**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**





[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 _______________





Commission
      File Number 0-26897





**JAVO
      BEVERAGE COMPANY, INC.**


(Name
      of
      small business issuer in its charter)





**DELAWARE**
            **48-1264292**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)





**1311
      SPECIALTY DRIVE**


**VISTA,
      CALIFORNIA 92081**


(Address
      of principal executive offices, including zip code)





**(760)
      560-5286**


(Issuer's
      telephone number)


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





**NONE**


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





**COMMON
      STOCK, WITH PAR VALUE: $.001,**


**SERIES-A
      JUNIOR PARTICIPATING PREFERRED STOCK, PAR VALUE $.001 PER
      SHARE,**


**AND
      RIGHTS TO PURCHASE SHARES SERIES-A JUNIOR PARTICIPATING**


**PREFERRED
      STOCK, PAR VALUE $.001 PER SHARE**


(Title
      of
      class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.  Yes o No þ





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the
      Act.  Yes o No þ





Indicate
      by check mark whether the 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 the
      Registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past
      90 days.  Yes þ No o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (Section 229.405 of this chapter) is not contained
      herein, and will not be contained, to the best of registrant’s knowledge, in
      definitive proxy or information statements incorporated by reference in
      Part III of this Form 10-K or any amendment to this
      Form 10-K. o





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 Act).




Large
      accelerated filer o Accelerated filer þ Non-accelerated filer o





Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act): Yes o No þ





The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant as of June 30, 2006 was $268,304,000, based on the last reported
      sale
      price of the Company’s Common Stock as of that date, as reported on the
      Over-the-Counter Bulletin Board quotation system.





The
      number of shares outstanding of the registrant's Common Stock, $0.001 par value
      per share, ("Common Stock") was 149,504,927 as of February 22,
      2007.








**PART
      I**





**ITEM
      1.**  **BUSINESS**





**FORWARD
      LOOKING STATEMENTS**





Statements
      and information contained in this Annual Report on Form 10-K that are not
      historical facts are forward-looking statements. These statements can be
      identified by the use of forward-looking words such as "believes," "expects,"
      "plans," "may," "will," "would," "could," "should," or "anticipates," or other
      comparable words, or by discussions of strategy, plans or goals that involve
      risks and uncertainties that could cause actual results to differ materially
      from those currently anticipated. Assumptions relating to forward-looking
      statements involve judgments about matters that are difficult to predict
      accurately and that are subject to many risks, including those identified below
      under Item 1A under the caption “Risk Factors.” Readers are cautioned against
      giving undue weight to forward-looking statements. The Company disclaims any
      intent to update forward-looking statements.





**CORPORATE
      HISTORY**





Javo®
      Beverage Company, Inc. (the "Company" or "Javo") was originally incorporated
      in
      the state of Washington as North West Converters, Inc. on February 9, 1987.
      In
      June of 1999, the Company changed its name to La Jolla Fresh Squeezed Coffee
      Co., Inc. and its Board of Directors ratified the acquisition of the assets
      of
      Stephen's Coffee, Inc. and the merger with Stephen's Coffee Holding, Inc. On
      February 22, 2000, the Company acquired all the outstanding shares of Sorisole
      Acquisition Corp. to become successor issuer to Sorisole pursuant to Rule 12g-3
      of the Securities Exchange Act of 1934 and subject to the reporting requirements
      of the Securities & Exchange Commission. On August 21, 2002, the Company
      reincorporated from Washington State to the state of Delaware and simultaneously
      changed its name from La Jolla Fresh Squeezed Coffee Company, Inc. to Javo
      Beverage Company, Inc.





**BUSINESS
      DESCRIPTION**





Javo
      Beverage Company is a manufacturer of coffee and tea concentrates, drink mixes,
      and flavor systems serving the foodservice, food and beverage manufacturing,
      and
      retail industries. For foodservice industry customers, Javo combines great
      tasting coffees, teas and specialty beverages with the added convenience and
      efficiency of dispenser-based systems. For food and beverage processors and
      retailers looking for authentic coffee and tea flavor for their packaged foods
      and ready-to-drink beverages, Javo supplies customized beverage formulations,
      extracts and flavors.


2





**PRODUCTS**





Javo
      Beverage Company is an innovation leader in the manufacture of coffee and tea
      dispensed beverages, drink mixes and flavor systems. The Company employs a
      proprietary brewing technology to produce fresh brewed coffees and teas that are
      flavorful, concentrated and stable. At a time when coffeehouse style beverages
      are proliferating, these unique capabilities have equipped the Company to offer
      products that remove the operational barriers for foodservice operators desiring
      to serve specialty coffee and tea beverages.





To
      address the needs of high-volume food service operators such as hospitals,
      casinos, hotels, sports parks, universities, military bases and caterers who
      are
      challenged to serve consistent, high quality coffees and teas, Javo offers
      a
      variety of beverage concentrates that may be conveniently dispensed “on-demand”
from equipment similar to fountain juice and soda machines. Javo brand coffee
      and tea concentrates arrive to the operator in refrigerated bag-in-box packages
      ready for loading into dispensers that serve hot beverages on an as-needed
      basis.





For
      food
      service operators and specialty coffee shops looking for ways to offer
      increasingly popular specialty iced coffee and tea flavored beverages, Javo
      offers barista-quality iced coffee and tea beverages that do not require
      brewing, chilling, mixing or storage. Javo’s beverage concentrates are offered
      in packages fitting a range of commonly used beverage dispensing formats. For
      preparing popular blended coffee and tea beverages, Javo offers convenient
      mixes
      in shelf-stable packages. Javo’s customers easily combine these products with
      water, milk and ice to serve specialty beverages without the requirement of
      expensive brewing equipment.





Finally,
      Javo enables food and beverage processors to better align their coffee and
      tea
      flavored products to the elevated quality standards of today’s consumer. Javo’s
      coffee and tea flavors are all natural, freshly brewed and highly concentrated.
      The Company’s proprietary brewing process uses only water and avoids the extreme
      heat of other extraction methods that commonly de-stabilize the flavor system
      prior to being added to latte, ice cream, yogurt, or energy drink applications.





**DISTRIBUTION**





The
      Company distributes its products through multiple and well established food
      distribution methods. Javo's dispensed on-demand coffee and dispensed iced
      coffee/tea beverages utilize broad line foodservice distributors that supply
      a
      complete range of food, beverage, and consumables to foodservice operators.
      These distributors own and manage inventories of Javo’s products, receive orders
      and deliver products as needed to clients for use in their operations. In the
      case of chain restaurant operators, designated captive distribution providers
      operate in a similar fashion. Javo supplies its industrial flavor systems to
      its
      food and beverage manufacturing customers by shipping bulk extracts directly
      to
      the food processing location.





**SALES
      AND SERVICE ORGANIZATIONS**





The
      Company continues to expand its sales force to build broader awareness of its
      product offerings on a national basis within its primary sales channels. Javo
      employs a direct sales force to make direct operator sales calls and service
      its
      customer distributor base. Javo’s service organization manages all aspects of
      its equipment program, including installations, asset tracking, emergency
      service and preventive maintenance. To supplement its service capabilities,
      Javo
      frequently employs the services of contract service partners.





The
      Company’s sales staff also markets directly to and services coffeehouses, chain
      restaurants, and beverage manufacturers. In many cases, Javo receives sales
      assistance from its distributors, equipment suppliers and partner brands in
      initiating and completing sales efforts.


3


**COMPETITION**





For
      its
      dispensed hot coffee business, Javo has several significant direct competitors
      in the United States. The largest is Douwe Egberts Coffee Systems, a division
      of
      Sara Lee Corporation. Douwe Egberts began its business in Europe where, compared
      to the United States, the market for dispensed coffee is more established and
      greater than three times the size. The Douwe Egberts products are frozen at
      the
      point of manufacture, shipped via frozen distribution facilities and dispensed
      from proprietary dispensers at their clients’ foodservice locations. Douwe
      Egberts’ competitive strength lies in its size, financial resources and long
      history in the coffee business. Despite these competitive advantages, we seek
      to
      compete on flavor delivery, operational ease of use and favorable
      pricing.





Nestle
      S.
      A. and Kraft Foods, Inc. have recently introduced competing liquid coffee
      concentrate products in the foodservice market.  These companies have
      significantly larger financial resources, brand awareness and existing
      distribution capabilities. However, we seek to compete with these companies
      based on product quality, pricing and the features of our dispensing systems.
      Even though these companies are likely to dedicate substantial resources
      toward the launch of their new products, we believe that any progress that
      converts customers from traditional roast and ground solutions and expands
      the
      market for liquid coffee concentrates is, long term, a positive development
      for
      Javo’s high quality coffee program.





The
      Company's specialty iced coffee and tea beverages and beverage mixes have a
      small and fragmented group of direct competitors, the largest of which is Kerry
      Foodservice (Jet Tea®, Oregon Chai® and other brands). The Company’s iced coffee
      concentrates are quite unique and have no competitors that can match the
      programs quality, dispensing ease and concentration level. Javo’s packaged
      coffee and tea mixes compete broadly with a variety of syrups and powdered
      mixes
      that have traditionally been used to prepare specialty coffee drinks. Management
      believes that its products in this category generally offer superior coffee
      flavor and greater ease in preparation than its competitors.




Javo
      has
      no known large, direct competitors for high quality liquid coffee/tea
      concentrates and flavor systems. The food and beverage industry has typically
      relied upon heavily flavored and heat-processed ingredients from industrial
      suppliers. We believe that these products require the customer to sacrifice
      flavor quality in their finished product and that the Company's high quality,
      flavorful extracts work extremely well in flavoring new consumer products that
      are attempting to take advantage of unique, refined flavors coming out of the
      specialty coffee industry.





**OPERATIONS**





The
      Company operates an approximately 40,000 square foot facility in Vista,
      California in San Diego County, which houses all of the Company's operations
      including its corporate office and manufacturing infrastructure. At this
      facility, coffee and teas are received, roasted and ground as necessary,
      extracted, and finally packaged into the appropriate format. Where necessary,
      the Company also uses off-site distribution and storage facilities as well
      as
      third-party co-manufacturers to produce products in specialty processing and
      packaging formats.





During
      2006, the Company continued to upgrade and expand various aspects of its
      manufacturing infrastructure including its extraction and liquid storage and
      handling systems. This effort is expected to continue during 2007 and is
      expected to both significantly improve product quality and expand the Company's
      manufacturing capacity.





The
      Vista
      facility also houses the Company's laboratory where the Company performs product
      design and formulation work both for its own products and for those of its
      customers.





**INTELLECTUAL
      PROPERTY**





The
      Company is the owner of certain trademarks, principally Javo®, which it has
      registered with the United States Patent and Trademark Office. The Company
      also
      owns its proprietary extraction processes and equipment as well as product
      formulas and other trade secrets that it has developed. As we rely on trade
      secret protection and do not use patents to protect our intellectual property,
      competitors could discover or independently develop similar processes, which
      could result in our loss of a competitive advantage.


4


**GREEN
      COFFEE COST AND SUPPLY**





The
      Company utilizes outside brokers for our supply of unroasted, or “green,”
coffees. Coffee is the world’s second largest traded commodity and its supply
      and price are subject to high volatility and to cyclical swings in commodity
      markets, based on supply and demand. In addition, a number of other factors,
      such as pest damage and weather-related crop failure could cause coffee prices
      to climb. Typically, coffee cost increases are passed through to the customers
      through price increases. World production of the commercial grade coffees the
      Company uses is currently on the rise. The Company typically makes forward
      commitments to ensure timely supply and more stable pricing.





**EMPLOYEES**





As
      of
      January 31, 2007, the Company employs 46 full-time employees. The Company also
      uses outside consultants, brokers and other independent contractors from time
      to
      time. Additional employees in sales, manufacturing and other areas are planned
      during 2007 in response to the Company’s anticipated continued growth. None of
      our employees is represented by a union and we believe our employee relations
      to
      be generally good.





**GOVERNMENT
      REGULATION**





The
      Company’s facility, operations and products are subject to various laws and
      regulations relating to health and safety and environmental issues. The
      operations of our in-house roaster are subject to various air quality and
      environmental laws and our products are subject to various laws and regulations
      to ensure food safety. While the Company believes that its operations are
      compliant with these laws, a finding of non-compliance could potentially
      interfere with the Company’s operations.





**AVAILABLE
      INFORMATION**





The
      Company files annual and quarterly reports, proxy statements and other documents
      with the Securities and Exchange Commission (“SEC”) under the Securities
      Exchange Act of 1934 (the “Exchange Act”). The public may read and print any
      materials that Javo Beverage Company files with the SEC through links to those
      filings on its website www.javobeverage.com ,
      under
      Investor Relations - SEC Filings or directly through the SEC at
      www.sec.gov.


5


**ITEM
      1A.**  **RISK
      FACTORS**




**The
      Company has never been profitable and may need to obtain additional funding
      necessary to enable it to continue to execute its business plan.**




The
      Company has never been profitable and management’s current business plans rely
      on growth in future revenue to supplement the Company’s liquid assets. There can
      be no assurance that the Company will achieve this additional revenue growth
      and/or incremental profitability and that additional capital to fund ongoing
      operations will be available to the Company on favorable terms, if at all.
      If
      additional funds are required and not available, the Company may be required
      to
      curtail operations or to seek funds on unfavorable terms, if additional funds
      are available at all.




**The
      Company has a limited operating history.**




The
      Company has a limited operating history upon which an evaluation of its
      prospects can be made. The Company’s prospects must be considered speculative
      considering the risks, expenses, and difficulties frequently encountered in
      the
      establishment of a new business, including the risks inherent in the development
      of specialty products such as liquid coffee concentrates. In 2002, the Company
      began its transition from a largely research and development based operation
      into a manufacturing company and continues to expand and improve its
      manufacturing infrastructure. There can be no assurance that unanticipated
      problems will not occur that would result in material delays in future product
      development or that our efforts will result in successful product and service
      commercialization. There can be no assurance that the Company will be able
      to
      achieve profitable operations.




**The
      Company may not be able to retain or hire key personnel.**




To
      operate successfully and manage our potential future growth, the Company must
      attract and retain qualified managerial, sales, and other personnel. We face
      competition for and cannot assure that we will be able to attract and retain
      such qualified personnel. If Javo loses its key personnel or is unable to hire
      and retain additional qualified personnel in the future, its business, financial
      condition and operating results could be adversely affected.




**Certain
      terms of the Company’s securities and investor agreements could require
      significant cash payments by the Company in certain circumstances that could
      materially adversely impact the Company.**




The
      Company’s senior convertible promissory notes and Series A, B and C warrants, as
      well as the securities purchase agreement and registration rights agreement
      associated with the sale of these securities, contain various provisions that
      protect the interests of the holders of these securities in a manner that may
      be
      adverse to our common stock holders. For example, in an event of default as
      defined in the notes, the Company could be required to redeem the remaining
      balance of the notes at a premium based on a formula that assigns a market
      value
      to the securities into which the remaining principal balance is convertible.
      The
      total cost of any such cash redemptions could be significantly higher than
      the
      actual remaining principal balance amount. In addition, other provisions provide
      other cash payment penalties, payments and valuation discounts in the event
      of
      failures by the Company to satisfy certain obligations, including, for example,
      to make timely cash payments or delivery of shares when due. The penalties
      under
      these agreements, particularly market valued redemptions of the remaining note,
      could materially adversely impact the Company.




**Certain
      terms of the Company’s senior convertible promissory notes and common stock
      warrants could result in other security holders suffering potentially
      significant dilution.**




The
      Company’s senior convertible promissory notes and Series A, B and C warrants
      contain terms that could result in adjustments to the conversion and exercise
      prices applicable to these securities. For example, assuming that the Company’s
      stock traded at $0.61 throughout the entire term of the note (i.e., just above
      the floor price at which the Company may issue shares in satisfaction of
      installment payments due under the note) and assuming that the Company made
      every principal and interest payment in shares Common Stock at the applicable
      15% discount to such $0.61 price, then approximately 47,773,144 million
      shares of Common Stock would be issued as principal and interest payments,
      excluding potential issuances relating to the warrants. The exercise price
      of
      the warrants and the number of shares that can be acquired on exercise can
      also
      be adjusted if we sell shares of Common Stock at prices below certain levels.
      These terms of the promissory note and warrants could result in significant
      additional dilution to our holders of Common Stock and would not result in
      any
      additional proceeds to the Company.


6




**The
      Company depends on access to commodity goods and services at competitive prices
      and access to co-manufactures, distributors and dispenser manufacturers. The
      Company also currently houses its principal manufacturing operations in one
      location, which would result in at least a temporary cessation of its production
      in the event of a catastrophic disaster.**




As
      the
      Company grows, it must be able to obtain at competitive prices substantial
      amounts of certain green coffee beans and manage roasting and grinding costs.
      The Company’s coffee bean and roasting and grinding costs make up a large
      component of its overall cost of goods sold. Commodity agricultural goods such
      as coffee can and do experience significant fluctuations in availability and
      prices which could in turn cause significant interruptions in the manufacturing
      output and sales of the Company. Typically these additional costs are passed
      through to customers as price increases. Additionally, the Company uses the
      services of outside distributors and dispenser manufacturers as well as contract
      manufacturing providers to produce certain of its products that require
      particular processing and manufacturing infrastructure not in place at the
      Company’s facility. While there are multiple providers of such services, the
      unanticipated cessation of the services of such providers could disrupt the
      Company’s production and revenues and expansion of the Company’s revenues will
      rely in part on the ability of these providers to accommodate growth. Moreover,
      the Company also currently houses its principal manufacturing operations in
      one
      location. In the event of a catastrophic disaster, such as complete destruction
      of the Company’s Vista plant by fire or earthquake, and particularly in light of
      the Company’s increasing production volume, the Company’s manufacturing
      operations would be at least temporarily halted during implementation of the
      Company’s disaster recovery plan. Such a cessation of manufacturing could
      materially and adversely impact the Company.




**The
      Company is in a very competitive industry.**




Competition
      to provide coffee products is intense and Javo expects the competition to
      increase. The Company competes directly with other companies that have developed
      and are in the process of developing products that will be competitive with
      the
      products developed and offered by the Company. There can be no assurance that
      other products that are functionally equivalent or similar to the Company’s
      products have not been developed or are not in development. We expect that
      there
      are companies or businesses that may have developed or are developing such
      products. There are other companies and businesses that have the expertise
      to do
      so and significant success in the marketplace could encourage them to develop
      and market products directly competitive with those developed and marketed
      by
      the Company. As a result of the size and breadth of certain of the Company’s
      competitors, such competitors have been and will be able to establish managed
      accounts by which they seek to gain a disproportionate share of users for their
      products. Such managed accounts can present significant competitive barriers
      to
      the Company. Additionally, we cannot always anticipate consumer trends, which
      influence demand for our products. Our future results will depend, in part,
      upon
      our ability to develop and offer products that capture the opportunities within
      these trends. There is no assurance that consumers will continue to purchase
      our
      products in the future or that we will be able to anticipate market demands
      or
      trends. We also may be unable to penetrate new markets. If our revenues
      decline for any of these reasons, our business, financial condition and results
      of operations will be adversely affected.




**The
      Company relies on a relatively new and proprietary extraction process.**




The
      Company has developed what management believes is a new and novel method of
      extracting roasted, ground coffee and tea into a liquid concentrate. The Company
      also believes that it derives a competitive advantage versus other liquid
      concentrate manufacturers from the quality of concentrate that this process
      produces. The Company currently relies on trade secret protection to prevent
      others from using this process. Trade secret protection is only as effective
      as
      the Company’s ability to keep the essential and material aspects of its process
      secret using contractual and physical measures. There is no guarantee that
      the
      Company’s efforts in this regard can or will prevent a competitor from obtaining
      the Company’s secrets or from independently developing the same or similar
      process.




**The
      Company is subject to various laws and regulations and from time to time may
      be
      party to litigation with third parties. The violation of such applicable laws
      and regulations or the unfavorable outcome of such litigation could materially
      and adversely affect the Company.**




The
      manufacture, sale and distribution of our products is subject to various
      federal, state and local laws and regulations. Our status as a reporting
      public company subjects us to various laws and regulations and we are subject
      to
      various accounting, tax and other laws and regulations. New laws and regulations
      may also be instituted in the future that apply to the Company. Failure to
      comply with such laws can result in fines and other penalties. For example,
      if a
      regulatory authority deemed that a product or production run was not in
      compliance with applicable laws or regulations, the Company could be fined
      or
      may have to institute a recall of such product. The application of new laws
      and
      regulations and fines and other penalties relating to noncompliance with laws
      and regulations could adversely affect our financial condition and operations.
      Moreover, the Company could be party to litigation, whether based on contract
      claims, product liability or otherwise that could result in significant
      liability for the Company and adversely affect our financial condition and
      operations.


7




**Trading
      volume in the Company’s securities is limited and sporadic.**




The
      Company’s Common Stock is traded on the Over the Counter Bulletin Board under
      the trading symbol “JAVO.” While currently there is an existing limited and
      sporadic public trading market for the Company’s securities, the price paid for
      the Company’s Common Stock on the Over the Counter market and the amount of
      stock traded are volatile. There can be no assurance that these markets will
      improve in the future.





**Volatility
      of Stock Price.**




Our
      Common Stock price has experienced and is likely to experience significant
      price
      and volume fluctuation in the future. Such fluctuations could adversely affect
      the market price of the Common Stock without regard to our operating
      performance. In addition we believe factors such as the ability to generate
      sales as well as other factors could cause the price of the Company’s Common
      Stock to fluctuate significantly.




**Additional
      capital funding to impair value of investment.**




If
      we
      expand more rapidly than currently anticipated or if our working capital needs
      exceed our current expectations, we may need to raise additional capital through
      public or private equity offerings or debt financings. Our future capital
      requirements depend on many factors including our research, development, sales
      and marketing activities. We do not know whether additional financing will
      be
      available when needed, or will be available on terms favorable to us. If we
      cannot raise needed funds on acceptable terms, we may not be able to develop
      or
      enhance our products, take advantage of future opportunities or respond to
      competitive pressures or unanticipated requirements. To the extent we raise
      additional capital by issuing equity securities, our stockholders may experience
      substantial dilution and the new equity securities may have greater rights,
      preferences or privileges than our existing Common Stock.




**The
      Company has not paid dividends to its stockholders in the past and does not
      anticipate paying dividends to its stockholders in the foreseeable future.**




The
      Company has not declared or paid cash dividends on its Common Stock. The Company
      presently intends to retain all future earnings, if any, to fund the operation
      of its business, and therefore the Company does not anticipate paying dividends
      on Common Stock in the foreseeable future.


8


**ITEM
      1B.**  **UNRESOLVED
      STAFF COMMENTS**





Not
      applicable.





**ITEM
      2.**  **PROPERTY**





Javo's
      facilities, including its principal executive offices are located in Vista,
      California in San Diego County. The Company entered into a seven-year lease
      of
      an approximately 40,000 square foot building on June 30, 2002. The Vista
      facility houses Javo's entire operation.





**ITEM
      3.**  **LEGAL
      PROCEEDINGS**





At
      the
      present time the Company has no material pending legal proceedings. However,
      from time to time, the Company may become involved in various litigation matters
      arising out of the normal conduct of its business, including litigation relating
      to commercial transactions, contracts, employment disputes and other matters.
      In
      the opinion of management, the final outcome of any such litigation will not
      have a material effect on our financial position, results of operations or
      cash
      flows.





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





On
      November 1, 2006, the Company had its 2006 Annual Meeting of Stockholders.
      At
      this meeting, two proposals were submitted for stockholder action. These
      proposals and the votes cast for, against and in abstention are summarized
      below:





·
            Election
                of nine directors to serve until the 2007 annual meeting of stockholders
                or until their respective successors are elected.





Nominee
            
            For
            
            WithheldCody
                C. Ashwell
            
            
            85,751,570
            
            
            1,338,544William
                C. Baker
            
            
            85,747,570
            
            
            1,342,544Ronald
                S. Beard
            
            
            85,997,014
            
            
            0Jerry
                W. Carlton
            
            
            85,662,014
            
            
            150,000Terry
                C. Hackett
            
            
            85,812,014
            
            
            0James
                R. Knapp
            
            
            85,226,570
            
            
            1,338,544Thomas
                J. Rielly
            
            
            84,471,470
            
            
            1,340,544Stanley
                A. Solomon
            
            
            85,812,014
            
            
            0Richard
                B. Specter
            
            
            85,793,014
            
            
            19,000





·
            To
                adopt an amendment of Article 4, Section 1 of the Company's Certificate
                of
                Incorporation to increase the number of authorized shares of Common
                Stock
                from one hundred fifty million (150,000,000) to three hundred million
                (300,000,000).





For
            
            Against
            
            Abstain86,037,614
            
            
            822,000
            
            
            459,500




9


**PART
      II**





**ITEM
      5.**  **MARKET
      FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





**MARKET
      INFORMATION**





The
      Company's Common Stock is traded over-the-counter and quoted on the OTC
      Electronic Bulletin Board under the symbol "JAVO." The reported highest and
      lowest prices for the Common Stock for each quarter as reported by the NASDAQ
      OTC Bulletin Board are shown below for the last two fiscal years and for the
      portion of the first quarter of the fiscal year 2007 as shown below. These
      quotations represent prices between dealers and do not include retail markup,
      markdown or commission nor do they necessarily represent actual
      transactions.





2005
            
            High
            
            LowFirst
                Quarter
            
            $
            0.44
            
            $
            0.32Second
                Quarter
            
            $
            0.41
            
            $
            0.29Third
                Quarter
            
            $
            0.38
            
            $
            0.29Fourth
                Quarter
            
            $
            0.33
            
            $
            0.202006First
                Quarter
            
            $
            0.54
            
            $
            0.25Second
                Quarter
            
            $
            2.38
            
            $
            0.42Third
                Quarter
            
            $
            2.31
            
            $
            1.32Fourth
                Quarter
            
            $
            1.90
            
            $
            1.282007First
                Quarter (through March 7, 2007)
            
            $
            1.41
            
            $
            0.90




The
      Company’s preferred stock is not currently trading on a public
      exchange.





**SHAREHOLDERS**





As
      of
      December 31, 2006, the Company had approximately 590 holders of record of its
      Common Stock and 149,504,927 shares of Common Stock outstanding. In addition
      the
      Company had approximately 160 holders of record of its Series B Preferred Stock
      and 1,775,166 shares of its Series B Preferred Stock outstanding.





**DIVIDENDS**





The
      Company has not declared a dividend during the past three fiscal years or since
      the end of the last fiscal year and does not expect to declare any dividends
      in
      the foreseeable future.


10





**STOCK
      PERFORMANCE GRAPH**







The
      above
      stock performance graph compares the change in value of a $1,000 investment
      in
      Javo Beverage Company, Inc., and an assumed $1,000 investment in indexes for
      Dow
      Jones Beverages Index and Standard and Poors Small Cap Index at the end of
      2001
      and each year end through December 2006.





**SALES
      AND ISSUANCES OF UNREGISTERED SECURITIES**





STOCK
      ISSUANCES TO EMPLOYEES FOR SERVICES





In
      June
      2006, the Company issued 25,000 shares of the Company’s restricted Common Stock
      to an employee in connection with an employment agreement. The Company recorded
      a non-cash expense of $0.29 per share totaling $7,250 for the issuance of
      shares. The expense was based on the fair market value of the shares as of
      the
      date of the employment agreement. The issuance was exempt from registration
      pursuant to Section 4(2) of the Securities Act of 1933. The Company valued
      the
      shares issued to employees for services at the closing stock price on the date
      of issuance of the Common Stock without discount.




WARRANTS
      ISSUED AND EXERCISED





In
      2006,
      the Company issued warrants for the purchase of 10,766 shares of Common Stock
      at
      $0.085 per share earned pursuant to a consulting agreement. The Company recorded
      a non-cash expense of $1,541 for the issuance of the warrants. No additional
      warrants may be earned through this consulting agreement. The issuance was
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933.
      The fair values of the above warrants to purchase Common Stock of the Company
      were determined using the Black-Scholes valuation model.





SERIES
      B PREFERRED STOCK ISSUANCES





In
      June
      2006, the Company issued 1,735,880 shares of non-voting and non convertible
      Series B Preferred Stock in return for the surrender of notes in the aggregate
      principal amount of $13,412,500, plus $3,946,299 of related accrued interest.
      In
      connection with the issuance of the Series B Preferred Stock, the Company wrote
      off the associated debt discount and loan fees totaling $5,197,890 as additional
      interest expense. The issuance was exempt from registration pursuant to Section
      4(2) of the Securities Act of 1933.





In
      September 2006, the Company issued 39,286 shares of non-voting and non
      convertible Series B Preferred Stock in return for surrender of notes in the
      aggregate principal amount of $337,500, plus $55,361 of related accrued
      interest. In connection with the issuance of the Series B Preferred Stock,
      the
      Company wrote off the associated debt discount and loan fees totaling $187,074
      as additional interest expense. The issuance was exempt from registration
      pursuant to Section 4(2) of the Securities Act of 1933.


11


**ITEM
      6.**  **SELECTED
      FINANCIAL DATA**





The
      table
      below shows selected financial data for our last four fiscal years. Our fiscal
      year ends on December 31 each year. There were no dividends paid during the
      past
      four years.





2006
            
            2005
            
            2004
            
            2003
            
            2002(In
                thousands $)Gross
                revenue
            
            
            10,322
            
            
            6,200
            
            
            2,084
            
            
            661
            
            
            605Gross
                profit
            
            
            3,143
            
            
            2,019
            
            
            688
            
            
            214
            
            
            636Loss
                from Operations
            
            
            (2,804
            )
            
            (2,032
            )
            
            (2,922
            )
            
            (3,057
            )
            
            (4,145
            )Net
                loss
            
            
            *(9,926
            )
            
            (4,844
            )
            
            (4,855
            )
            
            (4,093
            )
            
            (6,018
            )Total
                assets
            
            
            21,175
            
            
            4,579
            
            
            4,556
            
            
            4,501
            
            
            2,045Warrant
                liability
            
            
            **7,532
            
            
            --
            
            
            --
            
            
            --
            
            
            --Debt
                obligations
            
            
            8,609
            
            
            12,192
            
            
            8,860
            
            
            6,006
            
            
            3,253Stockholders’
                equity/(deficit)
            
            
            3,042
            
            
            (8,873
            )
            
            (5,053
            )
            
            (1,914
            )
            
            (1,995
            )





*The
      2006
      loss includes a one-time expense of $5.3 million in connection with the
      conversion of $13.75 million in promissory notes and related accrued interest
      of
      $4.0 million into Series B Preferred Stock.





**The
      fair value of warrants to purchase 7,195,844 shares of the Company’s common
      stock was recorded as a derivative liability under ETIF 00-19. The warrants
      have
      strike prices from $1.79 to $2.24 per share. The Company would receive an
      additional $15 million in equity capital if these warrants were exercised at
      the
      current strike prices.


12


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





The
      following discussion and analysis should be read in conjunction with the
      Company's financial statements and related notes included in this report and,
      except for historical information, may contain forward-looking statements within
      the meaning of applicable federal securities law.





**Overview**





The
      Company is a manufacturer of coffee and tea concentrates, drink mixes, and
      flavor systems serving the foodservice, food and beverage manufacturing, and
      retail industries. For foodservice industry customers, it combines great tasting
      coffees, teas and specialty beverages with the added convenience and efficiency
      of dispenser-based systems. For food and beverage manufacturers and retailers
      looking for authentic coffee and tea flavor for their packaged foods and
      ready-to-drink beverages, Javo supplies customized beverage formulations,
      extracts and flavors.





The
      following is a comparative table of income statements for years ended December
      31, 2006, 2005, and 2004. Below is a discussion and analysis of the
      period-over-period changes.





**Change****Income
                Statements**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2006
                to 2005**
            
            **2005
                to 2004**Net
                sales
            
            $
            10,321,655
            
            $
            6,200,327
            
            $
            2,083,810
            
            $
            4,121,328
            
            
            66.5%
            
            $
            4,116,517
            
            
            197.5%Cost
                of sales
            
            
            (7,178,753
            )
            
            (4,180,925
            )
            
            (1,395,961
            )
            
            (2,997,828
            )
            
            71.7%
            
            
            (2,784,964
            )
            
            199.5%Gross
                profit
            
            
            3,142,902
            
            
            2,019,402
            
            
            687,849
            
            
            1,123,500
            
            
            55.6%
            
            
            1,331,553
            
            
            193.6%Operating
                expenses:Research
                and development
            
            
            (306,065
            )
            
            (117,135
            )
            
            (433,523
            )
            
            (188,930
            )
            
            161.3%
            
            
            316,388
            
            
            (73.0)%Selling
                and marketing
            
            
            (2,408,265
            )
            
            (1,245,971
            )
            
            (963,010
            )
            
            (1,162,294
            )
            
            93.3%
            
            
            (282,961
            )
            
            29.4%General
                and administrative
            
            
            (3,232,505
            )
            
            (2,688,596
            )
            
            (2,213,152
            )
            
            (543,909
            )
            
            20.2%
            
            
            (475,444
            )
            
            21.5%Total
                operating expenses
            
            
            (5,946,835
            )
            
            (4,051,702
            )
            
            (3,609,685
            )
            
            (1,895,133
            )
            
            46.7%
            
            
            (442,017
            )
            
            12.2%Loss
                from operations
            
            
            (2,803,933
            )
            
            (2,032,300
            )
            
            (2,921,836
            )
            
            (771,633
            )
            
            37.9%
            
            
            889,536
            
            
            (30.4)%Other
                income (expenses):Interest
                income
            
            
            28,963
            
            
            17,720
            
            
            15,071
            
            
            11,243
            
            
            63.4%
            
            
            2,649
            
            
            17.6%Interest
                expense
            
            
            (2,162,999
            )
            
            (2,855,638
            )
            
            (1,949,606
            )
            
            692,639
            
            
            (24.2)%
            
            
            (906,032
            )
            
            46.5%Accelerated
                interest expense
            
            
            *(5,384,964
            )
            
            --
            
            
            --
            
            
            (5,384,964
            )
            
            --
            
            
            --
            
            
            --Other
                income
            
            
            --
            
            
            26,070
            
            
            134
            
            
            (26,070
            )
            
            --
            
            
            25,936
            
            
            19,355.2%Income
                from derivatives
            
            
            **404,721
            
            
            --
            
            
            --
            
            
            404,721
            
            
            --
            
            
            --
            
            
            --Gain/(loss)
                on disposal of assets
            
            
            (7,860
            )
            
            --
            
            
            1,701
            
            
            (7,850
            )
            
            --
            
            
            (1,701
            )
            
            --Total
                other expense
            
            
            (7,122,139
            )
            
            (2,811,848
            )
            
            (1,932,700
            )
            
            (4,319,291
            )
            
            153.6%
            
            
            (879,148
            )
            
            45.5%Net
                loss
            
            $
            (9,926,072
            )
            $
            (4,844,148
            )
            $
            (4,854,536
            )
            $
            (5,081,924
            )
            
            104.9%
            
            $
            10,388
            
            
            (0.2)%





*The
      2006
      loss includes one time expenses of $5.3 million in connection with the
      conversion of $13.75 million in promissory notes and related accrued interest
      of
      $4.0 million into Series B Preferred Stock.





**Expense
      for derivatives is a non-cash charge related to warrants to purchase 7,195,844
      shares of the Company’s Common Stock was recorded as a derivative liability
      under ETIF 00-19. The warrants have strike prices from $1.79 to $2.24 per share.
      The Company would receive an additional $15 million in equity capital if these
      warrants were exercised at the current strike prices.


13


**REVENUES**





For
      2006,
      the Company achieved record revenues of $10.3 million, an increase of $4.1
      million or 67% over 2005. The Company increased sales in each of its product
      categories: hot-dispensed, iced-dispensed, syrups and mixes and ingredients.





For
      2005,
      the Company had revenues of $6.2 million, an increase of $4.1 million or 197.5%
      over 2004. The Company increased sales of its hot-dispensed, mixes and syrups
      and ingredients products and added iced-dispensed products with the addition
      of
      7-Eleven as a customer.





During
      2006 and 2005, the Company significantly expanded national distribution of
      its
      dispensed hot and new iced coffee concentrates with the notable additions of
      distributors Gordon Foodservice, Shamrock Foodservice, Coremark, and McLane.
      The
      Company now sells its products nationally. The Company also expanded its
      presence as a coffee choice for group purchasing organizations such as Foodbuy,
      Amerinet and HPSI among others. In addition, the Company sells coffee and tea
      concentrates to several major consumer packaged goods companies that have
      introduced coffee or tea flavored ice creams and beverages.





The
      Company anticipates continued significant growth in its revenues in 2007 as
      it
      rolls out its products to foodservice chains, continues to add national and
      international distribution, expands sales of its dispensed iced coffee and
      tea
      beverages to convenience stores and quick service restaurants and increases
      sales of bulk coffee and tea extracts to consumer product companies and flavor
      houses. The Company expects accelerated growth in iced dispensed sales as
      several major convenience store chains rollout its product line to additional
      stores. These iced dispensed sales are anticipated to be concentrated in the
      spring, summer and early fall months.




**RESEARCH
      AND DEVELOPMENT EXPENSES**





Research
      and development expenses were $306,065 in 2006 compared to $117,135 in 2005,
      an
      increase of $188,930 or 161.3%. The increase in research and development expense
      was primarily due to the addition of staff and an increase in costs related
      to
      the development of new products and flavors.





Research
      and development expenses were $117,135 in 2005 compared to $433,523 in 2004,
      a
      reduction of $316,388 or 73%. The reduction in research and development expense
      was primarily due to lower overall costs as products under development in 2004
      were commercialized in 2005.





The
      Company anticipates an increase in research and development costs in 2007 as
      it
      continues to identify and develop additional and varied products around its
      extracts to fill customer needs.




**SELLING
      AND MARKETING EXPENSES**





Selling
      and marketing expenses for 2006 were $2.41 million compared to $1.26 million
      in
      2005, or an increase of 91.3%. These increases were the result of increased
      sales expenditures and the addition of five sales professionals with their
      related expenses. More specifically, approximately $580,000 of the increase
      was
      due to an increase in sales and marketing payroll expenses, $231,000 was
      attributable to related travel and entertainment expenses, $154,000 was
      attributable to increased marketing expenses, and $117,000 was attributable
      to
      expenditures on promotional materials.





Selling
      and marketing expenses for 2005 were $1.25 million compared to $0.96 million
      in
      2004. The increase of $290,000 or 30.2% is primarily attributed to the increase
      in marketing and promotion of $252,000, increase in payroll expenses of $70,000,
      increase in travel and entertainment of $35,000, offset by the reduction in
      other expenses of $74,000. These increases include the additional variable
      commission and marketing allowance due to greater sales and the cost of
      identifying and developing further national distribution opportunities.





The
      Company anticipates the sales and marketing costs in 2007 will increase in
      proportion to its increased sales and planned additional sales staff. The
      Company added five sales persons in 2006 and anticipates adding nine sales
      persons in 2007. The additional sales staff is expected to enable the Company
      to
      expand regional and national sales opportunities.


14


**GENERAL
      AND ADMINISTRATIVE EXPENSES**





General
      and administrative expenses for 2006 were $3.23 million compared to $2.69
      million in 2005. The increase of $540,000 or 20.2% was primarily due to an
      increase in warehouse overhead such as payroll and repairs and maintenance
      of
      $173,000, an increase in reserve for doubtful accounts of $150,000, an increase
      in finance and accounting expenses for payroll and outside accounting fees
      of
      $126,000 and an increase in other overhead expenses of $91,000. These cost
      increases were due to expansion of basic staff and services and increases in
      costs for legal, auditors, internal control consultants and improved insurance
      coverage’s reflecting the growth in its sales.





General
      and administrative expenses for 2005 were $2.69 million compared to $2.21
      million in 2004. The increase of $478,000 or 21.7% was primarily due to an
      increase in overhead expenses of $240,000, increase in warehouse expenses such
      as payroll and repairs and maintenance of $74,000, increase in bad debt
      allowance of $131,000 and an increase in finance and accounting expenses for
      payroll and outside accounting fees of $33,000. These cost increases were
      primarily due to expansion of basic staff and services commensurate with the
      Company’s expanding sales.




The
      Company anticipates that general and administration expenses will continue
      to
      increase in 2007. It anticipates further additions to its accounting and
      administrative staff as sales continue to grow and anticipates that
      documentation and related expenses coming from Sarbanes-Oxley Act compliance
      requirements will also increase in 2007. In addition, the Company expects
      increases in costs for general liability and directors and officers insurance
      and investor relations programs.





**OTHER
      INCOME/EXPENSES**





Other
      income/expenses were $7.12 million in 2006 compared to $2.81 million in 2005.
      The increase in other income/expenses of $4.31 million or 153.4% was primarily
      due to (i) a one-time expense of $5.39 million taken in connection with the
      conversion of a promissory notes in the principal amount of $13,750,000, offset
      by a reduction in interest expense of $0.69 million and (ii) a non-cash
      derivative income of $0.4 million taken in connection with the Company’s
      issuance of $21 million of senior convertible debt and related warrants.





Other
      income/expenses were $2.81 million in 2005 compared to $1.93 million in 2004.
      The increase in other income/expenses of $879,000 or 45.5% was primarily
      attributable to an increase in the non-cash interest expense for discount
      amortization for the Company’s promissory notes and its related accrued interest
      period over period.





The
      Company’s net other income/expenses will be affected significantly and
      unpredictably by the market price of its Common Stock because it is required
      under ETIF 00-19 to account for the warrants issued in connection with the
      Company’s senior convertible debt as derivative liabilities. The Company is
      required to revalue these warrants at the end of each reporting period. The
      Company is then required to record the periodic change in value as either
      non-cash derivative income (if the value of the warrants decreases) or as
      non-cash derivative expense (if the value of the warrants increases). Although
      the value of the warrants is affected by interest rates and the Company’s stock
      volatility, the primary cause of the change in the value of the warrants will
      be
      the value of the Company’s Common Stock. If the stock price goes up, the value
      of the warrants will generally increase and if the stock price goes down the
      value of the warrants will generally decrease. If these warrants were to be
      exercised in full, the Company would receive proceeds of approximately $15.0
      million.





The
      Company net other income/expenses in 2007 will include non-cash interest expense
      for accretion of the debt discount recorded in connection with its $21 million
      senior convertible debt. For 2007, the aggregate amount of this expense is
      expected to be $4.5 million, which will be expensed as follows in each of the
      four fiscal quarters: $1,121,658, $1,152,861, $1,133,196 and $1,089,015 in
      the
      1 st ,
      2 nd ,
      3 rd and
      4 th quarters, respectively.


15


**NET
      LOSS**





The
      net
      loss for the Company for 2006 was $9.94 million compared to $4.84 million in
      2005, an increase in loss of $5.10 million or 105.4%. The increase in loss
      was
      primarily due to one-time charges of $5.39 million taken in connection with
      the
      conversion of promissory notes in the principal amount of $13.75 million.





The
      net
      loss for the Company for 2005 was $4,844,149 compared to $4,854,537 in 2004,
      a
      decrease of $10,388 or 0.2%. The nominal decrease was primarily due to the
      significant increase in gross profit of $1,331,552, offset by additional
      operating expense of $353,267 and increased non-cash amortization of debt
      discount of $870,545.





The
      Company anticipates its net loss will decrease substantially in 2007 due to
      an
      anticipated increase in gross revenues, related increase in gross profit and
      relatively stable research and development and general and administrative
      expenses, notwithstanding significant planned increases in sales and marketing
      expenses. The Company’s other income expense for 2007 will be unpredictable due
      to the liability accounting for the warrants issued in connection with the
      issuance of $21 million of senior convertible debt.





**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      Company has experienced net losses and negative cash flows from operations
      each
      year since inception through December 31, 2006; it has an accumulated deficit
      of
      $40.3 million and has consumed cash from operations and financing in excess
      of
      $19 million. It has financed operations since inception primarily through
      capital contributions, related-party loans, and private-placements of its Common
      Stock and debt offerings. The Company received net offering proceeds of
      approximately $19 million from the issuance of $21 million of principal value
      of
      senior convertible debt in December 2006. The Company anticipates that its
      current cash and cash equivalents, as well as expected cash flows from
      anticipated increased sales and gross profits in 2007, will provide adequate
      capital to fund operations, sales growth and any required capital expenditures
      needs through the Company's cash flow breakeven.





The
      Company has a working capital line of credit with a banking institution that
      is
      secured by certain trade accounts receivable and certain coffee and finished
      goods inventory. The facility provides up to $3 million in working capital
      depending on the borrowing base at the present time. This facility currently
      has
      an outstanding balance of $713,000. The debt is current and the Company is
      in
      the process of resolving a technical violation of a debt covenant.  The
      interest rate on the facility is bank prime.





The
      Company used $1,935,803 in cash and cash equivalents in operating activities
      in
      2006, versus $2,721,195 and $2,447,654 respectively in 2005 and 2004. The
      decrease in use of cash in operating activities in 2006 is the result of
      increase gross profit partially offset by increased overall operating expenses
      and supplemented by a reduction in year-end inventories. The increase in use
      of
      cash in operating activities in 2005 of $273,541 is primarily the result of
      increased inventories necessary as the Company’s sales increased. The 2005
      operating cash activities were primarily funded by an increase in trade
      payables, additional net long-term debt of $1,355,000 and the Company’s cash
      reserves.





**FACTORS
      AFFECTING QUARTERLY PERFORMANCE**





The
      Company has experienced variations in sales from quarter to quarter due to
      the
      sales mix of its products and a variety of other factors including consumer
      buying trends, marketing programs, seasonality and weather, therefore the
      results of any quarter are not necessarily indicative of the results that maybe
      be achieved for the full fiscal year. The Company anticipates significant growth
      in sales of its iced dispensed products in 2007. These sales are expected to
      be
      greater in the spring, summer and early fall, therefore the Company anticipates
      greater seasonality in its gross revenue and operating results.


16


**CRITICAL
      ACCOUNTING POLICIES**





Use
      of
      Estimates





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements, and the reported amounts of revenues and expenses during the
      reporting periods. Actual results could materially differ from those
      estimates.





Concentration
      of Credit Risk




Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist principally of cash and trade accounts receivable.




Concentration
      of credit risk with respect to cash and cash equivalent is the result of the
      Company having $18.4 million in three separate financial institutions. The
      invested funds are in cash bank accounts, bank money market accounts and cash
      reserve funds. The cash or cash equivalent investment are liquid and the Company
      can access all funds with 3 days or less notice. The Company funds are in large
      financial institutions with less than $300,000 not covered by insurance.
      The Company does not believe that it is subject to any unusual credit or market
      risk.




Concentration
      of credit risk with respect to trade receivables has decreased as the Company
      continues to diversify its customer base. The Company routinely assesses the
      financial strength of its customers. At December 31, 2006, the Company had
      three
      customers whose balances approximated 37.6% of gross accounts receivable. No
      other customer balance exceeded 10% of gross accounts receivable.




Revenue
      Recognition





Revenue
      from coffee products is recognized upon shipment of product. Estimated returns
      and allowances are accrued at the time of sale.





Shipping
      and Handling Charges





The
      Company records shipping and handling charges, which are invoiced to customers
      with actual shipping and handling costs recorded as part of its cost of goods
      sold in the Statement of Operations.





Advertising
      Costs





Advertising
      and promotional costs are expensed as incurred. Advertising and promotional
      expenses were $707,916, $271,394 and $72,240 for the years ended December 31,
      2006, 2005 and 2004, respectively. Advertising expense include marketing
      allowances and promotional materials.





Research
      and Development Expenses





Research
      and development costs are expensed as incurred.


17


Income
      Taxes





The
      Company accounts for income taxes under the provisions of SFAS No. 109.
      "Accounting for Income Taxes," whereby deferred tax assets and liabilities
      are
      recognized for the future tax consequences attributable to temporary differences
      between bases used for financial reporting and income tax purposes. Deferred
      tax
      assets and liabilities are measured using enacted tax rates expected to apply
      to
      taxable income in the years in which those temporary differences are expected
      to
      be recovered or settled. A valuation allowance is provided for certain deferred
      tax assets if it is more likely than not that the Company will not realize
      tax
      assets through future operations.





On
      July
      2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income
      Taxes - an Interpretation of FASB Statement No. 109 (“Fin 48”) was issued. The
      provisions of FIN 48 are effective for fiscal years beginning after December
      15,
      2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an enterprise’s financial statements in accordance with FASB Statement No.
      109, Accounting for Income Taxes. It also prescribes a recognition threshold
      and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. The Company is
      currently evaluating the impact of FIN 48 on its results of operations,
      financial condition or cash flows.





Stock-Based
      Compensation





The
      Company adopted the provisions of SFAS 123(R), Share-based Payments, on January
      1, 2006. Accordingly, compensation costs for all share-based awards to employees
      are measured based on the grant date fair value of those awards and recognized
      over the period during which the employee is required to perform services in
      exchange for the award (generally over the vesting period of the award). The
      Company has no outstanding employee options or share-based payment awards with
      market or performance conditions. The implementation of SFAS 123(R) did not
      have
      a material effect on the Company's financial statements.





Quantifying
      Misstatements





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements (“SAB No. 108”),
      which provides interpretive guidance on the consideration of the effects of
      prior year misstatements in quantifying current year misstatements for the
      purpose of a materiality assessment. SAB No.108 requires registrants to quantify
      misstatement using both the balance sheet and income statement approaches and
      to
      evaluate whether either approach results in quantifying an error that is
      material based on relevant quantitative and qualitative factors. This guidance
      is effective for the first fiscal period ending after November 15, 2006. The
      adoption of SAB No. 108 did not have a material effect on the Company’s results
      of operations, financial condition or cash flows.





Loss
      per Share





Basic
      EPS
      is computed as net loss divided by weighted average shares outstanding. The
      potential shares that can be issued total 19,311,721 and 384,031 respectively
      at
      December 31, 2006 and 2005. The potential shares to be issued related to the
      senior convertible debt is calculated based on the stated conversion price
      of
      $1.79 per shares.





Cash
      and Cash Equivalents





Cash
      and
      cash equivalents include cash on hand and on deposit and highly liquid debt
      instruments with original maturities of three months or less. As of December
      31,
      2006, the company funds were on deposit at three financial
      institutions.


18


Trade
      Accounts Receivable





Trade
      accounts receivable are recorded on shipment of products to customers and
      generally due net 30 days. The trade receivables are not collateralized and
      interest is not accrued on past due accounts. Periodically,
      management reviews the adequacy of its provision for doubtful accounts based
      on
      historical bad debt expense results and current economic conditions using
      factors based on the aging of its accounts receivable. Additionally, the Company
      may identify additional allowance requirements based on indications that a
      specific customer may be experiencing financial difficulties. Actual bad debt
      results could differ materially from these estimates.





Inventory





Inventories
      consist principally of raw materials and finished goods and are stated at the
      lower of cost (first-in, first-out method) or market.





Property
      and Equipment





Property
      and equipment are depreciated over their estimated useful lives using the
      straight-line method over three to seven years. Additions are capitalized when
      acquired. The cost of maintenance and repairs is charged to expense as
      incurred.





Reclassifications





Certain
      prior year amounts in the accompanying financial statements have been
      reclassified to conform to the current year’s presentation.





Fair
      Value Measurements




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.” The Statement defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles and expands
      disclosures about fair value measurements, and does not require any new fair
      value measurements. This Statement applies under other accounting pronouncements
      that require or permit fair value measurements. The Statement is effective
      for
      the fiscal years beginning after November 15, 2007. The
      Company is assessing SFAS No. 157 and has not determined the impact the
      adoption of SFAS No. 157 will have on its results of operations or
      financial position.





**RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      July
      2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income
      Taxes - an Interpretation of FASB Statement No. 109 (“Fin 48”) was issued. The
      provisions of FIN 48 are effective for fiscal years beginning after December
      15,
      2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an enterprise’s financial statements in accordance with FASB Statement No.
      109, Accounting for Income Taxes. It also prescribes a recognition threshold
      and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. The Company is
      currently evaluating the impact of FIN 48 on its results of operations,
      financial condition or cash flows.





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements (“SAB No. 108”),
      which provides interpretive guidance on the consideration of the effects of
      prior year misstatements in quantifying current year misstatements for the
      purpose of a materiality assessment. SAB No.108 requires registrants to quantify
      misstatement using both the balance sheet and income statement approaches and
      to
      evaluate whether either approach results in quantifying an error that is
      material based on relevant quantitative and qualitative factors. This guidance
      is effective for the first fiscal period ending after November 15, 2006. The
      adoption of SAB No. 108 did not have a material effect on the Company’s results
      of operations, financial condition or cash flows.


19


In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.” The Statement defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles and expands
      disclosures about fair value measurements, and does not require any new fair
      value measurements. This Statement applies under other accounting pronouncements
      that require or permit fair value measurements. This guidance is effective
      for
      the first fiscal period ending after November 15, 2006. The adoption of SFAS
      No.
      157 did not have a material effect on the Company’s results of operations,
      financial condition or cash flows.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





In
      2005,
      the Company entered into a seven-year rental agreement with Javo Dispenser,
      LLC
      (“LLC”) to rent liquid concentrate dispensers for placement at its customer
      locations. The LLC is a Delaware limited liability company owned by Company
      directors, Baker, Knapp, Rielly, Hackett, and Solomon and three other Company
      shareholders. The Company’s Chief Financial Officer serves, without remuneration
      of any kind, as the General Manager of the LLC. The LLC has agreed to acquire,
      as needed, up to $2,000,000 worth of liquid dispensers, which will then be
      rented to the Company on terms that the Company believes to be arm’s length and
      no less favorable than could be obtained from an unaffiliated supplier. The
      term
      of the rental agreement extends to 2010 and, at the end of the term, the Company
      has the right to acquire the dispensers for nominal consideration of $1.00.
      The
      Company believes that the terms of this agreement are fair and are consistent
      with the terms that would be obtained in an arm’s length transaction. As of
      December 31, 2006, the LLC had purchased 758 dispensers at a cost of $1,744,000.
      The Company has rented these machines from the LLC and had incurred a dispenser
      rental expense of $73,291 and $370,791 in 2005 and 2006, respectively.





**COMMITMENTS
      AND CONTINGENCIES**





Set
      forth
      below is a table that summarizes our material obligations by type and by time
      period when these obligations become payable.





**Payments
                Due by Period****Total**
            
            **Less
                than**
              **1
                Year**
            
            **2-3
                Years**
            
            **4-5
                Years**
            
            **More
                than**
              **5
                Years**Long-term
                debt obligations
            
            $
            22,102,736
            
            $
            3,678,882
            
            $
            9,790,399
            
            $
            8,633,455
            
            $
            -Capital
                lease obligations
            
            
            826,469
            
            
            275,445
            
            
            551,024
            
            
            -
            
            
            -Total
            
            $
            22,929,205
            
            $
            3,954,327
            
            $
            10,341,423
            
            $
            8,633,455
            
            $
            -





20





**ITEM
      7A.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**





The
      Company’s market risks relating to our operations result primarily from changes
      in commodity prices and our ability to pass along those cost increases through
      customer price increases. We do not use financial instruments or commodity
      contracts in hedging transactions or for trading purposes, although we do buy
      futures contracts to mitigate against these risks, as described
      below.





Green
      coffee prices are subject to substantial price fluctuations due to various
      factors including weather, political and economic conditions in coffee-producing
      countries. Our gross profit margins can be impacted by changes in the price
      of
      green coffee. We enter into commitments with coffee brokers to purchase, on
      a
      forward-looking basis, commercial grade coffees, which gives us significant
      flexibility in selecting the date of the market price and timing of delivery.
      Depending on our demand and the condition of the coffee markets, we will
      generally make commitments for one to six months ahead; as of December 31,
      2006
      we had approximately $100,000 in green coffee purchase commitments.




**ITEM
      8.**  **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





The
      financial statements and supplementary data of the Company required in this
      item
      are set forth beginning on Page F-1 of this Form 10-K.




21





**Javo
                Beverage Company, Inc.****Index
                to Financial Statements****December
                31, 2006****Page**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            F-1FINANCIAL
                STATEMENTSBalance
                Sheets
            
            F-2Statements
                of Operations
            F-3Statements
                of Stockholder's Deficit
            F-4Statements
                of Cash Flows
            F-7Notes
                to Financial Statements
            F-9




22





REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To
      the
      Board of Directors and Shareholders of


Javo
      Beverage Company, Inc.


Vista,
      California








We
      have
      audited the accompanying balance sheets of Javo Beverage Company, Inc. as of
      December 31, 2006 and 2005, and the related statements of operations,
      stockholders’ deficit, and cash flows for the years ended December 31, 2006,
      2005 and 2004. These financial statements are the responsibility of Javo
      Beverage Company, Inc.’s management. Our responsibility is to express an opinion
      on these financial statements based on our audits.





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





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Javo Beverage Company, Inc. as
      of
      December 31, 2006 and 2005, and the results of its operations and its cash
      flows
      for the years ended  December
      31, 2006, 2005 and 2004, in conformity with accounting principles generally
      accepted in the United States of America.











Farber
      Hass Hurley & McEwen LLP





Granada
      Hills, California


March
      12,
      2007


F-1





**JAVO
                BEVERAGE COMPANY, INC.****BALANCE
                SHEETS****As
                of December 31, 2006 and
                2005**






**2006**
            
            **2005****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            18,324,161
            
            $
            519,554Accounts
                receivable, less allowances
            
            
            844,144
            
            
            776,761Inventory,
                net of reserve for obsolescence
            
            
            708,166
            
            
            1,408,599Prepaid
                expenses
            
            
            148,736
            
            
            42,810Employee
                Advances
            
            
            1,362
            
            
            --Total
                current assets
            
            
            20,026,569
            
            
            2,747,724Property
                and equipment, net
            
            
            880,559
            
            
            985,102Intangibles,
                net
            
            
            247,696
            
            
            825,865Deposits
            
            
            20,242
            
            
            20,242Total
                assets
            
            $
            21,175,066
            
            $
            4,578,933**LIABILITIES
                AND STOCKHOLDERS EQUITY/(DEFICIT)**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            1,176,683
            
            $
            1,199,156Accrued
                payroll and related benefits
            
            
            41,014
            
            
            27,318Accrued
                short-term interest payable
            
            
            289,360
            
            
            --Working
                capital line of credit
            
            
            713,000Warrants
                liability
            
            
            7,532,370
            
            
            --Current
                portion of long-term debt
            
            
            3,678,882
            
            
            32,705Total
                current liabilities
            
            
            13,431,309
            
            
            1,259,179Long-term
                debt, net of current portion
            
            
            18,423,854
            
            
            14,756,302Unamortized
                discount on long-term debt
            
            
            (13,818,233
            )
            
            (5,249,734
            )Accrued
                long-term interest payable
            
            
            95,847
            
            
            2,686,249Total
                liabilities
            
            
            18,132,777
            
            
            13,451,996Commitments
            
            
            --
            
            
            --Stockholders'
                equity/(deficit):Preferred
                stock, $0.001 par value, 10,000,000 shares authorized,
              1,775,
                166 shares issued and outstanding as of December 31, 2006, 0 shares
                issued
                and outstanding as of December 31, 2005
            
            
            1,775
            
            
            --Common
                stock, $0.001 par value, 300,000,000 shares authorized, 149,504,927
                shares
                issued and outstanding as of December 31, 2006, 149,479,927 shares
                issued
                and outstanding as of December 31, 2005
            
            
            149,504
            
            
            149,479Additional
                paid in capital
            
            
            43,196,496
            
            
            21,356,872Accumulated
                deficit
            
            
            (40,305,486
            )
            
            (30,379,414
            )Total
                stockholders' equity /(deficit)
            
            
            3,042,289
            
            
            (8,873,063
            )Total
                liabilities and stockholders' equity/(deficit)
            
            $
            21,175,066
            
            $
            4,578,933








The
      accompanying notes are an integral part of these financial
      statements.


F-2





**JAVO
                BEVERAGE COMPANY, INC.****STATEMENTS
                OF OPERATIONS****For
                the Years Ended December 31, 2006, 2005 and
                2004**






**2006**
            
            **2005**
            
            **2004**Net
                sales
            
            $
            10,321,655
            
            $
            6,200,327
            
            $
            2,083,810Cost
                of sales
            
            
            (7,178,753
            )
            
            (4,180,925
            )
            
            (1,395,961
            )Gross
                profit
            
            
            3,142,902
            
            
            2,019,402
            
            
            687,849Operating
                expenses:Research
                and development
            
            
            (306,065
            )
            
            (117,135
            )
            
            (433,523
            )Selling
                and marketing
            
            
            (2,408,265
            )
            
            (1,245,971
            )
            
            (963,010
            )General
                and administrative
            
            
            (3,232,505
            )
            
            (2,688,596
            )
            
            (2,213,152
            )Total
                operating expenses
            
            
            (5,946,835
            )
            
            (4,051,702
            )
            
            (3,609,685
            )Loss
                from operations
            
            
            (2,803,933
            )
            
            (2,032,300
            )
            
            (2,921,836
            )Other
                income (expenses):Interest
                income
            
            
            28,963
            
            
            17,720
            
            
            15,071Interest
                expense
            
            
            (2,162,999
            )
            
            (2,855,638
            )
            
            (1,949,606
            )Accelerated
                interest expense
            
            
            (5,384,964
            )
            
            --
            
            
            --Income
                (expense) from derivatives
            
            
            404,721
            
            
            --
            
            
            --Other
                income
            
            
            --
            
            
            26,070
            
            
            134Gain/(loss)
                on disposal of assets
            
            
            (7,860
            )
            
            --
            
            
            1,701Total
                other expense
            
            
            (7,122,139
            )
            
            (2,811,848
            )
            
            (1,932,700
            )Net
                loss
            
            $
            (9,926,072
            )
            $
            (4,844,148
            )
            $
            (4,854,536
            )Basic
                and diluted loss per share
            
            $
            (0.07
            )
            $
            (0.03
            )
            $
            (0.03
            )Weighted
                average number of shares outstanding, basic and diluted
            
            
            149,494,203
            
            
            149,441,676
            
            
            143,028,396








The
      accompanying notes are an integral part of these financial
      statements.


F-3





**JAVO
                BEVERAGE COMPANY, INC.****STATEMENTS
                OF STOCKHOLDERS' DEFICIT****For
                the Years Ended December 31, 2006, 2005 and
                2004**






Common
                Stock
            
            AdditionalShares
            
            Amount
            
            Paid-in
              Capital
            
            Accumulated
              Deficit
            
            Subscription
              Receivable
            
            TotalBalances
                at January 1, 2004
            
            
            141,046,434
            
            $
            141,046
            
            $
            18,864,264
            
            
            ($20,680,730
            )
            
            ($315,000
            )
            
            ($1,990,420
            )Shares
                issued for exercised warrants
            
            
            371,033
            
            
            371
            
            
            16,987
            
            
            --
            
            
            --
            
            
            17,358Subscription
                receivables collected
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            315,000
            
            
            315,000Warrants
                issued at a strike price of $0.085 per agreement with consultant
            
            
            --
            
            
            --
            
            
            25,990
            
            
            --
            
            
            --
            
            
            25,990Shares
                issued Board of Directors at $0.14
            
            
            1,200,000
            
            
            1,200
            
            
            166,800
            
            
            --
            
            
            --
            
            
            168,000Shares
                issued at $0.24 per share in connection with loan payable
            
            
            450,000
            
            
            450
            
            
            81,194
            
            
            --
            
            
            --
            
            
            81,644Shares
                issued at $0.26 per share in connection with loan payable
            
            
            6,150,000
            
            
            6,150
            
            
            1,150,186
            
            
            --
            
            
            --
            
            
            1,156,336Shares
                issued at $0.25 per share in connection with loan payable
            
            
            150,000
            
            
            150
            
            
            27,570
            
            
            --
            
            
            --
            
            
            27,720Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            (4,854,536
            )
            
            --
            
            
            (4,854,536
            )Balance
                at December 31, 2004
            
            
            149,367,467
            
            $
            149,367
            
            $
            20,332,991
            
            
            ($25,535,266
            )
            
            --
            
            
            ($5,052,908
            )








The
      accompanying notes are an integral part of these financial
      statements.


F-4





**JAVO
                BEVERAGE COMPANY, INC.****STATEMENTS
                OF STOCKHOLDERS' DEFICIT****For
                the Years Ended December 31, 2006, 2005 and
                2004**




Common
                Stock
            
            AdditionalShares
            
            Amount
            
            Paid-in
              Capital
            
            Accumulated
                Deficit
            
            TotalBalances
                at January 1, 2005
            
            
            149,367,467
            
            $
            149,367
            
            $
            20,332,991
            
            
            ($25,535,266
            )
            
            ($5,052,908
            )Shares
                issued for exercised warrants
            
            
            836,212
            
            
            836
            
            
            83,789
            
            
            --
            
            
            84,625Warrants
                issued at a strike price of $0.085 per agreement with consultant
            
            
            --
            
            
            --
            
            
            46,712
            
            
            --
            
            
            46,712Shares
                contributed by officers
            
            
            (5,550,002
            )
            
            (5,550
            )
            
            5,550
            
            
            --
            
            
            --Shares
                issued at $0.26 per share in connection with loan payable
            
            
            375,000
            
            
            375
            
            
            70,133
            
            
            --
            
            
            70,508Shares
                issued at $0.27 per share in connection with loan payable
            
            
            562,500
            
            
            563
            
            
            106,935
            
            
            --
            
            
            107,498Shares
                issued at $0.25 per share in connection with loan payable
            
            
            1,612,500
            
            
            1,613
            
            
            296,377
            
            
            --
            
            
            297,990Shares
                issued at $0.23 per share in connection with loan payable
            
            
            150,000
            
            
            150
            
            
            15,286
            
            
            --
            
            
            15,436Shares
                issued at $0.24 per share in connection with loan payable
            
            
            150,000
            
            
            150
            
            
            27,065
            
            
            --
            
            
            27,215Shares
                issued at $0.22 per share in connection with loan payable
            
            
            1,500,000
            
            
            1,500
            
            
            259,820
            
            
            --
            
            
            261,320Shares
                issued to employees at $0.33
            
            
            25,000
            
            
            25
            
            
            8,225
            
            
            --
            
            
            8,250Shares
                issued to employees at $0.28
            
            
            50,000
            
            
            50
            
            
            13,950
            
            
            --
            
            
            14,000Shares
                issued for services at $0.25
            
            
            438,750
            
            
            438
            
            
            90,001
            
            
            --
            
            
            90,439Shares
                returned by terminated employee
            
            
            (37,500
            )
            
            (38
            )
            
            38
            
            
            --
            
            
            --Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            (4,844,148
            )
            
            (4,844,148
            )Balance
                at December 31, 2005
            
            
            149,479,927
            
            $
            149,479
            
            $
            21,356,872
            
            
            ($30,379,414
            )
            
            ($8,873,063
            )








The
      accompanying notes are an integral part of these financial
      statements.


F-5





**JAVO
                BEVERAGE COMPANY, INC.****STATEMENTS
                OF STOCKHOLDERS' DEFICIT****For
                the Years Ended December 31, 2006, 2005 and
                2004**






Common
                Stock
            
            Preferred
                Stock
            
            AdditionalShares
            
            Amount
            
            Shares
            
            Amount
            
            Paid-in
              Capital
            
            Accumulated
                Deficit
            
            TotalBalances
                at January 1, 2006
            
            
            149,479,927
            
            $
            149,479
            
            
            --
            
            
            --
            
            $
            21,356,872
            
            
            ($30,379,414
            )
            
            ($8,873,063
            )Stock
                issued at $.29 to employee as part of employment agreement
            
            
            25,000
            
            $
            25
            
            
            --
            
            
            --
            
            $
            7,224
            
            
            --
            
            $
            7,249Preferred
                shares issued in debt conversion at $10.00 per share
            
            
            --
            
            
            --
            
            
            1,775,166
            
            $
            1,775
            
            $
            17,749,885
            
            
            --
            
            $
            17,751,660Warrants
                issued at a strike price of $0.085 per agreement with consultant
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            $
            1,541
            
            
            --
            
            $
            1,541Senior
                convertible debt beneficial conversion feature at fair
                value
            
            
            --
            
            
            --
            
            
            ---
            
            
            --
            
            $
            4,065,583
            
            
            --
            
            $
            4,065,583Warrants
                issued at a strike price of $1.79 in connection with senior convertible
                debt
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            $
            15,391
            
            
            --
            
            $
            15,391Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            ($9,926,072
            )
            
            ($9,926,072
            )Balance
                at December 31, 2006
            
            
            149,504,927
            
            $
            149,504
            
            
            1,775,166
            
            $
            1,775
            
            $
            43,196,496
            
            
            ($40,305,486
            )
            $
            3,042,289








The
      accompanying notes are an integral part of these financial
      statements.


F-6





**JAVO
                BEVERAGE COMPANY, INC.****STATEMENT
                OF CASH FLOWS****For
                the Years Ended December 31, 2006, 2005 and
                2004**






**2006**
            
            **2005**
            
            **2004**Cash
                flows from operating activities:Net
                loss
            
            $
            (9,926,072
            )
            $
            (4,844,148
            )
            $
            (4,854,536
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            2,415,581
            
            
            1,889,966
            
            
            1,353,890Accelerated
                interest and discount converted to preferred stock
            
            
            5,384,964
            
            
            --
            
            
            --Loss
                (gain) on derivatives
            
            
            (404,721
            )
            
            --
            
            
            --Issuance
                of common stock for compensation
            
            
            7,249
            
            
            101,438
            
            
            220,914Issuance
                of warrants for services and warrants exercised
            
            
            1,541
            
            
            46,712
            
            
            (25,990
            )Loss
                (gain) on disposal of assets
            
            
            7,860
            
            
            --
            
            
            (1,701
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (67,384
            )
            
            (461,258
            )
            
            (236,833
            )Inventories
            
            
            700,433
            
            
            (1,120,644
            )
            
            (162,157
            )Prepaid
                expenses and deposits
            
            
            (105,926
            )
            
            (128,588
            )
            
            68,257Employee
                advances
            
            
            (1,362
            )
            
            14,174
            
            
            1,900Accounts
                payable and accrued expenses
            
            
            (22,475
            )
            
            551,402
            
            
            340,157Accrued
                payroll and related benefits
            
            
            13,696
            
            
            785
            
            
            18,945Accrued
                interest payable
            
            
            60,813
            
            
            1,228,966
            
            
            829,498Net
                cash used in operating activities
            
            
            (1,935,803
            )
            
            (2,721,195
            )
            
            (2,447,656
            )Cash
                flows from investing activities:Proceeds
                from disposal of equipment
            
            
            1,094
            
            
            --
            
            
            9,419Purchases
                of property and equipment
            
            
            (151,238
            )
            
            (291,048
            )
            
            (510,542
            )Net
                cash used in investing activities
            
            
            (150,144
            )
            
            (291,048
            )
            
            (501,123
            )Cash
                flows from financing activities:Proceeds
                from long-term debt
            
            
            21,000,003
            
            
            1,450,000
            
            
            2,250,000Line-of-Credit
                advances
            
            
            713,000
            
            
            --
            
            
            --Loan
                costs
            
            
            (1,822,449
            )
            
            (95,000
            )
            
            (225,000
            )Payments
                on long-term debt
            
            
            --
            
            
            --
            
            
            (4,698
            )Payment
                received on stock subscription
            
            
            --
            
            
            --
            
            
            315,000Proceeds
                from exercised warrants
            
            
            --
            
            
            84,625
            
            
            17,941Net
                cash provided by financing activities
            
            
            19,890,554
            
            
            1,439,625
            
            
            2,353,243Net
                change in cash and cash equivalents
            
            
            17,804,607
            
            
            (1,572,618
            )
            
            (595,536
            )Cash
                and cash equivalents at beginning of period
            
            
            519,554
            
            
            2,092,172
            
            
            2,687,708Cash
                and cash equivalents at end of period
            
            $
            18,324,161
            
            $
            519,554
            
            $
            2,092,172








The
      accompanying notes are an integral part of these financial
      statements.


F-7





**JAVO
                BEVERAGE COMPANY, INC.****STATEMENT
                OF CASH FLOWS (Continued)****For
                the Years Ended December 31, 2006, 2005 and
                2004**






**2006**
            
            **2005**
            
            **2004**Non-cash
                financing and investing activities:Issuance
                of preferred stock in exchange for debt
            
            $
            17,751,660Equipment
                from capital lease
            
            $
            63,726Discount
                for beneficial conversion feature of Senior Convertible
                Debt
            
            $
            4,065,583Warrant
                Liability
            
            $
            7,532,370Supplemental
                cash flow information:Cash
                paid for interest
            
            $
            50,854
            
            $
            2,954
            
            
            -Cash
                paid for income taxes
            
            $
            1,936
            
            $
            5,787
            
            $
            1,600








The
      accompanying notes are an integral part of these financial
      statements.


F-8


**JAVO
      BEVERAGE COMPANY, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**





**NOTE
      1.**  **NATURE
      OF OPERATIONS**





Organization





Javo
      Beverage Company, Inc., formerly La Jolla Fresh Squeezed Coffee Company, Inc.,
      (the "Company") was incorporated in the state of Delaware on June 21, 2002.
      In
      2002, the Company merged with La Jolla Fresh Squeezed Coffee Company, Inc.
      ("LJCC"). LJCC was incorporated in the state of Washington on February 9, 1987.
      In 1998, LJCC acquired the net assets of Stephen's Coffee Company, Inc. ("SCC").
      SCC was incorporated in the state of California on August 13, 1993. SCC was
      the
      operating company responsible for the development of manufacturing methods
      and
      products for distribution. Effective November 1, 1998, SCC was acquired for
      1,142,500 shares of common stock representing approximately 9% of the
      outstanding voting stock of LJCC in exchange for the common stock of SCC. The
      LJCC's sales during 2001 were primarily of a promotional nature as it tried
      to
      find its niche in the marketplace. From August 13, 1993 to December 31, 2001,
      the Company was a development stage enterprise. After the merger of LJCC into
      the Company, the Company exited the development stage as it began to generate
      commercial revenues.





Nature
      of Operations





The
      Company is a manufacturer of coffee and tea concentrates, extracts, and
      beverages serving the foodservice, food and beverage manufacturing, and retail
      industries. For foodservice operators, Javo combines great tasting coffees,
      teas
      and specialty beverages with the added convenience and efficiency of
      dispenser-based systems. For food and beverage processors and retailers looking
      for authentic coffee and tea flavor for their packaged foods and ready-to-drink
      beverages, Javo supplies customized beverage formulations, extracts and
      flavors.





Restatement





The
      Cash
      Flow Statement for 2004 has been corrected for a classification error
      inadvertently reported in the amended 10KSB for 2004. The depreciation and
      amortization expense previously reported was $690,904 and should have been
      $1,353,890. The issuance of stock for compensation previously reported was
      $883,900 and should have been $220,194. The Cash Flow Statement for 2004 has
      been corrected in this report.





**NOTE
      2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





Use
      of
      Estimates





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements, and the reported amounts of revenues and expenses during the
      reporting periods. Actual results could materially differ from those
      estimates.




Concentration

      of Credit Risk




Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist principally of cash and trade accounts receivable .




Concentration
      of credit risk with respect to cash and cash equivalent is the result of the
      Company having $18.4 million in three separate financial institutions. The
      invested funds are in cash bank accounts, bank money market accounts and cash
      reserve funds. The cash or cash equivalent investment are liquid and the Company
      can access all funds with 3 days or less notice. The Company funds are in large
      financial institutions with less than $300,000 not covered by insurance. The
      Company does not believe that it is subject to any unusual credit or market
      risk.




Concentration
      of credit risk with respect to trade receivables has decreased as the Company
      continues to diversify its customer base. The Company routinely assesses the
      financial strength of its customers. At December 31, 2006, the Company had
      three
      customers whose balances approximated 20.0%, 8.9%, and 8.8% of gross accounts
      receivable. No other customer balance exceeded 10% of gross accounts
      receivable.


F-9


**JAVO
      BEVERAGE COMPANY, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**





**NOTE
      2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (continued)**





Revenue
      Recognition





Revenue
      from coffee products is recognized upon shipment of product. Estimated returns
      and allowances are accrued at the time of sale.





Shipping
      and Handling Charges





The
      Company records shipping and handling charges, which are invoiced to customers
      with actual shipping and handling costs recorded as part of its cost of goods
      sold in the Statement of Operations.





Advertising
      Costs





Advertising
      and promotional costs are expensed as incurred. Advertising and promotional
      expenses were $707,916, $271,394 and $72,240 for the years ended December 31,
      2006, 2005 and 2004, respectively.





Research
      and Development Expenses





Research
      and development costs are expensed as incurred.





Income
      Taxes





The
      Company accounts for income taxes under the provisions of SFAS No. 109.
      "Accounting for Income Taxes," whereby deferred tax assets and liabilities
      are
      recognized for the future tax consequences attributable to temporary differences
      between bases used for financial reporting and income tax purposes. Deferred
      tax
      assets and liabilities are measured using enacted tax rates expected to apply
      to
      taxable income in the years in which those temporary differences are expected
      to
      be recovered or settled. A valuation allowance is provided for certain deferred
      tax assets if it is more likely than not that the Company will not realize
      tax
      assets through future operations.





On
      July
      2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income
      Taxes - an Interpretation of FASB Statement No. 109 (“Fin 48”) was issued. The
      provisions of FIN 48 are effective for fiscal years beginning after December
      15,
      2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an enterprise’s financial statements in accordance with FASB Statement No.
      109, Accounting for Income Taxes. It also prescribes a recognition threshold
      and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. The Company is
      currently evaluating the impact of FIN 48 on its results of operations,
      financial condition or cash flows.





Stock-Based
      Compensation





The
      Company adopted the provisions of SFAS 123(R), Share-based Payments, on January
      1, 2006. Accordingly, compensation costs for all share-based awards to employees
      are measured based on the grant date fair value of those awards and recognized
      over the period during which the employee is required to perform services in
      exchange for the award (generally over the vesting period of the award). The
      Company has no outstanding employee options or share-based payment awards with
      market or performance conditions. The implementation of SFAS 123(R) did not
      have
      a material effect on the Company's financial statements.





Quantifying
      Misstatements





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements (“SAB No. 108”),
      which provides interpretive guidance on the consideration of the effects of
      prior year misstatements in quantifying current year misstatements for the
      purpose of a materiality assessment. SAB No.108 requires registrants to quantify
      misstatement using both the balance sheet and income statement approaches and
      to
      evaluate whether either approach results in quantifying an error that is
      material based on relevant quantitative and qualitative factors. This guidance
      is effective for the first fiscal period ending after November 15, 2006. The
      adoption of SAB No. 108 did not have a material effect on the Company’s results
      of operations, financial condition or cash flows.


F-10


**JAVO
      BEVERAGE COMPANY, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**





**NOTE
      2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (continued)**





Loss
      per Share





Basic
      EPS
      is computed as net loss is based on weighted average shares outstanding. The
      potential common shares that can be issued total 19,311,721 at December 31,
      2006, 384,031 at December 31, 2005 and 3,269,131 December 31, 2004. The number
      of potential shares to be issued at December 31, 2006 related to the senior
      convertible debt is calculated based on the stated conversion price of $1.79
      per
      share.




Cash
      and Cash Equivalents




Cash
      and
      cash equivalents include money market funds which are carried at cost, plus
      accrued interest, which approximates market. The Company does not believe that
      it is subject to any unusual credit or market risk.





Trade
      Accounts Receivable





Trade
      accounts receivable are recorded on shipment of products to customers and are
      generally due net 30 days. The trade receivable are not collateralized and
      interest is not accrued on past due accounts. Periodically,
      management reviews the adequacy of its provision for doubtful accounts based
      on
      historical bad debt expense results and current economic conditions using
      factors based on the aging of its accounts receivable. Additionally, the Company
      may identify additional allowance requirements based on indications that a
      specific customer may be experiencing financial difficulties. Actual bad debt
      results could differ materially from these estimates.





Inventory





Inventories
      consist principally of raw materials and finished goods and are stated at the
      lower of cost (first-in, first-out method) or market.





Property
      and Equipment





Property
      and equipment are depreciated over their estimated useful lives using the
      straight-line method over three to seven years. Additions are capitalized when
      acquired. The cost of maintenance and repairs is charged to expense as
      incurred.





Reclassifications





Certain
      prior year amounts in the accompanying financial statements have been
      reclassified to conform to the current year’s presentation.





Fair
      Value Measurements




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.” The Statement defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles and expands
      disclosures about fair value measurements, and does not require any new fair
      value measurements. This Statement applies under other accounting pronouncements
      that require or permit fair value measurements. The Statement is effective
      for
      the fiscal years beginning after November 15, 2007. The Company is
      assessing SFAS No. 157 and has not determined the impact of its the
      adoption of SFAS No. 157 will have its results of operations or financial
      position.


F-11


**JAVO
      BEVERAGE COMPANY, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**





**NOTE
      3.**  **MAJOR
      CUSTOMERS AND VENDORS**





The
      Company purchases certain products from five suppliers, which accounted for
      approximately 62%, 60% and 65% of total purchases in 2006, 2005 and 2004,
      respectively. Management does not believe that the loss of these suppliers
      could
      have a severe impact on the result of operations since the Company has
      identified available products at other vendors.





During
      the year ended December 31, 2006, 2005 and 2004, the Company had sales to three
      major customers, which accounted for 19%, 14% and 10% of sales in 2006, 19%,
      15%
      and 11% of sales in 2005 and 21%, 17% and 15% of sales in 2004, respectively.
      The Company expanded its customer base in 2006 and anticipates that sales in
      2007 will be to a broader base of customers and it will be less reliant on
      any
      one customer.





**NOTE
      4.**  **INVENTORY**





Inventory
      consists of the following at December 31, 2006 and 2005.





2006
            
            2005Raw
                Materials
            
            $
            462,558
            
            $
            986,441Finished
                Goods
            
            
            283,864
            
            
            460,414746,422
            
            
            1,446,855Reserve
                for Obsolescence
            
            
            (38,256
            )
            
            (38,256
            )$
            708,166
            
            $
            1,408,599





**NOTE
      5.**  **PROPERTY
      AND EQUIPMENT**





Property
      and equipment consists of the following at December 31, 2006, and
      2005.





2006
            
            2005Production
                Equipment
            
            $
            1,745,002
            
            $
            1,501,502Office
                Equipment
            
            
            167,781
            
            
            149,401Leasehold
                Improvements
            
            
            48,020
            
            
            114,202Total
                Cost
            
            
            1,960,803
            
            
            1,765,105Less
                Accumulated Depreciation
            
            
            (1,080,244
            )
            
            (780,003
            )$
            880,559
            
            $
            985,102





During
      the years ended December 31, 2006, 2005, and 2004 depreciation expense
      totaled $310,556, $266,248, and
      $233,488, respectively.


F-12


**JAVO
      BEVERAGE COMPANY, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**





**NOTE
      7.**  **INTANGIBLE
      ASSETS**





The
      Company recorded loan costs of $95,000 and $225,000 during the years ended
      December 31, 2005 and 2004, respectively, which represented a 10% loan cost
      paid
      in connection with its private placement debt offerings (see Note 8 below).
      These loan costs are being amortized over the five-year life of the loans.
      Amortization expense as of December 31, 2005 and 2004 was $220,730 and $170,371,
      respectively. In addition in 2005, the Company entered into a five year contract
      to be the primary liquid coffee provider for a large contract foodservice
      operator. These payments are subject to certain mandated sales performances.
      The
      Company paid $300,000 of the fee in September 2005. In
      2006
      and 2005, the Company recorded an expense of $53,422 and $25,174, respectively,
      for the amortization of the conversion fee. The conversion fee net of the
      $221,404 expense and the $600,000 remaining payable or $821,404 is reported
      on
      the balance sheet as part of the Company’s intangible assets.





2006
            
            2005Loan
                fees
            
            $
            1,141,050
            
            $
            1,133,550Conversion
                fee
            
            
            300,000
            
            
            300,0001,441,050
            
            
            1,433,550Accumulated
                amortization
            
            
            (1,193,354
            )
            
            (607,685
            )Net
                intangibles
            
            $
            247,696
            
            $
            825,865





**NOTE
      8.**  **WORKING
      CAPITAL LINE OF CREDIT**





The
      Company entered into a working capital line of credit agreement on September
      26,
      2006, with a bank to provide a loan of up to $3,000,000, secured by the
      Company’s accounts receivable and inventory. The term of the loan is one year
      and carries an annual interest rate of Comerica prime rate or 8.25% as of
      December 31, 2006. The available working capital loan amount is based on 75%
      of
      eligible accounts receivable and 40% of eligible inventories. Eligible accounts
      receivables are generally described as those due within thirty days or less
      from
      the date of invoice for products sales that have been validly assigned to the
      bank. Eligible accounts receivable specifically exclude foreign sales,
      receivables for sales that are not final and related party receivables. Eligible
      inventories are generally described as raw materials in saleable form and
      finished goods inventory that have been validly assigned to the bank. Eligible
      inventory specifically excludes supplies, packaging and work-in-process. The
      bank retains the discretion from time-to-time to define what qualifies as
      eligible accounts receivable and inventories. As of December 31, 2006, the
      Company had a $713,000 loan balance and available credit of $252,700. The debt
      is current and the Company is in the process of resolving a technical violation
      of a debt covenant.  The
      working capital line of credit matures on September 25, 2007, unless
      renewed.





**NOTE
      9.**  **LONG-TERM
      DEBT**





On
      April
      11, 2002, the Company issued $5,000,000 in promissory notes bearing 10% interest
      per year, which mature on April 11, 2007. The proceeds of this funding paid
      off
      a prior loan commitment and provided the Company with working capital to begin
      operations. In connection with these promissory notes, the Company issued
      30,000,000 shares of its restricted common stock and paid a 10% loan cost
      totaling $500,000. The Company determined that per APBO No. 14 the note holders
      had effectively purchased the 30,000,000 shares of restricted Common Stock
      for
      $2,910,973 and had paid $2,089,027 for the debt, based on the relative fair
      values of the respective equity and debt instruments issued. Accordingly, a
      $2,910,973 debt discount was recognized on the $5,000,000 principal value of
      the
      promissory notes, which is being amortized over the five-year life of the debt.
      This accounting makes the effective compound interest rate on the notes
      approximately 25% over the term of the debt. Of the $5,000,000 in promissory
      notes $4,500,000 plus related accrued interest were converted to Series B
      Preferred Stock in 2006.


F-13


**JAVO
      BEVERAGE COMPANY, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**





**NOTE
      9.**  **LONG-TERM
      DEBT (continued)**





In
      2003,
      the Company issued $6,000,000 in promissory notes bearing 10% interest per
      year,
      which mature in 2008. The proceeds of this funding provided the Company with
      working capital to continue operations. In connection with these promissory
      notes, the Company issued 36,000,000 shares of its restricted common stock
      and
      paid loan costs totaling $313,550. The Company determined per APBO No. 14,
      the
      note holders had effectively purchased the 36,000,000 shares of restricted
      Common Stock for $3,365,486 and had paid $2,634,534 for the debt, based on
      the
      relative fair values of the respective equity and debt instruments issued.
      Accordingly, a $3,365,486 debt discount was recognized on the $6,000,000
      principal value of the promissory notes, which is being amortized over the
      five-year life of the debt. This accounting makes the effective compound
      interest rate on the notes approximately 25% over the life of the debt. Of
      the
      $6,000,000 in promissory notes, $5,775,000 plus related accrued interest were
      converted to Series B Preferred Stock in 2006.





In
      2004,
      the Company issued $2,250,000 in promissory notes bearing 10% interest per
      year,
      which mature in 2009. The proceeds of this funding provided the Company with
      working capital to continue operations. In connection with these promissory
      notes, the Company issued 6,750,000 shares of common stock and incurred loan
      costs totaling $225,000. The Company determined that per APBO No. 14 the note
      holders had effectively purchased the 6,750,000 shares of restricted Common
      Stock for $1,518,914 and had paid $1,181,086 for the debt, based on the relative
      fair values of the respective equity and debt instruments issued. Accordingly,
      a
      $1,518,914 debt discount was recognized on the $2,700,000 principal value of
      the
      promissory notes, which is being amortized over the five-year life of the debt.
      This accounting makes the effective compound interest rate on the notes
      approximately 25% over the life of the debt .
      All of
      the $2,250,000 in promissory notes plus accrued interest were converted to
      Series B Preferred Stock in 2006.





In
      June
      2005, the Company issued $1,000,000 in promissory notes bearing 10% interest
      per
      year, which mature in 2010. The proceeds of this funding provided the Company
      with working capital to continue operations. In connection with these promissory
      notes, the Company issued 3,000,000 shares of its restricted Common Stock and
      incurred loan costs totaling $50,000. The Company determined that per APBO
      No.
      14 the note holders had effectively purchased the 3,000,000 shares of restricted
      common stock for $538,003 and had paid $461,997 for the debt, based on the
      relative fair values of the respective equity and debt instruments issued.
      Accordingly, a $538,003 debt discount was recognized on the $1,000,000 principal
      value of the promissory notes, which is being amortized over the five-year
      life
      of the debt. This accounting makes the effective compound interest rate on
      the
      notes approximately 25% over the life of the debt. All but $25,000 of the
      $1,000,000 in plus related accrued interest were converted to Series B Preferred
      Stock in 2006.





In
      December 2006, the Company issued $21,000,003 in Senior Convertible Debt. The
      Senior Convertible Debt bears annual interest at 6.95% per annum based on a
      360
      day year. The debt agreement provides for quarterly interest payments starting
      April 1, 2007 and fifty-four equal monthly principal payments of $388,889
      starting May 1, 2007. At the Company’s option, the interest and principal
      payments may be paid in either cash or in registered Common Stock valued at
      a
      12% discount to the volume weighted average stock price for the 20 trading
      days
      following the due date (the “VWAP”), if the VWAP is over $1.00 per share. If the
      VWAP stock price is more than $0.60 and less than $1.00 per share, then the
      principal payments at the Company’s option may be paid in registered Common
      Stock valued at a 15% discount to the VWAP. At no time will the conversion
      value
      of the registered shares used for payment of the debt exceed $1.79 per share.
      If
      the VWAP stock price is $0.60 or less, then the Company will be required to
      pay
      the interest and principal payments in cash. The investors may elect at any
      time
      to convert any or all the debt to registered shares at a value based on $1.79
      per share. The Senior Convertible Debt is a complex instrument requiring the
      Company to strictly adhere to certain notifications and payments schedules
      or be
      in default under its provisions. If an event of default occurs under the debt,
      the debt will bear interest at a rate of 15% for so long as the default
      continues. See the Senior Convertible Debt agreement attached to the Company’s
      8-K filed on December 18, 2006 for further details. The fair value of the Senior
      Convertible Debt with out the beneficial conversion feature was determined
      by
      first determining the fair value of the warrants issued in connection with
      the
      transaction and allocating the remainder of net proceeds to the debt. The
      allocation to the debt was $13,062,911 before expenses paid to third parties.
      The Company recorded a debt discount of $9,767,431 which is accreted at an
      interest rate of approximately 26.9% over the life of the senior convertible
      debt as interest expense.


F-14


**JAVO
      BEVERAGE COMPANY, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**





**NOTE
      9.**  **LONG-TERM
      DEBT (continued)**





In
      connection with the Senior Convertible Debt, the Company issued warrants for
      the
      purchase of 6,644,554 of the Company’s Common Stock. The Company issued Series A
      Warrants for 3,519,555 common shares at a strike price of $1.95 per share and
      Series B Warrants for 3,124,999 at a strike price of $2.24 per share. Any or
      all
      of the warrants maybe exercised any time between June 2007 and December 2011.
      The Company would receive gross proceeds of $13,863,130 if these warrants were
      exercised in full at their current strike prices. The A and B Warrant agreements
      are identical except for the strike price. These warrants were valued at the
      time of issuance using the Black-Scholes option valuation, which resulted in
      a
      fair value of $3,906,076 for the A Warrants and $3,406,249 for the B Warrants,
      representing a total fair value of these warrants of $7,312,955 as of December
      15, 2006. Because the warrants provide for a strike price reset if the Company
      issues stock at a price less than the defined exercise price, the Company was
      required under ETIF 00-19 to use liability accounting for the warrants. The
      fair
      value of the A and B warrants of $7,312,955 was recorded as to warrant
      liability. In connection with the issuance of the Senior Convertible Debt,
      the
      Company also issued Series C Warrants for the purchase of 11,731,844 at a strike
      price of $1.79 per share. These warrants only become exercisable if and to the
      extent the Company exercises its option to pre-pay part or all of the Senior
      Convertible Debt.





Cowen
      and
      Co., LLC acted as exclusive private placement agent for the Senior Convertible
      Debt offering and was paid a fee of $1,470,000 in cash. In addition, the Company
      reimbursed Cowen for its out-of-pocket expenses and issued Cowen Conversion
      Share Warrant to purchase 351,955 shares of Common Stock with a strike price
      of
      $1.79 per share, Series A Warrants to purchase 105,583 shares of Common Stock
      with a strike price of $1.95 per share and Series B Warrants to purchase 93,750
      shares of Common Stock with a strike price of $2.24. The warrants are the same
      terms as other warrants issued in connection the Senior Convertible Debt with
      the exception of the strike prices. The fair value of $624,137 for these
      warrants was determined using Black-Scholes in the same manner as the warrants
      issued to the investors. The Company recorded the $624,137 as a warrant
      liability as of the closing.





In
      addition to the above, the Senior Convertible debt was determined to have a
      beneficial conversion feature due to anticipated conversion of the debt
      principal to Common Stock at a discount to market if the stock price at time
      of
      conversion was between $0.60 and $1.79. The fair value of this beneficial
      conversion feature was determined to be $4,065,583 at the closing of the debt
      transaction. The fair value was determined by dividing the Conversion Price
      of
      $1.79 into the total debt to get the Conversion Shares of 11,731,844 and
      multiplying the number of conversion shares times the VWAP stock price at
      closing of $1.46 to get a determined debt value of $17,128,492. Comparing this
      with the determined debt value of $13,062,912, the resulting value of the
      beneficial conversion feature was determined to be $4,065,583. This value of
      this beneficial conversion feature was recorded as an additional discount to
      the
      debt and an addition to paid-in-capital as of the closing of the transaction.
      The beneficial conversion feature discount will be accreted to decrease the
      Beneficial Conversion Feature (BCF) Discount and to record an Other Expense
      over
      the period of the note using an effective interest rate of approximately
      8.6%.





In
      connection with the issuance of the Senior Convertible Debt, the Company entered
      into a Registration Rights Agreement that required it file for registration
      of a
      number of shares of Common Stock sufficient to allow full conversion of the
      principal and interest payments and exercise of the warrants. On January 11,
      2007 the Company filed an S-3 Registration Statement with the Securities and
      Exchange Commission. The Company is to use its best efforts to have this
      registration statement declared effective by May 14, 2007. If the registration
      statement is not declared effective by that time, the Company will be in default
      under the terms of the agreement and it will be subject to a penalty 1% of
      the
      debt per month, with a maximum penalty of up to 10% of the total amount of
      the
      debt.





The
      Company determined that all the Conversion Share, A and B Warrants issued in
      connection with the Senior Convertible Debt were to be accounted for as
      derivative liabilities. This accounting treatment requires the Company value
      the
      warrants at the end of each reporting period and record the change in value
      (mark-to-market) as an increase or decrease in warrant liability through a
      charge to other income or expense. As of December 31, 2006, the Company
      determined, using Black-Scholes,that the fair value of the warrants had declined
      by $404,721. Accordingly, the Company recorded a corresponding current-period
      “other derivative income” and recorded a reduction in warrant liability for that
      amount as of December 31, 2006.


F-15


**JAVO
      BEVERAGE COMPANY, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**





**NOTE
      9.**  **LONG-TERM
      DEBT (continued)**





Long-term
      debt at December 31, 2006 and 2005 consisted of the following:





2006
            
            2005Senior
                convertible debt, unsecured, payable in installments from May 2007
                through
                October 2011 with interest at 6.95% per annum due quarterly starting
                April
                2007 through maturity in 2011
            
            $
            21,000,003
            
            
            --Notes
                payable, unsecured, payable at maturity including interest at 10%
                per
                annum. Matures 2007
            
            
            500,000
            
            
            5,000,000Notes
                payable, unsecured, payable at maturity including interest at 10%
                per
                annum. Matures 2008
            
            
            225,000
            
            
            6,000,000Notes
                payable, unsecured, payable at maturity including interest at 10%
                per
                annum. Matures 2009
            
            
            200,000
            
            
            2,700,000Lease
                payable, secured by equipment, payable in monthly installments of
                $1,460,
                including interest at 16.642% per annum. Matures 2011.
            
            
            53,112
            
            
            --Notes
                payable, unsecured, payable at maturity including interest at 10%
                per
                annum. Matures 2010
            
            
            25,000
            
            
            1,000,000Lease
                payable, secured by equipment, payable in monthly installments of
                $1,312,
                including interest at 23.38% per annum. Matures 2008.
            
            
            23,289
            
            
            31,572Note
                payable, unsecured, payable in monthly installments of $1,174, including
                effective interest at 6.09% per annum. Matures 2008
            
            
            21,370
            
            
            33,420Lease
                payable, secured by equipment, payable in monthly installments of
                $498 at
                an annual interest rate of 10.741%. Matures in 2011.
            
            
            21,270
            
            
            --Lease
                payable, secured by equipment, payable in monthly installments of
                $1,150,
                including interest at 14.677%. Matures 2007.
            
            
            12,763
            
            
            --Lease
                payable, secured by equipment, payable in monthly installments of
                $1,701,
                including interest at 27.663% per annum. Matures 2007.
            
            
            10,883
            
            
            22,146Lease
                payable, secured by equipment, payable in monthly installments of
                $485,
                including interest at 6.0% Matures 2008.
            
            
            9,218Lease
                payable, secured by equipment, payable in monthly installments of
                $159,
                including interest at 49.273% per annum. Matures 2007
            
            
            828
            
            
            1869Note
                payable, secured by automobile, payable in monthly installments of
                $411,
                including interest at 1.9% per annum. Matured 2005
            
            
            --
            
            
            --22,102,736
            
            
            14,789,007Less
                current portion
            
            
            3,678,882
            
            
            32,705$
            18,423,854
            
            $
            14,756,302




F-16


**JAVO
      BEVERAGE COMPANY, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**








**NOTE
      9.**  **LONG-TERM
      DEBT (continued)**





2006Long-term
                debt matures as follows:December
                31, 2007
            
            $
            3,678,8822008
            
            
            4,930,8802009
            
            
            4,859,5192010
            
            
            4,737,4062011
            
            
            3,896,049Thereafter
            
            
            --$
            22,102,736





**NOTE
      10.**  **COMMITMENTS
      AND CONTINGENCIES**





Leases





The
      Company entered into a non-cancelable operating lease for its office space
      in
      2002. The lease expires in 2009. Total rent expense for all operating leases
      for
      the years ended December 31, 2006, 2005 and 2004 amounted to $324,223, $313,533
      and $308,655, respectively.





The
      Company's future annual minimum lease payments as of December 31, 2006 are
      as
      follows:





Year
                Ending2007
            
            $
            275,4452008
            
            
            283,7042009
            
            
            267,320$
            826,469





Consulting
      Agreements





In
      2003,
      the Company entered into an agreement with a consultant to implement a national
      sales effort for the Company's products. The agreement calls for the issuance
      of
      warrants to purchase 10 shares of the Company's Common Stock for each gallon
      of
      Company product sold by the consultant, with an exercise price of $0.085 per
      share. As of December 31, 2005 ,
      warrants to purchase a total of 489,234 shares had been issued to the consultant
      pursuant to this arrangement. In 2004, 115,969 shares were purchased under
      these
      warrants. No additional amount of these warrants have been exercised. The
      Company recognized an expense of $1,541, $46,712 and $79,605 in 2006, 2005
      and
      2004, respectively. The consulting agreement has now expired.





Litigation





As
      of
      December 31, 2006, there were no claims filed against the Company. However,
      the
      Company may, during its normal course of business, be subject from time to
      time
      to disputes and to legal proceedings against it.


F-17


**JAVO
      BEVERAGE COMPANY, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**





**NOTE
      11.**  **STOCK
      AND WARRANT TRANSACTIONS**





In
      2006,
      2005 and 2004, there were no options granted to any employees or
      officers.





The
      outstanding warrants for the purchase of the Company’s Common Stock as of
      December 31, 2006 are listed below. None of the warrants are owned by directors,
      officers or employees of the Company.


Strike
                  Price
              
              Number
                  of Warrants
              
              Exercise
                  Period$0.085
              
              
              384,031
              
              
              January
                  2007 through January 2009$1.79
              
              
              351,955
              
              
              June
                  2007 through December 2011$1.95
              
              
              3,625,142
              
              
              June
                  2007 through December 2012$2.24
              
              
              3,218,749
              
              
              June
                  2007 through December 20137,579,877
              
              
              Total
                  Outstanding Warrants


**NOTE
      12.**  **PROVISION
      FOR INCOME TAXES**





No
      provision for income taxes was recorded in 2006, 2005 or 2004 since the Company
      generated both book and tax losses. The Company’s deferred tax assets consist of
      the following:




PROVISION
                FOR INCOMES TAXES
            
            **2006**
            
            **2005**
            
            **2004**Net
                operating loss carry forward
            
            $
            43,100,000
            
            $
            30,300,000
            
            $
            25,500,000Calculated
                deferred tax benefit
            
            $
            17,240,000
            
            $
            12,120,000
            
            $
            10,200,000Valuation
                allowance
            
            
            ($17,240,000
            )
            
            ($12,120,000
            )
            
            ($10,200,000
            )Deferred
                tax asset
            
            $
            --
            
            $
            --
            
            $
            --Provision
                for income tax benefits were as follows:Tax
                benefit, calculated at statutory rate
            
            
            ($2,723,920
            )
            
            ($1,920,000
            )
            
            ($1,940,000
            )Increase
                in valuation allowance
            
            $
            2,723,920
            
            $
            1,920,000
            
            
            1,940,000$
            --
            
            $
            --
            
            $
            --





At
      December 31, 2006, the Company had net operating carryforwards for federal
      and
      state purposes that expire in various years through 2026. The extent to which
      these loss carryforwards can be used to offset future taxable income may be
      limited.


F-18


**JAVO
      BEVERAGE COMPANY, INC.**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006**





**NOTE
      13.**  **RELATED
      PARTY TRANSACTIONS**





In
      2005,
      the Company entered into a seven year rental agreement with Javo Dispenser,
      LLC
      (“LLC”) to rent liquid concentrate dispensers for placement at its customer
      locations. The LLC is a Delaware limited liability company owned by Company
      directors, Baker, Knapp, Rielly, Hackett and Solomon and three other Company
      shareholders. The Company’s Chief Financial Officer serves, without remuneration
      of any kind, as the General Manager of the LLC. The LLC has agreed to acquire,
      as needed, up to $2,000,000 worth of liquid dispensers, which are then be rented
      to the Company on terms that the Company believes to be arm’s length and no less
      favorable that could be obtained from an unaffiliated supplier. The term of
      the
      rental agreement extends to 2010 and, at the end of the term, the Company has
      the right to acquire the dispensers for nominal consideration of $1.00. The
      Company believes that the terms of this agreement are fair and are consistent
      with the terms that would be obtained in an arm’s length
      transaction. ****





As
      of
      December 31, 2006, the LLC had purchased 758 dispensers at a total cost of
      $1,744,000. The Company incurred dispenser rental expense of $370,791 and
      $73,291, in 2006 and 2005, respectively.





During
      2006 the Company converted $13,750,000 in promissory notes plus accrued interest
      of $4,001,660 to 1,775,166 shares Series B Preferred Stock. The Company’s eight
      outside directors converted $1,550,000 plus accrued interest of $524,305 to
      207,336 shares of Series B Preferred Stock or 11.7% of the total Series B
      Preferred Stock.


F-19


**ITEM
      9.**  **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      STATEMENTS**





Not
      applicable.





**ITEM
      9A.**  **CONTROLS
      AND PROCEDURES**





**Disclosure
      Controls and Procedures**





The
      Company management, under the supervision and with the participation of the
      Company's Chief Executive Officer and Chief Financial Officer and the aid of
      an
      outside consultant, carried out an evaluation of the effectiveness of the design
      and operation of the Company's disclosure controls and procedures (as defined
      in
      Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of
      December 31, 2006. Based upon that evaluation, our Chief Executive Officer
      and
      Chief Financial Officer concluded that our disclosure controls and procedures
      were ineffective as of the end of the period covered by this report.





Management’s
      assessment of our internal control over financial reporting did identify certain
      significant deficiencies some of which rose to the level of material weaknesses.
      However, we believe that the financial statements included in this Annual Report
      on Form 10-K correctly present our financial condition, results of operations
      and cash flows for the fiscal years.





**Management’s
      Report on Internal Control Over Financial Reporting**





The
      Company’s management is responsible for establishing and maintaining adequate
      internal control over financial reporting. The Company’s internal control over
      financial reporting is a process designed under the supervision of its Chief
      Executive Officer and Chief Financial Officer to provide reasonable assurance
      regarding the reliability of financial reporting and the preparation of the
      Company’s financial statements for external purposes in accordance with
      generally accepted accounting principles. Management evaluates the effectiveness
      of the Company’s internal control over financial reporting using criteria set
      forth by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO) in Internal Control-Integrated Framework. During this evaluation, the
      Company identified certain significant deficiencies in its internal control
      over
      financial reporting.





These
      significant deficiencies, some of which rose to the level of material
      weaknesses, included:





Receivables:
      The Company’s internal accounting software allowed the same person to input and
      post receivable transactions. In addition, the software did not allow timely
      identification of customer discounts and allowances to be reflected in the
      reporting of accounts receivable.





Payables:
      The Company’s controls over the approval and the requirement to have supporting
      documentation accompanying all disbursements were not operating
      effectively.





Inventory:
      The Company installed a new component to its inventory software system and
      was
      developing the processes to test and monitor proper tracking of inventory
      quantities and values as of December 31, 2006.





Adjusting
      journal entries: The Company had an informal process for fully documenting
      and
      retaining evidence of approval and support for adjusting journal
      entries.





IT
      environment:  The
      Company’s information technology control systems were informal in nature. This
      environment is lacking segregation of duties, formal security policies and
      the
      Company had not yet tested recovery of critical financial data.





Account
      analyses, account summaries and account reconciliations: Certain controls
      designed to ensure timely performance, review and approval of certain account
      analyses did not operate effectively.


23


Controls
      at the entity level: **** As
      evidenced by the significant deficiencies some of which rose to the level of
      material weaknesses described above, the Company determined that entity-level
      controls related to the control environment, risk assessment, monitoring
      function and dissemination of information and communication activities did
      not
      operate effectively. Such entity level controls, and a comprehensive process
      of
      monitoring of internal controls, are part of the framework to ensure that that
      the designed system of internal control is operating effectively to ensure
      that
      significant transactions are adequately identified, recorded and disclosed.







While
      the
      Company identified certain other deficiencies in its internal control over
      financial reporting, it does not believe they constitute significant
      deficiencies or material weaknesses.





The
      Company has taken steps and continues to make changes in its internal control
      and procedures to correct and remediate the deficiencies it identified during
      its assessment.





**Changes
      in Internal Contol over Financial Reporting**





The
      Company made several changes in its internal control over financial reporting
      in
      the fourth quarter of 2006 and into
      the first quarter of 2007 to remediate and correct identified significant
      deficiencies and material weaknesses in its internal control and procedures.
      These changes primarily involved further separation of duties in the control
      processes, adding additional review steps in certain processes, formalization
      and retention of written documentation of control, review and approval
      processes, and additional training of personnel involved in the financial
      processes and realignment of certain access rights by position within its
      accounting and information systems.





These
      changes in internal control over financial reporting to improve internal
      controls and remediate the identified significant deficiencies and material
      weaknesses included:





Receivables:
      The Company has added personnel and reassigned inputting and posting
      responsibilities and instituted a better system to more accurately and timely
      reflect receivables with known discounts at the time of customer invoice for
      more timely and accurate reporting.





Payables:
      The Company revised its buying and receiving processes to insure that written
      documentation was maintained with document approval processes for all purchases
      and expenses.





Inventory:
      The Company tightened internal control over its inventory counts and improved
      verification and valuation processes. In addition it began and continues
      additional testing and monitoring of its inventory software system.





Adjusting
      journal entries:  The
      Company implemented a formal process to retain and document the approval and
      support for adjusting journal entries.





IT
      environment: The Company is in the process of formalizing its information
      technology systems to insure that proper separation of duties has been provided
      and is maintained, and that formal security policies are established and
      maintained. In addition, the Company is currently planning to do a formal test
      of the recovery of critical financial data in the second quarter of
      2007.





Account
      analyses, account summaries and account reconciliations: The Company has and
      continues to formalize its processes to insure that account analyses, account
      summaries and account reconciliations are performed and reviewed and approved
      in
      a timely manner.





Controls
      at the Entity Level: The Company has taken additional actions to remediate
      the
      issues previously identified with respect to our ineffective controls at the
      entity level. The Company has engaged a consultant to help it improve system
      controls and to insure that they will meet the requirements under COSO.
      Consultants from the IT Systems provider will be engaged to perform further
      review of our current usage of our system, and the cost benefits of any proposed
      upgrades that are available.


24


The
      Company management has and continues to take action to correct the known
      deficiencies and it plans to remain vigilant and to add additional staff and
      system improvements, as needed, to ensure that its internal control over
      financial reporting is effective. These efforts include formalizing the
      assessment process by identifying and scheduling periodic internal testing
      of
      the various systems and process involved in its internal control over financial
      reporting.





The
      Company’s assessment of the effectiveness of internal control over financial
      reporting and the Company’s financial statements have been audited by Farber
      Hass Hurley & McEwen LLP, independent registered public accounting firm,
      which was given unrestricted access to all financial records and related data,
      including minutes of all meetings of shareholders and members of the Board
      of
      Directors. The independent registered public accounting firm’s report is
      presented on page 35.





**Item
      9B.**  **Other
      Information**





Not
      applicable.








**PART
      III**





**ITEM
      10.**  **DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**





**Directors
      and Executive Officers**





Set
      forth
      below are the names and ages of our executive officers and directors, as well
      as
      certain biographical information.





**CODY
      C. ASHWELL, 36**





Cody
      C.
      Ashwell is the Chairman and Chief Executive Officer of Javo Beverage Company.
      Mr. Ashwell has served as the Company's CEO and Chairman since September 4,
      2001, acted as a consultant to the Company prior to that, and has held a major
      stake in the Company since 1999. Prior to joining Javo, Mr. Ashwell was managing
      partner of Ashwell, Marshall & Associates. Prior to this, he was the founder
      and principal of a successful financial and insurance services firm, which
      was
      later, sold to the Allstate Insurance Corporation.





**GARY
      LILLIAN, 50**





Gary
      A.
      Lillian is Javo Beverage Company's President, responsible for the company's
      commercial strategy and the development of key industry alliances. Prior to
      becoming Javo's President in January of 2002, Mr. Lillian held executive level
      sales and marketing positions at consumer products companies including PepsiCo,
      Ford Motor Company, Pennzoil-Quaker State and The Clorox Company. He also
      founded start-up companies, including a beverage company and a packaged food
      company, which was later sold to Nestle. Lillian earned a bachelor's and a
      master's degree in business administration from Northwestern
      University.





**RICHARD
      A. GARTRELL, 58**





Richard
      A. Gartrell has served as Javo's Chief Financial Officer since the Fall of
      2001
      and acted as a consultant to the Company for two years prior to that. Mr.
      Gartrell was a certified public accountant and has more than 32 years of
      accounting experience. He has acted successfully in the position of chief
      financial officer at several mid-cap companies, most recently AMX Resorts,
      Inc.
      Mr. Gartrell has been qualified as an expert witness in forensic accounting
      and
      holds a Bachelor of Science degree in accounting from Colorado State
      University.


25


**WILLIAM
      E. MARSHALL, 36**





William
      E. Marshall is Javo’s Senior Executive Vice President of Operations and General
      Counsel and, since March, 2002, the Company's corporate secretary. Prior to
      becoming general counsel in January of 2002, Mr. Marshall served as the
      Company's Chief Administrative Officer. Mr. Marshall became Senior Executive
      Vice President in September 2002. A member of the California State Bar, Marshall
      earned his juris doctorate from the University of California at Los Angeles.
      He
      completed his undergraduate studies at the University of California at Santa
      Barbara.





**WILLIAM
      C. BAKER, 73**





William
      C. Baker has been a director of the Company since January, 2004. Mr. Baker
      also
      serves as a director of Public Storage, Inc. and California Pizza Kitchen,
      Inc.
      Previously, Mr. Baker served as a Director of Callaway Golf Company
      and of La Quinta Corporation (f/k/a The Meditrust Companies), President and
      Chief Executive Officer of the Los Angeles Turf Club, Inc., a subsidiary of
      Magna International, Inc., Chairman and Chief Executive Officer of The Santa
      Anita Companies, Inc., Chairman of Santa Anita Realty Enterprises, Inc. and
      Chairman, President and Chief Executive Officer of Santa Anita Operating
      Company. Mr. Baker also served as President and Chief Operating Officer of
      Red
      Robin International, Inc. (a restaurant chain) from May 1993 to May 1995, and Chairman
      and Chief Executive Officer of Carolina Restaurant Enterprises, Inc. from August
      1992 to December 1995. He was the principal shareholder and Chief Executive
      Officer of Del Taco, Inc. from 1977 until it was sold in 1988. Mr. Baker
      received his law degree in 1957 from the University of Texas.





**RONALD
      S. BEARD, 68**





Ronald
      S.
      Beard has been a director of the Company since January, 2004. Mr. Beard has
      also
      served as a Director of Callaway Golf Company since June 2001 acting as Chair
      of
      their Audit Committee and as lead independent director. Mr. Beard is currently
      a
      partner in the Zeughauser Group, consultants to the legal industry. Mr. Beard
      is
      a retired former partner of the law firm of Gibson, Dunn & Crutcher LLP. He
      joined the firm in 1964, served as Chairman of the firm from April 1991 until
      December 2001, and was also its Managing Partner from April 1991 until mid-1997.
      Mr. Beard served as Callaway Golf Company's general outside counsel from 1998
      until he joined its Board of Directors. He received his law degree in 1964
      from
      Yale Law School.





**JERRY
      W. CARLTON, 65**





Jerry
      W.
      Carlton has been a director of the Company since January, 2004. Mr. Carlton
      is
      an attorney specializing in tax and general business law and has been a partner
      in O'Melveny & Myers L.L.P. for 30 years. As Managing Partner of the firm's
      Orange County office for 15 years, Mr. Carlton handled hospital acquisitions
      and
      divestitures and was responsible for all legal aspects of a large managed care
      entity. Mr. Carlton has served as a director of numerous public and
      privately-held companies and on the boards of several charitable organizations,
      including: Phoenix House, Prentice Day School, Willametta K. Day Foundation,
      Arlington Investment Company, Vicente Management Company and the Foley Timber
      Company, Oakmont Corporation and Fibres International. Mr. Carlton earned his
      law degree from the University of Texas in 1967.





**TERRY
      C. HACKETT, 58**





Terry
      C.
      Hackett has been a director of the Company since January, 2004. Mr. Hackett
      has
      specialized in business and real estate transactions during his legal career.
      Currently he is the President of Hackett Management Corporation, a real estate
      management company, which manages the real estate assets, primarily retail
      properties, in which he is a partner. For fifteen years Mr. Hackett sat on
      the
      Board of Directors of Knott's Berry Farm Foods, which manufactured preserves,
      salad dressings, and other products for distribution throughout the United
      States. The company was sold to ConAgra in 1995. Mr. Hackett also sat on the
      Board of the parent company, Knott's Berry Farm, which was involved in the
      theme
      park, retail and food service business. Subsequently, he was the representative
      for the Knott family on the Board of Cedar Fair LP, which acquired Knott's
      and
      has theme parks, retail sales and food service and 12 locations throughout
      the
      U.S. Mr. Hackett has a degree in business finance from the University of
      Southern California School of Business and juris doctorate from the University
      of Southern California University School of Law.


26


**JAMES
      R. KNAPP, 71**





James
      R.
      Knapp has been a director of the Company since January, 2004. James R. Knapp
      has
      served as the Chairman of The Brookhollow Group, a Real estate investment and
      industrial and commercial development firm since 1980. Mr. Knapp currently
      serves as a director of UNIFI Mutual Holding Company, Ameritas Holding
      Company and Ameritas Life Insurance Corporation. From 1975 to 1980, Mr. Knapp
      served as Executive Vice President and Director of Pacific Enterprises (Formerly
      Pacific Lighting Corporation), the largest gas distribution company in the
      United States, where he was in charge of the financial and legal affairs of
      the
      company (corporate finance, gas supply finance, law, accounting and
      administration) as well as non-utility operations (real estate development,
      agriculture and equipment leasing). From 1971 to 1975, Mr. Knapp was Group
      Vice
      President of Pacific Enterprises in charge of non-utility operations. From
      1969
      to 1971, he was President and Co-Founder Dunn Properties Corporation, a
      developer of industrial properties in California, Texas, Georgia and Colorado.
      From 1967 to 1969, he was a partner in the law firm of Kalmbach, DeMarco, Knapp
      & Chillingworth. Prior to that he was a partner and associate in the law
      firm of Kindel and Anderson. Mr. Knapp received a degree in Economics from
      Stanford University and Juris Doctorate from Hastings College of the
      Law.





**THOMAS
      J. RIELLY, 55**





Thomas
      J.
      Rielly has been a director of the Company since January, 2004. Mr. Rielly is
      the
      founder of Rielly Homes, a California-based development company that has built
      over 3,000 residences and commercial buildings throughout Southern California.
      As president of Rielly Homes, Mr. Rielly is directly involved in all aspects
      of
      real estate development including land acquisition, financing, lender-joint
      venture relationships, project design, construction, leasing and sales of
      properties. Prior to founding Rielly Homes, Mr. Rielly served for eight years
      as
      Executive Vice President and Chief Operating Officer of BCE Development, Inc.'s
      United States operations where he managed a staff of 370 and assets exceeding
      $2.5 billion.





**STANLEY
      A. SOLOMON, 66**





Stanley
      A. Solomon has been a director of the Company since January, 2004. Mr. Solomon
      is a Certified Public Accountant currently operating a professional practice
      specializing in providing tax consulting services. Previously, Mr. Solomon
      was a
      partner in the national accounting firm of Kenneth Leventhal & Company. Mr.
      Solomon has served as an outside director of two publicly traded corporations.
      He earned a B.S. degree in accounting from Hunter College and a law degree
      from
      Brooklyn Law School.





**RICHARD
      B. SPECTER, 54**





Richard
      B. Specter has been a director of the Company since January, 2004. Mr. Specter
      is a partner in the Southern California law firm of Corbett, Steelman &
Specter. Mr. Specter has served as a litigator for over twenty-five years with
      extensive experience in both Federal and State courts. He has acted as lead
      counsel in major litigation involving franchise disputes, distribution rights,
      unfair competition and trademark issues. He has also been involved in antitrust
      matters affecting the petroleum, sports and newspaper industries, Federal and
      State securities claims, and commercial transactions. Mr. Specter's trial
      experience includes the areas of product liability, business disputes, real
      estate matters, employment disputes, professional malpractice and banking
      litigation, and antitrust litigation. Mr. Specter received his B.A. degree
      from
      Washington University and his law degree from George Washington University.
      Mr.
      Specter is a member of the Orange County Bar Association, American Bar
      Association, Pennsylvania Bar Association, Illinois State Bar Association,
      and
      Missouri Bar Association.




There
      are
      no family relationships among our directors or executive officers. In 2004,
      each
      outside director has received 150,000 shares of the Company's common stock
      as
      compensation for their service on its board of directors. No additional
      compensation has been given or paid to outside directors or its executive
      committee members.


27


**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Exchange Act requires our executive officers and directors, and
      persons who own more than 10% of a registered class of our equity securities,
      to
      file reports of beneficial ownership and changes in beneficial ownership with
      the SEC. Executive officers, directors and greater-than-10% shareholders are
      required by SEC regulations to furnish us with copies of all reports filed
      under
      Section 16(a). To the Company’s knowledge, based solely on the review of copies
      of the reports furnished to the Company, reports required to be filed by our
      executive officers, directors and greater-than-10% shareholders were timely
      filed, other than three reports on Form 4 that were filed late on behalf of
      Richard Specter reporting purchases of our Common Stock.





**Corporate
      Governance**





The
      Company does not have a standing audit, nominating or compensation committee.
      As
      a small company, we believe that all of our directors acting together, as
      opposed to a subset of them acting by means of a committee, is the most
      efficient and effective framework for us to perform the functions otherwise
      associated with audit, nominating and compensation committees.





Since
      we
      do not have a nominating committee, all of the members of the Board of Directors
      participate in the consideration of director nominees. The Board of Directors
      has determined that all of the members of the Board of Directors,
      with the exception of Cody C. Ashwell, are independent under the independence
      standards of the Nasdaq Stock Market. We do not currently have a written
      nominating committee charter or similar document.





The
      Company’s Board of Directors may employ a variety of methods for identifying and
      evaluating director nominees. If vacancies are anticipated or arise, our Board
      of Directors considers various potential candidates that may come to our
      attention through current board members, professional search firms, stockholders
      or other persons. These candidates may be evaluated by our Board of Directors
      at
      any time during the year.





The
      Company’s Board of Directors considers candidates recommended by stockholders
      when the nominations are properly submitted as described below. Following
      verification of the stockholder status of persons proposing candidates, our
      Board of Directors will make an initial analysis of the qualifications of any
      candidate recommended by stockholders or others pursuant to the criteria
      summarized herein to determine whether the candidate is qualified for service
      on
      the board, before deciding to undertake a complete evaluation of the candidate.
      If our Board of Directors determines that additional consideration is warranted,
      it may use a third-party search firm to gather additional information about
      the
      prospective nominee's background and experience. Other than the verification
      of
      compliance with procedures and stockholder status, and the initial analysis
      performed before undertaking a complete evaluation, our Board of Directors
      will
      treat a potential candidate nominated by a stockholder like any other potential
      candidate.





In
      evaluating a director candidate, the Company’s Board of Directors will review
      his or her qualifications including capability, availability to serve, conflicts
      of interest, general understanding of business, understanding of the Company's
      business and technology, educational and professional background, personal
      accomplishment and other relevant factors. Our Board of Directors has not
      established any specific qualification standards for director nominees, although
      from time to time the Board of Directors may identify certain skills or
      attributes as being particularly desirable to help meet specific needs that
      have
      arisen. Our Board of Directors may also interview prospective nominees in person
      or by telephone. After completing this evaluation, the Board of Directors will determine
      the nominees.


28


The
      Company’s Board of Directors considers director candidates recommended by
      stockholders. Candidates recommended by stockholders are evaluated on the same
      basis as are candidates recommended by our Board of Directors. Any stockholder
      wishing to recommend a candidate for nomination by the Board of Directors should
      provide the following information in a letter addressed to the Board in care
      of
      our Secretary: (i) the name and address of the stockholder recommending the
      person to be nominated; (ii) a representation that the stockholder is a holder
      beneficially or of record of our stock, including the number of shares held
      and
      the period of holding; (iii) a description of all arrangements or understandings
      between the stockholder and the recommended nominee; (iv) information as to
      any
      plans or proposals of the type required to be disclosed in Schedule 13D and
      any
      proposals that the nominee proposes to bring to the Board of Directors if
      elected; (v) any other information regarding the recommended nominee that would
      be required to be included in a proxy statement filed pursuant to Regulation
      14A
      pursuant to the Securities Exchange Act of 1934 and (vi) the consent of the
      recommended nominee to serve as a director if elected. Additional information
      may be requested to assist our Board of Directors in determining the eligibility
      of a proposed candidate to serve as a director. In addition, the notice must
      meet any other requirements contained in our bylaws.





Because
      we do not have an audit committee, the entire Board of Directors acts as the
      audit committee. The Board of Directors has determined that none of its members
      qualify as an audit committee financial expert as defined in Item 401(e) of
      Regulation S-K of the Securities and Exchange Act of 1934. To date we have
      not
      been able to identify a suitable candidate for our Board of Directors who would
      qualify as an audit committee financial expert. We do not currently have a
      written audit committee charter or similar document.





The
      Company’s Board of Directors met five times in 2006. All of the Company’s
      directors attended at least 75% of the meetings held in 2006.





The
      Company has no formal policies regarding director attendance at the annual
      meeting of stockholders, although directors are encouraged to attend. None
      of
      the directors attended the 2006 annual meeting due to the delays in the timing
      of the meeting.





**Director
      Independence**





The
      Company has determined that all of the Company’s directors, other than Cody
      Ashwell, who serves as the Company’s Chief Executive Officer, are independent.
      The Company has defined independence with reference to Nasdaq Marketplace Rule
      4200 and has considered known facts and circumstances, including stock ownership
      levels and related-party transaction, that could reasonably be expected to
      potentially impact independence. Although the Company is not listed on the
      Nasdaq Stock Market, the Company has applied the Nasdaq independence rules
      to
      make these independence determinations.





**Code
      of Ethics**





The
      Company has not adopted a formal written code of ethics that applies to its
      principal executive officer, principal financial officer, principal accounting
      officer or controller, or persons performing similar functions. The Company
      has
      not adopted such a code of ethics to date due to the Company’s relatively small
      size and limited resources. However, the Company intends to adopt a written
      code
      of ethics in 2007.


29


**ITEM
      11.**  **EXECUTIVE
      COMPENSATION**





**COMPENSATION
      DISCUSSION AND ANALYSIS**





Compensation
      Design and Philosophy





The
      principal objective of the Company’s compensation program is to provide
      competitive cash compensation to attract and retain talented employees who
      will
      help grow the Company’s business. Historically, the sole compensation element
      has been a base salary. However, due to the Company’s limited cash resources,
      cash bonuses have not historically been awarded and the Company has not issued
      stock options so as to minimize equity dilution and to avoid the potential
      negative impact on the Company’s ability to raise capital in equity financing
      transactions.





Following
      the Company’s success in raising a relatively significant amount of additional
      operating capital in December 2006, and in light of the Company’s improving
      financial performance, the Company expects that it will reconsider the principal
      compensation elements and may begin making use of equity awards and/or cash
      bonuses, as appropriate. By adding these elements, the Company would seek to
      align the long-term financial interests of the management team with the
      interests of the stockholders. In fiscal 2007, the Company expects that it
      may
      form a Compensation Committee of the board and that this committee would review
      the design and guiding philosophy for the Company’s executive compensation
      practices.





Establishment
      of Compensation Levels





Historically,
      compensation levels have been established through negotiation as each executive
      has joined the Company, with the Company establishing the appropriate salary
      level through an informal survey of what are considered to be competitive levels
      within the Company’s industry and geographic areas and after giving due regard
      to internal pay parity considerations. Because the Company has historically
      had
      only limited operating capital, the Company has only increased officer salaries
      once since 2002. This increase was made in late 2006 for one officer in
      recognition of the expanded duties that this officer had undertaken. In changing
      this compensation level, the salary of that officer was brought up to the levels
      of all other officers within the organization. Currently, all of our executive
      officers are paid an annual base salary of $180,000. Because these salary levels
      are generally the levels that were negotiated upon an officer’s entry into the
      Company, there has not been a systematic review of comparable compensation
      data
      for our existing employees. We expect that such a review may be undertaken
      in
      2007 if a Compensation Committee is formed as expected and that in later years
      a
      similar review would be undertaken periodically.


30


**SUMMARY
      COMPENSATION TABLES**





The
      following table shows the compensation paid in the last year with respect to
      the
      Company's Chief Executive Officer and the Company’s three other executive
      officers for fiscal 2006. As noted above in the Compensation Discussion &
Analysis, executive officer compensation consists solely of base salary.





The
      following table shows the compensation paid in the last year with respect to
      the
      Company's officers as of the end of the 2006 fiscal year. No other executive
      officers or directors received an annual salary or bonus exceeding
      $100,000. ****





(a)
            (b)
            (c)
            (j)Name
                & Principal Position
            Year
            Salary
                ($)
            Total
                ($)Chief
                Executive Officer & Chairman,
            2006
            $180,000
            $180,000Cody
                AshwellPresident,
            2006
            $180,000
            $180,000Gary
                LillianChief
                Financial Officer
            2006
            $180,000
            $180,000Richard
                GartrellGeneral
                Counsel & Senior Executive Vice President
            2006
            $162,750
            $162,750William
                Marshall








**COMPENSATION
      COMMITTEE REPORT**





The
      Board
      of Directors has reviewed and discussed the section of this report entitled
      “Compensation Discussion and Analysis” with management. Based on this review and
      discussion, the Board of Directors has recommended that the Compensation
      Discussion and Analysis be included in this Annual Report on Form 10-K for
      the fiscal year ended December 31, 2006.




Cody
      C.
      Ashwell


William
      C. Baker


Ronald
      S.
      Beard


Jerry
      W.
      Carlton


Terry
      C.
      Hackett


James
      R.
      Knapp


Thomas
      J.
      Rielly


Stanley
      A. Solomon


Richard
      B. Specter





**Compensation
      Committee Interlocks and Insider Participation**




The
      Company does not have a separate Compensation Committee and executive
      compensation decisions are made by the entire board, with the Chief Executive
      Officer abstaining on any proposed actions with respect to his compensation.
      Other than Mr. Ashwell, who serves as our Chief Executive Officer, no member
      of
      the board was, at any time during fiscal 2006, an officer or employee of the
      Company. There are no Board of Director interlocks between the Company and
      any
      other entities involving our executive officers and Board members who serve
      as
      executive officers or Board members of such entities.


31


**ITEM
      12.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The
      following table sets forth as of December 31, 2006, information concerning
      ownership of the Company's Common Stock by each person known by the Company
      to
      own beneficially more than 5% of its outstanding Common Stock, each director
      or
      executive officer and all officers and directors as a group. As of December
      31,
      2006, the Company had 149,504,927 shares of Common Stock issued and
      outstanding.





(1)
            (2)
            (3)
            (4)Title
                of Class
            Name
                and Address of Beneficial Owner*
            Amount
                and Nature Of
              Beneficial
                Ownership
            Percent
                of ClassCommon
                Stock
            Cody
                Ashwell
            9,187,027
            6.1%Common
                Stock
            Curci
                Investment Co., c/o 359 San Miguel Drive, Ste 201,
              Newport
                Beach, CA 92660
            8,546,500
            5.7%Common
                Stock
            William
                C. Baker
            7,370,000
            4.9%Common
                Stock
            Thomas
                Rielly
            4,900,000
            3.3%Common
                Stock
            James
                P. Knapp
            2,250,000
            1.5%Common
                Stock
            William
                Marshall
            1,500,300
            1.0%Common
                Stock
            Terry
                Hackett
            1,350,000
            0.9%Common
                Stock
            Jerry
                W. Carlton
            1,200,000
            0.8%Common
                Stock
            Richard
                A. Gartrell
            1,015,196
            0.7%Common
                Stock
            Gary
                Lillian
            750,000
            0.5%Common
                Stock
            Stanley
                A. Solomon
            750,000
            0.5%Common
                Stock
            Richard
                Specter
            737,215
            0.5%Common
                Stock
            Ronald
                Beard
            300,000
            0.2%All
                Executive Officers and Directors as a Group (13 persons)
            
            39,856,238
            26.7%





*
      Unless
      otherwise indicated, the address for each holder is c/o Javo Beverage Company,
      1311 Specialty Drive Vista CA 92081





It
      should
      be noted that as a group, the five top officers of the Company at the end of
      2003 and 2005 contributed a total of 41,550,002 shares of Common Stock to the
      Company treasury in order to facilitate the raising of $9,700,000 in investment
      capital through private placement offerings completed in 2003 and 2005. The
      employment agreements of the contributing members of management were amended
      in
      light of these contributions.





The
      following table sets forth as of December 31, 2006, information with respect
      to
      the shares of Series B Preferred Stock beneficially ownership of Directors
      and
      Executive Officers of the Company. As of December 31, 2006 the Company had
      1,775,166 shares of Series B Preferred Stock issued and
      outstanding.




Title
                of Class
            Name
                and Address of Beneficial Owner*
            Amount
                and Nature Of
              Beneficial
                Ownership
            Percent
                of ClassSeries
                B Preferred Stock
            Curci
                Investment Co., c/o 359 San Miguel Drive, Ste 201,
              Newport
                Beach, CA 92660
            188,388
            10.6%Series
                B Preferred Stock
            William
                C. Baker
            77,281
            4.4%Series
                B Preferred Stock
            Thomas
                Rielly
            60,693
            3.4%Series
                B Preferred Stock
            Terry
                Hackett
            25,228
            1.4%Series
                B Preferred Stock
            Stanley
                A. Solomon
            17,301
            1.0%Series
                B Preferred Stock
            James
                R. Knapp
            12,650
            0.7%Series
                B Preferred Stock
            Jerry
                W. Carlton
            7,141
            0.4%Series
                B Preferred Stock
            Richard
                Specter
            3,571
            0.2%Series
                B Preferred Stock
            Ronald
                Beard
            3,571
            0.2%All
                Executive Officers and Directors as a Group
            
            395,824
            22.3%





*
      Unless
      otherwise indicated, the address for each holder is c/o Javo Beverage Company,
      1311 Specialty Drive Vista CA 92081


32





**EQUITY
                COMPENSATION PLAN INFORMATION**NUMBER
                OF SHARES TO
              BE
                ISSUED UPON EXERCISE
              OF
                OUTSTANDING
              OPTIONS,
                WARRANTS,
              ANDRIGHTS
            
            WEIGHTED
                AVERAGE
              EXERCISE
                PRICE OF
              OUTSTANDING
                OPTIONS
              WARRANTS
                ANDRIGHTS
            
            NUMBER
                OF SHARES
              REMAINING
                AVAILABLE
              FOR
                FUTURE ISSUANCE
              UNDER
                EQUITY
              COMPENSATION
              PLANS
                (1)Equity
                compensation plans approved by shareholders
            
            
            --
            
            
            --
            
            
            --Equity
                compensation plans not approved by shareholders
            
            
            384,031
            (2)(3)
            
            --
            
            
            --Total
            
            
            384,031
            
            
            --
            
            
            --





(1)  
      Excludes number of shares to be issued upon exercise of outstanding options
      warrants.





(2)  
      Some 384,031 of these warrants relate to compensation paid to outside marketing
      consultants. These are reserves for warrants that have been earned but may
      not
      yet been issued pursuant to agreements with the consultants based on
      consultants' attaining certain performance objectives. See Item 5 herein for
      further details regarding these and other compensation-related
      issuances.





(3)  
      No formal equity compensation plan exists at Javo Beverage Company, Inc. for
      current or future employees at this time. Javo has in the past, as a part of
      employee compensation, issued negotiated amounts of Common Stock to certain
      employees pursuant to employment agreements providing that all or most all
      of
      the shares are subject to a right of the Company to cancel the shares. This
      right of cancellation lapses or expires as to portions of these shares according
      to a vesting schedule thereby resulting in the issued shares vesting in the
      employee per the schedule. Other issuances to consultants for services have
      been
      made. See
      Item
      5 herein generally for further details regarding these and other
      compensation-related issuances.








**ITEM
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**





On
      February 18, 2000, Mr. Kurt Toneys, then director and executive officer,
      purchased 2,850,000 shares of our Common Stock for $0.1875 per share by
      executing two promissory notes totaling $534,375, bearing interest at six
      percent per annum and due in February 2009. Mr. Toneys left the Company in
      August 2001. In June of 2002, the Company entered into an agreement with Mr.
      Toneys settling all matters relating to Mr. Toneys compensation and
      reimbursements and the promissory notes including interest owed. Mr. Toneys
      surrendered 1,750,100 of the 2,212,500 shares of Common Stock he held subject
      to
      the note and retained 462,400 shares. The Company issued Mr. Toneys 2,925,100
      three-year warrants at a strike price equal to his original purchase price
      of
      $0.1875 cents per share, extinguished the promissory notes, and paid him $35,000
      in cash. Mr. Toneys exercised warrants for 40,000 shares in 2004 and 826,212
      shares in 2005 and the remainder of the warrants expired.





During
      2006 the Company converted of $13,750,000 in promissory notes plus accrued
      interest of $4,001,660 to 1,775,166 shares Series B Preferred Stock. The
      Company’s eight outside directors converted $1,550,000 plus accrued interest of
      $524,305 to 207,336 shares of Series B Preferred Stock or 11.7% of the total
      Series B Preferred Stock.





**Related
      Party Transaction Policy**





The
      Company does not have a formal policy for the review and approval of
      related-party transactions, although any such transactions involving an officer
      or director are required to be brought before the Board of Directors for review.





In
      addition, see OFF-BALANCE SHEET ARRANGEMENTS in Item 7 above. ****


33


**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





**AUDIT
      FEES**





The
      aggregate fees billed for each of the last two fiscal years for professional
      services rendered by the principal accountant for the audit of the registrant's
      annual financial statements and review of financial statements included in
      the
      registrant's Form 10-QSB (17 CFR 249.308b) or services that are normally
      provided by the accountant in connection with statutory and regulatory filings
      or engagements for those fiscal years are $34,500 for fiscal year 2004, $69,000
      for fiscal year 2005 and $23,525 to date for fiscal year 2006. Additional
      billing amounts are anticipated for 2006 audit.





**AUDIT-RELATED
      FEES**





Other
      than amounts included as set forth above, there were no other fees billed in
      each of the last two fiscal years for assurance and related services by the
      principal accountant that are reasonably related to the performance of the
      audit
      or review of the registrant's financial statements.





**TAX
      FEES**





There
      were no fees billed in each of the last two fiscal years for products and
      services provided by the Company’s principal accountant.





**ALL
      OTHER FEES**





There
      were no fees billed in each of the last two fiscal years for products and
      services provided by the principal accountant, other than the services reported
      above.





Our
      entire Board acts as the Audit Committee, and intends to adopt pre-approval
      policies and procedures described in paragraph (c)(7)(i) of Rule 2-01 of
      Regulation S-X.





All
      of
      the services described above were approved by the audit committee pursuant
      to
      paragraph (C)(7)(i)(C) of Rule 2-01 of Regulation S-X.


34


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Shareholders of


Javo
      Beverage Company, Inc.


Vista,
      California





We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control Over Financial Reporting, that Javo
      Beverage Company, Inc. (the
      “Company”) did not maintain effective internal control over financial reporting
      as of December 31, 2006, because of the effect of the material weaknesses
      identified in management’s assessment based on criteria established in *Internal
      Control—Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
      The Company’s management is responsible for maintaining effective internal
      control over financial reporting and for its assessment of the effectiveness
      of
      internal control over financial reporting. Our responsibility is to express
      an
      opinion on management’s assessment and an opinion on the effectiveness of the
      Company’s internal control over financial reporting based on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinions.




A
      company’s internal control over financial reporting is a process designed by, or
      under the supervision of, the company’s principal executive and principal
      financial officers, or persons performing similar functions, and effected by
      the
      company’s board of directors, management, and other personnel to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial statements.




Because
      of the inherent limitations of internal control over financial reporting,
      including the possibility of collusion or improper management override of
      controls, material misstatements due to error or fraud may not be prevented
      or
      detected on a timely basis. Also, projections of any evaluation of the
      effectiveness of the internal control over financial reporting to future periods
      are subject to the risk that the controls may become inadequate because of
      changes in conditions, or that the degree of compliance with the policies or
      procedures may deteriorate.




A
      material weakness is a significant deficiency, or combination of significant
      deficiencies, that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected. The following material weaknesses have been identified and included
      in management’s assessment:




·  **Ineffective
      controls related to the preparation of certain account analyses, account
      summaries and account reconciliations:** Certain
      controls designed to ensure timely performance, review and approval of certain
      account analyses and reconciliations did not operate effectively. Specifically,
      certain reconciliations in areas including accounts receivable, accrued
      liabilities, other current assets, and property, plant and equipment were not
      performed in a timely manner. In certain circumstances the Company did not
      properly resolve reconciling items. These weaknesses resulted in a material
      adjustment to the Company’s financial statements for the year ended December 31,
      2006.




·  **Inadequate
      controls related to inventory quantities and value:** The
      Company has recently implemented a Material Resource Planning Software system
      (“MRP”). The MRP system was not adequately tested and monitored to insure proper
      tracking of quantities and valuation as of December 31, 2006.




· **I** **neffective
      controls over adjusting journal entries:** The
      Company’s current system allows adjusting journal entries to be made to the
      general ledger with no evidence of approval or support justifying the propriety
      of the entries.




·  **Ineffective
      controls over the IT environment-** The
      Company currently has an informal system of controls for its IT environment.
      The
      current system lacks segregation of duties, has no controlling security policy,
      and no process in place to test the recovery of critical financial data.


35


·  **Ineffective
      controls over the disbursements process:** The
      Company’s controls over the approval and the requirement to have supporting
      documentation accompanying all disbursements were not operating effectively
      during the year.




·  **Ineffective
      controls over access to the reporting of receivables:** The
      Company’s internal software does not restrict access by the same person to input
      and post transactions. In addition, the software does not allow timely
      identification of customer discounts and allowances to be reflected in the
      reporting of its accounts receivable.




·  **Ineffective
      controls at the entity level:** As
      evidenced by the material weaknesses described above, the Company determined
      that entity-level controls related to the control environment, risk assessment,
      monitoring function and dissemination of information and communication
      activities did not operate effectively, resulting in material weaknesses. Such
      entity level controls, and a comprehensive process of monitoring of internal
      controls, are part of the framework to ensure that that the designed system
      of
      internal control is operating effectively to ensure that significant
      transactions are adequately identified, recorded and disclosed.




These
      material weaknesses were considered in determining the nature, timing, and
      extent of audit tests applied in our audit of the financial statements as of
      and
      for the year ended December 31, 2006 of the Company and this report does not
      affect our report on such financial statements.




In
      our
      opinion, management’s assessment that Javo Beverage Company, Inc. did not
      maintain effective internal control over financial reporting as of December
      31,
      2006, is fairly stated, in all material respects, based on the COSO control
      criteria. Also, in our opinion, because of the effect of the material weakness
      described above on the achievement of the objectives of the control criteria,
      Javo Beverage Company, Inc. has not maintained effective internal control over
      financial reporting as of December 31, 2006, based on the COSO control
      criteria..








Farber Hass
      Hurley & McEwen LLP





36


**PART
      IV**





**ITEM
      15.**  **EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES**





(a)
      Financial Statements - See Index on page F-1





(b)
      Exhibits





2.1
            Agreement
                and Plan of Merger between La Jolla Fresh Squeezed Coffee Co., Inc.
                and
                Javo Beverage Company, Inc.(1).3.1
            Certificate
                of Incorporation (1).3.2
            Bylaws
                (1).4.1
            Shareholder
                Rights Agreement by and between the Company and Corporate Stock Transfer,
                Inc. as Rights Agent (1).10.1*
            Executive
                Employment Contract between the Company and Cody Ashwell
                (2)10.2*
            Executive
                Employment Contract between the Company and Gary Lillian
                (2)10.3*
            Executive
                Employment Contract between the Company and Richard Gartrell
                (2)10.4*
            Executive
                Employment Contract between the Company and William Marshall
                (2)10.5*
            Executive
                Employment Contract between the Company and Stephen Corey
                (2)10.6
            Net
                Industrial Lease (Facility Lease) dated August 12, 2002 between the
                Company and Square One Partners (3)11
            Statement
                re earnings per share - included in this 10-K's financial
                statements


_________________


31.1    
      Certification of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.


31.2    
      Certification of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.


32.1    
      Certification of the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.


32.2    
      Certification of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.





*
      Indicates a management compensatory plan or arrangement.





Incorporated
      by reference is the Company’s prior 10QSB’s, 10-K and 10KSB’s financial reports
      filed with the Securities and Exchange Commission for years 2002, 2003, 2004,
      2005 and 2006.


37





**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      Javo
      Beverage Company, Inc. has caused this report to be signed on its behalf by
      the
      undersigned, thereunder duly authorized, this March 16, 2007.





Javo
      Beverage Company, Inc.,


a
      Delaware corporation





By:
      /S/ Cody C.
      Ashwell


Cody C. Ashwell


Its:
      Chairman and Chief Executive Officer





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned in the
      City of Vista, California, on March 16, 2007.





Javo
      Beverage Company, Inc.,


a
      Delaware corporation





By:
      /s/ Cody C.
      Ashwell


Cody C. Ashwell


Its:
      Chairman and Chief Executive Officer





By:
      /s/ Richard A.
      Gartrell


Richard A. Gartrell


Its:
      Chief Financial Officer






38