to accomplish this objective. Management believes that proper in-store merchandising is a key element to providing maximum exposure to its brand and that retailer’s focus on effective shelf and display merchandising in order to yield increased revenue per shopping customer.

Through our arrangement with Target Corporation we continue to sell Skinny Water through approximately 1,200 stores around the country. The company has initiated contact with several retailers who are reviewing our Skinny Waters. These retailers include convenience stores, supermarkets, drug stores and club stores. As described below, we are also developing a National Direct Store Delivery (DSD) network of distributors in local markets.

Distribution Strategy

The company’s distribution strategy is to build out a national direct store delivery (DSD) network of local distributors, creating a national distribution system to sell our products. Distributors include beer wholesalers, Non alcoholic distributors, and energy beverage distributors. The company’s products are being reviewed by several DSD’s and we plan to enter into agreements with several DSD’s in 2008.
 
We also distribute our products directly to select national retail accounts based on purchase order relationships. Distribution will target category leaders in grocery, convenience, health clubs, retail drug, and health food establishments. We will contract with independent trucking companies or arrange pick up by the retailer from contract packers to independent warehouses, and then on to distributors or retail outlets. Distributors will then sell and deliver our products either to sub-distributors or directly to retail outlets, and such distributors or sub-distributors stock the retailers’ shelves with the products. We are responsible for managing our network of distributors and brokers and the hiring of sales managers, who are responsible for their respective specific channel of sales distribution.
 
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Sources and Availability of Raw Materials; Manufacturing

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

Skinny Water is produced through a packing, or co-pack, facility in the United States. The co-pack facility assembles our products and charges us a fee, by the case. We follow a “fill as needed” manufacturing model to the best of our ability and we have no significant backlog of orders. Substantially all of the raw materials used in the preparation, bottling and packaging of our products are purchased by us or by our contract packers in accordance with our specifications.

Generally, we obtain the ingredients used in our products from domestic suppliers and each ingredient has several reliable suppliers; however, as described above, we rely on InterHealth Nutraceuticals for Super CitriMax and Chromemate. We have no major supply contracts with any of our suppliers. As a general policy, we select ingredients in the development of our products that have multiple suppliers and are common ingredients. This provides a level of protection against a major supply constriction or calamity.

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

Competition 

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

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

We compete with other companies not only for consumer acceptance but also for shelf space in retail outlets and for marketing focus by distributors, most of whom also distribute other brands with which our products compete. The principal methods of competition include product quality, trade and consumer promotions, pricing, packaging and the development of new products. We expect our distributors to assist us in generating demand for our products.

Significant competitors for Skinny Water in the functional beverage category are product lines sold by Fuze, Enviga, Trimspa, SoBe, and Vitamin Water . Skinny Water will also compete more broadly with all beverages available to consumers. The beverage market is highly competitive, and includes international, national, regional and local producers and distributors, many of whom have greater financial, management and other resources than us. These brands have enjoyed broad, well-established national recognition for years, through well-funded ad and other branding campaigns. In addition, the companies manufacturing these products generally are greater in size and have greater financial, personnel, distribution and other resources than we do and have greater access to additional financing.
 
Based on these key competitive factors, we believe that we can compete effectively in the weight management industry. We, however, have no control over how successful competitors will be in addressing these factors. By providing a well-recognized program using the direct and electronic marketing and distribution channels, we believe that we have a competitive advantage in our market.

Research and Development

We undertake research and development activities in order to monitor developments within the dietary supplement industry and to identify or develop new, marketable products. These activities include reviewing periodicals, scientific research and relevant clinical studies and working with suppliers such as wild flavors. We must review the safety and efficacy of ingredients, production standards, labeling information, label claims and potential patent, trademark, legal or regulatory issues. Research and development expenses in the last two years have not been material. Although we may undertake research studies regarding our products, we do not expect to incur significant increases in research and development expenses in the near term. Throughout we will focus our efforts on Skinny Water, Skinny Teas, Skinny Java and Skinny Smoothies.

Proprietary Rights, Brand Names and Trademarks
 
We regard consumer recognition of and loyalty to all of our brand names and trademarks as extremely important to the long-terms success of our business. We license the trademarks to our products from Peace Mountain and Interhealth. Management considers these licenses as material to our business. We license the trademarks “Skinny Water,” “Skinny Tea,” “Skinny Juice,” “Skinny Shake,” and “Diet Water” from Peace Mountain Natural Beverages. We license the trademark “Super CitriMax Clinical Strength” from Interhealth Nutraceuticals. The terms of our trademark licenses are discussed under the caption “Our Products.” The proprietary rights to our products are held by the manufacturer and are licensed to us for purposes of bottling and distribution.  Since we are not the owner of these rights, our ability to continue using them is subject to the terms and conditions of the license agreements we have entered into with the licensors. The termination of our license agreements with Peace Mountain and Interhealth would likely have a material adverse effect on our consolidated financial position and results of operations.  We use non-disclosure agreements with employees and distributors to protect our rights and those of our suppliers.
 
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Government Regulation 
 
The production and marketing of our products are governed by the rules and regulations of various federal, state and local agencies, including, but not limited to the United States Food and Drug Administration (“FDA”), the Federal Trade Commission (“FTC”), and all fifty state Attorneys General. This regulatory regime serves to ensure that the product is safe, our claims are truthful and substantiated and that our products meet defined quality standards. We have not encountered any regulatory action as a result of our operations to date, however, since we have recently commenced operations no assurance can be given that we will not encounter regulatory action in the future. The FDA, pursuant to the Federal Food, Drug, and Cosmetic Act (“FFDCA”), regulates the formulation, manufacturing, packaging, labeling, distribution and sale of dietary supplements, while the FTC regulates the advertising of these products. In addition, all states regulate product claims through various forms of consumer protection statutes.
 
The FDA has broad authority to enforce the provisions of the FFDCA applicable to bottled water and dietary supplements, including powers to issue a public “Warning Letter” to a company, to publicize information about illegal products, to request a voluntary recall of illegal products from the market, and to request the Department of Justice to initiate civil seizure and/or injunction actions, and civil and criminal penalty proceedings in the United States Federal courts. The FTC exercises jurisdiction over the advertising of dietary supplements and foods and has the authority over both “deceptive” and “unfair” advertising and other marketing practices.

In addition to its broad investigative powers, the FTC has the power to initiate administrative and judicial proceedings against a company and may also seek a temporary restraining order or preliminary injunction against a company pending the final determination of an action The FTC’s remedies also include consumer redress, civil and criminal penalties. Weight loss products in particular are subject to increased regulatory scrutiny due to intensified campaigns by FDA, FTC and states’ attorneys general. Any type of investigation or enforcement action either by the FDA, FTC or any other federal, state or local agency would likely have a material adverse effect on our consolidated financial position or results of operations.
 
We are subject to the food labeling regulations required by the Nutritional Labeling Education Act of 1991 (“NLEA”). These regulations require all companies which offer food for sale and have annual gross sales of more than $500,000 to place uniform labels in specified formats disclosing the amounts of specified nutrients on all food products intended for human consumption and offered for sale. This regulation would apply to all of our products. The FFDCA contains exemptions and modifications of labeling requirements for certain types of food products, such as in this case foods containing insignificant amounts of nutrients. The FFDCA also establishes the circumstances in which companies may place nutrient content claims or health claims on labels.

Our Skinny Water and other dietary supplements are subject to the Dietary Supplement Health and Education Act of 1994 labeled (“DSHEA”). In 1994, the FFDCA was amended by DSHEA, which establishes a new framework governing the composition and labeling of dietary supplements. With respect to composition, DSHEA defines “dietary supplements” as “a vitamin; a mineral; an herb or other botanical; an amino acid; a dietary substance for use by man to supplement the diet by increasing total dietary intake; or a concentrate, metabolite, constituent, extract, or combination of any of the above dietary ingredients.” The provisions of DSHEA define dietary supplements and dietary ingredients; establish a new framework for assuring safety; outline guidelines for literature displayed where supplements are sold; provide for use of claims and nutritional support statements; require ingredient and nutrition labeling; and grant FDA the authority to establish regulations concerning good manufacturing practices (“GMPs”). We believe that our contract manufacturers meet the current regulations of the FDA specifically with regard to bottled water including good manufacturing practices (“GMPs”).
 
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Government Regulation of Dietary Supplements
 
It is our intent that Skinny Water be regulated as a dietary supplement by FDA under DSHEA. Generally, under DSHEA, dietary ingredients that were on the market before October 15, 1994 may be used in dietary supplements without notifying the FDA. However, a “new” dietary ingredient (i.e., a dietary ingredient that was “not marketed in the United States before October 15, 1994”) must be the subject of a new dietary ingredient notification submitted to the FDA, unless the ingredient has been “present in the food supply as an article used for food” without being “chemically altered.” A new dietary ingredient notification must provide the FDA evidence of a “history of use or other evidence of safety” establishing that use of the dietary ingredient “will reasonably be expected to be safe.” We believe that the dietary ingredient presently utilized in Skinny Water is not a new dietary ingredient. However, should the FDA disagree at any time in the future, we may need to cease marketing our dietary supplement products that contain such ingredient and promptly file (or have the supplier of this ingredient file) a new dietary ingredient notification with FDA. There can be no assurance that the FDA will accept the evidence of safety for any new dietary ingredients that we may market now or in the future, and the FDA’s refusal to accept such evidence could prevent the marketing of such dietary ingredients and would have a material adverse effect on our consolidated financial position or results of operations.

In addition, DSHEA permits “statements of nutritional support” to be included in labeling for dietary supplements without FDA pre-approval. Such statements may describe how a particular dietary ingredient affects the structure, function or general well being of the body, or the mechanism of action by which a dietary ingredient may affect body structure, function or well-being. A dietary supplement may not claim to diagnose, cure, mitigate, treat, or prevent a disease unless such claim has been reviewed and approved by the FDA as a “health claim” or “qualified health claim.”

A company that uses a statement of nutritional support in labeling must possess evidence substantiating that the statement is truthful and not misleading. The label and labeling of our products do contain statements of nutritional support, however, and we have no assurance that FDA will find the company’s substantiation adequate to support the statements of nutritional support being made for our Skinny products. If the statement of nutritional support appears on a product label or labeling of a dietary supplement, there must also appear on such label and labeling a FDA disclaimer statement, which is as follows: “This statement has (or these statements have) not been evaluated by the Food and Drug Administration.

This product is not intended to diagnose, treat, cure, or prevent any disease.” Pursuant to DSHEA, we are also required to notify the FDA about our use of the statement(s) within 30 days of marketing the product (the “30 Day Letter”). Upon receiving the 30 Day Letter and thereafter if FDA were to determine that a particular statement of nutritional support is an unacceptable drug claim, an unauthorized version of a “health claim,” or unsubstantiated, a company may be prevented from using the claim and may face further regulatory action. There is no assurance that FDA will not make any of the aforementioned determinations with regard to the claims made for any of the company’s products and no assurance that FDA will find the company’s substantiation evidence for Skinny Water or on any other of our products, if ever requested, adequate to support the claims being made for the company’s products.

FDA has already stated in a Courtesy Letter dated September 22, 2005, that the use of the term “water” in the name of our “Skinny Water” product appears to cause our product to be a bottled water, which is a standardized, conventional food, not a dietary supplement. A “Courtesy Letter” is the term commonly used to describe the written letter sent by FDA in response to a 30 Day Letter - it is not a Warning Letter. We disagree with the position taken by FDA that Skinny Water is”bottled water,” a conventional food. In response to the Courtesy Letter, we submitted a written response to FDA stating our position and have not received a reply from FDA to our response.
 
Recently, the FDA proposed GMPs specifically for dietary supplements. These new GMP regulations, if finalized, would be more detailed than the GMPs that currently apply to dietary supplements and may, among other things, require dietary supplements to be prepared, packaged and held in compliance with certain rules, and might require quality control provisions similar to those in the GMP regulations for drugs. There can be no assurance that, if the FDA adopts GMP regulations for dietary supplements, we or our suppliers will be able to comply with the new rules without incurring substantial expense that might have a have a material adverse effect on our consolidated financial position or results of operations.
 
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 Our advertising and sale of our dietary supplement products are subject to regulation by the FTC under the FTCA. The Federal Trade Commission Act (“FTCA”) prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. The FTCA provides that the dissemination or the causing to be disseminated of any false advertisement pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive act or practice. Under the FTC’s “substantiation doctrine”, an advertiser is required to have a “reasonable basis” for all objective product claims before the claims are made. Failure to adequately substantiate claims may be considered either deceptive or unfair practices. Pursuant to this FTC requirement, we are required to have adequate substantiation for all advertising claims made for our products at the time such claims are made.

In recent years, the FTC has instituted numerous enforcement actions against dietary supplement companies for failure to adequately substantiate claims made in advertising or for the use of false or misleading advertising claims. The FTC has specifically launched a nationwide law enforcement sweep called “Project Waistline” against companies making false and/or unsubstantiated weight loss claims. The initiative was created to stop deceptive advertising, provide refunds to consumers harmed by unscrupulous weight-loss advertisers, and encourage media outlets not to carry advertisements containing bogus weight loss claims and to educate consumers to be on their guard against companies promising weight loss without diet or exercise. These enforcement actions have often resulted in consent decrees and the payment of substantial civil penalties and/or restitution by the companies involved. Since our dietary supplement product, Skinny Water makes weight loss claims on its label, labeling and advertising, there can be no assurance that FTC (or FDA) will not investigate our products. Should FTC choose to investigate, we have no assurance that the company’s substantiation evidence for the claims made on Skinny Water or on any other of our products will be adequate and as a result enforcement actions/remedies could ensue.

Other Regulatory Considerations

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

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

Environmental Protection

We are operating within existing federal, state and local environmental laws and regulations and are taking action aimed at assuring compliance therewith. Compliance with such laws and regulations is not expected to materially affect our capital expenditures, earnings or competitive position.
 
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Seasonality
 
Typically in the weight loss industry, revenue is strongest in the first quarter and lowest in the fourth calendar quarter. Typically in the functional water industry, revenue is strongest in the 2nd and 3rd quarters of the year. We believe our business experiences seasonality, driven by the predisposition of dieters to initiate a diet and the placement of our advertising based on the price and availability of certain media. We believe the overall impact of seasonality on revenue is difficult to predict at this time.

Number of Employees

As of December 31, 2007, we had a total of four employees. Our independent contractors provide services to us on an at-will basis. Our employees are not subject to any collective bargaining agreement. We believe that employee relations are good.


RISK FACTORS

The following discussion should be read together with our financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements based upon current expectations that involve numerous risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including but not limited to those set forth under “Risk factors” and elsewhere in this Annual Report. We undertake no obligation to update any information contained in these forward-looking statements.
 
General Risks Related to Our Business
 
We have a limited operating history and our business model is highly speculative at the present time.

We only have a limited operating history upon which potential investors may base an evaluation of our prospects. To date, we have only had limited revenues and our business model is subject to a high degree of risk. For the year ended December 31, 2007, we had revenues of $752,825. There can be no assurance that we will be able to continue to generate revenues or that we will ever be profitable. Prospective investors may lose all or a portion of their investment. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in a highly competitive market, such as the market in which we compete. Such risks include, but are not limited to, our ability to obtain and retain customers and attract a significant number of new customers, the growth of the markets we intend to pursue, our ability to implement our growth strategy, especially the sales and marketing efforts, and the introduction of new products by us and our competitors.

We have a history of operating losses. If we continue to incur operating losses, we eventually may have insufficient working capital to maintain operations.
 
As of December 31, 2007, we had an accumulated deficit of $13,127,636. For the years ended December 31, 2007 and 2006, we incurred losses from operations of $2,828,745 and $2,303,446 respectively. If we are not able to begin to earn an operating profit at some point in the future, we will eventually have insufficient working capital to maintain our operations as we presently intend to conduct them.
 
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We have limited working capital and will need to raise additional capital in the future and our independent auditors have included a “going concern” opinion in their report.
 
At December 31, 2007, our cash and cash equivalents was approximately $15,043. We have been substantially reliant on capital raised from private placements of our securities to fund our operations. For instance, during the 2007 fiscal year, we raised an aggregate amount of $1,188,063 from the sale of securities to accredited investors in private transactions pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as amended. We believe that net cash on hand as of the date of this report and cash anticipated from operations and to be raised in private placements of our securities will only be sufficient to meet our expected cash needs for working capital and capital expenditures for a period twelve months. Accordingly, we have an immediate need for additional cash which we must satisfy either by immediately developing a market for our products, selling additional securities in private placements or by negotiating for an extension of credit from third party lenders. If we are unable to obtain additional capital, we will need to reduce costs and operations substantially. Our independent auditors have included a “going concern” explanatory paragraph in their report to our financial statements for the year ended December 31, 2007, citing recurring losses from operations. Our capital needs in the future will depend upon factors such as market acceptance of our products and any other new products we launch, the success of our independent distributors and our production, marketing and sales costs. None of these factors can be predicted with certainty.
 
If we are unable to achieve sufficient levels of sales to break-even, we will need substantial additional debt or equity financing in the future for which we currently have no commitments or arrangement. We cannot assure you that any additional financing, if required, will be available or, even if it is available that it will be on terms acceptable to us. If we raise additional funds by selling stock or convertible securities, the ownership of our existing shareholders will be diluted.

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

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

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

On April 4, 2007, we closed on a secure loan arrangement with Valley Green Bank pursuant to which we received funds in the amount of $350,000. We have applied these funds to satisfy our obligations to Madison Bank. Interest will be charged on the unpaid principal of this new loan arrangement until the full amount of principal has been paid at the rate of 8.25% per annum. We were obligated to repay this new loan in full immediately on the bank’s demand, but in no event later than March 20, 2008. We are currently in discussions with the bank to extend the term of the loan and to date, the bank has not demanded repayment. No assurances, however, can be given that the bank will ultimately extend the term of this loan for any specific duration, if at all. Interest payments are due on a monthly basis. The loan is secured by collateral consisting of a perfected first priority pledge of certain marketable securities held by our Chairman and entities with which he is affiliated. We also agreed to a confession of judgment in favor of the bank in the event we default under the loan agreements. The loan agreements also require the consent of the bank for certain actions, including incurring additional debt and incurring certain liens.

We entered into a secured financing arrangement based on our accounts receivable and if we are unable to make the scheduled payments on this facility or maintain compliance with other contractual covenants, we may default on this agreement.

On November 23, 2007, we entered into a one-year factoring agreement with United Capital Funding of Florida (“UCF”). The agreement provides for an initial funding limit of $300,000. On November 23, 2007 we received an initial funding through this arrangement of $124,269 and as of the date of this report, we have received an aggregate of $485,058 through this arrangement. Under this arrangement, all accounts submitted for purchase must be approved by UCF. The applicable factoring fee is 0.45% of the face amount of each purchased account and the purchase price is 80% of the face amount. UCF will retain the balance as a reserve, which it holds until the customer pays the factored invoice to UCF. In the event the reserve account is less than the required reserve amount, we will be obligated to pay UCF the shortfall. In addition to the factoring fee, we will also be responsible for certain additional fees upon the occurrence of certain contractually-specified events. As collateral securing the obligations, we granted UCF a continuing first priority security interest in all accounts and related inventory and intangibles. In addition, upon the occurrence of certain contractually-specified events, UCF may require us to repurchase a purchased account on demand. In connection with this arrangement, each of our Chairman and Chief Executive Officer agreed to personally guarantee our obligations to UCF. The agreement will automatically renew for successive one year terms until terminated. Either party may terminate the agreement on three month’s prior written notice. We are liable for an early termination fee in the event we fail to provide UCF with the required written notice. In case of an uncured default, the following actions may be taken against us:
 
 
·
 
All outstanding obligations would be immediately due and payable;
 
 
·
 
Any future advancement of funds facility would cease; and
  
 
·
 
All collateral, as defined in the agreement, could be seized and disposed of.

Fluctuations in our quarterly revenue and results of operations may lead to reduced prices for our stock.

Our quarterly net revenue and results of operations can be expected to vary significantly in the future. The business in which we compete experiences substantial seasonality caused by the timing of customer orders and fluctuations in the size and rate of growth of consumer demand. In other particular fiscal quarters, our net revenues may be lower and vary significantly. As a result, we cannot assure you that our results of operations will be consistent on a quarterly or annual basis. If our results of operations in a quarter fall below our expectations or those of our investors; the price of our common stock will likely decrease.
 
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Our revenues will decline and our competitive position will be adversely affected if we are unable to introduce successful products on a timely basis. 

Our business performance depends on the timely introduction of successful products or enhancements of existing products. Our inability to introduce products or enhancements, or significant delays in their release, could materially and adversely affect the ultimate success of our products and, in turn, our business, results of operations and financial condition. The process of introducing products or product enhancements is extremely complex, time consuming and expensive.

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

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

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

Our products are regulated as a dietary supplement under the Federal Food, Drug and Cosmetic Act (“FFDCA”), and are, therefore, not subject to pre-market approval by the FDA. However, our products are subject to extensive regulation by the FDA relating to adulteration and misbranding.

For instance, we are responsible for ensuring that all dietary ingredients in a supplement are safe, and must notify the FDA in advance of putting a product containing a new dietary ingredient (i.e., an ingredient not present in the U.S. food supply as an article used for food before October 15, 1994) on the market and furnish adequate information to provide reasonable assurance of the ingredient’s safety. Furthermore, if we make statements about the supplement’s effects on the structure or function of the body, we must, among other things, have adequate substantiation that the statements are truthful and not misleading. In addition, our product labels must bear proper ingredient and nutritional labeling and our products must be manufactured in accordance with current good manufacturing practices or “GMPs” for foods. The FDA has published notice of its intention to issue new GMPs specific to dietary supplements, which, when finally adopted may be more expensive to follow than prior GMPs. A dietary supplement product can be removed from the market if it is shown to pose a significant or unreasonable risk of illness or injury. Moreover, if the FDA determines that the “intended use” of any of our products is for the diagnosis, cure, mitigation, treatment or prevention of disease, the product would meet the definition of a drug and could not be sold as a dietary supplement until such time that the “intended use” of the product is not for the diagnosis, cure, mitigation, treatment or prevention of disease. Our failure to comply with applicable FDA regulatory requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions.
 
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Our advertising is subject to regulation by the FTC under the FTCA, which prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. Further, the FTCA provides that the dissemination or the causing to be disseminated of any false or misleading advertisement pertaining to, among other things, drugs or foods, which includes dietary supplements, is an unfair or deceptive act or practice. Under the FTC’s “substantiation doctrine,” an advertiser is required to have a “reasonable basis” for all product claims at the time the claims are first used in advertising or other promotions. Failure to adequately substantiate claims may be considered either as a deceptive or unfair practice. Pursuant to this FTC requirement, we are required to have adequate substantiation for all advertising claims made about our products. The type of substantiation will be dependent upon the product claims made. For example, a health claim normally would require competent and reliable scientific evidence, while a taste claim may only require competent and reliable survey evidence.

In recent years the FTC has initiated numerous investigations of dietary supplement and weight loss products and companies. The FTC has specifically launched a nationwide law enforcement sweep called “Project Waistline” against companies making false and/or inadequately substantiated weight loss claims. The initiative was created to stop deceptive advertising, provide refunds to consumers harmed by unscrupulous weight-loss advertisers, and encourage media outlets not to carry advertisements containing bogus weight loss claims and to educate consumers to be on their guard against companies promising weight loss without diet or exercise. These enforcement actions have often resulted in consent decrees and the payment of substantial civil penalties and/or restitution by the companies involved. If the FTC has reason to believe the law is being violated (e.g., we do not possess adequate substantiation for product claims), it can initiate enforcement action. The FTC has a variety of processes and remedies available to it for enforcement, both administratively and judicially, including compulsory process authority, cease and desist orders, and injunctions. FTC enforcement could result in orders requiring, among other things, limits on advertising, consumer redress, and divestiture of assets, rescission of contracts and such other relief as may be deemed necessary. Violation of such orders could result in substantial financial or other penalties. Any such action by the FTC would materially adversely affect our ability to successfully market our products.
 
If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our business could be impaired.

Our future success depends upon the continued service of our key management as well as upon our ability to attract, motivate and retain highly qualified employees with management, marketing, sales, creative and other skills. Currently, all of our employees are at-will and we cannot assure you that we will be able to retain them. The loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, and the results of our operations. In addition, hiring, training, and successfully integrating replacement sales and other personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful, which could negatively impact future revenues. Further, our business, operating results and financial condition could also be materially and adversely affected if we fail to attract additional highly qualified employees. In our industry, competition for highly skilled and creative employees is intense and costly. We expect this competition to continue for the foreseeable future, and we may experience increased costs in order to attract and retain skilled employees. We cannot assure you that we will be successful in attracting and retaining skilled personnel. 

Significant competition in our industry could adversely affect our business. 
 
Our market is highly competitive and relatively few products achieve significant market acceptance. Further, the market for dietary supplements is also highly competitive and our competitors in the functional beverage segment include well known brands such as Vitamin Water and Life Water. These current and future competitors may also gain access to wider distribution channels than we do. As a result, these current and future competitors may be able to:
 
• 
respond more quickly to new or emerging technologies or changes in customer preferences;
 
 
carry larger inventories;
 
 
• 
undertake more extensive marketing campaigns; and
 
 
• 
adopt more aggressive pricing policies.
 
 
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We may not have the resources required for us to respond effectively to market or technological changes or to compete successfully with current and future competitors. Increased competition may also result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, results of operations or financial condition. We cannot assure you that we will be able to successfully compete against our current or future competitors or that competitive pressures will not have a material adverse effect on our business, results of operations and financial condition.

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

We must engage distributors to sell our products principally to major retailers and chains including supermarkets and grocery and convenience stores. These relationships are typically on a purchase-order basis we do not have any relationships with distributors that are subject to significant minimum purchase commitments. Accordingly, we cannot assure any given level of performance by our distributors and we do not have any assurance that these accounts will result in recurring orders. The poor performance of our distributors, retailers or chains or our inability to collect accounts receivable from our distributors, retailers or chains could materially and adversely affect our results of operations and financial condition.

In addition, distributors and retailers of our products offer products which compete directly with our products for retail shelf space and consumer purchases. Accordingly, there is a risk that distributors or retailers may give higher priority to products of our competitors. In the future, our distributors and retailers may not continue to purchase our products or provide our products with adequate levels of promotional support. Accordingly, there can be no assurance that we will be able successfully to sell, market, commercialize or distribute our products at any time in the future.
 
We will rely heavily on independent distributors, and this could affect our ability to efficiently and profitably distribute and market our products, maintain our existing markets and expand our business into other geographic markets.

Our ability to establish a market for our unique brands and products in new geographic distribution areas, as well as maintain and expand our existing markets, is dependent on our ability to establish and maintain successful relationships with reliable independent distributors strategically positioned to serve those areas. Although we had established relationships with distributors in a number of markets across the United States for our products, we currently do not have any long-term, written distribution agreements with significant minimum purchase commitments. Further, we expect that any distributor we engage with will sell and distribute competing products, and our products may represent a small portion of their business. To the extent that our distributors are distracted from selling our products or do not employ sufficient efforts in managing and selling our products, our sales and profitability will be adversely affected. Our ability to maintain our distribution network and attract additional distributors will depend on a number of factors, many of which are outside our control. Some of these factors include:
 
 
 
the level of demand for our brands and products in a particular distribution area,
 
 
 
our ability to price our products at levels competitive with those offered by competing products, and
 
 
 
our ability to deliver products in the quantity and at the time ordered by distributors.
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We cannot ensure that we will be able to meet all or any of these factors in any of our current or prospective geographic areas of distribution. Our inability to achieve any of these factors in a geographic distribution area will have a material adverse effect on our relationships with our distributors in that particular geographic area, thus limiting our ability to expand our market, which will likely adversely effect our revenues and financial results.
 
We will incur significant time and expense in attracting additional distributors for our products.
 
Our marketing and sales strategy presently, and in the future, will rely on the availability and performance of independent distributors. We currently do not have any long-term, written distribution agreements with significant minimum purchase commitments. We intend to enter into written agreements with key distributors for varying terms and duration; however, many distribution relationships may be based solely on purchase orders and terminable by either party at will. We do not anticipate that in the future we will be able to establish, long-term contractual commitments from many of our distributors. In addition, we cannot provide any assurance as to the level of performance by our distributors under such agreements, that these agreements will include minimum purchase commitments by the distributors or that those agreements will not be terminated early. Moreover, there is the possibility that we may have to incur significant additional expenditures or agree to additional obligations to attract and maintain key distributors in one or more of our geographic distribution areas in order to profitably exploit our geographic markets, including the granting of exclusive rights for a defined territory or imposition of termination payments. There is no assurance that we will be able to establish distribution relationships or maintain successful relationships with distributors in our geographic distribution areas. If we are unable to establish or maintain successful distribution relationships, our business, financial condition, results of operations and cash flows will be adversely affected.

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

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

The General Corporation Law of Nevada permits provisions in the articles, by-laws or resolutions approved by stockholders which limit liability of directors for breach of fiduciary duty to certain specified circumstances, namely, breach of their duties of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law; acts involving unlawful payment of dividends or unlawful stock purchases or redemptions, or any transaction from which a director derived an improper personal benefit. Our Amended and Restated By-laws indemnify the Officers and Directors to the full extent permitted by Nevada law. The By-laws (with these exceptions) eliminates any personal liability of a Director to the stockholders for monetary damages for breach of a Director's fiduciary duty.

Therefore, a Director cannot be held liable for damages to the shareholders for gross negligence or lack of due care in carrying out his fiduciary duties as a Director. Our Articles may provide for indemnification to the full extent permitted under law, which includes all liability, damages and costs or expenses arising from or in connection with service for, employment by, or other affiliation with the company to the full extent and under all circumstances permitted by law. Indemnification is permitted under Nevada law if a director or officer acts in good faith in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation. A director or officer must be indemnified as to any matter in which he successfully defends himself. Indemnification is prohibited as to any matter in which the director or officer is adjudged liable to the corporation. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons pursuant to the foregoing provisions or otherwise, management has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

Certain Factors Relating to Our Industry
 
We compete in an industry that is brand-conscious, so brand name recognition and acceptance of our products are critical to our success.
 
Our business is substantially dependent upon awareness and market acceptance of our products and brands by our targeted consumers. In addition, our business depends on acceptance by our independent distributors of our brands as beverage brands that have the potential to provide incremental sales growth rather than reduce distributors’ existing beverage sales. It is too early in the product life cycle of our brands to determine whether our products and brands will achieve and maintain satisfactory levels of acceptance by independent distributors and retail consumers. We believe that the success of our brands will be substantially dependent upon acceptance of our brand by consumers, distributors and retailers. Accordingly, any failure of our brand to maintain or increase acceptance or market penetration would likely have a material adverse affect on our revenues and financial results.

Competition from traditional non-alcoholic beverage manufacturers may adversely affect our distribution relationships and may hinder development of our existing markets, as well as prevent us from expanding our markets.
 
The functional beverage industry is highly competitive. We compete with other beverage companies not only for consumer acceptance but also for shelf space in retail outlets and for marketing focus by our distributors, all of who also distribute other beverage brands. Our products compete with all non-alcoholic beverages, most of which are marketed by companies with greater financial resources than what we have. Some of these competitors are placing severe pressure on independent distributors not to carry competitive functional beverage brands such as ours. We also compete with national beverage producers.

Some of our direct competitors include Vitamin Water, Life Water, Fuze and Sobe. Increased competitor consolidations, market place competition, particularly among branded beverage products, and competitive product and pricing pressures could impact our earnings, market share and volume growth. If, due to such pressure or other competitive threats, we are unable to sufficiently maintain or develop our distribution channels, we may be unable to achieve our current revenue and financial targets. As a means of maintaining and expanding our distribution network, we intend to introduce product extensions and additional brands. There can be no assurance that we will be able to do so or that other companies will not be more successful in this regard over the long term. Competition, particularly from companies with greater financial and marketing resources than us, could have a material adverse affect on our existing markets, as well as our ability to expand the market for our products.
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We may face intellectual property infringement claims and other litigation which would be costly to resolve. 
 
We are not aware that any of our products infringe on the proprietary rights of third parties. However, we cannot assure you that third parties will not assert infringement claims against us in the future with respect to current or future products. There has been substantial litigation in the industry regarding copyright, trademark and other intellectual property rights. Whether brought by or against us, these claims can be time consuming, result in costly litigation and divert management’s attention from our day-to-day operations, which can have a material adverse effect on our business, operating results and financial condition. Further, similar to our competitors, we will likely become subject to litigation. Such litigation may be costly and time consuming and may divert management’s attention from our day-to-day operations. In addition, we cannot assure you that such litigation will be ultimately resolved in our favor or that an adverse outcome will not have a material adverse effect on our business, results of operations and financial condition.

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

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

We compete in an industry characterized by rapid changes in consumer preferences, so our ability to continue developing new products to satisfy our consumers’ changing preferences will determine our long-term success.
 
Our current market distribution and penetration may be limited with respect to the population as a whole to determine whether the brand has achieved initial consumer acceptance, and there can be no assurance that this acceptance will ultimately be achieved. Based on industry information and our own experience, we believe that in general alternative or New Age beverage brands and products may be successfully marketed for five to nine years after the product is introduced in a geographic distribution area before consumers’ taste preferences change, although some brands or products have longer lives. In light of the limited life for alternative or New Age beverage brands and products, a failure to introduce new brands, products or product extensions into the marketplace as current ones mature could prevent us from achieving long-term profitability. In addition, customer preferences are also affected by factors other than taste, such as the recent media focus on obesity in youth. If we do not adjust to respond to these and other changes in customer preferences, our sales may be adversely affected.
 
We could be exposed to product liability claims for personal injury or possibly death.
 
Although we have product liability insurance in amounts we believe are adequate, we cannot assure that the coverage will be sufficient to cover any or all product liability claims. To the extent our product liability coverage is insufficient; a product liability claim would likely have a material adverse affect upon our financial condition. In addition, any product liability claim successfully brought against us may materially damage the reputation of our products, thus adversely affecting our ability to continue to market and sell that or other products.
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Certain Factors Related to Our Common Stock
 
Because our common stock is traded on the OTC Bulletin Board, a shareholder’s ability to sell shares in the secondary trading market may be limited.
 
Our common stock is currently listed for trading in the United States on the OTC Bulletin Board. As a result, an investor may find it more difficult to dispose of or to obtain accurate quotations as to the price of our securities than if the securities were traded on the NASDAQ Stock Market or another national exchange, like The New York Stock Exchange or American Stock Exchange.

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

The price of our common stock may be volatile, and a shareholder’s investment in our common stock could suffer a decline in value.
 
There has been significant volatility in the volume and market price of our common stock, and this volatility may continue in the future. In addition, there is a greater chance for market volatility for securities that trade on the OTC Bulletin Board as opposed to a national exchange. This volatility may be caused by a variety of factors, including the lack of readily available quotations, the absence of consistent administrative supervision of “bid” and “ask” quotations and generally lower trading volume. In addition, factors such as quarterly variations in our operating results, changes in financial estimates by securities analysts or our failure to meet our or their projected financial and operating results, litigation involving us, general trends relating to the beverage industry, actions by governmental agencies, national economic and stock market considerations as well as other events and circumstances beyond our control could have a significant impact on the future market price of our common stock and the relative volatility of such market price. The price of our common stock has been and could continue to be subject to wide fluctuations in response to certain factors, including, but not limited to, the following:

quarter to quarter variations in results of operations;
 
 
our announcements of new products;
 
 
our competitors’ announcements of new products;
 
 
general conditions in the beverage industry; or
 
 
investor and customer perceptions and expectations regarding our products, plans and strategic position and those of our competitors and customers.
 
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Additionally, the public stock markets experience extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons often unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
 
There are outstanding a significant number of shares available for future sales under Rule 144.

As of December 31, 2007, of the 94,972,225 issued and outstanding shares of our Common Stock, approximately 77,588,556 shares may be deemed “restricted shares” and, in the future, may be sold in compliance with Rule 144 under the securities Act of 1933, as amended. Rule 144 provides that a person holding restricted securities for a period of one year may sell in brokerage transactions an amount equal to 1% of our outstanding Common Stock every three months. A person who is a “non-affiliate” of our Company and who has held restricted securities for over two years is not subject to the aforesaid volume limitations as long as the other conditions of the Rule are met. Possible or actual sales of our Common Stock by certain of our present shareholders under Rule 144 may, in the future, have a depressive effect on the price of our Common Stock in any market which may develop for such shares. Such sales at that time may have a depressive effect on the price of our Common Stock in the open market.

There are a significant number of outstanding securities convertible or exercisable into shares of common stock, the conversion or exercise of which may have a dilutive effect on the price of our common stock.  
 
As of December 31, 2007, there were outstanding and immediately exercisable options to purchase 3,208,000 shares of Common Stock and other warrants to purchase 9,814,890 shares of Common Stock. In addition, as of December 31, 2007, there remains outstanding an aggregate principal amount of $310,000 of debentures. The shares underlying warrants (including the warrants that are granted upon conversion of the debentures) represent approximately 11.6% of our common stock, and the shares underlying our currently outstanding options represent approximately 3.4% of our common stock. The conversion or exercise of these securities will cause dilution to our shareholders and the sale of the underlying Common Stock (or even the potential of such exercise or sale) may have a depressive effect on the market price of our securities. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of the outstanding options and warrants can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than the exercise terms provided by the outstanding options and warrants.

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

Our Certificate of Incorporation authorizes the issuance of up to 1,000,000 shares of “blank check” preferred stock, with such designation rights and preferences as may be determined from time to time by the Board of Directors. Currently, there are no shares of preferred stock are issued and outstanding. The Board of Directors is empowered, however, without shareholder approval, to issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of our common stock. In the event of such issuances, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our company. Although we have no present intention to issue any additional shares of our preferred stock, there can be no assurance that we will not do so in the future.
 
Item 2:  Description of Property.

Effective November 1, 2006, we have relocated our corporate offices to 3 Bala Plaza East, Suite 117, Bala Cynwyd, Pennsylvania. This space consists of approximately 5,000 square feet of office space and we have a rent-free arrangement to utilize this space until further notice.
 
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Item 3:  Legal Proceedings.

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

In addition, we are subject to other claims and litigation arising in the ordinary course of business. Our management considers that any liability from any reasonably foreseeable disposition of such other claims and litigation, individually or in the aggregate, would not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
 
Item 4:  Submission of Matters to a Vote of Security Holders.
 
No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2007.
 
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PART II
 
Item 5:  Market for Common Equity and Related Stockholder Matters

Following our name change, our common stock has traded on the OTC Bulletin Board since December 27, 2006 under the symbol SKNY.OB. Our common stock previously traded on the OTC Bulletin Board under the symbol CEII.OB from June 21, 2006 until December 26, 2006. Previously, our common stock traded on the OTC Pink Sheets under the symbol CEII.PK. The table set forth below shows the high and low bid information for the past two years.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. According to our stock transfer agent records, we had approximately 491 shareholders of our common stock as of December 31, 2007 holding 94,972,225 common shares.

 
 
High Bid
 
Low Bid
 
 
 
 
 
 
 
Fiscal 2007
 
 
 
 
 
 
 
 
 
 
 
March 31, 2007
 
$
0.43
 
$
0.17
 
June 30, 2007
 
$
0.28
 
$
0.15
 
September 30, 2007
 
$
0.19
 
$
0.10
 
December 31, 2007
 
$
0.14
 
$
0.06
 
 
             
Fiscal 2006
             
 
             
March 31, 2006
 
$
0.65
 
$
0.34
 
June 30, 2006
 
$
0.20
 
$
0.20
 
September 30, 2006
 
$
0.12
 
$
0.12
 
December 31, 2006
 
$
0.18
 
$
0.16
 
 
         

Dividends and Dividend Policy

There are no restrictions imposed on us that limit our ability to declare or pay dividends on our common stock, except as limited by state corporate law. During the year ended December 31, 2007, no cash or stock dividends  were  declared  or  paid  and  none  are  expected to be paid in the foreseeable future. We expect to continue to retain all earnings generated by our future operations for the development and growth of our business. The board of directors will determine whether or not to pay dividends in the future in light of our earnings, financial condition, capital requirements and other factors.

Transfer Agent

The transfer for our Common Stock is Interwest Transfer Agency, Salt Lake City, UT.
 
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Securities authorized for issuance under equity compensation plans
 
The following table provides information about our common stock that may be issued upon the exercise of options and rights under all of our existing equity compensation plans as of December 31, 2007, which consists of our Stock Option Plan.
 
Plan Category
 
Number of Securities to be
Issued upon Exercise of
Outstanding Options and Rights
(a)
 
Weighted Average Exercise
Price of Outstanding Options
(b)
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Excluding Securities
Reflected in Column (a)
(c)
 
 
 
 
 
 
 
 
 
Equity Compensation Plans Approved by Stockholders
   
12,325,000
 
$
0.143
   
7,675,000
 
Equity Compensation Plans Not Approved by Stockholders (1)
   
3,059,390
 
$
0.08
   
N/A
 
Total
   
15,384,390
   
-
   
7,675,000
 
__________________
(1) Consists of warrants issued to third parties for services rendered and shares of restricted stock awarded to certain of our executives.

Recent Sales of Unregistered Securities

Except as described elsewhere in this report, we did not issue any securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”) during the fiscal year ended December 31, 2007 or during the current fiscal year, other than those disclosed in previous SEC filings.
 
Stock Repurchases
 
During fiscal 2007, we did not repurchase any shares of our common stock.

Item 6:   Management’s Discussion and Analysis
 
Overview
 
This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see “Item 1—Business—Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with our audited consolidated financial statements and the notes to our audited consolidated financial statements included elsewhere in this report. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Item 1—Business—Risk Factors” and included in other portions of this report.

Nature of Operations

We were originally incorporated in the State of Utah on June 20, 1984 as Parvin Energy, Inc. Our name was later changed to Sahara Gold Corporation and on July 26, 1985 we changed our corporate domicile to the State of Nevada and on January 24, 1994 we changed our name to Inland Pacific Resources, Inc. On December 18, 2001, we entered into an agreement and plan of reorganization with Creative Enterprises, Inc. and changed our name to Creative Enterprises International, Inc. This discussion relates solely to the operations of Creative Enterprises International, Inc. On November 15, 2006, a majority of our common stockholders provided written consent to change the name of the company to Skinny Nutritional Corp. to more accurately describe our evolving operations. This change became effective December 27, 2006. See “Our Products and Strategy” below.
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We have had limited operations to date and until 2005 our efforts were focused primarily on the development and implementation of our business plan. Since the middle of 2005 we have engaged in significant marketing and sales activities related to our business plan of selling functional beverages and dietary supplements. We have generated revenues of $752,825 for fiscal 2007 and incurred a net loss of $2,303,446 for fiscal 2006 and 2,828,745 for year ended December 31, 2007. The net loss includes general and administrative expenses related to the costs of start-up operations and a significant amount of marketing expenses related to establishing our brand in the market.  In addition, the net loss includes a significant amount of public company expenses incurred to become a reporting company and transition the company from the pink sheets to the OTC Bulletin Board. Since the date of the merger and reorganization, we have raised capital through private sales of our common equity and debt securities.

Our Products and Strategy

Through the year ended December 31, 2007, we have operated our business in the rapidly evolving functional beverage and dietary supplement industries. More recently we have determined to focus on marketing and distributing our dietary supplement product, “Skinny Water” and developing other functional beverages.
 
In July 2004, we entered into a license and distribution agreement with Jamnica, d.d. that granted us an exclusive license to distribute Jamnica’s bottled waters in North America. Our agreement with Jamnica was for an initial term commencing on the date we received government approvals to distribute the products in the sales territory and continuing for a period of one year from the date the approvals are received. We received approval from the State of New York in April 2005 and the State of California in June 2005. The agreement would have automatically renewed for additional one year terms provided we satisfied certain sales volume targets. If we were unable to satisfy these targets, Jamnica had the right to either terminate the agreement or to appoint additional distributors in the territory. Based on the sales of Jana Water and Jana Skinny Water through the quarter ended September 30, 2006, we did not satisfy these targets.

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

We have also obtained the exclusive rights from Peace Mountain Natural Beverages Corporation to bottle and distribute a dietary supplement called Skinny Water(R). Skinny Water’s proprietary formula has an all-natural appetite suppressant that helps people maintain and lose weight when taken in conjunction with diet and exercise. On October 4, 2006, we entered into an amendment to our License and Distribution Agreement with Peace Mountain Natural Beverages. Pursuant to this amendment, we agreed to pay Peace Mountain an amount of $30,000 in two equal monthly installments commencing on the date of the amendment in satisfaction of allegations of non-performance by Peace Mountain. In addition, the parties further agreed to amend and restate our royalty obligation to Peace Mountain, pursuant to which amendment, we will have a minimum royalty obligation to Peace Mountain based on a percentage of wholesale sales with a quarterly minimum of $15,000. Our agreement with Peace Mountain will renew automatically provided that we satisfy the minimum quarterly payment of $15,000 specified in the contract.
 
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On February 27, 2007, we entered into a Marketing and Distribution Agreement with Geltech Sales, LLC for the national distribution of our Skinny-branded products. The initial term of the Agreement is three years, and it is renewable in one-year increments. Under the Agreement, Geltech agreed to solicit orders for our products through its distribution channels, which includes mass merchandisers, supermarkets, convenience stores, mass drug stores, as well as establishing distribution agreements with local, regional, and national direct store delivery (DSD) companies.

In consideration for Geltech’s services, we agreed to pay Geltech a commission based on the quantity of product sold through its network and agreed to issue to Geltech, or its designees, an aggregate of 1,500,000 common stock purchase warrants. The warrants are exercisable for a seven year period at a price of $0.24 per share. We had the right to redeem up to 750,000 of the warrants in the event that Geltech does not satisfy the required performance metrics. In addition, on February 27, 2007, we issued an additional total of 300,000 warrants to two consultants in consideration of the services rendered by such persons in connection with the negotiation and execution of the Agreement. October 16, 2007, we notified Geltech that we elected to terminate this agreement with Geltech based on performance obligations; resulting in a cancellation of 1,075,000 warrants.

We will principally generate revenues, income and cash by introducing, marketing, selling and distributing finished products in the beverage, health and nutrition industries. We will sell these products through national retailers and local distributors. We have been focused on, and will continue to increase our existing product lines and further develop our markets. We have established relationships with national retailers, including Target for the distribution of Skinny Water. We have reformulated Skinny Water in response to consumer preferences. We expect to continue our efforts to distribute Skinny Water through the distributors and retailers. However, these distributors and retailers were not bound by significant minimum purchase commitments and we do not expect that this will change in the near future. Accordingly, we must rely on recurring purchase orders for product sales and we cannot determine the frequency or amount of orders any retailer or distributor may make.

Our primary operating expenses include the following: direct operating expenses, such as transportation, warehousing and storage, overhead, fees and royalties to our suppliers and licensors and marketing costs. We have and will continue to incur significant marketing expenditures to support our brands including advertising costs, sponsorship fees and special promotional events. We have focused on developing brand awareness and trial through sampling both in stores and at events. Retailers and distributors may receive rebates, promotions, point of sale materials and merchandise displays. We seek to use in-store promotions and in-store placement of point-of-sale materials and racks, price promotions, sponsorship and product endorsements. The intent of these marketing expenditures is to enhance distribution and availability of our products as well as awareness and increase consumer preference for our brand, greater distribution and availability, awareness and promote long term growth.

Management Changes

In October 2006, we reorganized our executive management team. On October 4, 2006, our board of directors elected Mr. Ken Brice as a member of our board of directors and appointed Mr. Michael R. Reis as its interim Chief Operating Officer and also elected him as a director. Further, on October 5, 2006, Mr. Christopher Durkin Chief Executive Officer, President and a director, resigned from such positions with us. In addition, on October 6, 2006, we appointed Mr. Donald J. McDonald to serve as our new Chief Executive Officer, President and as a member of our board of directors. Also, on October 6, 2006, Mr. James Robb notified us that effective on such date he resigned from our board of directors.

On June 11, 2007, Kenneth Brice, the Company’s Chief Financial Officer and a member of its board of directors, tendered his resignation from his service with the Company, effective as of June 30, 2007. The Company’s Chief Executive Officer, Donald J. McDonald, will serve as its Chief Financial Officer until such time as the Company appoints another individual to serve in such capacity.
 
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Reorganization

On November 15, 2006, holders of approximately 53% of our issued and outstanding common stock consented in writing to the adoption of resolutions approving (1) amendments to our Articles of Incorporation to (a) change our corporate name to “Skinny Nutritional Corp.” and (b) increase the number of authorized shares of common stock 250,000,000 shares and (2) an amendment to our Employee Stock Option Plan to increase the number of shares of common stock available to be issued there under to 20,000,000 shares. These actions became effective as of December 27, 2006. Also effective as of such date, we granted an aggregate of 10,650,000 options under its Employee Stock Option Plan, including a total of 5,500,000 options granted to certain of our executive officers.

On December 22, 2006, we began an offering to the holders of an aggregate principal amount of $2,515,000 of convertible debentures the ability to convert such securities at a reduced conversion rate. The convertible debentures are scheduled to mature at various dates between December 2006 and October 2007 and were initially convertible at the conversion rate of $0.40 into (a) an aggregate of 6,287,500 shares of our common stock and (b) 6,287,500 common stock purchase warrants (the ‘‘Conversion Warrants’’). We determined to offer the debenture holders the option to convert the outstanding principal amount of their debentures into shares of common stock only at a conversion rate of $0.10 provided that the holders agree to the following: (i) convert the outstanding principal amount of its convertible debentures no later than January 31, 2007, (ii) acknowledge the surrender of the right to receive the Conversion Warrants and (iii) forfeit the unpaid interest that has accrued on such debentures, which was approximately $337,000, in the aggregate. To the extent that any holders decline this offer, such holders would continue to hold their convertible debentures and could elect to either convert such debentures on the original terms thereof or receive repayment of the principal and accrued and unpaid interest thereon, on the stated maturity date of such debentures. During calendar year 2007, an aggregate amount of debenture principal of $2,065,000 was converted into 22,553,333 shares of common stock. In addition one investor was repaid in cash for $20,000 in principal and $4,000 in interest.

Going Concern and Management Plans

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

As described in greater detail below under the caption “Liquidity and Capital Resources,” during the twelve months ended December 31, 2007, we have raised a total of $1,118,063 in gross proceeds from private transactions with accredited investors and current or former members of our executive management team.
 
Based on our current levels of expenditures and our business plan, we believe that our existing cash and cash equivalents (including the proceeds received from our recent private placement), will only be sufficient to fund our anticipated levels of operations for a period of six months. Accordingly, generating sales in that time period is important to support our business. However, we cannot guarantee that we will generate such growth.  If we do not generate sufficient cash flow to support our operations during that time frame, we will need to raise additional capital and may need to do so sooner than currently anticipated. Our independent auditors have included a “going concern” explanatory paragraph in their report to our financial statements for the year ended December 31, 2007, citing recurring losses and negative cash flows from operations. We can not assure you that any financing can be obtained or, if obtained, that it will be on reasonable terms.

If we raise additional funds by selling shares of common stock or convertible securities, the ownership of our existing shareholders will be diluted. Further, if additional funds are raised though the issuance of equity or debt securities, such additional securities may have powers, designations, preferences or rights senior to our currently outstanding securities. Further, if expenditures required to achieve our plans are greater than projected or if revenues are less than, or are generated more slowly than, projected, we will need to raise a greater amount of funds than currently expected. Without realization of additional capital, it would be unlikely for us to continue as a going concern.
 
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Critical Accounting Policies

The application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. For a summary of all of our accounting policies, including the accounting policies discussed below, see note 3 to our audited consolidated financial statements.

Revenue Recognition

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

Use of Estimates in the Preparation of Financial Statements
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Management Discussion and Analysis:

Results of Operations: Year Ended December 31, 2007 compared to Year Ended December 31, 2006

For the twelve months ended December 31, 2007, our revenues were $752,825 as compared to $628,380 for the same period last year. This increase in revenues for the twelve months ended December 31, 2007 is due primarily to the increased sales recorded in the fourth quarter of 2007. Cost of goods sold was $530,312 for the year ended December 31, 2007 as compared to $576,882 incurred during the same period last year. In addition, we decided to focus on new products during the fourth quarter of the 2007 fiscal year. Marketing and advertising costs were $721,442 for the year ended December 31, 2007 as compared to $394,949 for the same period last year, or a increase of 83%. This increase is attributable to product design and increased advertising expenses.

General and administrative costs (which include salaries, rent, office overhead, and public company expenses) were $2,220,492 for the twelve months ended December 31, 2007 as compared to $1,894,768 over the same period in 2006. This Increase of 17.2% is primarily due to costs associated with private placements of stock. For the twelve months ended December 31, 2007, we also incurred additional expenses in connection with operating as a reporting company, which began in December 2005.

Interest expense was $119,806 for the year ended December 31, 2007 as compared to $32,932 for the same period last year.

Net loss for the twelve month period was $2,828,745 as compared to $2,303,446 for the same period last year.
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Liquidity and Capital Resources

Satisfaction of Cash Requirements and Financing Activities

We have historically primarily been funded through the issuance of common stock, debt securities and external borrowings. During the calendar year 2007 the company’s primary means of raising capital was through the sale of common stock through private placements made pursuant to Rule 506 of Regulation D under the Securities Act of 1933. There were three private offerings made during the year. The first offering had an offering period starting on December 8, 2006 and was completed February 2007 with 10,000,000 shares being offered and an aggregate offering amount of $750,000. The offering raised $482,610 dollars during calendar year 2007 with 6,435,004 shares of common stock being issued. The second offering had an offering period of March 19, 2007 to September 6, 2007; with 13,333,333 shares being offered and an aggregate offering amount of $1,000,000 dollars. The offering raised $502,203 dollars with 6,696,509 shares being issued. The third offering had an offering period starting September 7, 2007 and ending November 7, 2007; with 13,333,333 shares being offered for and aggregate offering amount of $1,000,000 dollars. The offering raised 203,251 dollars with 2,716,666 shares being issued. There were 2,759,390 warrants issued to “Selling Agents” for the private placements of common stock during calendar year 2007. Selling agents received $106,954 dollars in commissions for private placement of common shares leaving the company with $1,011,109 dollars in net proceeds from private placements. Common shares totaling 9,809,332 shares were also issued to shareholders from prior subscriptions in the form of reset shares required by the covenants established in the pervious subscription agreements.

The securities sold in the above private placements have not been registered under the Securities Act of 1933, as amended, and were offered and sold in reliance upon the exemption from registration set forth in Section 4(2) thereof and Regulation D, promulgated under the Securities Act. We believe that the investors and the selling agent are ‘‘accredited investors’’, as such term is defined in Rule 501(a) promulgated under the Securities Act.

There were two holders of notes payable that converted their debt into common shares. On March 23, 2007; principal of $100,000 dollars and $4,274 dollars worth of interest were converted into 2,011,020 shares of common stock. The second conversion took place in two transactions; the first occurred on January 17, 2007 in which fifty-percent of the debt consisting of $ 12,500 dollars in principal and $1,171 dollars in interest were converted into 273,425 shares of common stock. The second transaction occurred during April 12, 2007 in which $12,500 dollars in principal was converted into 250,000 in common shares of stock. Interest of $5,513 was converted to 110,270 common shares on 1/17/07. There were other transactions the converted debt to 14,995 shares of common stock.

In addition, holders of an aggregate principal amount of $2,065,000 of convertible debentures converted such amount into shares of common stock as follows. In the first quarter, holders of principal of $1,750,000 converted such amount into 17,500,000 shares of common stock. Also in the first quarter one debt holder converted $20,000 in debt to 40,000 shares of common stock. In the second quarter two debt holders converted their debt into 400,000 common shares reducing the principal balance by $40,000 dollars. During the fourth quarter an additional conversion of $188,333 in principal and $37,667 in interest were converted into 3,013,333 shares of common stock at a conversion rate of $.075 a share. During December 2007, in a fourth conversion 1,600,000 shares of common stock were issued upon conversion of $66,667 in principal and $13,333 in interest at a conversion rate of $.05 per share. One investor was paid $20,000 dollars in principal and $4,000 dollars in interest to retire his debenture. In addition, we issued an aggregate of 765,000 common stock purchase warrants upon the conversion of outstanding debentures in 2007. Of these warrants, 225,000 warrants are exercisable at $0.20 per shares and the remainders are exercisable at $0.50 per share. All warrants expire three years from the date of issuance.
 
The securities sold in the above transactions were not registered under the Securities Act of 1933, as amended, and were offered and sold in reliance upon the exemption from registration set forth in Section 3(a)(9) thereof.
 
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We believe that net cash on hand as of the date of this Annual Report is only be sufficient to meet our expected cash needs for working capital and capital expenditures for a period of six months. Accordingly, we have an immediate need for additional capital. To raise additional funds, we intend to either undertake private placements of our securities, either as a self-offering or with the assistance of registered broker-dealers, or negotiate a private sale of our securities to one or more institutional investors. We currently have no firm agreements with any third-parties for additional transactions and no assurances can be given that we will be successful in raising sufficient capital from any of these proposed financings. Further, we cannot be assured that any additional financing will be available or, even if it is available that it will be on terms acceptable to us. Any inability to obtain required financing on sufficiently favorable terms could have a material adverse effect on our business, results of operations and financial condition. If we are unsuccessful in raising additional capital and increasing revenues from operations, we will need to reduce costs and operations substantially. Further, if expenditures required to achieve our plans are greater than projected or if revenues are less than, or are generated more slowly than, projected, we will need to raise a greater amount of funds than currently expected. Without realization of additional capital, it would be unlikely for us to continue as a going concern.

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

Other Transactions Impacting our Capital Resources

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

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

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

In December 2004, we entered into an exclusive five year agreement with Big Geyser, Inc., to distribute our products in the New York City market. However, as described above, we terminated this agreement in January 2006. We do not believe that the termination of our agreement with Big Geyser will have a material adverse impact on our operations. However, Big Geyser disputed our ability to terminate the agreement for cause and commenced an arbitration proceeding against us with the American Arbitration Association seeking damages. We agreed to a settlement of this matter and it was paid in full in accordance with its terms in February 2007.
 
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We were the co-defendant along with our Chairman in a civil suit filed in Miami-Dade County Circuit Court under the caption Swan v. Salaman and Creative Enterprises International, Inc. This case was settled in August 2007.

On or about May 8, 2006 a default judgment was entered against us in the Supreme Court of the State of New York for the County of New York (Index No. 600618/06) in the amount of $43,835.06 in an action brought against it by Evins Communications, Ltd. (“Evins”) purportedly commenced in February 2006 (and with respect to which complaint we do not believe it was served). The basis for such action is not known to the company. That judgment was later domesticated in Pennsylvania on or about August 3, 2006 On May 7, 2007 an order to show cause was signed by Justice York in the State Supreme Court ordering Evins to show cause why the default should not be vacated. On May 29, 2007, the court decided not to vacate the default, but scheduled further hearings on this issue. This case was settled in September 2007.

In December 2007, the Board of Directors authorized the issuance of 125,000 shares to a consultant in consideration for investor relation services provided to the company.
 
Break Even and Profitability 

As discussed in the overview to this analysis, we are developing a new product line based on our Skinny brand which we began selling in the first quarter of 2007 in addition to our current retail business for Skinny water. We have developed a financial plan that shows that if our assumptions for the cost of marketing and distribution are correct, we will be at breakeven in the third quarter of calendar 2008 if we generate meaningful sales of our products. However, our expectations may not be correct, our expenses may increase, our business arrangements may not result in the level of sales that we anticipate and we cannot offer any assurance that we will be able to achieve sufficient sales to realize this target during next year.

Product Research and Development 

We intend to expand our line of products, as described in the “Overview” section of this Management’s Discussion and Analysis, at such time as management believes that market conditions are appropriate. Management will base this determination on the rate of market acceptance of the products we currently offer. We do not engage in material product research and development activities. New products are formulated based on our license arrangements with our suppliers and licensors.

Marketing/Advertising 

In 2007, the company focused its marketing efforts in the development of new Skinny Water flavors, new bottle labels, and outer shrink wrap packaging to merchandise Skinny Water in 6 packs at the Target Stores around the country. The company’s primary marketing and advertising budget was spent executing an aggressive public relations campaign in coordination with a PR firm the company has retained. The company was able to built its brand and build product awareness through articles and mentions of Skinny Water in various print, radio, TV, and internet media channels. The company attended several trade shows including where it presented Skinny Water to beer wholesalers at their national trade show as well as the national trade shows for all convenience and drug store retailers.

Further, the company developed print ads that ran in national and local publications and further developed its online presence at its website www.skinnywater.com. In 2008, the company is focusing on in store merchandising and marketing support materials for all of its distributors, and establishing sampling teams in multiple locations at targeted events.
 
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Additional product development was started in late 2007 in the area of developing new flavors, new functional formulas, and the development of Skinny Teas, Energy, Sport, Antioxidant, and Vitamin Categories as part of the Skinny line of functional beverages.

In connection with our recent marketing campaign, we have invested over $721,442 of our working capital during the 2007. These programs have included developing marketing strategies and collateral material, conducting advertising initiatives and investing in initial store placements. We expect to incur significant marketing and advertising expenditures during 2008 to bring our new line of products to market. We believe that marketing and advertising are critical to our success.

Purchase or sale of plant or significant equipment 

As of the date of this Report, we do not have any plans to purchase plant or significant equipment.

Expected changes in the number of employees 

As of December 31, 2007 we have 4 employees including, our executive officers. We expect to hire an additional 10 employees in 2008.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements and do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources.

We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of the contract terms. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, we have not made any payments under these agreements that have been material individually or in the aggregate. As of December 31, 2007, we were not aware of any obligations under such indemnification agreements that would require material payments.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute.
 
Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The adoption of this Statement is not expected to have a material impact on the Company’s financial statements.
 
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Item 7:  Financial Statements.
 
Our audited financial statements for the fiscal year ended December 31, 2007 follows Item 14 of this Annual Report on Form 10-KSB, beginning at page 52.
 
Item 8:  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
 
None

Item 8A Controls and Procedures
 
Disclosure Controls
 
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the year to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accurately recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
 
The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting and disclosure controls and procedures. Internal controls over financial reporting are designed to provide reasonable assurance that the books and records reflect the transactions of the Company and that established policies and procedures are carefully followed.
 
Management has conducted an evaluation of the Company’s internal control over financial reporting using the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as a basis to evaluate effectiveness and determined that internal control over financial reporting was effective as of the end of the fiscal year ended December 31, 2007.
 
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. The Company’s internal control over financial reporting was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
 
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There were no changes in our internal controls over financial reporting during the quarterly period ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Inherent Limitations on Effectiveness of Controls
 
We do not expect that disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within its company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
Item 8B.  Other Information
 
The disclosure of the Company's current private placement contained in Item 1 of this report is incorporated by reference herein.
 
PART III
 
Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.

The following table summarizes the name, age and title of each of our current directors and executive officers. Directors are elected annually by our stockholders and hold office until their successors are elected and qualified, or until their earlier resignation or removal. Our Board of Directors currently consists of three members. On June 11, 2007, Kenneth Brice, the Company's former Chief Financial Officer and a member of its board of directors, tendered his resignation from his service with the Company, effective as of June 30, 2007. The Company's Chief Executive Officer, Donald J. McDonald, will serve as its Chief Financial Officer until such time as the Company appoints another individual to serve in such capacity. There are no family relationships among our current executive officers and directors. Officers are elected by and serve at the discretion of the Board of Directors.


Our directors and officers are currently as follows:

Name
 
Age
 
Position
 
 
 
 
 
Donald J. McDonald
 
55
 
Chief Executive Officer, President and Director
 
 
 
 
 
Michael Salaman
 
46
 
Chairman of the Board
 
 
 
 
 
Michael Reis
 
63
 
Interim Chief Operating Officer and Director
 
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Business Experience

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

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

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

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

   A general partner or executive officer of a business that had a bankruptcy petition filed by or against it either at the time of the bankruptcy or within the two years before the bankruptcy;

   Convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

   Subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities

   Found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
 
41

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

Our Board of Directors currently consists of three individuals. One of our current directors is independent as defined in the Marketplace Rules of The NASDAQ Stock Market.
 
During the fiscal year ended December 31, 2007, our board of directors held three meetings and acted by unanimous written consent on 16 occasions.
 
Due to the fact that our Board currently consists of three persons, none of whom are independent, we have not formally constituted any Board committees, including an audit committee. None of our current directors qualifies as an “audit committee financial expert” as defined in Item 401 under Regulation S-B of the Securities Act of 1933. In connection with our transition to being a reporting company we are actively seeking to expand our Board membership to include a majority of independent directors, including at least one person that satisfies the definition of “financial expert.”
 
The board did not adopt any modifications to the procedures by which security holders may recommend nominees to its board of directors.
 
Compliance with Section 16(a) of the Securities Exchange Act
 
Section 16(a) of the Securities Exchange Act of 1933, as amended, requires our directors and executive officers, and persons who own more than 10% of our outstanding Common Stock (collectively, “Reporting Persons”) to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our Common Stock. Reporting Persons are also required by SEC regulations to furnish us with copies of all such ownership reports they file. Based solely on our review of the copies of such reports received or written communications from certain Reporting Persons, we believe that, during the 2006 fiscal year, all Reporting Persons complied with all Section 16(a) filing requirements.
 
Code of Ethics
 
Due to the fact that we are currently seeking to expand our board of directors to include independent directors on our board members, we have not currently adopted a Code of Ethics. We intend to adopt a Code of Ethics, as defined by Rule 406 of Regulation S-B, promptly upon the election of additional independent members to our board of directors.
 
Board of Advisors

On March 20, 2008, the Company established an advisory board to provide advice on matters relating to the Company’s products. The Company will seek to appoint up to five individuals to its advisory board. On March 20, 2008, the Company appointed the following individuals to its advisory board: Pat Croce, Ron Wilson and Michael Zuckerman.

The Company also entered into a consulting agreement with Mr. Croce, pursuant to which the Company agreed to issue Croce an aggregate of 2,000,000 shares of its common stock in consideration of his agreement to serve on the Company’s Advisory Board and for providing the marketing services for the Company’s products. In addition to serving on the Advisory Board, Croce agreed to endorse and advertise the Company’s products through a newly formed company. In additional consideration for his agreement to provide the endorsement and marketing services, the Company agreed to pay a royalty with respect to the sale of its products that he endorses for the duration of his endorsement services. The Company issued each of the other initial members of its advisory board warrants to purchase 1,500,000 shares of Common Stock, exercisable for a period of five years at a price of $0.05.
 
42

 
Item 10.  Executive Compensation
 
Summary of Cash and Certain Other Compensation

The following table sets forth information concerning the total compensation that we have paid or that has accrued on behalf of each person who served as our Chairman and Chief Executive Officer during the fiscal year ended December 31, 2007.


Summary Compensation Table
 
Name and Principal Position
 
 
Year
 
 
Salary
($)
 
 
Bonus
($)
 
 
Stock Awards
($)
 
 
Option Awards
($)
 
 
All Other Compensation
($)
 
 
Total ($)
 
(a)
 
 
(b)
 
 
(c)
 
 
(d)
 
 
(e)
 
 
(f)
 
 
(i)
 
 
(j)
 
Donald J. McDonald
Chief Executive Officer, Chief Financial Officer and President (1)
 
 
2007
 
$
98,333
 
$
0
 
 
0
 
 
136,931
 
 
0
 
 
235,264
 
     
2006
   
$20,000
   
0
   
0
   
75,000
   
0
   
$95,000
 
                                             
Michael Salaman,
Chairman
 
 
2007
 
$
100,000
 
$
0
 
 
0
 
 
202,500
 
 
   
 
302,500
 
     
2006
   
28,605
   
0
   
0
   
0
   
5,000
   
33,065
 
____________
(1) Mr. McDonald became our Chief Executive Officer and President on October 6, 2006 and assumed the position of Chief Financial Officer as of June 30, 2007 following the resignation of Mr. Kenneth Brice as Chief Financial Officer.
 
Director Compensation

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

Employment Agreements

We have not entered into written employment agreements with any of our executive officers. During the first 10 months for 2007 our Chairman and CEO were compensated at a rate of $7,500 per month. On November 28, 2007, the Board of Directors of the Company approved increases in the monthly compensation rates, effective as of November 2007, payable to each of its Chairman, Chief Executive Officer. The Chairman will receive compensation of $12,500 per month and a $700 dollar monthly automobile allowance; the CEO will receive compensation of $11,667 dollars per month and a $700 monthly automobile allowance.

We also agreed to negotiate employment agreements with both executives to reflect these arrangements. We anticipate that these agreements will include a discretionary bonus opportunity, a monthly automobile allowance, reimbursement for health and life insurance policies, and certain additional benefits, including a severance benefit of an amount to be determined which would be operative upon the occurrence of a change in control of the Company and in the event that either of the executives are terminated from their employment without cause. The Company has not yet entered into employment agreements with these individuals.
 
43

 
Outstanding Equity Awards at Fiscal Year-End

The following table sets forth certain information concerning outstanding equity awards held by our Named Executive Officers as of the year ended December 31, 2007. 

 
 
Option Awards
 
Stock Awards
Name
 
Number
of
Securities Underlying Unexercised Options
(#)
Exercisable
 
Number
of
Securities Underlying Unexercised Options
(#)
Unexercisable
 
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
(#)
 
Option Exercise Price
($)
 
Option Expiration Date
 
Number of Shares or Units of Stock That Have Not Vested
(#)
 
Market Value of Shares or Units of Stock That Have Not Vested
($)
 
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#)
 
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($)
(a)
 
(b)
 
(c)
 
(d)
 
(e)
 
(f)
 
(g)
 
(h)
 
(i)
 
(j)
Donald J. McDonald
 
 
855,625
   
1,644,375
         
.17
   
10/6/11
 
 
__
 
 
__
 
 
__
 
 
__
 
 
 
625,000
   
1,875,000
         
.08
   
11/28/12
 
 
__
 
 
__
 
 
__
 
 
__
Michael Salaman
 
 
600,000
   
2,400,000
         
.25
   
1/12/12
 
 
__
 
 
__
 
 
__
 
 
__
 
 
 
750,000
   
2,250,000
         
.08
   
11/28/12
 
 
__
 
 
__
 
 
__
 
 
__
 
Stock Option Plan

Our Board of Directors initially adopted our Employee Stock Option Plan (the “Plan”) on November 16, 1998 and it was approved by our stockholders on December 21, 2001. The Plan will terminate ten years from the date of its adoption by the Board, unless sooner terminated. Our Board of Directors, on October 6, 2006, unanimously approved and recommended for shareholder approval the amendment of the Plan to increase the number of shares authorized for issuance there under from 1,000,000 shares to 20,000,000 shares. The requisite vote of our shareholders was obtained on November 15, 2006. Under our stock option plan, we may grant incentive (“ISOs”) and non-statutory (“Non-ISOs”) options to employees, non employee members of the Board of Directors and consultants and other independent advisors who provide services to us. The maximum shares of common stock which may be issued over the term of the plan shall not exceed 20,000,000 shares. As of December 31, 2007, 12,325,000 options were issued and outstanding.

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

Eligibility: Awards may be granted to any of our employees or consultants or to non-employee members of the Board of Directors or of any board of directors (or similar governing authority) of any of our affiliates.
 
44


Types of Awards: Awards under the Plan include incentive stock options and non-statutory stock options. Each award will be evidenced by an instrument in such form as the Committee may prescribe, setting forth applicable terms such as the exercise price and term of any option or applicable forfeiture conditions or performance requirements for any restricted stock grant. Except as noted below, all relevant terms of any award will be set by the Committee in its discretion. Incentive stock options may be granted only to eligible employees of the Company or any parent or subsidiary corporation and must have an exercise price of not less than one hundred percent (100%) of the fair market value of the Common Stock on the date of grant (one hundred ten percent (110%) for incentive stock options granted to any ten-percent (10%) shareholder). In addition, the term of an incentive stock option may not exceed ten (10) years. Non-statutory stock options must have an exercise price of not less than one hundred percent (100%) of the fair market value of the Common Stock on the date of grant and the term of any Non-statutory Stock Option may not exceed ten (10) years. In the case of an incentive stock option, the amount of the aggregate fair market value of Common Stock (determined at the time of grant) with respect to which incentive stock options are exercisable for the first time by an employee during any calendar year (under all such plans of his or her employer corporation and its parent and subsidiary corporations) may not exceed $100,000.

Effect of Significant Corporate Events: In the event of a change in control, the Board shall have the discretion to provide for any or all of the following: (i) the acceleration, in whole or in part, of outstanding Stock Options, (ii) the assumption of outstanding Stock Options, or substitution thereof, by the acquiring entity and (iii) the termination of all Stock Options that remaining outstanding at the time of the change of control. In the event of any change in the outstanding shares of Common Stock through merger, consolidation, sale of all or substantially all our property, or organization, an appropriate and proportionate adjustment will be made in (i) the maximum numbers and kinds of shares subject to the Plan, (ii) the numbers and kinds of shares or other securities subject to the then outstanding awards, and (iii) the exercise price for each share subject to then outstanding Stock Options. Should any change be made to the common stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding common stock as a class, appropriate adjustments shall be made to (i) the maximum number and/or class of securities that can be issued under the Plan, and (ii) the number and/or class of securities and the exercise price in effect under each outstanding option.

Amendments to the Plan: The Board of Directors may amend or modify the Plan at any time subject to the rights of holders of outstanding awards on the date of amendment or modification; provided, however, that the Board may not, without the consent of the participant, reduce the number of shares subject to the award, change the price of outstanding awards or adversely effect the provisions relating to an award’s vesting and exercise rights.
 
45

 
Item 11.  Security Ownership
 
The following table sets forth the beneficial ownership of our Common Stock as of December 31, 2007, by (i) each director and each executive officer, (ii) and all directors and executive officers as a group, and (iii) persons (including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of l934), known by us to be the beneficial owner of more than five percent of its common stock. Shares of Common Stock subject to options exercisable within 60 days from the date of this table are deemed to be outstanding and beneficially owned for purposes of computing the percentage ownership of such person but are not treated as outstanding for purposes of computing the percentage ownership of others. As of December 31, 2007, there were 94,972,225 shares issued and outstanding.


 
 
Shares of Common Stock
Beneficially Owned
 
Name and Address of Owner
 
Number
 
Percent (%)
 
 
 
 
 
 
 
Officers and Directors
 
 
 
 
 
 
 
 
 
 
 
Michael Salaman (1)
       c/o Skinny Nutritional Corp.
       3 Bala Plaza East, Suite 117, Bala Cynwyd, PA 19004
 
 
10,862,657
 
 
12.4
%
               
Donald McDonald (2)
             
c/o Skinny Nutritional Corporation
             
3 Bala Plaza East Suite # 117 Bala Cynwyd PA 19004
   
2,250,000
   
2.3
%
               
Michael Reis (3)
        c/o Skinny Nutritional Corp.
        3 Bala Plaza East, Suite 117, Bala Cynwyd, PA 19004
 
 
521,125
 
 
*
 
 
             
All Directors and Officers as a Group (3 Persons)
   
13,633,782
   
13.6
 
 
 
 
 
 
 
 
 
Other Beneficial Owners
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Charles Hallinan
P.O. Box 915, Bala Cynwyd, PA 19004
 
 
5,011,015
 
 
5.3
%
 
 
 
 
 
 
 
 
Yehuda Dachs
P.O. Box 495, Lakewood, NJ 08701
 
 
7,619,974
 
 
7.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_____________________
*
Denotes ownership percentage of less than 1%.
(1)
Based on information set forth in a Schedule 13D filed with the SEC on October 16, 2006. Includes vested options to purchase 1,950,000 shares of common stock. Excludes unvested options to purchase 4,050,000 shares of common stock. Excludes 2,075,000 shares of restricted common stock granted on March 24, 2008.
(2)
Includes options to purchase 2,250,000 shares of Common Stock and excludes 2,750,000 unvested options Excludes 2,075,000 shares of restricted common stock granted on March 24, 2008.
 
46


Item 12:  Certain Relationships and Related Transactions.
 
For information concerning employment agreements with, and compensation of, our executive officers and directors, see the disclosure in the section of this Annual Report on Form 10-KSB captioned “Executive Compensation.” 

We had obtained a $500,000 letter of credit with Wachovia Bank to secure our purchase orders with Agrokor, a former supplier. This letter of credit was secured by personal assets of our Chairman and bore interest at a rate of 7.5% per annum. We borrowed $314,000 against this letter of credit in placing our initial order with Agrokor for 1,200,000 bottles of product. The letter of credit was originally supported by a $500,000 demand note (line of credit) issued to Wachovia through Madison Bank. On June 1, 2005, our obligations were transferred to Madison Bank. The interest on the demand note is one percent above the prime rate and the outstanding balance is due on the bank’s demand. On January 4, 2007, we entered into a Forbearance Agreement with Madison Bank concerning the repayment of this obligation. Pursuant to the Forbearance Agreement, we and the Bank agreed to the following repayment schedule for the outstanding balance due: (a) an initial amount of $17,000 was paid upon execution of the Agreement; (b) monthly installments of $5,000 will be payable by the first day of each month through May 2007; and (c) a final payment of the remaining outstanding balance due will be due on or before May 31, 2007. Interest will continue to accrue on the note at the rate of 1% above the Wall Street Journal Prime Rate. In addition, in order to secure the repayment of the note and our obligations under the Agreement, our Chairman pledged certain shares of common stock of other publicly traded companies held by him, we granted the Bank a first priority security interest in its accounts and other assets and our Chairman and certain of his affiliates provided personal guarantees for the loan amount. In the event the aggregate market value of the pledged securities is less than $350,000, then the Bank may exercise its rights to accelerate repayment of the note and otherwise take such actions as is permitted under the Agreement to protect its security interest in the collateral.
 
On April 4, 2007, the Company closed on a secure loan arrangement with Valley Green Bank pursuant to which it will receive funds in the amount of $350,000. The Company has applied this amount to satisfy its obligations to Madison Bank. Interest will be charged on the unpaid principal of this new loan arrangement until the full amount of principal has been paid at the rate of 8.25% per annum. The Company was obligated to repay this new loan in full immediately on the bank’s demand, but in no event later than March 20, 2008. Since that date we have been in discussions with the bank to extend the term of the loan. No assurances, however, can be given that the bank will extend the loan. Interest payments are due on a monthly basis. Pursuant to this arrangement with Valley Green Bank, the loan is secured by collateral consisting of a perfected first priority pledge of certain marketable securities held by the Company’s Chairman and entities with which he is affiliated. The Company also agreed to a confession of judgment in favor of the bank in the event it defaults under the loan agreements. The loan agreements also require the consent of the bank for certain actions, including incurring additional debt and incurring certain liens.
 
On November 23, 2007, the Company entered into a one-year factoring agreement with United Capital Funding of Florida (“UCF”). The agreement provides for an initial funding limit of $300,000. As of December 31, 2007, we had received $485,058 of funding through this arrangement. All accounts submitted for purchase must be approved by UCF. The applicable factoring fee is 0.45% of the face amount of each purchased account and the purchase price is 80% of the face amount. UCF will retain the balance as a reserve, which it holds until the customer pays the factored invoice to UCF. In the event the reserve account is less than the required reserve amount, we will be obligated to pay UCF the shortfall. In addition to the factoring fee, we will also be responsible for certain additional fees upon the occurrence of certain contractually-specified events. As collateral securing the obligations, we granted UCF a continuing first priority security interest in all accounts and related inventory and intangibles. Upon the occurrence of certain contractually-specified events, UCF may require us to repurchase a purchased account on demand. In connection with this arrangement, each of our Chairman and Chief Executive Officer agreed to personally guarantee our obligations to UCF. The agreement will automatically renew for successive one year terms until terminated. Either party may terminate the agreement on three month’s prior written notice. We are liable for an early termination fee in the event we fail to provide them with the required written notice.
 
47


Item 13.  Exhibits

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

Exhibit No.
Description
 
 
3.1
Certificate of Incorporation, as amended (filed as Exhibit 3.1 to Registration Statement on Form SB-2 filed with the Commission on September 18, 2002)
 
 
3.1.1
Certificate of Amendment to Articles of Incorporation (filed as Exhibit 3.1 to Current Report on Form 8-K filed on December 28, 2006).
 
 
3.2
Amended By-laws (filed as Exhibit 3.2 to Current Report on Form 8-K filed on November 13, 2006).
 
 
4.1
Specimen of Common Stock Certificate (filed as Exhibit 4.1 to Registration Statement on Form SB-2 filed with the Commission on September 18, 2002).
 
 
4.2
Form of Warrants Issued March 30, 2004 (filed as Exhibit 4.2 to Registration Statement on Form 10-SB filed with the Commission on May 13, 2005).
 
 
4.3
Form of Convertible Debentures issued during 2005 fiscal year (filed as Exhibit 4.3 to Registration Statement on Form 10-SB filed with the Commission on October 19, 2005).
 
 
4.4
Form of Warrant granted upon conversion of Convertible Debentures (filed as Exhibit 4.4 to Registration Statement on Form 10-SB filed with the Commission on October 19, 2005).
 
 
4.5
Form of Warrant issued in Private Sales of Securities (filed as Exhibit 4.5 to Registration Statement on Form 10-SB/A filed with the Commission on February 8, 2006).
 
 
4.6
Form of Convertible Note issued to our Chairman and certain other individuals as of March 20, 2006 (filed as Exhibit 4.6 to Registration Statement on Form 10-SB/A filed with the Commission on March 23, 2006).
 
 
4.7
Form of Convertible Note issued June 5, 2006 (filed as Exhibit 4.1 to Current Report on Form 8-K dated June 9, 2006.
 
 
4.8
Note Modification Agreement between the Company and James Robb (filed as Exhibit 4.1 to Quarterly Report on Form 10-QSB for the quarter ended September 30, 2006).
 
 
4.9
Form of Convertible Note issued in October 2006 (filed as Exhibit 4.9 to Annual Report on Form 10-KSB for the year ended December 31, 2006.
 
 
4.10
Form of Warrant issued in February 2007 pursuant to Distribution Agreement (filed as Exhibit 4.10 to Annual Report on Form 10-KSB for the year ended December 31, 2006.
   
4.11
Secured Note payable to Valley Green Bank (filed as Exhibit 4.11 to Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007).
 
48

 
10.1
Agreement and Plan of Reorganization with Inland Pacific Resources, Inc. (filed as Exhibit 10.2 to Registration Statement on Form SB-2/A filed with the Commission on January 29, 2003).
 
 
10.2#
Agreement with Jamnica, d.d., as amended, dated July 21, 2004 (filed as Exhibit 10.2 to Registration Statement on Form 10-SB/A filed with the Commission on February 8, 2006).
 
 
10.3#
Agreement with Peace Mountain Natural Beverages Corporation, dated August 1, 2004 (filed as Exhibit 10.3 to Registration Statement on Form 10-SB/A filed with the Commission on February 8, 2006).
 
 
10.4#
Agreement with Interhealth Nutraceuticals, Inc., dated June 9, 2004 (filed as Exhibit 10.4 to Registration Statement on Form 10-SB/A filed with the Commission on February 8, 2006).
 
 
10.5#
Agreement with Big Geyser, Inc., dated December 14, 2004 (filed as Exhibit 10.5 to Registration Statement on Form 10-SB/A filed with the Commission on February 8, 2006).
 
 
10.6 (1)
Amended Stock Option Plan and Form of Option Award (filed as Exhibit B to definitive Information Statement dated December 5, 2006).
 
 
10.7
Demand Note held by Madison Bank (filed as Exhibit 10.7 to Registration Statement on Form 10-SB/A filed with the Commission on December 16, 2005).
 
 
10.8
Lease Agreement dated September 12, 2005 between the Company and Rose Hill Property Assoc., Inc. (filed as Exhibit 10.8 to Registration Statement on Form 10-SB filed with the Commission on October 19, 2005).
 
 
10.9#
Agreement with Exclusive Beverage Distributors dated March 20, 2006 (filed as Exhibit 10.9 to our Annual Report on Form 10-KSB for the year ended December 31, 2005).
 
 
10.10
Separation Agreement between the Company and Christopher Durkin (filed as Exhibit 10.1 to Current Report on Form 8-K filed October 11, 2006).
 
 
10.11##
Amendment Agreement between the Company and Peace Mountain Natural Beverages Corp. (filed as an Exhibit to Annual Report on Form 10-KSB for the year ended December 31, 2006).
 
 
10.12
Termination Agreement between the Registrant, Jamnica, d.d. and Jana North America, Inc. (filed as an Exhibit to Annual Report on Form 10-KSB for the year ended December 31, 2006).
 
 
10.13
Forbearance Agreement between the Company and Madison Bank (filed as Exhibit 10.1 to Current Report on Form 8-K filed on January 10, 2007).
 
 
10.14##
Distribution Agreement with Geltech LLC dated February 27, 2007. (filed as an Exhibit to Annual Report on Form 10-KSB for the year ended December 31, 2006).
   
10.15*##
Letter Agreement with Pasqual Croce
   
21
Subsidiaries of Small Business Issuer. (filed as Exhibit 21 to Annual Report on Form 10-KSB for the year ended December 31, 2007).
 
 
31.1*
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15(d) -14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32.1*
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
____________
(1)  Indicates a management plan or contract.
49

 
Item 14.  Principal Accountant Fees and Services.
 
We have selected Connolly, Grady & Cha, PC, as our independent accountants for the current fiscal year. The audit services to be provided by Connolly, Grady & Cha consist of examination of financial statements, services relative to filings with the Securities and Exchange Commission, and consultation in regard to various accounting matters. The financial statements included with this Annual Report have been audited by Connolly, Grady & Cha. The following table presents fees for professional audit services rendered by Connolly, Grady & Cha for each of the two fiscal years set forth below, and fees billed for other services performed for the years ended December 31, 2007 and 2006. Fees for professional services by our independent auditors for the fiscal years 2007 and 2006 in each of the following categories are as follows:
 
 
 
Year Ended
December 31, 2007
 
Year Ended
December 31, 2006
 
Audit Fees (1)
 
$
25,000
 
$
25,000
 
Audit-Related Fees (2)
   
0
   
0
 
Tax Fees (3)
   
10,000
   
10,000
 
All Other Fees (4)
   
0
   
0
 
Total
 
$
35,000
 
$
35,000
 
______________
(1)
Audit services consist of audit work performed in the preparation of financial statements for the fiscal year and for the review of financial statements included in Quarterly Reports on Form 10-Q during the fiscal year, as well as work that generally only the independent auditor can reasonably be expected to provide, including consents for registration statement flings and responding to SEC comment letters on annual and quarterly filings.
 
(2)
Audit-related services consist of assurance and related services that are traditionally performed by the independent auditor, including due diligence related to mergers and acquisitions, agreed upon procedures report and accounting and regulatory consultations.
 
(3)
Tax services consist of all services performed by the independent auditor’s tax personnel, except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.
 
(4)
Other services consist of those service not captured in the other categories.
 
We have determined that the services provided by our independent auditors and the fees paid to them for such services has not compromised the independence of our independent auditors.
 
As our Board of Directors currently consists solely of three individuals, only one of whom is independent, the engagement of our independent accountants and auditors is approved by our Board of Directors acting as the audit committee. Accordingly, our entire Board, he has responsibility for appointing, setting compensation and overseeing the work of the independent auditor.

Pursuant to Section 10A(i) (2) of the Securities Exchange Act of 1934, we are responsible for listing the non-audit services approved by our Board (acting as the Audit Committee) to be performed by our independent registered public accounting firm. During the fourth quarter of fiscal 2005, we did not pre-approve the performance of any non-audit services by our independent registered public accounting firm.
 
50

 


Skinny Nutritional Corp
and Subsidiary
December 31, 2007

Contents

 
Page
 
 
Independent Auditor's Report
52
 
 
Financial Statements
 
 
 
Consolidated Balance Sheet, December 31, 2007
53-54
 
 
Consolidated Statements of Operations
 
For the Years Ended December 31, 2007, 2006 and 2005
55
 
 
Consolidated Statements of Stockholders' Equity (Deficit)
 
For the Year Ended December 31, 2007 and 2006
56-57
 
 
Consolidated Statements of Cash Flows
 
For the Years Ended December 31, 2007 and 2006 and 2005
58-59
 
 
Notes to Consolidated Financial Statements
60-75
 

 
51


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
Skinny Nutritional Corp and Subsidiary
3 Bala Plaza - Suite 117
Bala Cynwyd, PA 19004

We have audited the accompanying consolidated balance sheets of Skinny Nutritional Corp (a Nevada Corporation) and Subsidiary as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the years in the three year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

As more fully described in Note 20 to the financial statements, the Company has not valued their stock options and warrants as described by generally accepted accounting principles. In our opinion, the accounting principles generally accepted in the United States of America require that these instruments be valued using option-pricing models adjusted for the unique characteristics of those instruments.

In our opinion except for the matters discussed in the preceding paragraph, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Skinny Nutritional Corp and Subsidiary as of December 31, 2007 and 2006 and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred losses since inception and has not yet been successful in establishing profitable operations. Further, the Company has current liabilities in excess of current assets. These factors raise substantial doubt about the ability of the Company to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 
/s/ Connolly, Grady & Cha, P.C.
 
Certified Public Accountants

Philadelphia, Pennsylvania

April 14, 2008
 
52

 
Skinny Nutritional Corp and Subsidiary

Consolidated Balance Sheet

December 31, 2007
 
ASSETS
 
   
December31,
 
 
 
2007
 
2006
 
CURRENT ASSETS
 
 
 
 
 
     Cash and cash equivalents
 
$
15,043
 
$
118,683
 
     Cash - escrow, restricted
   
3,697
   
56,485
 
     Accounts receivable
   
401,487
   
3,406
 
     Inventory
   
86,575
       
 Prepaid expenses
   
23,795
   
46,460
 
                    Total current assets
   
530,597
   
225,034
 
 
         
 
         
 
         
FIXED ASSETS
         
     Fixed assets
   
0
   
9,973
 
     Accumulated depreciation
   
0
   
(3,699
)
 
         
                    Total fixed assets
   
0
   
6,274
 
 
         
 
         
OTHER ASSETS
         
     Security deposits
   
0
   
0
 
 
         
                    TOTAL ASSETS
 
$
530,597
 
$
231,308
 

53

 
Skinny Nutritional Corp and Subsidiary
Consolidated Balance Sheet


LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
   
 December 31,
 
    
 
2007
 
2006
 
CURRENT LIABILITIES
 
 
 
 
 
     Current maturities of long term debt
 
$
   
$
$300,283
 
     Line of credit
   
340,000
   
314,533
 
     Accounts payable
   
610,256
   
296,596
 
     Accrued expenses
   
57,500
   
30,000
 
 Accrued Interest Payable
   
84,563
   
118,906
 
 Revolving Line of Credit
   
317,560
       
     Notes Payable
   
220,936
       
     Current portion of convertible notes
   
310,000
   
2,395,000
 
     Settlements payable
   
120,000
   
180,000
 
 
         
                    Total current liabilities
   
2,060,815
   
3,635,318
 
 
         
LONG TERM LIABILITIES
         
     Long-term debt, net of current portion
           
     Convertible notes payable, net of current portion
                          
 
         
                    Total long term liabilities
           
 
         
 STOCKHOLDERS’ DEFICIT
         
     Preferred stock, $.001 par value, 1,000,000 shares
         
         authorized, none issued and outstanding
         
     Common stock, $.001 par value, 250,000,000 shares
         
         authorized, 94,972,225 shares issued and outstanding
         
         at December 31, 2007 and 42,673,327 issued and
         
         outstanding at December 31, 2006
   
94,972
   
42,673
 
     Additional paid-in capital
   
11,502,446
   
6,852,208
 
     (Deficit) accumulated during the development stage
   
(13,127,636
)
 
(10,298,891
)
 
         
                    Total stockholders’ deficit
   
(1,530,218
)
 
(3,404,010
)
 
         
                    TOTAL LIABILITIES AND
         
                      STOCKHOLDERS’ DEFICIT
 
$
530,597
 
$
231,308
 

See accompanying notes and accountant’s report.
 
54

 
Skinny Nutritional Corp and Subsidiary
Consolidated Statements of Operations


 
 
For the Years Ended December 31,
 
 
 
2007
 
2006
 
2005
 
 
 
 
 
 
 
 
 
Revenue - net
 
$
752,825
 
$
628,380
 
$
514,146
 
 
             
Cost of goods sold
   
530,312
   
576,882
   
456,270
 
 
             
Gross profit
   
222,513
   
51,498
   
57,876
 
 
             
Expenses
             
Marketing and advertising
   
721,442
   
394,949
   
1,307,186
 
General and administrative
   
2,220,492
   
1,894,768
   
1,950,320
 
 
             
Total expenses
   
2,941,934
   
2,289,717
   
3,257,506
 
 
             
Net (loss) from operations
   
(2,719,421
)
 
(2,238,219
)
 
(3,199,630
)
 
             
Other income (expense)
             
Loss from disposition of fixed assets
   
(9,690
)
 
(114,887
)
   
Other Income
   
20,172
             
Interest expense
   
(119,806
)
 
(32,932
)
 
(230,216
)
Interest income
          
82,592
   
  
 
 
             
Total other expenses
   
(109,324
)
 
(65,227
)
 
(230,216
)
 
             
Income Taxes
             
Current
   
-0-
   
-0-
   
-0-
 
Deferred
   
-0-
   
-0-
   
-0-
 
 
             
Total income taxes
   
-0-
   
-0-
   
-0-
 
 
             
Net (Loss)
   
(2,828,745
)
 
($2,303,446
)
 
($3,429,846
)
(Loss) per common share
   
($.03
)
 
($ .10
)
 
($ .26
)
 
See accompanying notes and accountant’s report.
 
55

 
Skinny Nutritional Corp and Subsidiary
Statement of Stockholders’ Equity (Deficit)
For The Years Ended December 31, 2007 and 2006
 
 
 
 
 
 
 
Additional
 
Stock
 
  
 
 
 
 Common Stock
 
Paid-In
 
Subscription
 
 Accumulated
 
 
 
Shares
 
Amount
 
Capital
 
Receivable
 
 Deficit
 
Balance, December 31, 2005
 
 
15,115,000
 
$
15,115
 
$
4,754,303
 
$
 
 
$
(7,995,445
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conversion of convertible debt into
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
common shares at $.40 per share
 
 
302,500
 
 
303
 
 
120,697
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
for cash at $.40 per share
 
 
687,500
 
 
687
 
 
274,313
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
for cash at $.05 per share
 
 
8,000,000
 
 
8,000
 
 
392,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
for cash at $.075 per share
 
 
3,558,467
 
 
3,558
 
 
263,345
 
 
 
 
 
 
 
                                 
Issuance of common stock for
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
services at $.01 per share
 
 
900,000
 
 
900
 
 
8,100
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conversion of loans into
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
common shares at $.05
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
per share
 
 
12,840,000
 
 
12,840
 
 
629,160
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest shares on above
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
conversion at $.144 per share
 
 
69,861
 
 
70
 
 
9,990
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock in
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
exchange for convertible
 
 
 
 
 
 
 
 
 
 
           
debentures at $.10
 
 
1,200,000
 
 
1,200
 
 
118,800
 
           
 
 
 
 
 
 
 
 
 
 
 
           
Warrants issued in exchange
 
 
 
 
 
 
 
 
 
 
           
for services
 
 
 
 
 
 
 
 
85,200
 
           
                                 
Options issued in exchange
 
 
 
 
 
 
 
 
 
 
           
for services
 
 
 
 
 
 
 
 
196,300
             
                                 
Net Loss for year ended
                               
December 31, 2006
 
 
  
 
 
 
 
 
               
(2,303,446
)
 
 
 
 
 
 
 
 
 
 
             
Balance, December 31, 2006 
 
 
42,673,328 
 
 
42,673 
 
 
6,852,208 
 
     
$
(10,298,891
)

(Continued)
 
56

 
Skinny Nutritional Corp and Subsidiary
Statement of Stockholders’ Equity (Deficit)
For The Years Ended December 31, 2007 and 2006
 
 
 
Common Stock
 
Additional
Paid-In
 
Stock
Subscription
 
Accumulated
 
 
 
Shares
 
Amount
 
Capital
 
 Receivable
 
Deficit
 
Balance, December 31, 2006
 
 
42,673,328 
 
 
42,673 
 
$
6,852,208 
 
$
 
 
$
(10,298,891
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of Common Stock for Cash
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At .075 Cents per Share
 
 
15,848,179
   
15,849
   
1,172,214
     
 
 
 
 
 
 
 
                   
 
 
 
 
Conversion of convertible debt into
                               
Common shares at $.40 per share
   
40,000
   
40
   
19,960
             
                                 
Conversion of convertible debt into
 
 
                   
 
 
 
 
Common shares at $.10 per share
 
 
17,900,000
   
17,900
   
1,772,100
     
 
 
 
 
 
 
 
                   
 
 
 
 
Conversion of convertible debt into
 
 
                   
 
 
 
 
Common shares at $.075 per share
 
 
3,013,333
   
3,013
   
222,987
     
 
 
 
 
 
 
 
                   
 
 
 
 
Conversion of convertible debt into
 
 
                   
 
 
 
 
Common shares at $.05 per share
 
 
1,600,000
   
1,600
   
78,400
     
 
 
 
 
 
 
 
                   
 
 
 
 
Issuance of Common Stock
 
 
                   
 
 
 
 
For Note and Interest
 
 
2,629,720
   
2,630
   
133,314