UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Amendment No. 2

FORM 20-F/A

[    ]     REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006

OR

[    ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

OR

[    ]   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report _______________

Commission file number: 0-15276

CLEARLY CANADIAN BEVERAGE CORPORATION
(Exact name of Registrant specified in its charter)

British Columbia, Canada
(Jurisdiction of incorporation or organization)

2267 10th Avenue W.
Vancouver, British Columbia, Canada V6K 2J1
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of Each Class
None

Name of each exchange on which registered
Not applicable

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

Common Shares Without Par Value
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2006: 13,879,853 Common Shares

Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes [    ]     No [X]

If this report is an annual or transition report, indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes [    ]     No [X]

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]     No [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer [    ]     Accelerated filer [    ]      Non-accelerated filer [X]

Indicate by check mark which financial statement item Registrant has elected to follow:

Item 17 [    ]     Item 18 [X]

If this report is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [     ]     No [X]

EXPLANATORY NOTE

We are filing this Amendment No. 2 to our Annual Report on Form 20-F/A for the fiscal year ended December 31, 2006, originally filed on July 2, 2007 and amended on August 3, 2007, for the purpose of responding to comments made by the Securities and Exchange Commission in a letter dated December 12, 2007.

TABLE OF CONTENTS

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GENERAL

In this Annual Report on Form 20-F/A, all references to “Clearly Canadian”, “us”, “we” or the “Company” refer to Clearly Canadian Beverage Corporation, carrying on business as Clearly Canadian Brands, and its subsidiaries and affiliated companies. References to this “Form 20-F/A” and this “Annual Report” mean references to this Annual Report on Form 20-F/A for the year ended December 31, 2006.

We use the U.S. dollar as our reporting currency. All references in this Annual Report to “dollars” or “$” are expressed in U.S. dollars, unless otherwise indicated. See also “Item 3. Key Information” for more detailed currency and conversion information. Our consolidated financial statements which form part of the annual report are presented in U.S. dollars and are prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”) which differ in certain respects from accounting principles generally accepted in the United States (“U.S. GAAP”). The differences between Canadian GAAP and U.S. GAAP, as they relate to our business, are explained in the notes to our consolidated financial statements.

Unless otherwise indicated, all share numbers in this Annual Report give effect to the 1:10 reverse split on the common shares that was competed on May 2, 2005.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements (within the meaning of the United States Private Securities Litigation Reform Act of 1995) concerning our business strategies, market conditions, outlook and other matters. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management including, but not limited to, certain statements and projections concerning our plans, intentions, strategies, expectations, predictions, financial projections, assumptions and estimates related to accounting policies, concerning the our future activities and results of operations and other future events or conditions. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be “forward-looking statements.” Forward-looking statements contained in this report are based on current facts and analyses and include, but are not limited to, the following:

• the effect of certain transactions, including marketing arrangements and product distribution system changes, on our revenues and results of operations in future periods;
• our discussions with potential new customers and the status of these discussions;
• our ability to secure additional financing and improve operating cash flow to allow it to continue as a going concern;
• application of critical accounting policies and the effect of recent accounting pronouncements on our results of operations;
• our focus on key long-term objectives, including diversifying its alternative beverage product lines, maintaining and expanding current market share, and improving its network of distributors;
• the sufficiency and availability of our supply of raw materials and water, distribution network, contract bottling supplier facilities and property, plant and equipment related to our operations; and
• other statements related to our business and results of operations.

Forward looking statements are made based on management’s reasonable beliefs, estimates and opinions on the date the statements are made. However, these forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risk factors include, but are not limited to, general economic conditions, our ability to generate sufficient cash flows to support capital expansion plans and general operating activities; changing beverage consumption trends of consumers; competition; pricing and availability of raw materials; our ability to maintain the current and future retail listings for its beverages and to maintain favourable supply arrangements and relationships

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and procure timely and adequate production of our products; laws and regulations and changes thereto that may affect the way our products are manufactured, distributed and sold; and political and economic uncertainties including exchange controls, currency fluctuations, taxation and other laws or governmental economic, fiscal, monetary or political policies of Canada, the United States and foreign countries affecting foreign trade, investment and taxation and other factors beyond our reasonable control, which, in turn, could affect our current or future operations. See “Key Information – Risk Factors”. Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in forward-looking statements. The reader is cautioned not to place undue reliance on forward-looking statements. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this filing. Readers should carefully review the cautionary statements and risk factors contained in this and other documents that we file from time to time with the Securities and Exchange Commission.

Not applicable.

Not applicable.

Not applicable.

Annual Information

The following selected financial data has been derived from our audited consolidated financial statements. This financial data is in U.S. dollars, unless otherwise indicated, and is presented in accordance with Canadian GAAP and U.S. GAAP, as indicated. This information should be read in conjunction with, and qualified by reference to, our financial statements included in Item 18 of this Annual Report, as well as “Item 5. Operating and Financial Review and Prospects.” Included as Note 22 to the audited financial statements is a U.S. GAAP reconciliation that describes the principal differences between Canadian GAAP and U.S. GAAP as they relate to the financial statements.

Statement of Operations Data:

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______________________
(1)      Based on weighted average shares outstanding. For accounting purposes, there were 10,223,284 shares of our common stock outstanding as of December 31, 2006 (not including 37,300 shares owned by us, as previously acquired under normal course issuer bids).

Balance Sheet Data:

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Currency Translations

Effective December 31, 1997, we adopted the U.S. dollar as our reporting currency. The assets and liabilities of our Canadian operations are translated into United States dollars at the rates of exchange at the balance sheet dates, and revenue and expenses are translated at the average rates of exchange for the periods of operation. All references in this Annual Report, including our financial statements, to “dollars” or “$” are expressed in U.S. dollars, unless otherwise indicated.

The following table sets out the exchange rates for the conversion of one Canadian dollar into U.S. dollars in effect at the end of the following periods, and the average exchange rates (based on the average of the exchange rates on the last day of each month in such periods) and the range of high and low exchange rates for such periods.

The following table sets forth the high and low exchange rates for the conversion of one Canadian dollar into U.S. dollars for each of the last 6 months.

Exchange rates are based upon the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. The noon rate of exchange on June 15, 2007 as reported by the Federal Reserve Bank of New York for the conversion of one Canadian dollar into U.S. dollars was $0.9364 (US $1.00 = $1.0679 CDN).

Not Applicable.

Not Applicable.

Our business is subject to a number of risks. These risks could cause actual results to differ materially from results projected in any forward-looking statement in this report. These risks should be carefully considered because such factors may have a significant impact on our business, operating results and financial condition. The following factors contain certain forward-looking statements involving risks and uncertainties. Our actual results may differ materially from the results anticipated in these forward-looking statements.

Risks Related to Our Business

There is a risk to our operating as a going-concern. If we cannot fund our operations and/or liabilities from revenues or financing efforts, we may have to change our business plan, significantly reduce or suspend our operations, sell or merge our business

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Our financial statements have been prepared on the assumption that we are a going concern and will be able to realize our assets and discharge our liabilities in the normal course of business; however, certain events and conditions cast substantial doubt on this assumption. We had a loss of $8,247,000 for the year ended December 31, 2006 and had a working capital of $5,245,000, an accumulated deficit of $77,055,000 and a shareholders’ equity of $7,464,000 at year-end. For the year ended December 31, 2005, we also had a loss of $6,069,000 and had a working capital deficit of $446,000, an accumulated deficit of $68,714,000 and a shareholders’ equity of $1,724,000. Operations for the years ended December 31, 2006 and December 31, 2005 have been funded primarily from the issuance of capital stock and the continued support of creditors.

Management has continued to take steps to try to improve our financial results and cash flows. These steps include liquidation of non-core investments and pursuing equity financing to fund working capital requirements. Since January 2006, we have raised approximately $7,731,000 million of equity financing to fund working capital requirements. Nonetheless, we may need to seek additional sources of debt and/or equity financing in the future to fund our operations, liabilities and working capital requirements.

The financial statements do not reflect adjustments to the carrying value of assets and liabilities, the reported revenues and expenses and balance sheet classifications used that would be necessary if the going concern assumption were not appropriate. Such adjustments could be material.

We have a history of operating losses which are likely to continue unless we significantly increase sales volume and maintain fixed and variable costs

We incurred net losses of $8,247,000 (including a write down of property, plant and equipment of $137,000) during the year ended December 31, 2006 compared to net loss during the year ended December 31, 2005 of $6,069,000 (including a write down of property, plant and equipment of $382,000). and net loss of $5,531,000 during the year ended December 31, 2004 (including write down of property, plant and equipment of $721,000 and distribution rights of $1,536,000). Operating losses (gross profit less selling, general and administrative expenses) were $4,966,000 during the year ended December 31, 2006 compared to $2,800,000 during the year ended December 31, 2005, and $2,049,000 during the year ended December 31, 2004. We will likely incur additional losses during the year ending December 31, 2007. We believe that to operate at a profit we must significantly increase the sales volume for our products, achieve and maintain efficiencies in operations, maintain fixed costs at or near current levels and avoid significant increases in variable costs relating to production, marketing and distribution. Our ability to significantly increase sales from current levels will depend primarily on success in maintaining and/or increasing market share and availability for our Clearly Canadian® sparkling flavoured water and expanding distribution of our other beverage product lines into new geographic distribution areas, particularly in the United States and Canada. Our ability to significantly increase sales from current levels will also depend on success in maintaining and/or increasing market share and availability of our snack food and organic baby food lines of products recently acquired as part of our recent corporate acquisitions. Our ability to successfully enter new distribution areas will, in turn, depend on various factors, many of which are beyond our control, including, but not limited to, the continued demand for our current brands and products in target markets, the ability to price our products at levels competitive with competing products, the ability to establish and maintain relationships with distributors in each geographic area of distribution and the ability in the future to create, develop and successfully introduce new brands and products.

We have experienced a trend of declining revenue and may never be profitable

We have experienced a declining revenue trend for the past several years. During the year ended December 31, 2006, we had sales revenues of $7,462,000, compared to revenues of $8,712,000 in 2005, $11,064,000 in 2004, $13,270,000 in 2003, and $20,205,000 in 2002. From 2001 to 2006, our revenues declined 68%. This declining revenue trend occurred while the industry for the alternative beverage category, according to Beverage Marketing Corporation of New York, has grown in market size in the United States from $3.8 billion in wholesale dollar sales in 1992 to over $14 billion. Competition has intensified in the alternative beverage category and we compete for market share against some companies with substantially greater marketing, personnel, distribution and production resources. In an effort to compete over the past five years, we spent substantial resources marketing and repositioning our Clearly Canadian® sparkling flavoured water brand and introducing new brands, including Clearly Canadian O+2®, Tré Limone®, Reebok Fitness Water, reformulated Clearly Canadian® sparkling flavoured and Clearly Canadian® Natural Enhanced Water beverage products. Despite such marketing efforts, we had only

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limited success with the Clearly Canadian O+2®, Tré Limone® and Reebok Fitness Water and we no longer market these products. We may not be successful in reversing the declining revenue trend, and we may not be able to generate sufficient revenues from sales to return to profitability.

Dependence on key management employees

Our business is dependent upon the continued support of existing senior management, including our Chief Executive Officer, Brent Lokash, and our President, David Reingold. Mr. Lokash was appointed as our President on September 29, 2005 following the resignation of Douglas Mason as President, and he has been responsible for our business planning, corporate and brand initiatives and financings. Mr. Lokash resigned as President of the Company on May 29, 2007 and was appointed Chief Executive Officer on the same day. Mr. Reingold was appointed our President on May 29, 2007. The loss of Mr. Lokash or Mr. Reingold, or any other key members of our existing management, could adversely affect our business and prospects.

Our operations may be adversely affected by exchange controls, currency fluctuations, taxation laws and other laws or policies of Canada, the United States or other countries

Our operations are carried out primarily in Canada and in the U.S., with less significant operations in other countries. Such operations and the associated capital investments could be adversely affected by exchange controls, currency fluctuations, taxation laws and other laws or policies of Canada, the United States and other countries affecting foreign trade, investment and taxation, which, in turn, could affect our current or future foreign operations.

Our future operating results are subject to a number of uncertainties

Our future operating results are subject to a number of uncertainties, including our ability to market our products and to develop and introduce new products, our ability to penetrate new markets, the marketing efforts of distributors and retailers of our products, most of which also distribute or sell products that are competitive with our products, the number, quantity and marketing forces behind products introduced by competitors and laws and regulations and any changes thereto, especially those that may affect the way in which our products are marketed and produced, as well as laws or regulations that are enforceable by such regulatory authorities as the Food and Drug Administration.

Enforcement of civil liabilities

As Canadian citizens and residents, some of our directors and officers may not subject themselves to U.S. legal proceedings so that recovery on judgments issued by U.S. courts may be difficult or impossible. While reciprocal enforcement of judgment legislation exists between Canada and the U.S., Clearly Canadian and its insiders may have defences available to avoid in Canada the effect of U.S. judgments under Canadian law, making enforcement difficult or impossible. Our management may not have any personal assets available in the U.S. to satisfy judgments of U.S. courts. Therefore, our shareholders in the United States may have to avail themselves of remedies under Canadian corporate and securities laws for perceived oppression, breach of fiduciary duty and like legal complaints. Canadian law may not provide for remedies equivalent to those available under U.S. law.

Our results of operations have fluctuated and are likely to continue to fluctuate

Our results of operations have fluctuated in the past and are likely to continue to fluctuate from period to period depending on a number of factors, including the timing and receipt of significant product orders, increased cost in the completion of product orders, increased competition, regulatory and other developments in our markets, changes in the demand for our products, the cancellation of product orders, difficulties in collection of receivables, the timing of new product introductions, changes in pricing policies by us and our competitors, delays in the introduction of products by us, expenses associated with the acquisition of production resources and raw materials from third parties, the mix of sales of our products, seasonality of customer purchases, personnel changes, political and economic uncertainty, the mix of international and North American revenue, tax policies, foreign currency exchange rates and general economic and political conditions.

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We believe that economic developments and trends have adversely affected and may continue to affect levels of consumer spending in the markets that we serve. We believe that these and other factors have adversely affected demand for our products. While we believe that economic conditions in certain of our markets show signs of improvement, we also believe that economic conditions and general trends are likely to continue to affect demand for premium priced beverage products such as we produce and sell. Such factors may also increase the amount of doubtful accounts or adversely affect the likelihood of collection of such accounts with third parties, such as distributors and retailers, to whom we sells products.

Because we are unable to forecast with certainty the receipt of orders for products and our expense levels are relatively fixed and are based, in part, upon our expectation of future revenue, if revenue levels fall below expectations, operating results are likely to be adversely affected. As a result, net income may be disproportionately affected because a relatively small amount of our expenses vary with our revenue.

Based on all of the foregoing factors, we believe that our quarterly and annual revenue, direct expenses and operating results are likely to vary significantly in the future, that period-to-period comparisons of the results of operations may not necessarily be meaningful and that such comparisons should not be relied upon as an indication of future performance.

Our intellectual property rights are critical to our success, and the loss of such rights could materially and adversely affect our business

We regard our trademarks, trade dress, copyrights, trade secrets and similar intellectual property as critical to our success and we attempt to protect such property with registered and common law trademarks and copyrights, restrictions on disclosure and other actions to forestall infringement. We rely on a combination of trademark and trade secrecy laws, confidentiality procedures and contractual provisions to protect our intellectual property rights. In the past, we have licensed elements of our distinctive trademarks, trade dress and similar proprietary rights to third parties, and we anticipate that we may license such elements in the future as well. While we attempt to ensure that the quality of our brand is maintained by such licensees, no assurances can be given that such licensees will not take actions that might materially and adversely affect the value of our proprietary rights or the reputation of our products, either of which could have a material adverse effect on our business. Furthermore, there can be no assurance that third parties will not infringe or misappropriate our trademarks, trade dress and similar proprietary rights. Despite our precautions, some or all of the trade secrets and other know-how that we consider proprietary could be independently developed, could otherwise become known by others or could be deemed to be in the public domain. If we lose some or all of our intellectual property rights, our business may be materially and adversely affected.

Increases in the cost of packaging and raw materials could reduce profits

We spend significant amounts on packaging for our products. We consider packaging to be an important component in the sale of our products. Packaging has been very important to our success and helps to distinguish our products from those of our competitors. We, and our co-packers from whom we buy products, purchase primary packaging supplies, including bottles, caps, preforms, plastic sleeves, labels, trays, jars, lids, tins and bags from outside vendors. In addition, we, and our co-packers, purchase a significant portion of the ingredients needed to produce our products, including sweeteners, flavors, dried fruits, nuts, vegetable products, rice, grains, milk and egg products and carbon dioxide from outside vendors. We rely on our ongoing relationships with key suppliers and co-packers to support our operations. If the cost of our packaging or raw materials increases significantly, the total cost of our products would increase significantly, which could adversely affect the sales of our products, as well as our financial performance.

We have made estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our financial statements

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our financial statements in conformity with Canadian GAAP. Actual results could differ significantly from anticipated results should such estimates and/or assumptions prove to be materially incorrect or inaccurate. We believe that the information herein (see “Item 5.

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Operating and Financial Review and Prospects – Application of Critical Accounting Policies” and “Note 2” to financial statements) addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and beyond our control.

Our directors, officers, promoters and other members of management may serve as directors, officers, promoters and other members of management of other companies, therefore it is possible that a conflict of interest may arise

Certain of our directors, officers, and other members of management, including Brent Lokash, Edwin Fok, Andrew Strang, David Reingold George Reznik and Marco Markin, presently serve as directors, officers, promoters and members of management of other companies and therefore it is possible that a conflict may arise between their duties as a director, officer, promoter or member of management of Clearly Canadian and their duties as a director, officer, promoter or member of management of such other companies.

Our directors and officers are aware of the existence of laws governing accountability of directors and officers for corporate opportunity and requiring disclosures by directors of conflicts of interest and we will rely upon such laws in respect of any directors’ and officers’ conflicts of interest or in respect of any breaches of duty by any of our directors or officers. All such conflicts will be disclosed in accordance with the provisions of applicable corporate legislation and directors or officers will govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law.

Our markets are highly competitive

We operate in highly competitive geographic and product markets, and most of our markets are dominated by competitors with greater resources. We cannot be certain that we could successfully compete for sales to distributors or stores that purchase from larger, more established companies that have greater financial, managerial, sales and technical resources. In addition, we compete for limited retailer shelf space for our products. Larger competitors, such as mainstream food and beverage companies including but not limited to Coca-Cola, PepsiCo, Cadbury, Hain-Celestial, Heinz, Nestle, and Johnvince Foods, also may be able to benefit from economies of scale, pricing advantages or the introduction of new products that compete with our products. Retailers also market competitive products under their own private labels.

In the future, competitors may introduce other products that compete with our products and these competitive products may have an adverse effect on our business, results of operations and financial condition.

We also compete with other manufacturers in the procurement of natural and organic product ingredients, which may be less plentiful in the open market than conventional product ingredients. This competition may increase in the future along with increasing public demand for natural and organic products. This could cause our expenses to increase or could limit the amount of product that we can manufacture and sell.

Consumer preferences for our products are difficult to predict and may change

A significant shift in consumer demand away from our products or our failure to maintain our current market position could reduce our sales or the prestige of our brands in our markets, which could harm our business. While we continue to diversify our product offerings, we cannot be certain that demand for our products will continue at current levels or increase in the future.

Our acquisition strategy exposes us to risk

We intend to continue to grow our business in part through the acquisition of new brands, both in Canada and the United States. Our acquisition strategy is based on identifying and acquiring brands with products that complement our existing product mix. We cannot be certain that we will be able to successfully:

-  identify suitable acquisition candidates;

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-  negotiate identified acquisitions on terms acceptable to us; or

-  integrate acquisitions that we complete.

We may encounter increased competition for acquisitions in the future, which could result in acquisition prices we do not consider acceptable. We are unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed.

Our future success may be dependent on our ability to integrate brands that we acquire

Our future success may be dependent upon our ability to effectively integrate new brands that we acquire, including our ability to realize potentially available marketing opportunities and cost savings, some of which may involve operational changes. We cannot be certain:

-  as to the timing or number of marketing opportunities or amount of cost savings that may be realized as the result of our integration of an acquired brand;

-  that a business combination will enhance our competitive position and business prospects; or

-  that we will not experience difficulties with customers, personnel or other parties as a result of a business combination.

In addition, we cannot be certain that we will be successful in:

-  integrating an acquired brand’s distribution channels with our own;

-  coordinating sales force activities of an acquired brand or in selling the products of an acquired brand to our customer base; or

-  integrating an acquired brand into our management information systems or integrating an acquired brand’s products into our product mix.

Additionally, integrating an acquired brand into our existing operations will require management resources and may divert our management from our day-to-day operations. If we are not successful in integrating the operations of acquired brands, our business could be harmed.

We are dependent on the distribution services of independent distributors and independent food/beverage brokers in order to distribute and sell our products to retailers and consumers

We rely, in addition to our own sale organization, upon sales efforts made by or through distributors and brokers to sell our products. The loss of, or business disruption at, one or more of these distributors or brokers may harm our business. If we were required to obtain additional or alternative distribution and food brokerage agreements or arrangements in the future, we cannot be certain that we will be able to do so on satisfactory terms or in a timely manner.

For our beverages, we rely, to a significant extent, on the distribution services of distributors in order to distribute and sell our beverage products to retailers and consumers. Over recent years, we have observed an increased consolidation of distribution services within the alternative beverage industry. Traditional soft drink companies, which also own or operate distribution companies that provide distribution services to alternative beverage companies, have acquired or developed alternative beverage products. As a result of these developments, these distribution companies that are associated with traditional soft drink beverage companies are less willing to distribute and sell other companies’ alternative beverage products, especially if such products compete with the products that the traditional soft drink companies have within their portfolio of beverages. In view of these developments, we are attempting to diversify our distribution network to align ourselves with distribution companies that are not affiliated only with traditional soft drink beverage companies. Our recent efforts include a transition

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from our largest distributor, the Dr. Pepper/Seven-Up Bottling Group, which has been distributing our products in the Mid West, South Central and South West of the United States, to a network of these other types of distributors who distribute a variety of alternative beverages. There is no assurance that the volume of sales from these new distributors will match or exceed the volume of sales which in the past was generated by the Dr. Pepper/Seven-Up Bottling Group, and this shift in distribution strategy may have an adverse impact on our sales and results of operations.

For fiscal year 2006, over 20% of our beverage sales were to one distributor; approximately 50% of our organic and natural snack food sales were to one distributor and over 90% of our organic baby food sales was to one distributor. There is no assurance that the volume of sales to any of these distributors will match or exceed the volume of sales which in the past was generated by these customers and lower sales to these customers may have an adverse impact on our sales and results of operations.

Loss of one or more of our independent co-packers could harm our business

Our revenue is derived from products manufactured by independent co-packers. The loss of one or more co-packers, or our failure to retain co-packers for newly acquired products or brands, could delay or postpone production of our products, which could have a material adverse effect on our business, results of operations and financial condition until such time as an alternate source could be secured, which may be on less favorable terms.

Our future results of operations may be adversely affected by escalating fuel costs

Many aspects of our business have been, and continue to be, directly affected by the continuously rising cost of fuel. Increased fuel costs have translated into increased costs for the products and services we receive from our third party providers including, but not limited to, increased production and distribution costs for our products. As the cost of doing business increases, we may not be able to pass these higher costs on to our customers and, therefore, any such increase may adversely affect our earnings.

Our inability to use our trademarks could have a material adverse effect on our business

We believe that brand awareness is a significant component in a consumer’s decision to purchase one product over another in the highly competitive food, beverage and personal care industry. Although we endeavour to protect our trademarks and trade names, there can be no assurance that these efforts will be successful, or that third parties will not challenge our right to use one or more of our trademarks or trade names. We believe that our trademarks and trade names are significant to the marketing and sale of our products and that the inability to utilize certain of these names could have a material adverse effect on our business, results of operations and financial condition.

Our products must comply with government regulation

The USDA has adopted, and the Canadian Food Inspection Agency is soon to adopt regulations with respect to a national organic labelling and certification program. We currently manufacture organic products which are covered by these regulations. Future developments in the regulation of labelling of organic foods could require us to further modify the labelling of our products, which could affect the sales of our products and thus harm our business.

In addition, the Canadian Food Inspection Agency has recently adopted regulations with respect to natural health products (NHP) which require that all products sold as natural health products be NHP licensed. Some of our Clearly Canadian® Natural Enhanced Waters are natural health products and we have applied for an NHP license for these products but are able to sell them during the application process. If we do not obtain an NHP license for these products we may not be able to sell them in Canada which could harm our business.

We continually monitor and modify packaging to be in compliance with the rules of the various countries where we sell our products. Our ability to meet local packaging regulations impact our ability to sell products in these regions.

Furthermore, new government laws and regulations may be introduced in the future that could result in additional compliance costs, seizures, confiscations, recalls or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products. If we fail to comply with applicable laws and regulations, we

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may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our business, results of operations and financial condition.

Product recalls could have a material adverse effect on our business

Manufacturers and distributors of products in our industry are sometimes subject to the recall of their products for a variety of reasons, including for product defects, such as ingredient contamination, packaging safety and inadequate labelling disclosure. If any of our products are recalled due to a product defect or for any other reason, we could be required to incur the expense of the recall or the expense of any resulting legal proceeding. Additionally, if one of our significant brands were subject to recall, the image of that brand and our image could be harmed, which could have a material adverse effect on our business.

Product liability suits, if brought, could have a material adverse effect on our business

If a product liability claim exceeding our insurance coverage were to be successfully asserted against us, it could harm our business. We cannot assure you that such coverage will be sufficient to insure against claims which may be brought against us, or that we will be able to maintain such insurance or obtain additional insurance covering existing or new products. As a marketer of food, beverage and personal care products, we are subject to the risk of claims for product liability. We maintain product liability insurance and generally require that our co-packers maintain product liability insurance naming us as a co-insured.

We rely on independent certification for a number of our food products

We rely on independent certification, such as certifications of our products as “organic” or “kosher,” to differentiate our products from others. The loss of any independent certifications could adversely affect our market position as a natural and organic food company, which could harm our business.

We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified. For example, we can lose our “organic” certification if a manufacturing plant becomes contaminated with non-organic materials, or if it is not properly cleaned after a production run. In addition, all raw materials must be certified organic. Similarly, we can lose our “kosher” certification if a manufacturing plant and raw materials do not meet the requirements of the appropriate kosher supervision organization.

Our industries are subject to seasonal variations in demand.

Sales of both beverage products and snack food products are subject to seasonal variations in demand. For example, consumers in North America typically consume fewer beverage products in the late fall, winter and early spring months and consume a higher amount of snack food around some holidays. As a result, our sales and results of operations vary seasonally and such variations may be significant. For these reasons you should not rely on quarterly operating results as indications of future performance.

Our growth is dependent on our ability to introduce new products and improve existing products

Our growth depends in large part on our ability to generate and implement improvements to our existing products and to introduce new products to consumers. The innovation and product improvements are affected by the level of funding that can be made available, the technical capability of our team in developing and testing product prototypes, and the success of our management in rolling out the resulting improvements in a timely manner. If we are unsuccessful in implementing product improvements that satisfy the demands of consumers, our business could be harmed.

The profitability of our operations is dependent on our ability to manage our inventory

Our profit margins depend on our ability to manage our inventory efficiently., A number of factors, such as changes in customers’ inventory levels, access to shelf space and changes in consumer preferences, may lengthen the number of days we carry certain inventories, hence impeding our effort to manage our inventory efficiently.

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Risks Related to our Capital Stock

BG Capital Group beneficially owns a majority of the voting power and effectively controls our company, which could discourage or prevent a takeover, even if an acquisition would be beneficial to our shareholders

As of June 11, 2007, BG Capital Group Ltd. is the holder of 126,754 of our common shares, 600,000 (100% of class) of our Class B Preferred shares which are convertible into 2,460,000 common shares, and holds warrants to acquire an additional 4,000,000 common shares at a price of $1.25 per share. In the event BG Capital were to convert its Class B Preferred shares into common shares and exercise all of its rights to acquire stock on the exercise of warrants issued in connection with previous financings, as of June 11, 2007, it would own approximately 32.47% of our common shares. In addition, BG Capital has been issued 1,120,000 Variable Multiple Voting Shares on the conversion of 1,400,000 Class B Preferred shares, and will receive an additional 480,000 Variable Multiple Voting Shares on the conversion of the 600,000 Class B preferred shares still outstanding. Based on 20,423,820 of the company’s common shares which issued and outstanding as of June 11, 2007, the number of votes accruing by formula to each Variable Multiple Voting Share is approximately 20.3, for a total of 55.98% votes. The ownership of the Variable Multiple Voting Shares has the effect of increasing BG Capital’s outstanding voting power further. Accordingly, this single shareholder can influence the outcome of shareholder votes, involving the election of directors, the adoption or amendment of provisions in our articles of association and the approval of mergers or other similar transactions, such as a sale of substantially all of our assets. Such control by BG Capital could have the effect of delaying, deferring or preventing a change in control of our Company.

In addition, we have a shareholders’ rights plan and super majority approval requirements, each of which may prevent or delay a change of control.

Future financings and exercise of the outstanding options and warrants could result in significant dilution to our shareholders

During 2006 we completed several private placements, resulting in the issuance of common and preferred shares and common share warrants. Additionally, we may need to seek additional sources of debt or equity financings in the future to fund our operations and working capital requirements. As we issue stock or convertible securities in the future, including for any future financing, those issuances would also dilute our shareholders. If additional funds are raised through the issuance of equity or convertible debt securities, the newly-issued securities may have rights, preferences or privileges senior to those of existing shareholders. Furthermore, if additional shares are issued or if we acquire other businesses through the sale of equity securities, our shareholders’ will be diluted.

In addition, we have reserved, in aggregate, 1,750,000 common shares for issuance upon exercise of options under our 2005 Stock Option Plan, and 10,000,000 common shares for issuance upon exercise of options or other stock-based awards under our 2006 Equity Incentive Plan. As of June 15, 2007, we had granted options exercisable to acquire up to 2,871,683 common shares under these plans at exercise prices ranging from $1.00 to $12.26 per share. As of June 15, 2007, there are outstanding warrants to purchase up to 13,510,683 shares at exercise prices ranging from $1.25 to $4.00 per share. The issuance of shares under either of our stock plans or upon exercise of any of the outstanding stock purchase warrants will also dilute our shareholders.

Our shares have experienced significant price volatility and continued volatility may adversely affect the price of our common shares

Our common share price has experienced significant price volatility, with trading prices on the OTC Bulletin Board ranging from $0.45 (high) to $0.16 (low) during the year ended December 31, 2004, from $2.50 (high) to $1.10 (low) during the year ended December 31, 2005, from $4.41 (high) to $2.05 (low) during the year ended December 31, 2006 and from $3.18 (high) to $2.20 (low) during the period from January 1, 2007 to June 15, 2007 . There are many reasons for fluctuations in trading, including announcements of developments related to our business, fluctuations in operating results, failure to meet investor expectations, general conditions in the beverage industry and the worldwide economy, announcements of innovations, new products or product enhancements by us or our competitors, acquisitions and divestitures, changes in governmental regulations, developments in licensing arrangements and changes in relationships with trade partners and suppliers. In addition, in recent years the stock

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market in general, and the market for small capitalization stocks in particular, has experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Such fluctuations could adversely affect the market price of our common shares.

Trading on the OTC Bulletin Board may be volatile and sporadic, which could depress the market price of the common stock and make it difficult for shareholders to resell their shares

Our common stock is quoted on the OTC Bulletin Board. Trading in stock quoted on the OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like Amex. Accordingly, an investor in our common stock may have difficulty reselling his or her shares.

Because our common stock is considered a “penny stock,” our shareholders’ ability to sell or buy shares in the secondary trading market may be limited

Our common stock is subject to certain rules and regulations relating to “penny stock.” A “penny stock” is generally defined as any equity security that has a price less than $5.00 per share and that is not quoted on the NASDAQ Stock Market or a national securities exchange. Being a penny stock generally means that any broker who wants to trade in our shares (other than with established clients and certain institutional investors) must comply with certain “sales practice requirements,” including delivery to the prospective purchaser of the penny stock a risk disclosure document describing the penny stock market and the risks associated therewith. In addition, broker-dealers must take certain steps prior to selling a “penny stock,” which steps include:

• obtaining financial and investment information from the investor;

• obtaining a written suitability questionnaire and purchase agreement signed by the investor; and

• providing the investor a written identification of the shares being offered and the quantity of the shares.

If these penny stock rules are not followed by the broker-dealer, the investor has no obligation to purchase the shares. The application of these comprehensive rules will make it more difficult for broker-dealers to sell our common stock, and as a practical matter, these requirements may mean that brokers are less likely to make recommendations on our shares to its general clients.

As a result, for as long as our common stock is subject to these penny stock rules, our shareholders may have difficulty in selling their shares in the secondary trading market. In addition, prices for shares of our common stock may be lower than might otherwise prevail if our common stock were quoted on the NASDAQ Stock Market or traded on a national securities exchange, like The New York Stock Exchange or American Stock Exchange. This lack of liquidity may also make it more difficult for us to raise capital in the future through the sale of equity securities information on the company

Name and Incorporation

Clearly Canadian Beverage Corporation is a British Columbia corporation, governed by the Business Corporations Act (British Columbia. The Company was incorporated under the name Cambridge Development Corporation on March 18, 1981. The Company subsequently changed its name to Bridgewest Development Corporation on October 28, 1983, to BDC Industries Corp. on November 15, 1984 and to the Jolt Beverage Company, Ltd. on September 3, 1986. On December 14, 1987, the Jolt Beverage Company, Ltd. amalgamated with Interbev Packaging Corp. and

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Brewmaster Systems Ltd. and on May 13, 1988, the Company changed its name to International Beverage Corporation. The Company changed its name to Clearly Canadian Beverage Corporation on May 14, 1990 and is. The Company registered the trade name, Clearly Canadian Brands, in British Columbia on June 5, 2007 and currently carries on business as Clearly Canadian Brands.

The Company’s corporate head office is presently located at 2267 10th Avenue W., Vancouver, British Columbia V6K 2J1 (telephone no: (604) 742-5300) and our registered and records offices are located at 1780 - 400 Burrard Street, Vancouver, British Columbia, V6C 3A6. We do not have an agent in the U.S.

Material Events

In fiscal 2006, the Company completed the following material transactions:

• In August 2006, the Company settled litigation with respect to its Blue Mountain Springs Ltd. subsidiary. The terms of the settlement included the issuance of 624,314 of the Company’s common shares with a fair value at the time of issuance of $1,529,000;

• In August 2006, the Company completed a private placement of 333,334 of the Company’s common shares issued at $3.00 per share, together with a warrant to purchase 333,334 of the Company’s common shares exercisable at $3.25 per share. In connection with the private placement, the Company paid broker fees of $120,000 and granted broker warrants to purchase 23,333 of the Company’s common shares exercisable at $3.25 per share;

• In June 2006, the Company completed a private placement of 1,205,000 of the Company’s common shares issued at $2.75 per share. In connection with the private placement, the Company paid broker fees of $397,649 and granted broker warrants to purchase 84,350 of the Company’s common shares exercisable at $3.00 per share;

• In June 2006, we relinquished our right to take water from our Thornton well site in Innisfill, Ontario and sold our water equipment and storage tanks at the Thornton well site for $400,000 CDN; and

• In May 2006, the Company completed a private placement of 1,312,500 of the Company’s common shares issued at $2.00 per share. In connection with the private placement, the Company paid broker fees of $313,800 and granted broker warrants to purchase 91,525 of the Company’s common shares exercisable at $2.25 per share. As a condition of this financing, the participants in the $1,000,000 private placement which we completed in December 2005 agreed to surrender all but 4,120,000 warrants of their 20,000,000 warrants issued with that private placement.

Subsequent to the end of fiscal 2006, the Company has completed the following material transactions:

• In April, 2007, the Company completed a private placement of 333,000 of the Company’s common shares issued at $3.00 per share, together with a warrant to purchase 333,000 of the Company’s common shares, vesting upon issuance, exercisable at $3.25 per share and expiring in two years;

• In March, 2007, the Company completed a private placement of 833,000 of the Company’s common shares issued at $3.00 per share, together with a warrant to purchase 833,000 of the Company’s common shares, exercisable at $3.25 per share. In connection with the private placement, the Company paid broker fees of $287,730 and granted broker warrants to purchase 23,333 of the Company’s common shares exercisable at $3.25 per share;

Subsequent to the end of fiscal 2006, the Company completed the following acquisitions which have transformed the Company from a marketer of premium alternative beverages to a diversified company marketing premium alternative beverages and natural and organic products:

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• On May 24, 2007, the Company acquired all of the outstanding shares of My Organic Baby Inc. (“MOB”), which markets Canada’s first full nation wide line of organic baby food. As consideration for the acquisition, the Company paid $400,000 CDN; issued the vendors 630,000 of the Company’s common shares, provided, that if a gain of $600,000 CDN is not realized from a sale of these shares within two years, the Company will pay any shortfall; and issued the vendors 3,750,000 warrants to purchase the Company's common shares at a purchase price of $4.00 per share, provided that if a gain of $3,750,000 CDN is not realized from a sale of the shares attached to the warrants within one year, the Company will pay any shortfall. For its latest completed fiscal year ended January 31, 2007, MOB had sales of approximately $1,300,000 CDN and net income before tax of approximately $30,000 CDN. Our consolidated financial statements for the second quarter of 2007 will include the results of operations of MOB beginning on March 24, 2007; and

• On February 7, 2007, the Company acquired all of the outstanding shares of DMR Food Corporation (“DMR”), a leading packager and marketer of natural and organic snack foods in Canada. As consideration for the acquisition, the Company paid $450,000 CDN on closing; $450,000 CDN payable over three years; and, issued the vendors warrants to purchase 3,000,000 of the Company’s common shares at a price of $4.00 per share. If the vendors do not realize, by February 7, 2008, a gain of $2,550,000 CDN from the exercise and sale of our common shares issuable under the warrants, the vendors have the right to require the Company to pay any shortfall. For its latest completed fiscal year ended September 30, 2006, DMR had sales of approximately $4,100,000 CDN and net income before tax of approximately $195,000 CDN. Our consolidated financial statements for the first quarter of 2007 include the results of operations of DMR beginning on February 7, 2007.

Capital Expenditures

A discussion of our principal capital expenditures over the last three years may be found under “Results of Operations” and under “Cash used in Investing Activities” in Item 5. A description of the principal capital expenditures, if any, currently in progress or planned for the coming year may be found in “Item 4. Information on the Company – Business Overview” below in this Annual Report.”

Clearly Canadian Brands markets, distributes and sells premium alternative beverages, including Clearly Canadian® sparkling flavoured waters and Clearly Canadian dailyEnergy, dailyVitamin and dailyHydration Natural Enhanced Waters which are distributed in the United States, Canada and various other countries. Clearly Canadian's recent acquisition of My Organic Baby Inc. and DMR Food Corporation marks the Company's debut into organic and natural products with a full line of organic baby and toddler foods under the brand names My Organic Baby and My Organic Toddler, and a wide range of dried fruit and nut snacks offerings under many brand names including SunRidge Farms, Naturalife, Sweet Selections, SSG, Simply by Nature and Glengrove Organics.

Our products are marketed and sold to all classes of retail trade, including national supermarkets, national and independent convenience stores, drug stores, mass-market stores and specialty natural food stores. We primarily rely on distributors and brokers to sell our products to retail customers.

All of our beverage and organic baby food products are manufactured and produced by independent food and beverage manufacturers (“co-packers”) using proprietary specifications controlled by us. We package our dried fruit and nut snack products at our own facilities.

Our brand names are, or are becoming, well recognized in the marketplace in which they are sold. In particular, the brand name Clearly Canadian, which is the cornerstone of our Company, has sold over 2 billion bottles worldwide since its inception in 1988 and is widely regarded as being at the forefront of the creation of the alternative beverage market.

Our mission is to be a leader in providing consumers with healthy and environmentally friendly product choices through continued innovation and strategic acquisitions. Our business strategy is to leverage our Clearly Canadian

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brand name and our strong management team to integrate all of our brands into one sales and marketing strategy in order to lower our costs and increase our market share.

Products

Beverages

Our beverage products are considered “alternative” beverages, a category which became identifiable in the mid-1980s. Alternative beverages are distinguishable from traditional soft drinks in that they generally contain natural ingredients, less sugar and calories, and less or no carbonation. Alternative beverages are traditionally seen as healthful, premium-priced and distinctively packaged. The alternative beverage category is now generally recognized in the beverage industry to include beverages such as: “retail PET waters”, “enhanced waters”, “premium sodas”, “nutrient-enhanced fruit drinks”, “fresh packaged juices”, “smoothies”, “regular single-serve fruit beverages”, “sparkling waters”, “sports beverages”, “ready-to-drink coffees”, “regular ready-to-drink teas”, “energy drinks”, “vegetable/fruit juice blends”, “nutrient-enhanced dairy products”, “nutrient-enhanced teas” and “shelf-stable dairy drinks”.

We are focused on creating new alternative beverage brands, developing product extensions and reformulations for existing brands and strengthening the distribution network for our products. In so doing, we have attempted to expand the availability of our existing products and to diversify our alternative beverage product line offerings.

Our current beverage offerings are:

• Clearly Canadian® sparkling flavored waters, an all natural, no preservative, carbonated water in various flavors, with different caloric levels and which is produced in a 14 oz. proprietary glass bottle and a 1 Litre proprietary PET (plastic) bottle;

• Clearly Canadian® Natural Enhanced Waters, an all natural, no preservative, non-carbonated enhanced water in various flavors, with different vitamin, mineral and organic essence enhanced formulations and which is produced under the sub brand names dailyEnergy, dailyVitamin and dailyHydration in a stock, 20 oz. PET bottle; and

• An oxygen enhanced water which we have co-packed for a private label customer.

In the fiscal year 2006, beverages accounted for 100% of our revenue, however, we anticipate this to diminish to approximately 50% of our revenue in fiscal year 2007 with the addition of our organic baby food and dried fruit and nut products, both of which we have recently acquired.

Organic Baby Food

We market over 40 different certified organic baby food products under the brand name My Organic Baby. These products, which we develop, cover the full range of baby foods including, biscuits, juice, formula, cereal and baby food in jars. We are currently the only company in Canada offering every type of baby food product in a certified organic format.

Dried Fruit and Nuts Snacks

We develop, package and market over 100 different dried fruit and nut products, most of which are either certified organic or natural. Most of our snack products are sold under the brand names SunRidge Farms, Naturalife, Sweet Selections, SSG, Simply by Nature and Glengrove Organics and come in various bag and PET container sizes. We also customize and package private label bag and bulk dried fruit and nut snacks for several major retailers in Canada.

Prior Products

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During the past three years, we have marketed Clearly Canadian® sparkling flavored waters in a 14 oz. proprietary glass bottle, Clearly Canadian O+2® oxygen enhanced water in a stock, 20 oz. PET bottle, and our oxygen enhanced water which we have co-packed for a private label customer. In fiscal year 2006 we launched a reformulated and redesigned version of our sparkling flavoured waters. These changes included a refreshing new package design that trades on the Clearly Canadian® brand’s established history and reformulated flavours that include the product’s original, full flavours and new zero calories flavors. Subsequent to the end of fiscal year 2006, we discontinued the Clearly Canadian O+2® oxygen enhanced waters due to diminishing sales and introduced Clearly Canadian® Natural Enhanced Waters as a natural and organic entry into the rapidly growing enhanced water category. During fiscal 2005 and in prior years, from time to time and in a limited manner, we sold bulk water from our Thornton well site in Innisfill, Ontario. In June 2006, we relinquished our right to take water from the Thornton well site and will no longer derive revenue from that water source.

In fiscal 2006 and fiscal 2005, sales of our flavoured sparkling water products represented approximately 67% and 70%, respectively, of our total product revenues.

New Initiatives

Our Company has historically introduced innovative beverage products to the marketplace, including Clearly Canadian® sparkling flavoured waters, Battery energy drink (one of North America’s first energy drinks), Orbitz (beverage with floating beads) and Reebok Fitness Water (one of North America’s first vitamin enhanced waters). We are focused on continuing this tradition and using our experience and technical knowledge to invest in research and innovation for all of our product offerings, including beverages, organic baby products and organic and natural snacks. We are also consistently exploring opportunities to license our Clearly Canadian® brand name for profitable ventures and to acquire niche companies or products in the “alternative” beverage or organic and natural food category which could increase their competitiveness by utilizing our existing sales, marketing and administrative infrastructure.

Distribution and Sales

For most of our product lines, we distribute and sell through a network of food or beverage distributors (our DSD System). Typically, we appoint distributors to distribute and sell our products within an assigned territory. Our distributors purchase finished goods from our company and are, in certain circumstances, subject to certain minimum sales performance and sales promotion requirements within their territories in order to maintain their distribution rights. In addition to the DSD System, we also sell some of our products on a direct sale basis to certain retailers. We utilize our own sales team, and, in certain territories, a broker sales team to sell into the DSD network, to support the DSD network and to sell directly to retailers. Distributors purchase products from us for resale to retailers. Brokers act as sales agents for us within designated territories and receive commissions to sell to distributors or to retailers. Because distributors take title to the products upon purchase, product pricing decisions on sales of our products by the distributors are generally made in their sole discretion, although we may participate in product pricing during promotional periods.

In fiscal 2006 we only distributed and sold our beverage products. Our major distributor was the Dr. Pepper/Seven Up Bottling Group based in Dallas, Texas (“DPSU”) which covered the majority of states in the Mid West, South Central and South West of the United States and accounted for over 20% of our U.S. sales of Clearly Canadian® beverage products. Subsequent to in 2007, we discontinued our relationship with DPSU in an attempt to diversify our distribution network to align ourselves with distribution companies that are not affiliated with traditional soft drink beverage companies. Since these efforts began, we have signed several significant independent distributors in key markets such as New York and Los Angeles and we have ongoing resources devoted to expanding our network of beverage distributors. In Canada, our principal selling arrangement for beverages is through Acosta Canada, which is a large food and beverage broker providing a full range of selling and merchandising services. With respect to distribution of our beverage products in countries other than the U.S. and Canada, we have distribution arrangements with various distribution groups in the Caribbean, Turkey, Korea, Indonesia, and other countries. During the 2006 fiscal year, the largest markets for our products were the United States (approximately 80% of total sales), Canada (approximately 18% of total sales) and International (2%).

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Our customer base for our organic baby food and dried fruit and nut snack products consists principally of natural food distributors, including Tree of Life, the largest such distributor in Canada which also focuses heavily on mainstream retailers. Recently, growth of natural and organic foods has shifted from the natural food channel to the grocery channels as mainstream grocery distributors and retailers provide these products to meet consumer demand and awareness. Two of our distributors account for over 50% of sales of our organic baby food and dried fruit and nut snack products. We currently only sell these products in Canada.

Marketing

We use a mix of trade, retail and consumer advertising to promote our products, including retail listing fees, in store promotions and distribution drive incentives. For our My Organic Baby brand we are utilizing television and mass print advertising and for our Clearly Canadian® beverages we are utilizing our sports properties, professional basketball star Steve Nash and professional baseball star Justin Morneau, both of whom we have signed to endorsement agreements. For many of our products, we are at a stage where our marketing activities in certain regions and categories require us to spend greater than our profitability, however, in those situations we have determined that the investment is necessary to gain market share. We also expect to gain wide consumer exposure through the significant role we are playing in an eight episode business reality television series set to air on a U.S. cable network in early fiscal 2008.

Concerning our charitable initiatives, we have partnered with Global Water, a U.S. based, non-profit organization committed to establishing safe water supplies in developing nations. Through corporate donations and upcoming fundraising events, we finance and construct the creation of clean and safe drinking water systems in villages in developing nations. Our initial plans are to finance a minimum of two projects a year at a cost of $20,000 per project. We completed two projects in fiscal 2006 in Central America.

Competition

We products compete in highly competitive geographic and product markets against companies with much greater resources than us. The alternative beverage market includes international, national, regional and local producers and distributors such as:

• Coca-Cola – producer of Fruitopia, Nestea, Powerade, Fuze, Vitamin Water and Dasani;
• PepsiCo – producer of Lipton Teas, Aquafina, SoBe, Izze and Gatorade;
• Cadbury – producer of Snapple, Mistic and Stewart’s Soda;
• Nestlé – producer of Perrier, Poland Springs, Arrowhead and other water beverages; and
• Red Bull and Monster energy drinks;

Our direct competitors in the natural and organic snack food and baby food markets include:

• Heinz Company – producer of Heinz organic baby foods in jars and cereals;
• Hain-Celestial – producer of Earth’s Best, a full line of organic baby food line in the U.S. and baby food jars in Canada;
• President’s Choice – producer of PC Organics, an organic line of baby food exclusive to Loblaws, a Canadian grocery chain;
• Johnvince – markets dried fruits and nuts in bulk and packages under many brand names such as Planters;
• Dan-D Foods – markets dried fruits and nuts under Dan-D-Pack and sold primarily in Western Canada;
• Navitas Natural Foods – markets organic functional foods under brand names Cacao Power TM, Goji Power TM, Golden Power TM, Maca Power TM, Yacon Power TM, Cashew Power TM.

While we believe that we compete favorably on factors such as quality, merchandising, range of flavors, brand name recognition and loyalty, the expansion of competitors for all markets in which we operate, along with the expansion of our competitor’s products, many of whom have substantially greater marketing, cash, distribution, technical and other resources than we do, could resulted in our products having a decreased market share, as we have experienced with our beverages over the past several years, or decreased growth potential. While we will continue to experience

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these increasing competitive pressures, we believe that we can improve our market share in this competitive environment by implementing the initiatives described above.

Raw Materials and Suppliers

We, and our co-packers, acquire the raw materials that we use in producing our finished products from a variety of suppliers. The pricing and availability of such raw materials is subject to change based on competitive conditions. However, in certain instances we secure the supply and pricing of some raw materials through contractual commitments.

Our bottles are supplied from one glass bottle manufacturer and two plastic (PET) bottle manufacturers. Based on our knowledge of the capacities of our suppliers, we expect to have a sufficient supply of bottles to enable us to meet our anticipated future requirements.

We currently use three co-pack bottling facilities to produce our beverages and between five and six co-pack facilities to produce our organic baby food, all of whom utilize facilities in the U.S. and Canada.

The water used in our Clearly Canadian® sparkling flavoured sparkling beverages presently comes from municipal water supplied by our co-packers. The water used in our private label oxygen enhanced water beverage is supplied by our co-packer from a spring water supply source located in the Cascade Mountains in Washington and the water used in our Clearly Canadian® Natural Enhanced Waters is derived from an artesian water source we own in Formosa, Ontario. On an on-going basis, we review the sources of the water used in our products and may make changes to the sourcing of its water in the future.

We believe we have an adequate supply of raw materials, including dried fruits, nuts, organic baby food materials and water to meet our present production requirements.

Quality Control

The quality of all of our products is intended to meet or exceed the requirements imposed by applicable regulatory authorities in the United States, Canada and other countries where our products are sold. For products that utilize water from our water sources, our system of quality control begins at the well site where we closely monitor the quality of the source water. The water is tested a second time as it is received at the bottling facility. For all of our products, the final test is of the finished product, which is conducted after production. We conduct, or intend to conduct (in relation to our newly acquired businesses) regular inspections at each of our co-packing facilities. Our quality assurance team conducts continuous random on-site audits of the quality control systems at each facility, and continuously review standards with both suppliers and production operations. Each and every production run at our facilities is tested to ensure our product specifications are being met. We also use independent testing labs on a regular basis.

Trademarks, Copyright and Protection of Intellectual Property

We have numerous trademark registrations in the United States, Canada and in other countries worldwide in connection with our Clearly Canadian® beverage product lines. We also have trademark registrations in Canada in connection with Simply by Nature and Naturalife. Our trademark registrations are valid for varying periods of time, but are renewable before expiry. We have also applied for trademark registrations in Canada and/or the United States in connection with dailyEnergy, dailyVitamin, dailyHydration, My Organic Baby, My Organic Toddler and Glengrove Organics.

We retain copyright to any work created by our employees during the course of their employment and, where necessary, acquire copyright by assignment from independent contractors who prepare artistic work for our products and promotional materials.

We regard our trademarks, copyrights, trade secrets and similar intellectual property as critical to our success and attempt to protect such property with registered and common law trademarks and copyrights, restrictions on

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disclosure and other actions to forestall infringement. We rely on a combination of trademark and trade secrecy laws, confidentiality procedures and contractual provisions to protect our intellectual property rights. We have in the past, and expect that we may in the future, license elements of our distinctive trademarks, trade dress and similar proprietary rights to third parties. Product package, merchandising design and artwork are also important to our success and we intend to take action to protect against imitation of our products and packages and to protect our trademarks, patents and copyrights as necessary.

Insurance

We maintain “all risk” property insurance up to an aggregate policy limit of approximately $2,000,000 CDN, which covers loss and damage to our product inventories (loss limited to approximately $2,000,000 CDN), office contents, tenant improvements and certain buildings and equipment. Additionally, we have commercial general liability insurance that covers claims against us by third parties for bodily injury and property damage, including claims based upon product liability. The aggregate policy limit for our commercial general liability insurance is Cdn$10 million.

Government Regulation

In Canada, we, our co-packers and suppliers are required to meet the requirements of a variety of federal, provincial and local government authorities and agencies in connection with our products. With respect to federal matters, our products are regulated by Health Canada, which deals with product quality requirements, and by the Canadian Food Inspection Agency, which deals with product content and product labeling issues. At the provincial level, we are subject to regulation and controls imposed by the Ontario Ministry of Environment with respect to water drawn from our Formosa water source. Additionally, at the local level, we are regulated by certain regional authorities who deal with issues concerning land and property uses that relate to our well sites.

In the United States, we our co-packers and suppliers are required to meet the rules and regulations set down by the Federal Food and Drug Administration relating to the production, packaging, quality, labelling and distribution of our products. The operations of our production and distribution facilities are subject to various federal, state and local environmental laws and workplace regulations, including Occupational Safety and Health Act, the Unfair Labor Standards Act, the Clean Air Act, the Clean Water Act and laws relating to the maintenance of fuel storage tanks. Additionally, at the state level, a number of government agencies and authorities impose certain licensing requirements for our products.

Independent Certification

We rely on independent certification, such as certifications of certain of our products as “organic” or “kosher,” to differentiate our products in natural and specialty food categories. We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified. We utilize organizations such as Quality Assurance International (QAI) to certify our products as organic under the guidelines established by the USDA. Similarly, we utilize appropriate kosher supervision organizations to certify certain of our products as kosher.

Employees

As of December 31, 2006, we and our subsidiaries had a total of 18 staff, who were either employed as employees or retained as consultants. Of this number, seven worked in various management and administration positions and 11 were involved in various sales, marketing and operations.

As of June 15, 2007, we and our subsidiaries had a total of 38 staff, who were either employed as employees or retained as consultants. Of this number, 9 worked in various management and administration positions and 29 were involved in various sales, marketing and operations.

Subsidiaries

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We have five wholly-owned subsidiaries:

• CC Beverage (U.S.) Corporation, a Washington corporation which distributes certain of the Company’s beverage products in the U.S.;

• Blue Mountain Springs Ltd., an Ontario corporation which owns certain property in Ontario containing a potential future source of water for the Company’s products;

• Clearly Canadian Beverage (International) Corporation, a Barbados corporation which has no current operations;

• DMR Food Corporation, an Ontario corporation which operates the Company’s dried fruit and nut snack business; and

• My Organic Baby Inc., an Ontario corporation which operates the Company’s organic baby products business.

Our corporate head offices are located at 2267 10th Avenue W., Vancouver, British Columbia. The space is approximately 1,600 square feet in size, and is leased at a basic rate of $60,000 CDN per year plus expenses. This lease expires on December 31, 2007.

We have a Toronto facility, comprising 8,376 square feet, which packages and warehouses our dried fruit and nut products and is used as an office for sales and marketing staff for those products along with our organic baby food products. This facility is leased at a basic rate of $50,256 CDN per year plus expenses and has a lease which expires on December 31, 2008. We anticipate that during fiscal 2007 or fiscal 2008 we will be required to relocate this facility to accommodate increase business capacity.

We own two properties in Ontario which contain water sources. One site is in Formosa, Ontario which as an artesian well with a water-taking permit allowing up to approximately 238,000 gallons per day to be drawn from the property. This permit is subject to renewal every two years. The other site is in Collingwood, Ontario and consists of a 4 acre parcel of land with a spring water source which currently has no permit to draw water. We also own 300 acres of land in Piney, Manitoba which may be developed as a future water source.

Environmental Issues

Based on our current operations, environmental protection requirements do not have a significant financial and operational effect on the capital expenditures, earnings and competitive position of our company in the current financial year and are not expected to have a significant effect in the reasonably foreseeable future.

Not Applicable.

Overview

In 2006, we were in the sole business of producing, distributing and marketing premium alternative beverages and products, including Clearly Canadian® sparkling flavored water, Clearly Canadian O+2® oxygen enhanced water beverage and a private label oxygen enhanced water beverage. All of our products were distributed in the United States and Canada and certain of our products were distributed in Korea, Indonesia, and other countries. During the

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2006 fiscal year, the largest markets for our products were the United States (approximately 80% of total sales), Canada (approximately 18% of total sales) and International (2%).

Critical Accounting Policies

The following discussion is based on the consolidated financial statements included in this annual report which have been prepared in accordance with Canadian GAAP. These principles differ in certain material respects from U.S. GAAP. These differences are described in Note 22 of our consolidated financial statements.

In the ordinary course of business, we make estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our financial statements in conformity with Canadian GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

There are several accounting policies that we believe are critical to the presentation of our consolidated financial statements. Note 2 - “Summary of significant accounting policies” to our consolidated financial statements summarizes each of these significant accounting policies. Those accounting policies should be read in conjunction with the other notes to the consolidated financial statements and management’s discussion and analysis of results of operations and financial condition described in this “Operating and Financial Review and Prospects.” Set out below are certain of the accounting policies that we believe are critical to the presentation of its consolidated financial statements.

Going concern

The accompanying financial statements have been prepared using Canadian generally accepted accounting principles applicable to a going concern.

While these accompanying financial statements have been prepared on the assumption that we are a going concern and will be able to realize its assets and discharge its liabilities in the normal course of business, certain events and conditions cast substantial doubt on this assumption. We had a loss of $8,247.000 for the year ended December 31, 2006 and had a working capital of $5,245,000, an accumulated deficit of $77,055,000 and a shareholders’ equity of $7,464,000 at year-end. Operations for the year ended December 31, 2006 have been funded primarily from the issuance of capital stock and the continued support of creditors.

Management has continued to take steps to try to improve our financial results and cash flows. These steps include listing for sale certain land and water rights, analyzing liquidation of non-core investments and pursuing debt and/or equity financing to fund working capital requirements (see Subsequent Events). Management believes that we will be able to secure the necessary financing; however, there is no assurance that management will be successful in achieving these objectives.

These financial statements do not reflect adjustments to the carrying value of assets and liabilities, the reported revenues and expenses and balance sheet classifications used that would be necessary if the going concern assumption were not appropriate. Such adjustments could be material.

Distribution rights

Costs associated with the acquisition of certain territorial rights to distribute beverage products have been recorded as distribution rights and until January 1, 2002 were amortized on a straight-line basis over a 10-year period. Effective January 1, 2002, we adopted the new recommendations of the Canadian Institute of Chartered Accountants (CICA) with regard to intangible assets. Under the new recommendations, which can only be applied prospectively, the distribution rights were determined to have an indefinite life. Therefore, they are not amortized, but are tested for impairment in value at least annually, or more frequently if events or changes in circumstances indicate that there

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might be an impairment, taking into account the ability to recover the carrying value portion from expected future operating cash flows on a discounted basis. We also consider projected future operating results, trends and other such circumstances in making such evaluations. A provision is recorded for any impairment in the carrying value when such a determination is made.

We undertook our annual review of the carrying value of distribution rights and determined that the value of the distribution rights was impaired. As a result, we recorded a charge of $1,536,000 in the year ended December 31, 2004 audited financial statements. No provision was recorded in the year ended December 31, 2005 and December 31, 2006.

Financial instruments

     (a) Fair value of financial instruments. The fair value of cash and cash equivalents, accounts receivable, bank indebtedness, and accounts payable and accrued liabilities corresponds to their carrying value due to their short-term nature. The carrying value of long-term debt approximates its fair value based upon the discount rates applied.

     (b) Concentration of credit risk. We grant credit to our customers in the normal course of business. Credit valuations are performed on a regular basis and the financial statements take into account an allowance for bad debts. At December 31, 2006, three customers represented 64% (two customer in December 31, 2005 represented 60%) of total accounts receivable.

     (c) Interest rate risk. Our short term bank credit facility bears interest at U.S. prime plus 4%. The long term debt bears interest at a fixed rate, as disclosed in the notes to these financial statements. We do not use derivative instruments to manage our exposure to interest rate risk.

     (d) Foreign exchange rate risk. The majority of our revenues are earned and production costs incurred in the United States. However, certain selling, general and administration costs are incurred in Canada and we are therefore subject to risk due to fluctuations in exchange rates. We do not use derivative instruments to manage our exposure to foreign exchange rate risk.

Use of estimates

The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant areas requiring the use of management estimates relate to the assessment of the carrying value of and land and water sources ($1.035 million). Actual results may differ materially from those estimates.

Results of Operations

Year ended December 31, 2006 compared with year ended December 31, 2005

Sales were $7,462,000 for 2006 compared with $8,712,000 for 2005, a decrease of 14.3% ($1,250,000) compared to 2005. This decline in sales is attributable to the cumulative impact of increased competition, lack of new product and package design initiatives and significantly reduced sales and marketing activities in recent years. This has been a direct result of working capital constraints which we have has addressed, in part, through our recently completed financings (see Liquidity and Capital Resources). Going forward it will be necessary for us to secure additional financing in order to support more aggressive marketing and sales activities for our beverage products.

The decrease in sales for 2006 compared with 2005 comprised of decreases in sales of both the non-carbonated and carbonated lines. Sales of non-carbonated product were $2,465,000 for 2006 compared with $2,627,000 for 2005, a decrease of $162,000 from 2005. Sales of our carbonated product line were $4,997,000 for 2006 compared to $6,086,000 in 2005, a decrease of $1,089,000 from 2005. We believe the decline in the carbonated product line is a

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result of increased competition and product alternatives in the marketplace. While the Company continues to experience a decline in sales of its carbonated products into 2007, the Company looks forward to reversing previous trends of declining sales of its Clearly Canadian branded beverages with the introduction of new package formats of its carbonated product, such as its new 1 Litre grocery pack currently being tested with a large U.S. retailer, the introduction of new products such as its Natural Enhanced Waters and the transition, in many of its key markets in the United States effective in the first quarter of 2007, to new distributors who are focused on alternative beverages not affiliated with major soft drink brands. The Company expects sales of its non-branded, non-carbonated product line to be relatively stable in 2007.

Cost of sales expenses were $5,677,000 for 2006 compared with $6,349,000 for 2005, a decrease of $672,000 from 2005. The net of sales less cost of sales, being the gross margin percentage, decreased to 23.9% in 2006 compared with 27.1% in 2005. The decrease in gross margin percentage was due primarily to a write down of inventory in 2006 (62.5% of the 3.2% decrease). The remainder of the decrease in gross margin represents cost escalation of product inputs of raw materials and packaging which we were unable to pass on to our customers. The Company has made adjustments to its selling prices and distribution model which it believes will help offset anticipated increases in raw materials and packaging.

Beginning January 1, 2006 we deduct all sales incentives paid to direct or indirect customers from gross sales in accordance with new EIC-156 of the Canadian Institute of Chartered Accountants. Sales incentives include contractual marketing payments to distributors, coupons, rebates, free product and slotting fees. The amount of such sales incentives were $343,000 in 2006 and $429,000 in 2005. The 2005 sales figures have been restated on a consistent basis; accordingly the impact on this change in required presentation is an increase in reported sales of $86,000 in 2006 over 2005.

General and administrative expenses for 2006 compared to 2005 were as follows:

The primary reason for the increase in general and administrative expenses for 2006 compared to 2005 is due to the Company incurring certain remuneration and payroll expenses which are the fair value of stock options and warrants ($1,405,000) granted for marketing and consulting services which have resulted both in the Company gaining national retail listings in 2007 and raising capital in 2006 and 2007. The increase in professional fees is due to the re-audit of our December 31, 2003 and December 31, 2004 financial statements, amending our previously filed Annual Report for 2005, and fees associated with the registration with the US Securities Exchange Commission of stock issued in our financings.

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Corporate development and financing costs of approximately $190,000 were paid to BG Capital Group Ltd., our controlling shareholder, in respect of reorganization and financing costs incurred on the Company’s behalf, compared with Nil in 2005. Management fees of $322,000 were paid under a contract for services with BG Capital Group Ltd. as compared with no comparable expense in 2005. The increase in investor relations costs relates to our planned increase in shareholder awareness initiatives. Product development costs in 2006 relate to the redesign and reformulation of our new sparkling water line and the creation of our Natural Enhanced Waters. The increase in insurance cost relates to the increased cost of our Directors and Officers Liability insurance coverage, however the Company expects a significant reduction in the cost of our Directors and Officers Liability insurance in 2007.

We incurred selling expenses of $2,326,000 for 2006 or 31.2% of sales, compared with $2,755,000 or 31.7% of sales for 2005. A comparison of selling expenses for YTD-2006 compared with YTD-2005 is as follows:

Selling expenses decreased for 2006 compared to 2005 primarily due to the reversal of accrued marketing program expenses of $161,000 as a result of our review of the previously estimated liabilities to former distributors, and an overall decrease in selling expenses of approximately $470,000 due to lower variable remuneration, marketing costs and retail support associated with decreased sales. A significant portion of the Company’s beverage sales expenses in the United States have, for 2007, been transitioned to a variable expense model to assist the Company’s working capital requirements going forward. Offsetting these lower costs were additional expenses in 2006 of the one-time cost of video programming of $50,000 related to the creation of a reality TV series about the Company and new product design fees of approximately $157,000.

Stock based compensation was $2,426,000 2006 compared with $1,709,000 in 2005. The increased expense of $717,000 is due to the increased number and fair value of stock options granted for 2006 over 2005.

Lawsuit settlement costs of $797,000 in 2006 represents an increase of $797,000 from the previous year. This expense comprises the excess of the consideration given by the Company in common shares, the fair value of common share purchase warrants, and land, over the book value of debt extinguished on settlement of all litigation associated with the purchase of its Blue Mountain subsidiary. On settlement of this litigation the Company retains clear title to a 4 acre parcel of land containing a significant potential water source.

Write down of property for 2006 was $137,000, compared to $382,000 in 2005, a decrease of $245,000. Management reviews the carrying cost of its capital assets at least annually, and where there is an indication of an impairment in value this loss is recognized in the year.

Amortization of property, plant and equipment for 2006 was $16,000, compared to $122,000 for 2005, a decrease of $106,000. The decrease was result of write down of machinery and equipment in 2006 and 2005.

Gain on sale of investments of marketable securities for 2006 was $201,000 compared with Nil in 2005. This was due to the sale of all of the Company’s holdings of a public company investment.

Restructuring costs were $112,000 in 2006, compared with $680,000 in 2005, for a decrease of $568,000. The restructuring, now completed, related to the amendment of consulting contracts with former management, and premises lease obligations.

Interest income of $132,000 in 2006 represents an increase of $132,000 over 2005. The Company has its surplus cash reserves invested in short term bank interest earning deposits. These reserves were raised in private placements of stock for future working capital requirements.

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Royalty income was $125,000 for 2006 compared with $76,000 for 2005, an increase of $49,000. The royalty of $125,000 is the maximum royalty receivable in any year, and is received pursuant to an agreement with the purchaser of the company’s Washington State bottling facilities in 2002 and is based on the number co pack sales at the facility with the purchaser. Under the terms of the sale agreement, the purchaser’s obligation to pay the royalty expires February 2007.

Other expense was a recovery of ($35,000) for 2006 compared with an expense of $231,000 for 2005, a decrease of $266,000. The $231,000 in other expense in 2005 related to financing and accretion costs on short term debt which was retired.

The loss for 2006 was $8,247,000 (or $.82 per share) compared with $6,069,000 for 2005 (or $1.06 per share). The increase in the loss for 2006 over 2005 of $2,178,000 is primarily due to the reasons detailed above.

Year ended December 31, 2005 compared with year ended December 31, 2004

Sales were $8,712,000 for 2005 compared with $11,064,000 for 2004, a decrease of 21.2% ($2,352,000) compared to 2004. This decline in sales is attributable to the cumulative impact of increased competition, lack of new product and package design initiatives and significantly reduced sales and marketing activities in recent years. These factors in management’s judgment are inter-related and due to their nature their impact cannot be separately quantified. The reduced sales and marketing activities has been a direct result of working capital constraints which we have addressed, in part, through our recently completed financings (see Liquidity and Capital Resources). Going forward it will be necessary for us to secure additional financing in order to support more aggressive marketing and sales activities for our beverage products, and refresh our product offerings by reformulation and repackaging.

There were no significant changes in our cost of sales and gross profit margin percentages, being 27.1% for 2005 and 27.2% for 2004. However, we expect to reduce our cost of sales and increase our gross profit margins in 2006 as a result of packaging changes on our core product.

There were no significant changes in our general and administrative expenses, being $2,411,000 for 2005 compared to $2,312,000 for 2004. We have streamlined our upper level management, significantly reduced our office expense overhead and we are continuing our corporate restructuring program. As a result, we expect to reduce our general and administrative expenses in 2006.

Selling expenses of $3,181,000 in 2005 were approximately 36.5% of sales, compared with $3,275,000 or approximately 29.6% of sales in 2004. The increase in the percentage of sales expended on selling expenses is a reflection of the increased cost associated with attempting to maintain market share in a competitive business throughout North America. In 2005, we increased our selling expenses in most regions of the United States with the addition of “Market Specialists” whose mandate is to increase availability of product in the all-other-market segment. The increase in selling expenses coincided with our increased distribution efforts with the Dr Pepper/Seven Up Bottling Group. These efforts resulted in sales growth in the South Central region in 2005, as compared with 2004. While our sales declined in other regions of the United States which offset the gains from the South Central region, our private label water business experienced significant growth in 2005, rising 37.6 % over 2004. We expect continued growth of our private label water business into 2006.

The loss for 2005 was $6,069,000 (or $1.06 per share) compared with a 2004 loss of $5,531,000 (or $7.14 per share). A comparison of significant differences in other items of expense between 2005 and 2004 is as follows:

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The following is a summary of our quarterly results for the eight most recently completed financial quarters ended December 31, 2006:

Total revenue has been reclassified in the above presentation for all comparative periods to give effect to the presentation adopted with EIC-156, whereby vendor and reseller sales incentives are deducted from gross sales.

During 2006, we increased our cash position from $520,000 at December 31, 2005 to $5,267,000 at December 31, 2006, an increase of $4,747,000. This increase is attributable to the following activities:

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Operating losses for fiscal 2006 used cash of $2,847,000 and, for dividends paid to Class B preferred shares, we used cash of $94,246. We continue to operate at a loss and are currently utilizing approximately $300,000 of our cash reserves per month to sustain operations. We are continuing to evaluate various marketing initiatives and the potential of acquiring shelf space at national retailers. Should we decide to make investments of this nature we will be required to draw down our cash reserves accordingly unless additional equity can be raised. We have no significant other potential sources of financing such as term debt facilities available to us at this time.

At December 31, 2006 we had no material debt other than normal accounts payable to suppliers and service providers totaling $1,629,000.

We have no interest bearing debt at December 31, 2006.

Working Capital Requirements

We had working capital of $5,245,000 at December 31, 2006. Subsequent to fiscal year end 2006, we completed, in March, 2007 and April, 2007, a series of brokered and non-brokered private placements for a total sale of 1,166,333 common shares for an aggregate purchase price of $3,499,000. We believe that our internal sources of liquidity, together with our operating line of credit and the net proceeds from our recent private placement will be sufficient to satisfy cash and working capital requirements through fiscal 2007. However, to the extent that such sources of liquidity are not sufficient, we may need to seek additional sources of debt and/or equity financing in the future to fund our operations and working capital. Such financings may or may not be available on attractive terms, or at all, or may be dilutive to current or future shareholders. See the risk factors and notes regarding “Forward-Looking Statements” and “Going Concern” assumptions set out in this annual report.

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Bank Indebtedness

Our subsidiary, CC Beverage (US) Corporation (“CC Beverage”), has an operating line of credit with an unspecified term available with a United States bank, which bears interest at US prime rate plus 4%. The borrowing facility is collateralized by a first lien on all accounts receivable and inventories of CC Beverage. CC Beverage can borrow up to the lesser of $1,000,000 and 80% of trade accounts receivable outstanding less than 60 days (as at December 31, 2006 - $403,593, December 31, 2005 - $456,000). The weighted average interest rate for the year ended December 31, 2006 was 11.96% (December 31, 2005 - 10.19%; 2004 - 8.495%); As at December 31, 2006, Nil has been drawn on this line of credit (December 31, 2005 - $361,000). This operating line of credit is also secured by a corporate guarantee from the Company.

Long-Term Debt

Our long-term debt at December 31, 2006 was Nil. We paid down the long term debt through the settlement of lawsuits as per note 19.

During the past three years, we have had no material research and development expenditures.

A significant trend reflected in our recent financial results is declining sales revenues. Other than in 2001, where revenues increased slightly, our revenues have declined each year since 1996. We had revenues of $7,462,000 in fiscal 2006 compared to $8,712,000 in fiscal 2005, compared to $11,064,000 in 2004, $13,270,000 in 2003, $20,205,000 in 2002, $23,257,000 in 2001, and $23,247,000 in 2000. Similarly, another significant trend for our company has been a deterioration in our working capital position

As a result of financing activities in 2006 (see “Liquidity and Capital Resources” above), we managed to significantly improve our working capital. At December 31, 2006, we had working capital of $5,245,000 compared to a working capital deficit of $446,000 at December 31, 2005 and financing activities to date in fiscal 2007 have further increased our working capital. We are committed to pursuing more financing opportunities and carefully examining expenses in order to build on the improving working capital position of the Company.

As a result of our acquisitions of My Organic Baby Inc. and DMR Food Corporation and as a result of expected internal growth in both these companies and with our improved beverage products in, we expect, in fiscal 2007, to reverse our trend of declining revenues.

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

The Company's total contractual obligations at December 31, 2006 were $1,872,000 and were comprised of various types of debt instruments, including consulting contracts, comprising primarily of non-cash payments which we made, and operating leases.

The following table is a summary of the Company’s contractual obligations as at December 31, 2006:

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The foregoing discussion in this Item 5 contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 concerning our business strategies, market conditions, outlook and other matters. This discussion and analysis of our results of operations and financial condition is qualified in its entirety by reference to and should be read in conjunction with our audited financial statements for the fiscal year ended December 31, 2006 and the related notes thereto, as well as the risk factors set out in this annual report.

Our board of directors (the “Board”) is currently comprised of four directors. Directors are appointed for three-year terms, however one-third (or the next smaller whole number if the number of directors is not a multiple of three) of the number of directors fixed pursuant to the articles is required to retire from office at succeeding annual general meetings. A retiring director is eligible for re-election and shall act as a director throughout the meeting at which he retires. The Board is currently comprised of four directors. Executive officers are appointed by the Board and hold office until their death, resignation or removal from office.

Our directors and senior management, their ages, positions held, and duration as such, are as follows:

The following is a brief account of the education and business experience of our directors and senior management during at least the past five years, indicating each person’s principal occupation during the period, and the name and principal business of the organization by which he was employed.

Brent Lokash, Director and Chief Executive Officer

Brent Lokash was appointed as a director on May 5, 2005 and is our Chief Executive Officer. Mr. Lokash was a member of the board of directors of The Neptune Society, Inc. from May 30, 2003 to January 1, 2006, when it traded on the OTC Bulletin Board under the symbol “NPTIE”. The Neptune Society, Inc. markets and administers pre-planned and at-need cremation services in over 10 states. Since being called to the Bar of British Columbia in 1995, Mr. Lokash has practiced administrative and commercial law as a sole practitioner in Vancouver, British Columbia.

David Reingold, Director and President

David Reingold was appointed as a Director on May 29, 2007 and is President of the Company. Mr. Reingold is the founder of DMR Food Corporation, a top seller of organic and natural snack foods in Eastern Canada and is

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responsible for some of the leading brands in the industry. In addition, Mr. Reingold is the co-founder of My Organic Baby Inc., the first full line of certified organic baby food in Canada. His years of service within the Canadian health food industry have been highlighted by numerous product, service and supplier awards.

Edwin Fok, Chief Financial Officer

Edwin Fok was appointed our Chief Financial Officer on June 18^th 2007. Mr. Fok brings over 17 years of financial management experience to Clearly Canadian. Previously, Mr. Fok was the Controller for Business Objects, a $1.2 billion revenue, five thousand staff global software company. Mr. Fok has also held several management positions in private and public companies including Corporate Controller at Rocky Mountaineer Vacations, a privately held tourism company and Director of Finance at Burntsand Inc, a technology consulting company listed on the Toronto Stock Exchange. Mr. Fok holds a Bachelor of Administration Degree from Lakehead University, a Master of Business Administration degree from the Executive program at Simon Fraser University and is also a member of the Certified General Accountant’s Association of British Columbia.

Andrew Strang, Corporate Affairs

Andrew Strang was retained on February 1, 2006 as our Chief Operating Executive and is now in charge of Corporate Affairs. In 1996, Mr. Strang co-founded the privately held Maple Leaf GST Refund Service Ltd (“Maple Leaf”) and pioneered a new financial service in Canada. Maple Leaf assisted non-residents of Canada obtain GST refunds pursuant to the Visitor Rebate Program overseen by the Canada Customs and Revenue Agency. Maple Leaf operated nationwide in Canada and opened offices in Victoria, Whistler, Vancouver, Toronto, Montreal, and Dorval. In February 2002, Maple Leaf was sold to Swiss-based multi-national Global Refund AB where Mr. Strang assisted in the corporate transition until May 2003. Since then, Mr. Strang has acted as an independent business consultant. Mr. Strang is a graduate of the University of British Columbia law school (1990) and is currently a practicing member of the Law Society of British Columbia.

Marco Markin, Director

Marco P. Markin was appointed to the Board on May 5, 2005. Mr. Markin has been the CEO of BG Capital Management Corp. since April 2005 and also serves as Chairman of the Management Board of The Neptune Society, Inc. where he has led the company since 1999 to a ten-fold increase in revenue. From November 1994 to September 1999, Mr. Markin was the Executive Vice President of TPP Management Inc., a private investment company, having a diverse portfolio consisting of residential/commercial real estate, merchant banking, and securities. His expertise included corporate management, and corporate development, securing and managing a portfolio of 400,000 square feet of real estate. He was also the co-owner of one of the largest direct marketing companies in Canada, which was subsequently sold to the Financial Post. Mr. Markin graduated from Bishop College in Montreal in 1982. He also attended the University of British Columbia's Science Program.

George Reznik, Director

George Reznik was appointed to the Board on May 29, 2007. Mr. Reznik brings over eighteen years of corporate finance, operational management, investor relations and M & A experience to the Clearly Canadian Board of Directors. Mr. Reznik is currently the CFO of Digital Dispatch, a publicly traded leader in mobile data. Previously, Mr. Reznik served at the CFO and COO of publicly traded Infowave Software, and as the Vice President of Finance for publicly traded Pivotal Corporation where he led the company through an Initial Public Offering on the NASDAQ and Toronto Stock Exchange during Pivotal's high revenue growth phase. Mr. Reznik is a Chartered Accountant, Chartered Business Valuator and a Certified Fraud Examiner, and holds a Bachelor of Commerce degree from the University of Manitoba, Canada.

Advisory Board

In the first quarter of 2006, we created the Clearly Canadian Advisory Board to provide advisory services to the company regarding product development and the expansion of sales and distribution channels. We believe that retaining persons as advisors or consultants with expertise in marketing and beverage distribution will assist in all aspect of our business, particularly with regard to enhancing our existing strategies to market and developing new

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strategies to market. We provide compensation to the members of our Advisory Board in the form of cash, stock options or warrants.

As of June 15, 2007, we had two members on the Advisory Board, as follows:

Brian O’Byrne

Mr. O/Byrne is the former President of Yoo-hoo/Orangina Beverage Company. He presided over Yoo-hoo/Orangina from 1997 until it was sold to Cadbury Schweppes PLC in 2001. He is also co-founder and CEO of the INOV8 Beverage Company, an idea shop specializing in creating new and innovative beverage concepts based in Rye, New York. His many years of experience in running profitable beverage companies can assist the company in all aspects of its business, in particular, the expansion of its sales and distribution channels in the United States.

Steve Nash

Steve Nash, a member of the NBA’s Phoenix Suns, is a two-time NBA Most Valuable Player and in the second quarter of fiscal 2006 entered into a three-year exclusive beverage product endorsement relationship with us. This three-year exclusive agreement names Clearly Canadian as Steve Nash’s official beverage endorser and appoints Mr. Nash to our Advisory Board. Mr. Nash is a three time NBA All-Star and regarded as one of the great team players in NBA history. He was also recently named one of the “100 Most Influential People” in TIME Magazine’s annual issue. He also has a strong connection to our home country of Canada, having grown up in British Columbia and having lead Canada’s Men’s Basketball team at the 2000 Olympics in Sydney, Australia. Mr. Nash’s involvement in the sports world, and his highly visible public status, can assist us with our product development and marketing initiatives.

Significant Employees

Other than our management, we do not have any significant employees.

Family Relationships

One of our former directors, Cameron Strang, is the brother of one of our members of the senior management team, Andrew Strang. There are no other family relationships between any director, executive officer or significant employee.

Arrangements with Major Shareholder

Marco Markin and Brent Lokash, directors of the Company, were appointed to such offices as nominees of BG Capital Group in connection with our corporate restructuring and pursuant to the Preferred Share Purchase Agreement dated March 28, 2005 between Clearly Canadian and BG Capital (see “Item 19. Exhibits”). Marco Markin, one of our directors, is also currently an employee of BG Capital Management Corp. an affiliate of BG Capital Group, which, as of June 15, 2007 is a controlling shareholder of the Company.

Involvement in Certain Legal Proceedings

None of our current directors, executive officers and control persons has been involved in any of the following events during the past five years:

• any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

• any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

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• being 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 involvement in any type of business, securities or banking activities; or

• being found by a court of competent jurisdiction (in a civil action), the 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.

Set out below are particulars of compensation paid to the following persons (the “Named Executive Officers”) in fiscal 2006:

For our most recently completed fiscal year ended December 31, 2006, we had two Named Executive Officers, whose names and positions held with us are set out in the summary of compensation table below.

Summary of Compensation Table

The following table is a summary of compensation paid to the Named Executive Officers for each of our three most recently completed fiscal years, in accordance with National Instrument 51-102, Continuous Disclosure Obligations (“NI 51-102”):

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________________________
(1) Compensation is paid in part to company controlled by the named executive officer on a fee basis for consulting services rendered to the company and in part to named executive officer for role as officer and director of Company. Resigned as President and appointed CEO on May 29, 2007.

(2) Resigned as a director and officer on March 31, 2006.

(3) Appointed as President and a Director on May 29, 2007.

(4) Resigned as CFO on May 31, 2007.

(5) Resigned as President and appointed CEO on May 29, 2007.

Report on Executive Compensation

During the most recently completed financial year, our compensation committee set compensation of executive officers (including the Named Executive Officers) in a manner consistent with the compensation provided by other comparable companies within the beverage industry.

The basis upon which the compensation of our President or Chief Executive Officer is determined is consistent with the compensation policy and structure which is applicable to all of our executive officers.

Our executive compensation program is based in part on a pay-for-performance philosophy. The executive compensation program is designed to encourage, compensate and reward employees on the basis of individual and corporate performance, both in the short and the long term. Base salaries are set at levels which are competitive with the base salaries paid by companies within the beverage industry and companies of comparable size, thereby enabling our company to compete for and retain executives important to our company’s long term success. Incentive compensation is directly tied to corporate and individual performance. Share ownership opportunities are provided to align the interests of executive officers with the longer term interests of shareholders.

The objectives of the executive compensation strategy are as follows: (i) to attract and retain talented and effective individuals to provide those functions which are important to our company’s success; (ii) to encourage and recognize high levels of performance by linking achievement of specific goals with inventive compensation; and (iii) to establish a clear linkage between long term executive compensation and the interests of our company and its shareholders.

Our executive compensation program has four components: (i) base salary; (ii) bonus compensation; (iii) stock option grants; and (iv) other compensation and benefits. These components may be summarized as follows:

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• Base Salary. We approve ranges for base salaries for executive officers at all levels of our company and our subsidiaries based upon our analysis of appropriate external comparisons and industry reviews, together with periodic advice received from independent consultants and reviews of market data from peer groups, industry and national surveys. The level of base salary for each executive officer within a specified range is determined by our company based primarily on the executive officer’s past performance, contractual commitments, as well as by the level of responsibility, expertise and the importance of the executive officer’s position to our company.

• Bonus Compensation. Officers and employees of our company are eligible for annual incentive awards. Corporate performance, as assessed by the compensation committee or the board of directors, determines the bonus compensation to be paid to all eligible officers and employees. The targets for corporate performance established by the board of directors are set primarily by reference to our company’s expected financial performance during the fiscal year, as well as by reference to other significant factors, such as, cash management, strategic business development and management of personnel resources. The compensation committee and the board of directors have the discretion to modify corporate performance targets throughout the year.

• Stock Option Grants. Our stock option plans are administered by the corporate secretary, or such other officer or employee as may be designated by the Board. The stock option plans are designed to give each option holder an interest in preserving and maximizing shareholder value in the longer term, to enable our company to attract and retain individuals with experience and ability, and to reward individuals for current performance and expected future performance. We consider stock option grants when reviewing executive officer compensation packages as a whole.

• Equity Incentive Plan. Our equity incentive plan is administered by our directors, or such committee as may be designated by our directors. The purpose of our equity incentive plan is to provide long-term performance incentives to certain key employees and consultants of our company and our company’s subsidiaries who are largely responsible for the management and protection of the business of our company and our company’s subsidiaries.

• Other Compensation and Benefits. Benefits are maintained at a level which is competitive overall in relation to appropriate external comparisons. Executive officers are entitled to certain perquisites which vary with their level of responsibility. These perquisites are considered part of a competitive compensation package and are not always related to corporate performance.

Stock Options

We currently maintain three equity compensation plans – 1997 Stock Option Plan; 2005 Stock Option Plan; and 2006 Equity Incentive Plan.

1997 Stock Option Plan

We maintain a stock option plan (the 1997 Stock Option Plan) that was initially approved by the shareholders at our annual meeting held on June 27, 1997. An amendment to the 1997 Stock Option Plan was subsequently approved by the shareholders at an annual meeting held on June 29, 2001. The amendment increased the number of common shares issuable under the 1997 Stock Option Plan to 1,750,000 pre-consolidated common shares, representing approximately 25% of our company’s issued and outstanding common shares at that time. The 1997 Stock Option Plan is administered by our corporate secretary, or such other officer or employee as may be designated by our board of directors. As of June 15, 2007, there were options outstanding under the 1997 Stock Option Plan entitling the holders of the options to purchase up to 98,105 common shares at exercise prices between Cdn$6.50 and Cdn$13.50 per share.

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2005 Stock Option Plan

At our annual and special general meeting held on April 29, 2005, a new stock option plan was approved by shareholders and adopted (the 2005 Stock Option Plan) to replace the 1997 Stock Option Plan. The 2005 Stock Option Plan was adopted to bring our stock option plan in line with the stock option plans of comparable companies, and to make changes to the termination and vesting provisions. Upon the adoption of the 2005 Stock Option Plan, the 1997 Stock Option Plan is continuing in effect only until the exercise or expiry of all of the stock options currently outstanding pursuant to the 1997 Stock Option Plan. As of June 15, 2007, there were options outstanding under the 2005 Stock Option Plan entitling the holders of the options to purchase up to 844,412 common shares at exercise prices between $1.00 and $2.75 per share.

The purpose of the 2005 Stock Option Plan is to provide us with a share related mechanism to enable us to attract, retain, motivate and reward qualified directors, officers, employees and consultants, and to secure the benefits of the incentive inherent in share ownership by directors and key employees and consultants who, in the judgment of our directors will be largely responsible for our future growth and success.

The following information is intended as a brief description of the 2005 Stock Option Plan and is qualified in its entirety by the full text of the 2005 Stock Option Plan.

2006 Equity Incentive Plan

On February 1, 2006, our Board of Directors adopted the 2006 Equity Incentive Plan, providing for the grant of up to 10,000,000 common stock based awards. As of June 15, 2007, there were options outstanding under the 2006 Equity Incentive Plan entitling the holders of the options to purchase up to 1,929,166 common shares at exercise prices between $1.75 and $2.91 per share.

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The purpose of the 2006 Equity Incentive Plan is to provide long-term performance incentives to key employees and consultants responsible for the management, growth and protection of our business. The following information is intended as a brief description of the 2006 Equity Incentive Plan and is qualified in its entirety by the full text of the 2006 Equity Incentive Plan.

Stock Purchase Warrants

As of June 15, 2007, we had the following outstanding stock purchase warrants:

• warrants to purchase 1,000,000 shares of common stock at an exercise price of $2.00 per share, expiring October 31, 2010; warrants to purchase 84,350 shares of common stock at an exercise price of $3.00 per share, expiring in July, 2007; warrants to purchase 356,667 shares of common stock at an exercise price of $3.25 per share expiring Sept, 2008; warrants to purchase 856,333 shares of common stock at an exercise price of $3.25 per share expiring in March, 2009; warrants to purchase 333,000 shares of common stock at an exercise price of $3.25 pr share expiring in April, 2009; and warrants to purchase 100,000 shares of common stock at an exercise price of $2.00 per share expiring on July, 2011.

• warrants to purchase 4,090,000 Series A shares at an exercise price of $1.25 per share, expiring December 28, 2007.

• warrants to purchase 3,000,000 shares at an exercise price of $4.00 per share, expiring February, 2010; and warrants to purchase 3,750,000 shares at an exercise price of $4.00 per share, expiring May, 2010.

Stock Options Granted During the 2006 Fiscal Year

The following table sets out detail regarding stock option grants made to our Named Executive Officers during the 2006 fiscal year:

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Aggregated Option Exercises During the 2006 Fiscal Year and Fiscal Year End Option Values

The following table sets forth details of all exercises of stock options by Named Executive Officers during our fiscal year ended December 31, 2006 and the fiscal year end value of unexercised options on an aggregated basis:

Compensation of Directors

During the 2006 fiscal year, we paid or accrued an aggregate of Nil cash to our three non-management directors, who are also not executive officers (Marco Markin, Cameron Strang and David Parkes).

We have no standard incentive arrangement pursuant to which we compensate directors for their services in their capacity as directors, except for the granting from time to time of incentive stock options. During the most recently completed financial year, we granted an aggregate of 200,000 incentive stock options to directors, as set forth in the table below, solely for services rendered in their capacity as directors of our Company or for their involvement in board committees:

Employment, Management and Consulting Agreements

The following is a summary of the employment and consulting agreements with our senior management and directors:

• Employment Agreement with David Reingold dated May 24, 2007 and expiring on May 24, 2010, pursuant to which Mr. Reingold agrees to operate My Organic Baby Inc., among other duties, and will receive cash and shares as base employment compensation;

• Director/Officer Agreement with Brent Lokash dated May 29, 2007, pursuant to which he is appointed as our President and a Director, and which provides for compensation in the form of stock options to Mr. Lokash. This director/officer agreement is terminable by us at any time upon notice, and is terminable by Mr. Lokash upon 60 days’ notice;

• Director Agreement with Marco Markin dated May 29, 2007, pursuant to which he is appointed a Director, and which provides for compensation in the form of cash and stock options to Mr. Markin. This director

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agreement is terminable by us at any time upon notice, and is terminable by Mr. Markin upon 60 days’ notice;
 
• Director/Officer Agreement with David Reingold dated May 29, 2007, pursuant to which he is appointed as our President and a Director, and which provides for compensation in the form of stock options to Mr. Reingold. This director/officer agreement is terminable by us at any time upon notice, and is terminable by Mr. Reingold upon 60 days’ notice;
   
• Director Agreement with George Reznik dated May 29, 2007, pursuant to which he is appointed a Director, and which provides for compensation in the form of cash and stock options to Mr. Reznik. This director agreement is terminable by us at any time upon notice, and is terminable by Mr. Reznik upon 60 days’ notice;
   
• Employment Agreement with Edwin Fok dated May 25, 2007 pursuant to which Mr. Fok agrees to act as the Chief Financial Officer to the Company. The agreement is terminable by us on four and half months notice , and by Mr. Fok on 30 days’ notice;
   
• Consulting Agreement with BRL Consulting Inc., a company wholly owned and operated by Mr. Lokash, dated October 27, 2005 and amended February 20, 2007, pursuant to which BRL Consulting provides certain consulting services to us in exchange for cash compensation. This consulting agreement is terminable by either party upon 60 days’ notice;
   
• Consulting Agreement with David Reingold dated February 5, 2007 and expiring on January 31, 2010, pursuant to which Mr. Reingold agrees to operate DMR Food Corporation, among other duties, and will receive options to purchase Company stock as compensation for services;
   
• Employment Agreement with Andrew Strang dated January 1, 2007 and amended February 28, 2007, terminable by either party upon thirty days’ notice; and
   
• Consulting Agreement with Altamont Investments Ltd., a private company wholly owned and operated by Andrew Strang, dated February 28, 2007, terminable upon 30 days’ notice.

Committees of the Board of Directors

Our board of directors has established the following committees:

• Audit Committee: The Board’s audit committee reviews our annual and interim financial statements and certain other public disclosure documents required by regulatory authorities and makes recommendations to the board of directors with respect to such statements and documents. This committee also makes recommendations to the board of directors regarding the appointment of independent auditors, reviews the nature and scope of the annual audit as proposed by the auditors and management, and reviews with management the risks inherent in the Company’s business and risk management programs relating thereto. This committee also reviews with the auditors and management the adequacy of our internal accounting control procedures and systems, considers our audit procedures and reviews and approves the non-audit services to be performed by the independent accountants. During the fiscal year ended December 31, 2006, no non-audit services were performed or approved by the audit committee to be performed by our independent accountants, other than certain tax compliance services which the audit committee believes that the independent accountants could provide without impairing their independence.
   
  The audit committee is currently comprised of Marco Markin and George Reznik. Of these directors, only George Reznik is considered “independent” within the meaning of section 1.4 of MI 52-110. The Board has

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determined that George Reznik meets the requirements of an “audit committee financial expert” as defined by the SEC. All other members of the audit committee have significant business experience and a general understanding of accounting principles and knowledge of financial statements.

The Board adopted an Audit Committee Charter on May 11, 2004, a copy of which is available upon request in writing to our corporate secretary.

• Compensation Committee. The Board’s compensation committee is currently comprised of Marco Markin and George Reznik.

• Corporate Governance Committee: The Board’s corporate governance committee is currently comprised of Marco Markin and George Reznik and is responsible for developing and implementing the Company’s policies regarding corporate governance as imposed under corporate and securities laws and consistent with good corporate practices.

As of December 31, 2006, we and our subsidiaries had a total of 18 staff, who were either employed as employees or retained as consultants. Of this number, 7 worked in various management and administration positions in our corporate head office in Vancouver, British Columbia, and 11 were involved in various sales, marketing and operations.

As of June 15, 2007, there were 20,423,820 shares of the Company’s common stock; 600,000 shares of the Company’s Class B preferred stock and 320,000 of the Company’s Variable Multiple Voting Shares issued and outstanding.

The following table provide information as of June 15, 2007 regarding beneficial ownership of our common stock by (i) each of our executive officers and directors who held those positions during fiscal 2006 and who hold those positions as of June 15, 2007, and (ii) all such executive officers and directors as a group. None of such persons beneficially owned any shares of Class B preferred stock or Variable Multiple Voting Shares as of such date. The information in this table is based upon information supplied by such executive officers and directors. To our knowledge and except as set forth in the footnotes to the table, each of the persons named in the table has sole voting and investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable. Unless indicated otherwise, each holder’s address is c/o Clearly Canadian Beverage Corporation, 2267 10th Avenue W., Vancouver, British Columbia, Canada V6K 2J1:

_______________________
** Less than one percent

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Beneficial Stock Ownership

The following tables provide information as of June 15, 2007 regarding beneficial ownership of our common stock and preferred stock by each person that is known to us to beneficially own 5% or more of any class of our stock (“Major Shareholders”). The information in this table is based upon information supplied by such major shareholders. To our knowledge and except as set forth in the footnotes to the table, each of the persons named in the table has sole voting and investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable:

__________________
** Less than one percent

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Changes in Stock Ownership

The following provides a summary of changes in stock ownership during fiscal 2006 with respect to the above Major Shareholders:

• In November 2006, BG Capital Group converted 400,000 class B preferred shares for 1,640,000 common shares and 320,000 Multiple Voting Shares;

• In August, 2006 the Company issued 140,000 shares at $2.30 per share to BG Capital Group as settlement for consulting services provided to the Company.

Voting Rights

All holders of common shares have the same voting rights. Each Class B Preferred Share has the right to five votes on any vote of the common shareholder (see “Item 11. Additional Information – General Description of Capital Structure – Class B Preferred Shares”).

U.S. Stockholders

At June 15, 2006, based on the records of Pacific Corporate Trust, our transfer agent, there were 156 holders of record of common stock with an address in the United States, who collectively held 1,803,977 shares of common stock, representing approximately 18.7% of the total issued and outstanding common shares. The actual number of stockholders may be greater than the amount on record with our transfer agent due to shares being held with nominees.

Control

BG Capital Group Ltd., our majority shareholder, has two nominees on the Board and as of June 15, 2007 beneficially owns or controls more than 57% of our voting power and effectively controls our company. Through its holdings, BG Capital Group Ltd. can influence matters requiring shareholder approval, including the election of directors. Such control could have the effect of delaying, deferring or preventing a change of control of our company.

Other than BG Capital Group Ltd., to the best of our knowledge, we are not directly nor indirectly owned or controlled by any other person, entity or government.

Change of Control

We have a shareholders’ rights plan and supermajority approval requirements, each of which may prevent or delay a future change of control of our company (See “Item 10. Additional Information – Shareholder Protection Provisions” below).

Except as set out below or otherwise disclosed in this report or in our audited financial statements attached hereto, there are no material transactions with any of our directors, officers or control persons that have occurred during the last three fiscal years.

• In the year ended December 31, 2006, the Company paid $55,000 in remaining costs associated with the lease of its former office premises to a limited partnership in which certain ex-directors of the Company

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had an interest. The Company terminated this lease on December 31, 2005 and has moved to different premises;

• In the year ended December 31, 2006, the Company recorded management fees of $322,000 in connection with a contract for service provided by BG Capital Group Ltd., our controlling shareholder. The contract was terminated on March 15, 2006. In August 2006 the Company issued 140,000 shares at $2.30 per share as settlement of services provided;

• In the year ended December 31, 2006 the Company paid $190,000 in corporate development and financing expense reimbursements to BG Capital Group Ltd.;

• In August 2006, the Company paid $50,000 to BG Capital Group Ltd. as a finder’s fee in connection with a private placement of 333,334 common shares issued by the Company at $3.00 per share. BG Capital has the right until August, 2007 to convert any or all of this finder’s fee into the Company’s common shares at a price of $3.00 per share;

• In July 2006, the Company paid $137,187 to BG Capital Group Ltd. as a finder’s fee in connection with a private placement of 1,205,000 common shares issued by the Company at $2.75 per share. BG Capital has the right until July, 2007 to convert any or all of this finder’s fee into the Company’s common shares at a price of $2.75 per share;

• In May 2006, the Company paid $130,750 to BG Capital Group Ltd. as a finder’s fee in connection with a private placement of 1,312,500 common shares issued by the Company at $2.00 per share. BG Capital has the right until May, 2007 to convert any or all of this finder’s fee into the Company’s common shares at a price of $2.00 per share;

• On December 28, 2005, we completed a private placement of units with four investors, BG Capital Group Ltd., Douglas L. Mason, a director, Brent Lokash, our President, CEO and a director, and Gladys Jenks, for an aggregate purchase price of $1,000,000. The private placement units consisted of an aggregate of 800,000 shares of our common stock, 5,000,000 Series A share purchase warrants, 5,000,000 Series B share purchase warrants, 5,000,000 Series C share purchase warrants and 5,000,000 Series D share purchase warrants. Subsequently, in May 2006, the holders of the foregoing warrants agreed to surrender all but 4,120,000 warrants of their 20,000,000 warrants;

• On May 24, 2005, we issued 450,000 shares to BG Capital Group Ltd. as a finder’s fee in connection with our recently completed private placements;

• On May 25, 2005, BG Capital Group exchanged its 2,000,000 Class A Preferred shares for 2,000,000 Class B Preferred shares (100% of class). The Class B Preferred shares are convertible, in whole but not in part, into such number of our common shares as would equal 50% of the number of our fully diluted common shares immediately prior to such conversion;

• On May 5, 2005, BG Capital Group Ltd. converted its $1,000,000 loan with our company into 1,000,000 Class A Preferred shares at $1.00 per share and concurrently we sold to BG Capital Group Ltd. an additional 1,000,000 Class A Preferred shares at $1.00 per share. Also on May 5, 2005, three nominees of BG Capital Group Ltd., Marco Markin, Brent Lokash and Cameron Strang, were appointed to our board of directors;

• On April 1, 2005, we entered into a consulting agreement with BG Capital Group Ltd., pursuant to which BG Capital Group Ltd. agreed to provide to us certain consulting services, including assistance with accounting, financing and cash flow management as well as advice relating to our corporate restructuring, future financing requirements and on-going strategic planning. In consideration for such services, we agreed to pay to BG Capital Group Ltd. 10,000 shares of our common stock, payable in monthly in arrears, at a deemed price of $1.00 per share;

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• On February 9, 2005, we entered into a loan agreement and demand note with BG Capital Group Ltd., pursuant to which BG Capital Group Ltd. agreed to loan to us an aggregate of $1,000,000. The loan bore interest at a rate of 10% per annum and was payable within 90 days, upon demand;

• On December 14, 2004 and January 14, 2005, we completed a private placement of 1,500,000 common shares (pre-reverse split) at a price of Cdn$0.25 per share, of which 1,035,000 shares were acquired by certain former directors, officers and employees of our company as follows:

• Concurrently with the loan from Quest Capital, on March 4, 2004, we entered into a loan agreement, as amended April 6, 2004 and November 19, 2004, with certain of our former directors and officers. Pursuant to the loan, those directors and officers provided to us an additional $500,000. The loan bore an interest rate of 12% per year compounded and payable monthly and is secured by a charge over all of our present and future assets and properties, but is subordinated in priority and payment to the loans to us from Global (GMPC) Holdings Inc. Pursuant to the terms of loan, we issued to those former directors and officers an aggregate of 330,000 common shares as follows:

• On March 4, 2004, we entered into a loan agreement with Quest Capital Corp., pursuant to which Quest Capital Corp. agreed to loan to us an aggregate of $1,350,000 CDN. In consideration of the loan agreement, as amended March 19, 2004, April 6, 2004 and September 20, 2004, we issued to Quest Capital Corp. 660,000 of our common shares as bonus shares on March 19, 2004, 167,500 additional shares on September 20, 2004 and 202,500 additional shares on November 18, 2004. The loan was repaid in full by November 23, 2004. Pursuant to the terms of the loan, we were required to arrange the sale of the bonus shares. In order to facilitate the loan, Douglas L. Mason, our former President, Chief Executive Officer and

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director, agreed to purchase the bonus shares at a price of $0.40 per share from Quest Capital Corp. on July 6, 2004.

Except as disclosed in the preceding discussion, we have not been a party to any transaction, proposed transaction, or series of transactions in which the amount involved exceeds $60,000, and in which, to our knowledge, any of our directors, officers, five percent beneficial security holders, or any member of the immediate family of the foregoing persons has had or will have a direct or indirect material interest.

Not Applicable.

Financial Statements

See Item 18 and see Item 5 for additional financial information related to the Company.

Legal Proceedings

Other than as set out below, there are no material legal proceedings to which we are a party or to which any of our properties is subject, nor are any such proceedings known to be contemplated. From time to time, we are subject to other legal proceedings and claims that arise in the ordinary course of its business.

Dispute with Ralph Moyal

The litigation which the Company has settled relates to all claims surrounding its subsidiary, Blue Mountain Springs Ltd. (Blue Mountain). This litigation commenced in 1997 and involved a claim against the Company and Blue Mountain to repay an outstanding $1,750,000 CDN debt owed by the Company to the former owners of Blue Mountain. The Company had withheld payment of this debt in order to set off another claim against the Company by a third party for entitlement to shares in Blue Mountain.

The terms of the settlement concluded in the third quarter of 2006 required the Company to issue 624,314 common shares, issue a common share purchase warrant expiring July 14, 2011 for the purchase of a further 100,000 shares at a price of $2.00 per share, transfer 42 acres of residential land in Ontario to a plaintiff, grant a plaintiff the right of first refusal to purchase 4 acres of land with a water source in Ontario and issue a further approximately 14,000 shares of the Company.

In consideration of the above and the settlement of the litigation, $1,750,000 CDN debt was extinguished, and the plaintiff assumed a mortgage registered against the 42 acre parcel of land above.

Full provision has been made in these financial statements for the settlement of the litigation, as follows:

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The 624,314 shares and the share purchase warrant have been issued into escrow, to be released in scheduled traunches beginning on the earlier of three months from the date the securities are registered by an effective registration statement filed with the US Securities Exchange Commission, or July 29, 2007 (the “First Release Date”), and ending 24 months thereafter. The settlement terms includes a provision that requires the Company to issue additional shares to ensure that the initial 624,314 shares issued into escrow have a value of $1,100,000 (approximately $2.59 per share ) based on the average trading price of the shares for the 10 day period preceding the First Release Date. In the event that there is a shortfall, the Company will be required to issue additional shares at the average trading price above to meet the $1,100,000 value. At the balance sheet date, there were no additional shares issuable.

Dispute with D. Bruce Horton and Continental Consulting Ltd.

In August 1999, a claim was filed against us in the Supreme Court of British Columbia by D. Bruce Horton and his company, Continental Consulting Ltd. (Continental). Mr. Horton is claiming compensation from us for allegedly constructively dismissing him as an officer of Clearly Canadian. Continental is claiming compensation from us alleging that we terminated our management agreement without cause. Mr. Horton and Continental are claiming an aggregate of Cdn$2.4 million plus interest and costs. We do not accept Mr. Horton’s and Continental’s allegations, and we have filed statements of defence and have further filed counterclaims against Mr. Horton and Continental for monies owed and damages. We have made an accrual based on its expected costs.

Dividend Policy

During the year ended December 31, 2006 we did pay cash dividends to holders of our equity securities.

During fiscal 2006, there were no Class A Preferred shares issued and outstanding, and no further dividends are accruing on the Class A Preferred shares.

The Class B Preferred shares provide for the payment of cash dividends on each Class B Preferred share at the rate of 10% per annum of the deemed issue price of $1.00 per Class B Preferred share. For the first year, dividends on the Class B Preferred shares were payable in advance on the date of issuance of the Class B Preferred shares through the issuance of common shares at a price of $1.00 per share. Accordingly, on May 24, 2005, we issued 200,000 common shares to BG Capital Group Ltd. in respect of dividends payable on the Class B Preferred shares, and on October 10, 2006, we paid a $94,246 cash dividend to BG Capital Group Ltd. for the period from May 12, 2006 to October 31, 2006. As of June 15, 2007, there are 600,000 Class B Preferred shares issued and outstanding, all of which are held by BG Capital Group Ltd.

We have no fixed dividend policy. The payment of dividends in the future will depend, among other things, upon our earnings, capital requirements and operating and financial condition. Generally, dividends can only be paid if a corporation has retained earnings. There can be no assurance that we will generate sufficient earnings to allow us to pay dividends.

There have been no significant changes to our business since December 31, 2005, except as disclosed herein.

Trading Markets

Our common stock currently trades on the OTC Bulletin Board under the symbol “CCBEF”. Our common stock commenced trading through the NASDAQ system on September 3, 1987; however, on February 14, 2001, our shares were delisted from NASDAQ (based on non-compliance with NASDAQ’s minimum bid price and minimum

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market value requirements for continued listing) and our shares have been trading in the United States on the OTC Bulletin Board since.

Previously, our common shares were also traded in Canada. Originally, our common shares were listed for trading on the Vancouver Stock Exchange (the “VSE”) on January 25, 1984. On December 3, 1997, our shares were listed for trading on the Toronto Stock Exchange (the “TSX”) and on January 9, 1998, we voluntarily delisted our securities from the VSE. On February 17, 2005, our shares commenced trading on the Canadian Trading and Quotational System Inc. (“CNQ”) under the symbol “CCBC” and concurrently our common shares were voluntarily delisted from trading on the TSX as we were not meeting the TSX’s continued listing requirements. Subsequently, on May 6, 2005, we voluntarily delisted from trading on the CNQ to facilitate certain contractual and financing matters related to our transactions with BG Capital.

On May 2, 2005, a 1:10 reverse split was completed on our common stock and the common stock began trading on a post-consolidated basis on May 5, 2005. The market price information provided in the tables below represents actual trading prices. The following table sets out the annual high and low sale prices for the common shares traded on the OTC Bulletin Board for the five years ended December 31, 2005. These quotations represent inter-dealer prices without mark-ups or commissions and may not necessarily be indicative of actual sales prices.

The following table sets the quarterly high and low sale prices (in U.S. dollars) for our common shares traded on the OTC Bulletin Board for the 2006 and 2005 fiscal years. These quotations represent inter-dealer prices without mark-ups or commissions and may not necessarily be indicative of actual sales prices.

The following table sets out the monthly high and low sale prices (in U.S. dollars) for our common shares traded on the OTC Bulletin Board during the six months ended May 31, 2006. These quotations represent inter-dealer prices without mark-ups or commissions and may not necessarily be indicative of actual sales prices.

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Our Class A Preferred Shares and Class B Preferred Shares do not trade on a Canadian marketplace or foreign marketplace.

Transfer Agent

The transfer agent and registrar for our common stock is Pacific Corporate Trust Company, 10th Floor –625 Howe Street, Vancouver, BC, Canada V7V 1E1 (Telephone: 1-877-288-6822).

Not applicable.

See “Item 9. Offer and Listing Details – Trading Markets” above.

Not applicable.

Not applicable.

Not applicable.

Not applicable.

Clearly Canadian Beverage Corporation was incorporated under the Company Act (British Columbia), and we are now governed by the Business Corporations Act (British Columbia) (the “BCA”). Our “Notice of Articles” (formerly called a “memorandum”) does not restrict the business that we may carry on, nor does it set out any specific objects or purposes for our business.

Directors

Under the BCA, every director and every senior officer of our company who is, in any way, directly or indirectly, materially interested in a proposed material contract or transaction with us is required, subject to certain exemptions, to disclose the nature and extent of his or her interest at a meeting of the directors. The BCA further provides that every director must account to us for any profit made as a consequence of our entering into or performing the proposed material contract or transaction in which the director has a material interest, unless either:

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A special resolution is a resolution passed by a majority of not less than three-quarters of the votes cast by our shareholders who, being entitled to do so, vote in person or by proxy at a duly called general meeting of our company. Under our articles, a director who is interested in a proposed contract or transaction with us may be counted in the quorum at any directors’ meeting at which the proposed contract or transaction is approved.

Compensation payable to our directors is set by the board of directors with input from the compensation committee. An independent quorum of directors is not required in order for the board of directors to approve compensation payable to directors.

Under our articles, the board of directors may authorize the borrowing of money in such manner and amount, on such security, from such sources and upon such terms and conditions as they in their absolute discretion think fit. These borrowing powers may be varied by an amendment to our articles approved by a special resolution of the shareholders.

Our articles provide for a rotation of the terms of office for directors. Directors are appointed for three-year terms, however one-third (or the next smaller whole number if the number of directors is not a multiple of three) of the number of directors fixed pursuant to the articles is required to retire from office at succeeding annual general meetings. Directors are not required to hold shares in our company.

General Description of Capital Structure

As of December 31, 2006, our capital structure was as follows:

• an unlimited number of common shares without par value, of which 13,917,153 common shares were issued and outstanding;
• 2,000,000 Class A Preferred Shares, none of which were issued and outstanding; and
• 2,000,000 Class B Preferred Shares, 1,600,000 shares of which were issued and outstanding.

In addition, on March 16, 2006, we held a special general meeting of shareholders, at which the shareholders approved (a) the re-designation of the common shares as “Limited Voting Shares” and (b) the creation of a class of “Variable Multiple Voting Shares.” Holders of Variable Multiple Voting Shares are entitled to multiple votes at all meetings of common shareholders, and the number of votes attached to each Variable Multiple Voting Share is equal to the greater of (i) ten and (ii) ten times a fraction the numerator of which is the number of issued common shares and the denominator of which is the number of issued common shares on March 16, 2006. As of December 31, 2006, 320,000 Variable Multiple Voting Shares are issued and outstanding.

Common Shares

Each common share entitles the holder to one vote at any meeting of our shareholders, to receive, as and when declared by the Board of Directors, dividends in such amounts as shall be determined by the Board of Directors; and to receive any remaining property in the event of liquidation, dissolution or winding-up of our company.

Class A Preferred Shares

The rights attached to the Class A Preferred Shares include the right to dividends in the amount of 10% per annum payable quarterly in advance (payable by the issuance of common shares calculated at a share price equal to the ten day average closing price of our common shares on the OTC Bulletin Board market preceding the date of issuance of such dividend shares), the right to one vote for each Class A Preferred Share on any vote of the common shares,

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and the right of conversion into common shares at a conversion price equal to the ten day average trading price of common shares on the OTC Bulletin Board market preceding the date of conversion. The Class A Preferred Shares rank, as to dividends, redemptions, and the distribution of assets upon liquidation, prior to (i) the common shares and (ii) any class or series of shares of our capital stock created subsequent to these Class A Preferred Shares which by their terms ranks junior to the Class A Preferred Shares and junior to the Class B Preferred Shares and (iv) any class or series of shares of our capital stock created subsequent to the Class A Preferred Shares which by their terms ranks senior to the Class A Preferred Shares (the “Senior Securities”); and pari passu with (v) any class or series of shares of our capital stock created subsequent to the Class A Preferred Shares by their terms ranks on a parity with the Class A Preferred Shares.

Class B Preferred Shares

The rights attached to the Class B Preferred Shares include the right to dividends in the amount of 10% per annum payable, in the first year, in advance, by the issuance of common shares at a price of $1.00 per share, and thereafter in advance in monthly cash instalments. Each Class B Preferred Share has the right to five votes on any vote of the common shareholders. The Class B Preferred Shares as a class are convertible, in whole but not in part, into such number of common shares as would equal 50% of the number of fully diluted common shares immediately prior to such conversion of the Class B Preferred Shares. The Class B Preferred Shares rank, as to dividends, redemptions, and the distribution of assets upon liquidation, prior to (i) the common shares and the Class A Preferred Shares; and (ii) any class or series of shares of our capital stock created subsequent to these Class B Preferred Shares which by their terms ranks junior to the Class A Preferred Shares and junior to the Class B Preferred Shares and (iv) any class or series of shares of our capital stock created subsequent to the Class B Preferred Shares which by their terms ranks senior to the Class B Preferred Shares (the “Senior Securities”); and pari passu with (v) any class or series of shares of our capital stock created subsequent to the Class B Preferred Shares by their terms ranks on a parity with the Class B Preferred Shares.

Variable Multiple Voting Shares

The Variable Multiple Voting Shares rank equally with the common shares with respect to dividends and rights on liquidation. With regard to voting, each Variable Multiple Voting Share entitles the holder thereof to 10 votes for each share held or such greater number of votes for each Variable Multiple Voting Share as may be determined in accordance with the following formula:

Share Rights

Amendments to our articles, including any provisions affecting rights attaching to shares of our capital stock, must be approved by a special resolution of the shareholders, or as otherwise provided for in the BCA. Rights or special rights attached to a particular class or series of shares may not be prejudiced or interfered with without first obtaining consent by way of special resolution of the holders of the affected class or series of shares.

We have adopted a shareholders’ rights plan. Under the plan, a person or group of persons acting jointly that acquire beneficial ownership of 20% or more of our outstanding common shares may not be entitled to exercise rights issued under the plan. See “Shareholder Protection Provisions – The Rights Plan” below.

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Meetings of Shareholders

We must hold an annual general meeting of shareholders at least once in every calendar year and not more than 13 months after the date the last annual general meeting was held. In addition, our directors may, whenever they think fit, convene a general meeting of shareholders for whatever purpose the directors may determine. Under the BCA, directors must convene a general meeting of shareholders on the requisition of one or more shareholders holding in the aggregate not less than 5% of the issued voting shares. All shareholders of record as at the record date set for a meeting of shareholders are entitled to attend and vote at the meeting in person or by proxy.

Shareholder Protection Provisions

Our shareholders have previously approved the adoption of certain shareholder protection measures to deter coercive or unfair takeover tactics or offers, and to encourage potential acquirers in any takeover attempts to negotiate directly with our board of directors. Specifically, the shareholders have approved and we have implemented a rights plan (the “Rights Plan”), the terms of which are contained in a rights agreement dated October 1, 1990, as amended, and a supermajority amendment (the “Supermajority Amendment”) which forms a part of our articles.

The Rights Plan

Pursuant to the Rights Plan, each common share carries one right (a “Right”) which becomes exercisable on the date (the “Distribution Date”) which corresponds to the close of business on the 10th business day after the earlier to occur of (i) the date of a public announcement that a person or group of persons acting jointly (an “Acquiring Person”) have acquired beneficial ownership of 20% or more of the outstanding common shares, other than pursuant to an offer which is determined by our board of directors to be fair and otherwise in the best interests of us and our shareholders (a “Qualified Offer”), such date being the “Stock Acquisition Date”, or (ii) the date of a public announcement of the commencement, or announcement of an intention to make, a takeover offer, the consummation of which would result in the beneficial ownership by a person or group of persons acting jointly of 20% or more of the outstanding common shares. Until the Distribution Date, the Rights are evidenced by the certificates representing the common shares and the Rights may be transferred only with the common shares. Following the Distribution Date, the Rights are transferable and certificates representing the Rights will be issued to the holders of record of the common shares.

Each Right will entitle its holder upon exercise and payment of the exercise price in effect from time to time (currently Cdn$15.00) (the “Exercise Price”) to one common share. Upon the occurrence of certain events including (i) the acquisition by a person or a group of persons acting jointly of 20% or more of the common shares other than pursuant to a Qualified Offer or (ii) a merger or other business combination transaction (other than a merger which follows a Qualified Offer) or (iii) the sale of 50% or more of our consolidated assets or earning power, provision will be made so that each Right will entitle its holder upon exercise to receive, upon payment of the Exercise Price in effect at the time, that number of common shares which have a market value of two times such Exercise Price provided that any Acquiring Person shall not be entitled to the benefit of such adjustment.

Until the 10th business day following the Stock Acquisition Date, the Rights may be redeemed, in whole, but not in part, by the board of directors at a price of Cdn$0.001 per Right and upon the redemption of the Rights the holders of the Rights will be entitled only to receive the redemption price.

The Rights Plan was first approved by our shareholders at the annual general meeting held on December 1, 1989. The Rights Plan was for an initial term of 10 years and expired on December 31, 1999. At the annual general meeting held on June 24, 1999, the shareholders approved the re-adoption and extension of the Rights Plan for a further 10 years (expiry date December 31, 2009). At the annual general meeting held on June 23, 2000, the shareholders approved reducing the Exercise Price of a Right from Cdn$70.00 to Cdn$15.00.

This description is qualified in its entirety by reference to the rights agreement pursuant to which the Rights Plan was established.

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The Supermajority Amendment

The Supermajority Amendment requires that certain mergers and other forms of business combinations involving us and beneficial owner of greater than 20% of the outstanding common shares be approved by the holders of at least 80% of the outstanding common shares unless such transaction is approved by the board of directors in which case the Supermajority Amendment will not apply. The Supermajority Amendment provides that the approval of the holders of at least 80% of the outstanding common shares must be obtained in order to amend, repeal, or adopt any provisions inconsistent with the Supermajority Amendment, unless such action is approved by the majority of the board of directors.

The full text of the Supermajority Amendment is contained in our articles and this description is qualified in its entirety by reference to our articles.

Other than contracts entered into in the ordinary course of business, we have entered into the following material contracts during the two years proceeding the date of this annual report:

• Share Purchase Agreement dated May 24, 2007, pursuant to which the Company acquired all of the outstanding shares of My Organic Baby Inc., an Ontario corporation;

• Share Purchase Agreement dated February 7, 2007, pursuant to which the Company acquired all of the outstanding shares of DMR Food Corporation, an Ontario corporation; and

• Private Placement Subscription Agreement, dated December 28, 2005, between us and four investors (BG Capital Group Ltd., Douglas L. Mason, a director, Brent Lokash, our President and a director, and Gladys Jenks) in our private placement of units for 800,000 common shares, 5,000,000 Series A warrants, 5,000,000 Series B warrants, 5,000,000 Series C warrants, and 5,000,000 Series D warrants for a total purchase price of $1,000,000. These agreements were subsequently amended on May 12, 2006, for the cancellation of warrants and to submit to the shareholders a proposal to amend the terms of the Class B preferred shares.

There are no governmental laws, decrees or regulations in Canada restricting the import or export of capital or affecting the remittance to the United States of interest, dividends or other payments to non-resident holders of our shares. However, the payment or crediting of interest or dividends to United States residents may be subject to applicable withholding taxes at a rate prescribed by the Income Tax Act (Canada) and modified by the provisions of the Canada-United States Income Tax Convention, 1980 (see commentary in the section entitled “Taxation” below).

Except as provided in the Investment Canada Act (the “ICA”), there are no limitations under the laws of Canada, the Province of British Columbia or in our Memorandum or Articles on the right of foreigners to hold and/or vote the shares of our capital stock.

The ICA has application where a “non-Canadian” individual or entity or controlled group of entities proposes to make an investment to acquire control of a Canadian business enterprise, either directly or indirectly, by way of purchase of voting shares of a corporation or of substantially all of the assets used in the Canadian business enterprise. An investment to acquire voting shares of a corporation is deemed to be an acquisition of control where more than one-half of the voting shares are acquired. An acquisition of less than one-third of the voting shares of a corporation is deemed not to be an acquisition of control and an acquisition of between one-third and one-half of the voting shares of a corporation is presumed to be an acquisition of control unless it can be established that the acquisition does not in fact result in control of the corporation by the investor.

An investment to acquire control of a Canadian business enterprise, the gross assets of which exceed certain thresholds, must be reviewed and approved under the ICA before implementation. An investment to acquire control

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of a Canadian business enterprise, the gross asset value of which falls below these threshold amounts, is one in respect of which notification must be given under the ICA although approval is not required prior to implementation of the investment.

Specific investment thresholds apply to investors of the United States. The investment threshold for a direct acquisition of control has been established at Cdn$250 million for 2005 and no review is required for an indirect acquisition of control. Each year the direct acquisition investment threshold is adjusted for inflation.

Canadian Federal Income Tax Considerations

The following is a general discussion of the material Canadian federal income tax consequences applicable to a holder of our common shares who is a resident of the United States and who is not, and is not deemed to be, a resident of Canada, who holds such common shares as capital property and who does not use or hold such common shares in carrying on a business in Canada (a “Non-Resident Holder”).

This summary is based on the current provisions of the Income Tax Act (Canada) and regulations thereunder (the “ITA”) and all specific proposals to amend the ITA publicly announced prior to the date hereof by the Minister of Finance (Canada) and the current administrative practices of the Canada Revenue Agency. It has been assumed that all specific proposals to amend the ITA will be enacted in substantially their present form and that no other relevant amendments to the ITA will come into force. However, no assurance can be given to this effect. Except for the foregoing, this summary does not take into account or anticipate any changes in law, whether by legislative, administrative or judicial decision or action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations which may differ from those described herein. See “United States Federal Income Tax Consequences” below.

This summary is not exhaustive of all possible Canadian federal income tax consequences to all Non-Resident Holders and in particular will not be applicable where the Non-Resident Holder is a non-resident insurer carrying on an insurance business in Canada in respect of which our common shares are held or used in Canada. Nor should these comments be interpreted as legal or tax advice to any particular Non-Resident Holder, each of whom should consult their own tax advisors with respect to their particular circumstances.

Dividends

Dividends (including deemed dividends) paid or credited on our common shares to a Non-Resident Holder will be subject to withholding tax in Canada. The Canada-United States Income Tax Convention, 1980, as amended (the “Treaty”) provides that the normal 25% rate of withholding tax on the gross amount of such dividends is reduced to 15% if paid to a resident of the United States. The Treaty provides for a further reduction of the withholding tax rate to 5% if the beneficial owner of such dividends is a company (any entity which is treated as a body corporate for purposes of the ITA) which is a resident of the United States and which owns at least 10% of our voting stock.

Capital Gains

A Non-Resident Holder will not be subject to tax under the ITA in respect of a capital gain realized upon the disposition or deemed disposition (such as would arise on the death of an individual Non-Resident Holder) of a common share unless such share is “taxable Canadian property” to the Non-Resident Holder. A common share in the capital of our company will be taxable Canadian property to a Non-Resident Holder if (i) at any time during the five year period ending at the time of disposition of such share, the Non-Resident Holder, persons with whom the Non-Resident Holder did not deal at arm’s length, or the Non-Resident Holder together with all such persons owned (or had an option to acquire) 25% or more of the issued shares of any class or series of our capital stock; or (ii) the Non-Resident Holder elected under the ITA to treat such common shares as taxable Canadian property upon ceasing to be a resident of Canada prior to October 2, 1996.

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However, under the Treaty, a Non-Resident Holder to whom our common shares represent taxable Canadian property will not be liable to tax in Canada in respect of a capital gain realized on the disposition of such shares unless:

• the value of such shares is derived principally from real property situated in Canada (including mineral properties in Canada and rights in relation thereto), or

• the Non-Resident Holder was a resident of Canada for 120 months during any period of 20 consecutive years preceding the disposition of such shares and was a resident of Canada at any time during the 10 years immediately preceding such disposition and owned such shares (or property for which such shares were substituted) at the time the Non-Resident Holder ceased to be a resident of Canada.

U.S. Federal Income Tax Consequences

The following is a summary of the anticipated material U.S. federal income tax consequences to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of our common shares (“Common Shares”).

This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax consequences that may apply to a U.S. Holder as a result of the acquisition, ownership, and disposition of Common Shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder. Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. federal, U.S. state and local, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares.

Scope of this Disclosure

Authorities

This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations (whether final, temporary, or proposed), published rulings of the Internal Revenue Service (“IRS”), published administrative positions of the IRS, the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended (the “Canada-U.S. Tax Convention”), and U.S. court decisions that are applicable and, in each case, as in effect and available, as of the date of this Annual Report. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive basis. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive basis.

U.S. Holders

For purposes of this summary, a “U.S. Holder” is a beneficial owner of Common Shares that, for U.S. federal income tax purposes, is (a) an individual who is a citizen or resident of the U.S., (b) a corporation, or any other entity classified as a corporation for U.S. federal income tax purposes, that is created or organized in or under the laws of the U.S. or any state in the U.S., including the District of Columbia, (c) an estate if the income of such estate is subject to U.S. federal income tax regardless of the source of such income, or (d) a trust if (i) such trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or (ii) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of such trust.

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Non-U.S. Holders

For purposes of this summary, a “non-U.S. Holder” is a beneficial owner of Common Shares other than a U.S. Holder. This summary does not address the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares to non-U.S. Holders. Accordingly, a non-U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. federal, U.S. state and local, and foreign tax consequences (including the potential application of and operation of any tax treaties) of the acquisition, ownership, and disposition of Common Shares.

U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed

This summary does not address the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares to U.S. Holders that are subject to special provisions under the Code, including the following U.S. Holders: (a) U.S. Holders that are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) U.S. Holders that are financial institutions, insurance companies, real estate investment trusts, or regulated investment companies; (c) U.S. Holders that are broker-dealers, dealers, or traders in securities or currencies that elect to apply a mark-to-market accounting method; (d) U.S. Holders that have a “functional currency” other than the U.S. dollar; (e) U.S. Holders that are liable for the alternative minimum tax under the Code; (f) U.S. Holders that own Common Shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than one position; (g) U.S. Holders that acquired Common Shares in connection with the exercise of employee stock options or otherwise as compensation for services; (h) U.S. Holders that hold Common Shares other than as a capital asset within the meaning of Section 1221 of the Code; or (i) U.S. Holders that own, directly or indirectly, 10% or more, by voting power or value, of our outstanding shares. U.S. Holders that are subject to special provisions under the Code, including U.S. Holders described immediately above, should consult their own financial advisor, legal counsel or accountant regarding the U.S. federal, U.S. state and local, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares.

If an entity that is classified as partnership (or “pass-through” entity) for U.S. federal income tax purposes holds Common Shares, the U.S. federal income tax consequences to such partnership (or “pass-through” entity) and the partners of such partnership (or owners of such “pass-through” entity) generally will depend on the activities of the partnership (or “pass-through” entity) and the status of such partners (or owners). Partners of entities that are classified as partnerships (or owners of “pass-through” entities) for U.S. federal income tax purposes should consult their own financial advisor, legal counsel or accountant regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.

Tax Consequences Other than U.S. Federal Income Tax Consequences Not Addressed

This summary does not address the U.S. state and local, U.S. federal estate and gift, or foreign tax consequences to U.S. Holders of the acquisition, ownership, and disposition of Common Shares. Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. state and local, U.S. federal estate and gift, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares. (See “Taxation—Canadian Federal Income Tax Considerations” above).

U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition of Common Shares

Distributions on Common Shares

General Taxation of Distributions

A U.S. Holder that receives a distribution, including a constructive distribution, with respect to the Common Shares will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of our current or accumulated “earnings and profits.” To the extent that a distribution exceeds our current and accumulated “earnings and profits,” such distribution will be treated (a) first, as a tax-free return of capital to the extent of a U.S. Holder’s tax basis in the

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Common Shares and, (b) thereafter, as gain from the sale or exchange of such Common Shares. (See more detailed discussion at “Disposition of Common Shares” below).

Reduced Tax Rates for Certain Dividends

For taxable years beginning after December 31, 2002 and before January 1, 2009, a dividend paid by us generally will be taxed at the preferential tax rates applicable to long-term capital gains if (a) we are a “qualified foreign corporation” (as defined below), (b) the U.S. Holder receiving such dividend is an individual, estate, or trust, and (c) such dividend is paid on Common Shares that have been held by such U.S. Holder for at least 61 days during the 121-day period beginning 60 days before the “ex-dividend date” (i.e., the first date that a purchaser of such Common Shares will not be entitled to receive such dividend).

We generally will be a “qualified foreign corporation” under Section 1(h)(11) of the Code (a “QFC”) if (a) we are incorporated in a possession of the U.S., (b) we are eligible for the benefits of the Canada-U.S. Tax Convention, or (c) the Common Shares are readily tradable on an established securities market in the U.S. However, even if we satisfies one or more of such requirements, we will not be treated as a QFC if we are a “passive foreign investment company” (as defined below) for the taxable year during which we pay a dividend or for the preceding taxable year. In 2003, the U.S. Department of the Treasury (the “Treasury”) and the IRS announced that they intended to issue Treasury Regulations providing procedures for a foreign corporation to certify that it is a QFC. Although these Treasury Regulations were not issued in 2004, the Treasury and the IRS have confirmed their intention to issue these Treasury Regulations. It is expected that these Treasury Regulations will obligate persons required to file information returns to report a distribution with respect to a foreign security issued by a foreign corporation as a dividend from a QFC if the foreign corporation has, among other things, certified under penalties of perjury that the foreign corporation was not a “passive foreign investment company” for the taxable year during which the foreign corporation paid the dividend or for the preceding taxable year.

As discussed below, we do not believe that we were a “passive foreign investment company” for the taxable year ended December 31, 2006, and we do not expect that we will be a “passive foreign investment company” for the taxable year ending December 31, 2007. (See more detailed discussion at “Additional Rules that May Apply to U.S. Holders” below). However, there can be no assurance that the IRS will not challenge our determination concerning our “passive foreign investment company” status or that we will not be a “passive foreign investment company” for the current or any future taxable year. Accordingly, although we anticipate that we may be a QFC, there can be no assurances that the IRS will not challenge the determination made by us concerning our QFC status, that we will be a QFC for the current or any future taxable year, or that we will be able to certify that we are a QFC in accordance with the certification procedures issued by the Treasury and the IRS.

If we are not a QFC, a dividend paid by us to a U.S. Holder, including a U.S. Holder that is an individual, estate, or trust, generally will be taxed at ordinary income tax rates (and not at the preferential tax rates applicable to long-term capital gains). The dividend rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the dividend rules.

Distributions Paid in Foreign Currency

The amount of a distribution paid to a U.S. Holder in foreign currency generally will be equal to the U.S. dollar value of such distribution based on the exchange rate applicable on the date of receipt. A U.S. Holder that does not convert foreign currency received as a distribution into U.S. dollars on the date of receipt generally will have a tax basis in such foreign currency equal to the U.S. dollar value of such foreign currency on the date of receipt. Such a U.S. Holder generally will recognize ordinary income or loss on the subsequent sale or other taxable disposition of such foreign currency (including an exchange for U.S. dollars).

Dividends Received Deduction

Dividends paid on the Common Shares generally will not be eligible for the “dividends received deduction.” The availability of the dividends received deduction is subject to complex limitations that are beyond the scope of this

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discussion, and a U.S. Holder that is a corporation should consult its own financial advisor, legal counsel, or accountant regarding the dividends received deduction.

Disposition of Common Shares

A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of Common Shares in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder’s tax basis in the Common Shares sold or otherwise disposed of. Any such gain or loss generally will be capital gain or loss, which will be long-term capital gain or loss if the Common Shares are held for more than one year. Gain or loss recognized by a U.S. Holder on the sale or other taxable disposition of Common Shares generally will be treated as “U.S. source” for purposes of applying the U.S. foreign tax credit rules. (See more detailed discussion at “Foreign Tax Credit” below).

Preferential tax rates apply to long-term capital gains of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gains of a U.S. Holder that is a corporation. Deductions for capital losses and net capital losses are subject to complex limitations. For a U.S. Holder that is an individual, estate, or trust, capital losses may be used to offset capital gains and up to U.S.$3,000 of ordinary income. An unused capital loss of a U.S. Holder that is an individual, estate, or trust generally may be carried forward to subsequent taxable years, until such net capital loss is exhausted. For a U.S. Holder that is a corporation, capital losses may be used to offset capital gains, and an unused capital loss generally may be carried back three years and carried forward five years from the year in which such net capital loss is recognized.

Foreign Tax Credit

A U.S. Holder who pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on the Common Shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a year.

Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source.” In addition, this limitation is calculated separately with respect to specific categories of income (including “passive income,” “high withholding tax interest,” “financial services income,” “general income,” and certain other categories of income). Dividends paid by us generally will constitute “foreign source” income and generally will be categorized as “passive income” or, in the case of certain U.S. Holders, “financial services income.” However, for taxable years beginning after December 31, 2006, the foreign tax credit limitation categories are reduced to “passive income” and “general income” (and the other categories of income, including “financial services income” are eliminated). The foreign tax credit rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the foreign tax credit rules.

Information Reporting; Backup Withholding Tax

Payments made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from certain sales or other taxable dispositions of, Common Shares generally will be subject to information reporting and backup withholding tax, at the rate of 28%, if a U.S. Holder (a) fails to furnish such U.S. Holder’s correct U.S. taxpayer identification number (generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, U.S. Holders that are corporations generally are excluded from these information reporting and backup withholding tax rules. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if

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such U.S. Holder furnishes required information to the IRS. Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the information reporting and backup withholding tax rules.

Additional Rules that May Apply to U.S. Holders

If we are a “controlled foreign corporation” or a “passive foreign investment company” (each as defined below), the preceding sections of this summary may not describe the U.S. federal income tax consequences to U.S. Holders of the acquisition, ownership, and disposition of Common Shares.

Controlled Foreign Corporation

We generally will be a “controlled foreign corporation” under Section 957 of the Code (a “CFC”) if more than 50% of the total voting power or the total value of our outstanding shares is owned, directly or indirectly, by citizens or residents of the U.S., domestic partnerships, domestic corporations, domestic estates, or domestic trusts (each as defined in Section 7701(a)(30) of the Code), each of which own, directly or indirectly, 10% or more of the total voting power of our outstanding shares (a “10% Shareholder”).

If we are a CFC, a 10% Shareholder generally will be subject to current U.S. federal income tax with respect to (a) such 10% Shareholder’s pro rata share of our “subpart F income” (as defined in Section 952 of the Code) and (b) such 10% Shareholder’s pro rata share of our earnings invested in “United States property” (as defined in Section 956 of the Code). In addition, under Section 1248 of the Code, any gain recognized on the sale or other taxable disposition of Common Shares by a U.S. Holder that was a 10% Shareholder at any time during the five-year period ending with such sale or other taxable disposition generally will be treated as a dividend to the extent of our “earnings and profits” that are attributable to such Common Shares. If we are both a CFC and a “passive foreign investment company” (as defined below), we generally will be treated as a CFC (and not as a “passive foreign investment company”) with respect to any 10% Shareholder.

We do not believe that we have has previously been, or currently is, a CFC. However, there can be no assurance that we will not be a CFC for the current or any future taxable year.

Passive Foreign Investment Company

We generally will be a “passive foreign investment company” under Section 1297 of the Code (a “PFIC”) if, for a taxable year, (a) 75% or more of our gross income for such taxable year is passive income or (b) 50% or more of the assets held by us either produce passive income or are held for the production of passive income, based on the fair market value of such assets (or on the adjusted tax basis of such assets, if we are not publicly traded and either are a “controlled foreign corporation” or makes an election). “Passive income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.

For purposes of the PFIC income test and assets test described above, if we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another foreign corporation, we will be treated as if it (a) held a proportionate share of the assets of such other foreign corporation and (b) received directly a proportionate share of the income of such other foreign corporation. In addition, for purposes of the PFIC income test and asset test described above, “passive income” does not include any interest, dividends, rents, or royalties that are received or accrued by us from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.

If we are a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition of Common Shares will depend on whether such U.S. Holder makes an election to treat us as a “qualified electing fund” or “QEF” under Section 1295 of the Code (a “QEF Election”) or a mark-to-market election under Section 1296 of the Code (a “Mark-to-Market Election”). A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a “Non-Electing U.S. Holder.”

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Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of Common Shares, and any “excess distribution” (as defined in Section 1291(b) of the Code) paid on the Common Shares, must be rateably allocated to each day in a Non-Electing U.S. Holder’s holding period for the Common Shares. The amount of any such gain or excess distribution allocated to prior years of such Non-Electing U.S. Holder’s holding period for the Common Shares generally will be subject to U.S. federal income tax at the highest tax applicable to ordinary income in each such prior year. A Non-Electing U.S. Holder will be required to pay interest on the resulting tax liability for each such prior year, calculated as if such tax liability had been due in each such prior year.

A U.S. Holder that makes a QEF Election generally will not be subject to the rules of Section 1291 of the Code discussed above. However, a U.S. Holder that makes a QEF Election generally will be subject to U.S. federal income tax on such U.S. Holder’s pro rata share of (a) our “net capital gain,” which will be taxed as long-term capital gain to such U.S. Holder, and (b) our “ordinary earnings,” which will be taxed as ordinary income to such U.S. Holder. A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such amounts for each taxable year in which we are a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by us.

A U.S. Holder that makes a Mark-to-Market Election generally will not be subject to the rules of Section 1291 of the Code discussed above. A U.S. Holder may make a Mark-to-Market Election only if the Common Shares are “marketable stock” (as defined in Section 1296(e) of the Code). A U.S. Holder that makes a Mark-to-Market Election will include in gross income, for each taxable year in which we are a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the Common Shares as of the close of such taxable year over (b) such U.S. Holder’s tax basis in such Common Shares. A U.S. Holder that makes a Mark-to-Market Election will, subject to certain limitations, be allowed a deduction in an amount equal to the excess, if any, of (a) such U.S. Holder’s adjusted tax basis in the Common Shares over (b) the fair market value of such Common Shares as of the close of such taxable year.

We do not believe that we were a PFIC for the taxable year ended December 31, 2005, and we do not expect that we will be a PFIC for the taxable year ending December 31, 2006. There can be no assurance, however, that the IRS will not challenge our determination concerning its PFIC status or that we will not be a PFIC for the current or any future taxable year.

The PFIC rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the PFIC rules and how the PFIC rules may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.

Not applicable.

Not applicable.

Copies of our notice of articles and articles, along with copies of the Rights Plan, the 1997 Stock Option Plan, the 2005 Stock Option Plan and the 2006 Equity Incentive Plan may be inspected at our offices 2267 10th Avenue W., Vancouver, British Columbia, Canada during normal business hours.

All subsidiary information for Clearly Canadian is included in its consolidated financial statements.

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Other than described below, we are not a party to any market risk sensitive instruments other than instruments evidencing interest-bearing debt obligations as described in “Item 5. Operating and Financial Review and Prospects” and in Note 2 and Note 12 to our audited financial statements for the year ended December 31, 2006 entitled “Significant Accounting Policies” and “Long-Term Debt”, respectively.

Financial instruments

Not applicable.

PART II

We are not in default in the payment of any principal or interest instalments with respect to any of our indebtedness, nor are we in arrears in the payment of any dividends declared by us.

No material modifications have been made to the rights of holders of our shares of capital stock as presented in our notice of articles and articles. We have adopted a shareholder rights plan, the terms of which are described in “Item 10. Additional Information – Shareholder Protection Provisions.”

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We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective at a reasonable assurance level.

Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are 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, 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. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

During the year ended December 31, 2006, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Segregation of duties is a basic, key internal control and one of the most difficult to achieve in a small company. It is used to ensure that errors or irregularities are prevented or detected on a timely basis by employees in the normal course of business. Due to limited resources, a complete segregation of duties within our operating and accounting groups can not be fully achieved. The result is that we are highly reliant on the qualifications, experience and integrity of our staff and on the performance of mitigating procedures during our financial close processes in order to ensure the financial statements are presented fairly in all material respects. Any changes in the current control process will be dependant upon the growth of our operations and the number of our staff to allow further segregation of duties. Management will continue to review existing mitigating controls and, if appropriate, implement changes to its internal control processes whereby more effective mitigating controls will be adopted.

Our Board of Directors has determined that none of members of the Audit Committee meets the requirements of an “audit committee financial expert” as defined by the SEC. All of the members of the Audit Committee have significant business experience and a general understanding of accounting principles and knowledge of financial statements. Our Chief Financial Officer and our Controller are available to assist the audit committee with respect to accounting issues.

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We have adopted a code of ethics for our Chief Executive Officer, principal financial officer, principal accounting officer, controller and other persons performing similar functions. Our code of ethics complies with the SEC rules. The code of ethics addresses the following:

• honest and ethical conduct, including handling of corporate opportunities and conflicts of interest;

• full, fair, accurate, timely and quality public disclosure filed with the SEC and otherwise publicly made by us;

• compliance with applicable the laws and regulations;

• prompt internal reporting of violations of the code of ethics; and

• accountability for adherence to the code of ethics;

A copy of the code of ethics was previously filed with the SEC as an exhibit to our annual report on Form 20-F for the year ended December 31, 2003.

There have been no waivers to the code of ethics as of the date of this report.

Effective October 6, 2006, we changed our independent auditors from UHY LDMB Advisors Inc. of 6345 - 197 Street, Langley, British Columbia V2Y 1K8 to KPMG LLP of P.O. Box#10426, 777 Dunsmuir Street, Vancouver, BC V7Y 1K3.

UHY LDMB Advisors Inc. served as our independent auditor for fiscal 2004 and 2005. The table below sets forth the total amount billed by KPMG LLP and UHY LDMB Advisors Inc. for services performed in the 2006 and 2005 fiscal years, and breaks down these amounts by category of service:

“Audit Fees” are the aggregate fees billed by KMPG LLP and UHY LDMB Advisors Inc. for the audit of our consolidated annual financial statements, reviews of interim financial statements and attestation services that are provided in connection with statutory and regulatory filings or engagements. This category comprises fees billed for independent accountant review of the interim financial statements, as well as advisory services associated with our financial reporting.

“Audit-Related Fees” are fees charged by KPMG LLP and UHY LDMB for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.”

“Tax Fees” are fees for professional services rendered by KPMG LLP for tax compliance, tax advice on actual or contemplated transactions.

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Audit Committee’s Pre-Approval Policies and Procedures

The Audit Committee nominates and engages the independent auditors to audit the financial statements, and approves all audit, audit-related services, tax services and other services provided by KPMG LLP. Any services provided by KPMG LLP that are not specifically included within the scope of the audit must be pre-approved by the audit committee prior to any engagement. The audit committee is permitted to approve certain fees for audit-related services, tax services and other services pursuant to a de minimis exception before the completion of the engagement. The audit committee pre-approves any non-audit services to be performed by the independent accountants under the de minimis exception of Rule 2-01 (c)(7)(i)(C) of Regulation S-X as promulgated by the Securities and Exchange Commission.

During the fiscal year ended December 31, 2006, no non-audit services were performed or approved by the audit committee to be performed by our independent accountants, other than certain tax compliance services which the audit committee believes that the independent accountants could provide without impairing their independence. There were no waivers of the audit committee pre-approval process in 2006.

Not Applicable.

Not Applicable.

PART III

See “Item 18. Financial Statements”.

The following financial statements are filed as part of this annual report:

• Auditors’ Report of KPMG LLP

• Auditors’ Report of UHY LDMB Advisors Inc.

• Consolidated Balance Sheets as of December 31, 2006 and 2005

• Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2006, 2005 and 2004

• Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004

• Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004

• Notes to Consolidated Financial Statements

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Consolidated Financial Statements
(Expressed in thousands of United States dollars, except where indicated)

CLEARLY CANADIAN BEVERAGE CORPORATION

Year ended December 31, 2006 (Amended)

AUDITORS' REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheet of Clearly Canadian Beverage Corporation as at December 31, 2006 and the consolidated statements of earnings, changes in shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2006 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

The consolidated financial statements as at December 31, 2004 and December 31, 2005 and for the years then ended were audited by other auditors, who expressed an opinion without reservation on those statements in their report, dated June 12, 2006.

Chartered Accountants

Vancouver, Canada

March 9, 2007

KPMG LLP, a Canadian limited liability partnership is the Canadian
member firm of KPMG International, a Swiss cooperative.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Clearly Canadian Beverage Corporation

We have audited the accompanying consolidated balance sheets of Clearly Canadian Beverage Corporation as of December 31, 2006 and the consolidated statements of earnings, deficit and cash flows for the year then ended. 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 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our audit opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Clearly Canadian Beverage Corporation as of December 31, 2006 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has insufficient working capital to meet its planned business objectives that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 22 to the consolidated financial statements.

Chartered Accountants

Vancouver, Canada

March 9, 2007

Auditors’ Report

To the Directors and Shareholders of
Clearly Canadian Beverage Corporation

We have audited the consolidated balance sheets of Clearly Canadian Beverage Corporation as at December 31, 2005 and 2004 and the consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2005 and 2004 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

June 12, 2006
Chartered Accountants
Langley, British Columbia

Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Difference

In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the consolidated financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in Note 1 to the financial statements; when there is a change in accounting principles that has a material effect on the comparability of the Company’s financial statements, such as described in Note 3 to the financial statements; and when there has been a restatement to prior year financial statements to correct certain errors as described in Note 3 to the financial statements. Our report to the shareholders dated June 12, 2006, is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors’ report when they are adequately disclosed in the consolidated financial statements.

June 12, 2006
Chartered Accountants
Langley, British Columbia

See accompanying notes to consolidated financial statements.

Approved on behalf of the Board:

1

See accompanying notes to consolidated financial statements.

2