UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K/A2







xANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the
fiscal year ended:




DECEMBER
31, 2007


OR





oTRANSITION
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
Registrant as Specified in Its Charter)




DELAWARE
            48-1264292(State
      or Other Jurisdiction of Incorporation or Organization)
            (I.R.S.
      Employer Identification No.)




1311
SPECIALTY DRIVE


VISTA,
CALIFORNIA 92081


(Address
of principal executive offices, including zip code)


(760)
560-5286


(Registrant’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 January 31, 2008 was $79,409,349, 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 155,294,245 as of February 12,
2008.





Documents
Incorporated by Reference




The
information required by Part III of this Form 10-K, to the extent not
set forth herein, is incorporated by reference from the issuer's Proxy Statement
to be filed in connection with the 2008 Annual Meeting of
Stockholders.





















EXPLANATORY
NOTE






Javo
Beverage Company, Inc is filing this Amendment No. 2 on Form 10-K/A2 to its
Annual Report on Form 10-K for the year ended December 31, 2007, as originally
filed with the Securities and Exchange Commission on March 20, 2008 (the
“Original Filing”), in response to a comment letter asking us to clarify certain
disclosures.    We are providing the additional information
required by Part III and IV of Form 10K “proxy information”  which was
file on April 29, 2008 on Amendment No. 1 on Form 10K/A.  Further we
have expanded our disclosure in item 9A regarding our internal controls over
financial reporting and disclosures.





This
Amendment No. 2 does not change the previously reported financial
statements or, except as noted above, any of the other disclosures contained in
the Original Filing.  This Amendment No. 2 continues to speak as
of the date of the Original Filing and we have not updated or amended the
disclosures contained therein to reflect events that have occurred since the
date of the Original Filing.  Accordingly, this Amendment No. 2
should be read in conjunction with our filings made with the Securities and
Exchange Commission subsequent to the date of the Original Filing.



















i





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.  Forward-looking statements include,
but are not limited to, statements regarding our expectations for revenue
growth, distribution arrangements and future results of
operations.  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 the Company then acquired the assets of Stephen's Coffee, Inc. and
merged 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
manufactures and sells concentrated beverage solutions that allow restaurants in
the food service industry and food and beverage manufacturers in the retail
industry to serve popular new specialty coffees and teas. For food service
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 flavors for their packaged foods and ready-to-drink beverages, Javo supplies
customized beverage formulations, extracts, and flavors.





The
Company’s business model is positioned to benefit from current trends in the
food service industry.   Consumers have become accustomed to
drinking premium coffees and teas discovered in specialty coffee
shops.  Restaurants and food service institutions catering to these
more sophisticated tastes have learned they must offer a broader, higher quality
beverage menu.  Offering specialty beverages is operationally
challenging with long preparation times, short shelf lives and high amounts of
waste.  Many food service operators have been searching for turnkey
beverage solutions that fit their current operating system while meeting their
increasingly higher quality standards.  The Company’s specialty coffee
and tea programs give its customers a system that is high quality, operationally
efficient, and has the cost savings associated with concentrated dispensed juice
and soft drinks.





The
Company has a growing list of national and regional customers, including:
7-Eleven, Sunoco, BP Products North America, Exxon-Mobil, Haagen-Dazs, Mrs.
Fields, Caribou Coffee, Compass Group, Premier Healthcare, Speedway, MedAssets
Supply Chain System, US Department of Veterans Affairs, Amerinet, Gordon
Foodservice, Shamrock Foods, Sysco Food, and US Foodservice.





The
Company’s relationship with 7-Eleven, the leading convenience retailer in the
world, has continued to develop over the past year. In 2007, the chain’s iced
coffee program, which was supplied by Javo, was expanded to over 750
locations.   In July 2007, Javo signed an agreement to supply
premium iced coffee beverages to most of 7-Eleven’s 7,100 locations nationwide.
The Company anticipates an expansion by 7-Eleven to additional regions in the
U.S. prior to the peak summertime selling season in 2008.





The
Company began programs with other large convenience retailers during 2007 and is
currently expanding or preparing to expand to additional locations with Sunoco,
BP Products North America (am/pm and BP stores), Exxon-Mobil (On the Run) along
with other regional chains and independent stores.





The
Company’s hot coffee program has recently gained the approval of several large
national purchasing organizations, opening up thousands of potential dispensing
locations to conversion.   In December 2007, Javo announced that
Premier Healthcare, Inc., the largest healthcare group purchasing organization
in the United States, awarded Javo a multi-year contract for dispensed
beverages. According to the terms of the agreement, Premier will offer Javo
specialty hot and iced coffees to its network of 1,700 participating
not-for-profit hospitals and more than 49,000 other healthcare facilities
nationwide. Premier members will purchase the coffee shop-style beverage
concentrates from more than 50 distribution centers across the
country.


1





In
December of 2007, Javo announced an agreement with MedAssets Supply Chain System
of Alpharetta, Georgia, one of the largest purchasing organizations for food and
beverages in the healthcare industry. This relationship gives Javo entry to sell
its products in 32,000 facilities nationwide.





Also
during 2007, Javo was awarded Prime Vendor status by the
United States Department of Veterans Affairs, providing access to more than 250
large VA facilities nationwide. Javo’s first government sector approval provides
significant opportunities for sales growth. Some of the Company’s competitors,
with foreign sources of supply, are prohibited from participating in contracts
by the Berry amendment, which is a federal law that prohibits the distribution
of foreign made goods to U.S. military.





In
November 2007, the Company announced the extension of its preferred supplier
relationship and the addition of iced coffee to its Compass Group Americas
Division agreement.  The Americas Division contains the U.S., Canadian
and Latin American operating groups of Compass Group, the world’s largest food
service company.  Through company-owned members such as Morrison
Management, Eurest, Bon Appetit, Chartwells College and University Dining,
Restaurant Associates and Creative Host Services, the Compass Group provides
food, vending and related services on client premises at thousands of
locations.





The
Company also enhanced its competitive position during 2007 with the introduction
of new product lines and flavor extensions to existing programs.  The
Company is very proud to have launched the industry’s first-ever dispensed
coffee certified as both fair trade and organic to its line of on-demand hot
beverages, as well as a new line of health and wellness teas under the brand
Fit+TM.  Other flavors added this year include Caramel Latte, Hazelnut
Latte, Green Tea Latte, Chai Tea Latte and Horchata Rice Drink.





PRODUCTS





Javo is
an innovative 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 coffee shop-style beverages
are proliferating to a growing number of the estimated 2.5 million food service
locations in the United States, Javo’s unique production capabilities have
equipped it to offer its customers the opportunity to serve specialty beverage
programs for hot “on- demand” coffee and for specialty dispensed iced coffee and
tea, but without the need to install and learn a barista-style operating
system.





Javo
addresses 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, with a variety of
beverage concentrates that may be conveniently dispensed “on-demand” from
equipment similar to fountain juice and soda machines.  Javo coffee
and tea concentrates arrive to the operator in refrigerated bag-in-box packages
ready for loading into dispensers that once installed, create recurring revenue
for Javo.  Javo’s hot coffee program offers nine proprietary varieties
with a concentration level as strong as 45 parts water to 1 part coffee extract
including Fair Trade Organic French Roast, French Roast, 100% Colombian and
Colombian House Blend in both regular and decaffeinated
varieties.  The Company’s specialty iced coffee and tea product line
offers ten unique flavors with concentration levels as high as 7 to
1.  The most popular selections in this product line include Mocha
Latte, French Vanilla Latte, Caramel Latte, Hazelnut Iced Coffee, 100% Colombian
Iced Coffee, Horchata Rice Drink and Lemonade Green Tea.





For other
food service operators and specialty coffee shops that have expanded their
beverage menus to serve increasingly popular specialty iced coffee and tea
flavored beverages, Javo offers a line of packaged beverage syrups and flavors
that quickly and easily prepare complex, value added drinks without the
requirement of expensive brewing equipment or highly trained
staff.  Varieties offered include:   Mocha Iced
Blended, French Vanilla Iced Blended and Chai Iced Blended
beverages.





Javo
enables food and beverage suppliers to the retail industry to better align their
coffee and tea flavored products to the elevated quality standards of today’s
consumer by supplying bulk flavor systems for institutional customers. Javo’s
coffee and tea flavors are ideal for these applications since they are freshly
brewed, all natural, and highly concentrated.  The Company’s
proprietary brewing process uses only water and avoids the punishing heat of
other extraction methods that de-stabilize the flavor system prior to its use in
packaged drink, ice cream, yogurt, or confectionary applications.





DISTRIBUTION





The
Company distributes its products through multiple, well established food
distribution methods.  Javo's dispensed on-demand coffee and iced
coffee and tea beverages utilize broad line food service distributors that
supply a complete range of food, beverage, and consumables to food service
operators.  The Company continues to expand the number of national and
regional distributors established to deliver its beverage concentrates to
restaurants in the United States; its products are already stocked at many
distribution centers operated by Sysco , US Foodservice, Gordon Foods, Shamrock
Foods, McLane, Core-mark and other broad line and specialty
distributors.  These distributors purchase Javo’s products, manage
inventories, process orders and deliver products as needed by the Company’s food
service customers.  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.


2





The
Company sells its bag-in-box dispensed coffee and tea products to broad line and
specialty distributors such as Sysco Foods, US Foodservice, Coremark and McLane
at an established single price with no separate fee for the dispenser
systems.  The distributor sells and delivers the bag-inbox products to
the operator/user.  The operator/users serve the products through the
dispenser system to their customers, employees and/or patients.  The
typical operator/users include hospitals, casinos, health care facilities,
restaurants, hotels and convenience stores.





SALES
AND SERVICE ORGANIZATIONS





Javo
employs a national sales force to communicate and demonstrate its product value
propositions to restaurants, institutional food service operators and food
distributors.  The Company directed a major expansion of its sales
capabilities in 2007 to better compete for national coffee and tea
contracts.  This investment proved to be timely and effective as the
Company added a number of important new national and regional food purchasing
organizations to its customer group in 2007, including: Premier Healthcare, US
Department of Veterans Affairs, Med-Assets and VGM.  In many cases,
Javo receives sales assistance from its distributors, equipment suppliers and
partner brands in initiating sales efforts.





Javo’s
service organization manages all aspects of its equipment program, including:
installations, asset tracking, emergency service, and preventive
maintenance.  To supplement its capabilities, Javo frequently employs
contract service partners to install and perform preventative maintenance on
dispensing equipment.





COMPETITION





Hot
On-Demand Coffee





Javo has
several significant direct competitors for its dispensed hot coffee business in
the United States, the largest being Douwe Egberts® Coffee Systems, a division
of Sara Lee Corporation.  Douwe Egberts originated in Europe where the
market for dispensed coffee is more established and sales are more than three
times those of the United States.  Douwe Egberts’ products are frozen
at the point of manufacture, shipped frozen to its distribution facilities and
thawed prior to use in its proprietary dispensers at food service locations.
Sara Lee owns approximately 80% of the market for dispensed coffee systems in
the United States, due in large part to the fact that it was for many years the
only available product of its type.  Douwe Egberts’ competitive
strength lies in its size, financial resources and long history in the coffee
business.  Despite these advantages, Javo has established its ability
to compete favorably on quality, ease of use, variety of flavor offerings and
reliability of service.




Nestle S.
A. (Nescafe®), Kraft Foods (Maxwell House®) and Coca Cola (Juan
Valdez®) have also relatively recently introduced competing liquid coffee
concentrate products in the food service market.  While each of these
companies has significantly larger financial resources and brand awareness
generally, management believes that each has distinct disadvantages compared to
Javo in product quality, features of their dispensing systems, and equipment
service.  Javo’s dispensed coffees are typically priced favorably as
compared to major competitors’ products. Even though these companies are
likely to dedicate substantial resources toward the launch of their new
products, an estimated 97% of the coffee market in the United States still
utilizes traditional roast-and-ground preparation, which means that there
remains a large potential market for conversion to a dispensing format offering
high quality “on demand” coffee, such as that offered by Javo.





Most
competitors offer either frozen products (in order to overcome extract
shelf-life and stability limitations) or ambient, “shelf stable” products that
rely on more aggressive processing and preservatives to maintain their shelf
life.  Management believes that its ability to offer freshly produced,
refrigerated extracts gives it a competitive advantage a market for on-demand
coffee that is increasingly quality and flavor conscious.





Specialty
Iced Coffee and Tea Beverages





Javo is a
market leader in the sales and development of concentrated, dispensable
specialty iced coffees and teas for convenience-oriented retailers in the United
States, such as 7-Eleven stores.  Several competitors, including Sara
Lee Corporation, are stepping into the growing market for dispensed iced coffees
with single strength systems that do not compare favorably with Javo’s offering
because they require more frequent and relatively cumbersome product changes.
These competitors often contract with other manufacturers to sell existing
products under their own brand.  These manufacturers are generally not
vertically integrated in extraction or use very rudimentary extraction methods
resulting in, management believes, a sacrifice to product quality or
concentration level or both. Javo’s in-house extraction technology and ability
to concentrate its beverage system gives it quality, in-dispenser shelf life,
and pricing advantages in the marketplace compared to its primary
competitors.


3





The
Company's specialty iced coffee and tea 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).  Javo’s iced
coffee concentrates are unique, and in the opinion of management, have no
competitors that are able to match our product’s quality, preparation 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.





Bulk
Ingredient Extracts





Javo has
no known large, direct competitors offering bulk liquid coffee and tea
concentrates and flavor systems comparable to Javo’s. The food and beverage
industry has typically relied upon heavily flavored and heat-processed
ingredients from industrial suppliers.  Unlike many other food
industry flavors, coffee and tea products are difficult to process and deliver
in a stable system that does not sacrifice flavor quality in the finished retail
product.  Javo’s high quality, flavorful coffee and tea concentrates
work extremely well in flavoring new consumer products that are attempting to
feature the unique, refined flavors coming out of the specialty coffee
industry.





OPERATIONS





Javo
operates a 40,000 square foot facility in Vista, California near San Diego, that
houses all of its operations including its corporate office and manufacturing
infrastructure.  This facility has historically received coffees and
teas and extracted them for its various food service products.  During
2007, Javo upgraded and expanded key aspects of its manufacturing
capabilities.  Specifically, the Company expanded its in-house
roasting capacity and integrated the thermal processing and packaging of iced
coffees and teas.  These initiatives, which have continued during 2008
are expected to significantly improve product quality, expand manufacturing
capacity, and reduce costs.  Javo uses, as necessary, off-site
distribution and storage facilities as well as third-party co-manufacturers to
produce products in specialty processing and packaging formats.





The Vista
facility also houses the research and development laboratory where the Company
performs product design and formulation work both for its own products and for
those of its customers.  In 2007, Javo enhanced its ability to
customize and improve the quality of coffee and tea products with the addition
of food scientists and product development professionals.




SEASONALITY





Sales of
hot and iced dispensed products are somewhat seasonal, with the second and third
calendar quarters accounting for the highest sales volumes for iced dispensed
products and the first and fourth calendar quarters the highest sales volumes
for hot dispensed products.  In 2008, Javo anticipates that growth in
the sales of iced dispensed products will exceed growth in hot dispensed
products.





INTELLECTUAL
PROPERTY





Javo has
developed and owns intellectual property in the areas of manufacturing, new
product development, and product branding.  Most importantly, the
Company has developed what it believes is a new and novel method of extracting
coffee and tea.  This process produces concentrated extracts that
combine excellent flavor, purity, stability, and yield on a commercial scale
allowing the Company to offer concentrated products that meet demanding quality
expectations.  Javo’s research and development department has
developed a library of products around this extraction technology that include
proprietary bean blends, flavors, and stability systems in a variety of
dispensed and non-dispensed platforms.   Javo relies on trade
secret protection rather than patents to protect its extraction
technology.  While properly managed trade secret protection has
certain advantages, competitors could independently develop similar processes
and products, which could result in the loss of a competitive advantage. The
Company also owns certain trademarks, including Javo®, that are registered with
the United States Patent and Trademark Office.  The Company continues
to expand and refine its branding as it develops new variations of its logo and
trade dress for its new product lines.





GREEN
COFFEE COST AND SUPPLY





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


4





EMPLOYEES





As of
February 25, 2008, the Company employed 55 full-time employees. The Company also
uses outside consultants, brokers and other independent contractors from time to
time.  A modest number of additional employees in sales, manufacturing
and other areas are planned during 2008 in response to the Company’s anticipated
growth.  None of its employees are represented by a union and the
Company believes its 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 its in-house roaster are subject to various air quality and
environmental laws and its 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.




ITEM
1A.  RISK FACTORS





In
addition to the other information in this report, you should carefully consider
the following risks.  If any of the following risks actually occur,
the Company’s business, financial condition and/or operating results could be
materially adversely affected.  The risk factors summarized below are
not the only risks Javo faces.  Additional risks and uncertainties not
currently known to the Company or that we currently deem to be immaterial also
may materially adversely affect the business, financial condition and/or
operating results.




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




To
operate successfully and manage 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 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.




The
Company has never been profitable and may need to obtain additional funding 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 additional revenue growth, reach
profitability or find additional capital to fund ongoing operations, if needed.
If additional funds are required and not available, the Company may be required
to curtail operations or to seek funds on unfavorable terms.




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




5





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 had 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.




The
Company depends on access to commodity goods and services at competitive prices
and access to co-manufacturers, 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.
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 the 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, 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. 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. Javo expects that there are companies that may have
developed or are developing such products. As a result of their size and
breadth, certain of the Company’s competitors have been able to establish
managed contract accounts by which they gain a disproportionate share of users
for their products. While such managed accounts can present significant
competitive barriers, the Company’s recently achieved national scope has limited
the negative impact of such accounts. Additionally, Javo cannot always
anticipate consumer trends, which influence demand for its products. 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 the Company’s products in the future or that
it will be able to anticipate market demands or trends. Javo may also be unable
to penetrate new markets.  If its revenues decline for any of these
reasons, the Company’s financial condition and operating results will be
adversely affected.




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




The
Company has developed what it believes is a 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 Javo products are subject to various
federal, state and local laws and regulations. The Company’s status as a
reporting public company subjects it to various laws and regulations and it is
subject to various accounting, tax and other laws and regulations. New laws and
regulations may also be instituted in the future that could 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 the Company’s
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.




6





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.





The
Company’s stock price is subject to volatility.




The
Company’s 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 its
operating performance. In addition, management believes 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.




Additionally,
because Javo records certain securities as variable instruments, movements in
the stock price from quarter to quarter can result in the recording of
significant non-cash revenues or expenses, which are unrelated to our operating
performance.  In 2007, we recorded non-cash derivative income of $5.1
million as a result of a falling stock price. This derivative income is solely
an accounting artifice and does not reflect real operating revenue. Significant
future movements in our stock price are likely to result in our recording
significant gains or losses on these instruments.




The
Company expects significant growth and will face challenges in managing this
growth.




The
Company has historically been a small organization with resources for only
limited production, sales and marketing and administration. The Company expects
to experience significant growth in sales in fiscal 2008 and anticipates the
need to scale up its production, sales, and marketing functions and general
administration capabilities. If the Company does not manage growth well, it may
lose sales or damage customer relationships, which could negatively affect its
results and long-term prospects.




The
Company’s customer contracts generally do not provide for guaranteed sales
levels and we may not realize the expected revenues from any given
contract.




The
majority of the Company customer contracts, including its contracts with
7-Eleven, the US Department of Veteran Affairs and Premier Healthcare establish
only the general terms and conditions of the customer relationship. Because
these contracts do not contain minimum purchase requirements, Javo cannot be
certain that we will actually realize the expected sales levels under these
agreements.  The Company qualifies its customers prior to installation of
dispensers and reserves the right to remove and place dispensers in other
customer locations.  However, the Company cannot be certain that we
will actually achieve its targeted levels of revenue growth in future
periods.




Additional
capital to fund growth and continuing operations is not assured.




If the
Company expands more rapidly than currently anticipated, or if its working
capital needs exceed current expectations, then it may need to raise additional
capital through public or private equity offerings or debt financings. Future
capital requirements depend on many factors including its dispenser
acquisitions, manufacturing, research and development and sales and marketing
activities. The Company does not know whether additional financing will be
available when needed, or will be available on terms favorable to it. If the
Company cannot raise needed funds on acceptable terms, it may not be able to
develop or enhance its products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements. To the extent
the Company raises additional capital by issuing equity securities, its
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 common stock stockholders in the past and
does not anticipate paying dividends to its common stock 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.


7





The
Sarbanes-Oxley Act requires, among other things, the Company to maintain
effective disclosure controls and procedures and internal control over financial
reporting.





The
Company believes that it is in compliance with the requirements of the
Sarbanes-Oxley Act having implemented internal financial and accounting controls
and procedures as well as ongoing internal and external testing and management
assessments of the effectiveness of its internal control over financial
reporting.  However, interpretations and implementation requirements
under The Sarbanes-Oxley Act are continually subject to change.  As a
result, failure on its part to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act could result in the loss of investor confidence in the
reliability of its financial statements, potentially causing the market value of
the Common Stock to decline.




ITEM
1B.  UNRESOLVED STAFF COMMENTS





Not
applicable.





ITEM
2.  PROPERTIES





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 operations.  In January 2008, the
Company rented on a month-to-month basis additional warehouse space near its
Vista facility to store certain raw materials used in production.





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





There
were no matters submitted to a vote of our security holders during the fourth
quarter of fiscal year 2007.


8




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 2008 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.





2006
            
            High
            
            
            LowFirst
      Quarter
            
            $
            0.54
            
            
            $
            0.25Second
      Quarter
            
            $
            2.38
            
            
            $
            0.42Third
      Quarter
            
            $
            2.31
            
            
            $
            1.32Fourth
      Quarter
            
            $
            1.90
            
            
            $
            1.282007First
      Quarter
            
            $
            1.41
            
            
            $
            0.81Second
      Quarter
            
            $
            1.61
            
            
            $
            1.07Third
      Quarter
            
            $
            1.48
            
            
            $
            0.91Fourth
      Quarter
            
            $
            1.23
            
            
            $
            0.692008First
      Quarter (through February 20, 2008)
            
            $
            0.88
            
            
            $
            0.52




The
Company’s preferred stock and debt securities do not trade on a public
exchange.





SHAREHOLDERS





As of
December 31, 2007, the Company had more than 500 holders of record of its Common
Stock and 153,378,797 shares of Common Stock outstanding.  In addition
the Company had approximately 160 holders of record of its Series B Preferred
Stock and 1,952,683 shares of its Series B Preferred Stock
outstanding.





DIVIDENDS





The
Company has never declared a dividend to its Common Stockholders and does not
expect to declare any dividends in the foreseeable future.





In July
2007, the Company issued 177,517 shares of Series B Preferred Stock as payment
in kind for a $1 dividend per share to the holders of the Series B Preferred
Shares.  The issuance increased the shares of Series B Preferred
shares outstanding to 1,952,683.









STOCK
PERFORMANCE GRAPH









The above
stock performance graph compares the change in value of a $100 investment in
Javo Beverage Company, Inc., and an assumed $100 investment in indexes for Dow
Jones Beverages Index and Standard and Poors Small  Cap Index at the
end of 2002 and each year end through December 2007.


9





ITEM
6.  SELECTED FINANCIAL DATA





The table
below shows selected financial data for the Company’s last five fiscal years as
indicated and quarterly data for the last two fiscal years.   The
Company’s fiscal year ends on December 31 of each year.  There were no
dividends paid to Common Stockholders during the past four
years.  Certain prior year amounts have been reclassified to conform
to current year presentation.  The data presented was derived from its
audited financial statements and should be read in conjunction with those
financial statements and notes thereto, and with Management’s Discussion and
Analysis of the Financial Condition and Results of Operations included in Part
II, Item 7 of this Form 10-K for the relevant period.





2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(In
      thousands $)Gross
      revenue
            
            
            12,559
            
            
            
            10,322
            
            
            
            6,200
            
            
            
            2,084
            
            
            
            662Gross
      profit
            
            
            4,054
            
            
            
            3,510
            
            
            
            2,093
            
            
            
            688
            
            
            
            447Loss
      from Operations
            
            
            (7,105
            )
            
            
            (2,804
            )
            
            
            (2,032
            )
            
            
            (2,922
            )
            
            
            214Net
      loss
            
            
            *(7,449)
            
            
            
            **(9,926)
            
            
            
            (4,844
            )
            
            
            (4,855
            )
            
            
            (6,251
            )Total
      assets
            
            
            18,382
            
            
            
            21,175
            
            
            
            4,579
            
            
            
            4,556
            
            
            
            4,501Warrant
      liability ***
            
            
            2,389
            
            
            
            7,532
            
            
            
            --
            
            
            
            --
            
            
            
            --Debt
      obligations – net of debt discounts
            
            
            9,414
            
            
            
            8,609
            
            
            
            12,192
            
            
            
            8,860
            
            
            
            6,705Stockholders’
      equity/(deficit)
            
            
            152
            
            
            
            3,042
            
            
            
            (8,873
            )
            
            
            (5,053
            )
            
            
            (3,621
            )Loss
      per share
            
            $
            (0.05
            )
            
            $
            (0.07
            )
            
            $
            (0.03
            )
            
            $
            (0.03
            )
            
            $
            (0.05
            )





* The
2007 Net Loss includes non-cash option compensation expense of $964 thousand and
depreciation and amortization expense of $5.2 million.  Approximately
$4.5 million of this $5.2 is reported in interest expense and was for accretion
of debt discount/premium. In addition it includes non-cash derivative of income
of $5.1 million.




**The
2006 Net 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 and depreciation and amortization
expense of $5.385 million, as well as non-cash derivative income of $405
thousand.




***The
Warrant liability represents the fair value of warrants to purchase 7,195,844
shares of the Company’s Common Stock, which is recorded as a derivative
liability. The fair value of the warrants was determined using the Black Scholes
Valuation Model. The warrants have strike prices from $1.79 to $2.24 per
share.  The Company would receive an additional $14.9 million in
equity capital if these warrants were exercised at the current strike
prices.  The warrants expire on December 2011, if not
exercised.




Summarized
quarterly financial information for 2007 and 2006 follows (in
thousands):





First
            
            
            Second
            
            
            Third
            
            
            Fourth
            
            
            Total2007
      quarterlyNet
      sales
            
            
            2,748
            
            
            
            3,195
            
            
            
            3,922
            
            
            
            2,694
            
            
            
            12,559Gross
      profit
            
            
            1,105
            
            
            
            989
            
            
            
            1,114
            
            
            
            846
            
            
            
            4,054Loss
      from operations
            
            
            (563
            )
            
            
            (2,183
            )
            
            
            (1,784
            )
            
            
            (2,575
            )
            
            
            (7,105
            )Net
      income/(loss)
            
            
            409
            
            
            
            (5,668
            )
            
            
            (127
            )
            
            
            (2,063
            )
            
            
            (7,449
            )(Loss)
      per share
            
            $
            0.01
            
            
            $
            (0.04
            )
            
            $
            (0.00
            )
            
            $
            (0.01
            )
            
            $
            (0.05
            )2006
      quarterlyNet
      sales
            
            
            2,338
            
            
            
            3,178
            
            
            
            2,308
            
            
            
            2,498
            
            
            
            10,322Gross
      profit
            
            
            829
            
            
            
            1,262
            
            
            
            941
            
            
            
            478
            
            
            
            3,510,Loss
      from operations
            
            
            (315
            )
            
            
            (67
            )
            
            
            (434
            )
            
            
            (1,988
            )
            
            
            (2,804
            )Net
      income/(loss)
            
            
            (1,154
            )
            
            
            (6,154
            )
            
            
            (709
            )
            
            
            (1,909
            )
            
            
            (9,926
            )(Loss)
      per share
            
            $
            (0.01
            )
            
            $
            (0.04
            )
            
            $
            (0.01
            )
            
            $
            0.01
            )
            
            $
            (0.07
            )





10




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 food service, food and beverage manufacturing, and
retail industries. Javo employs proprietary brewing technology to produce fresh
brewed coffees and teas that are flavorful, concentrated and stable and offers a
variety of beverage concentrates that may be dispensed on-demand from equipment
similar to fountain juice and soda dispensers.  The Company’s coffee
and tea concentrates arrive at the operator in refrigerated bag-in-box packages
ready for loading into dispensers that serve hot and over-ice beverages on an
as-needed basis.  For food service 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.





Comparative
Summary of GAAP Income Statements





The
following is a comparative table of income statements for years ended December
31, 2007, 2006, and 2005.  Below is a discussion and analysis of the
period-over-period changes. Certain prior year amounts have been reclassified to
conform to current year presentation.





ChangeIncome
      Statements
            
            2007
            
            
            2006
            
            
            2005
            
            
            2007
      to 2006
            
            
            2006
      to 2005Net
      sales
            
            $
            12,559,132
            
            
            $
            10,321,655
            
            
            $
            6,200,327
            
            
            $
            2,237,477
            
            
            
            21.7
            %
            
            $
            4,121,328
            
            
            
            66.4
            %Cost
      of sales
            
            
            (8,504,863
            )
            
            
            (6,811,319
            )
            
            
            (4,107,634
            )
            
            
            (1,693,544
            )
            
            
            24.9
            %
            
            
            (2,703,685
            )
            
            
            65.8
            %Gross
      profit
            
            
            4,054,269
            
            
            
            3,510,336
            
            
            
            2,092,693
            
            
            
            543,933
            
            
            
            15.5
            %
            
            
            1,417,643
            
            
            
            67.7
            %Operating
      expenses:Selling
      and marketing
            
            
            (4,687,083
            )
            
            
            (2,408,265
            )
            
            
            (1,245,971
            )
            
            
            (2,278,818
            )
            
            
            94.6
            %
            
            
            (1,162,294
            )
            
            
            93.3
            %General
      and administrative
            
            
            (6,472,440
            )
            
            
            (3,906,004
            )
            
            
            (2,879,022
            )
            
            
            (2,566,436
            )
            
            
            65.7
            %
            
            
            (1,026,982
            )
            
            
            35.7
            %Total
      operating expenses
            
            
            (11,159,523
            )
            
            
            (6,314,269
            )
            
            
            (4,124,993
            )
            
            
            (4,845,254
            )
            
            
            76.7
            %
            
            
            (2,189,276
            )
            
            
            53.1
            %Loss
      from operations
            
            
            (7,105,254
            )
            
            
            (2,803,933
            )
            
            
            (2,032,300
            )
            
            
            (4,301,321
            )
            
            
            153.4
            %
            
            
            (771,633
            )
            
            
            38.0
            %Other
      income (expenses):Interest
      income
            
            
            673,597
            
            
            
            28,963
            
            
            
            17,720
            
            
            
            644,634
            
            
            
            2225.7
            %
            
            
            11,243
            
            
            
            63.4
            %Interest
      expense
            
            
            (6,200,874
            )
            
            
            (2,162,999
            )
            
            
            (2,855,638
            )
            
            
            (4,037,875
            )
            
            
            186.7
            %
            
            
            692,639
            
            
            
            -24.3
            %Accelerated
      interest expense
            
            
            --
            
            
            
            (5,384,964
            )
            
            
            --
            
            
            
            5,384,964
            
            
            
            -100.0
            %
            
            
            (5,384,964
            )
            
            
            --Other
      income
            
            
            46,297
            
            
            
            --
            
            
            
            26,070
            
            
            
            46,297
            
            
            
            --
            
            
            
            (26,070
            )
            
            
            -100.0
            %Income
      from derivatives ***
            
            
            5,143,156
            
            
            
            404,721
            
            
            
            --
            
            
            
            4,738,435
            
            
            
            1170.8
            %
            
            
            404,721
            
            
            
            --Gain/(loss)
      on disposal of  assets
            
            
            (5,858
            )
            
            
            (7,860
            )
            
            
            --
            
            
            
            2,002
            
            
            
            -25.5
            %
            
            
            (7,860
            )
            
            
            --Total
      other expense
            
            
            (343,682
            )
            
            
            (7,122,139
            )
            
            
            (2,811,848
            )
            
            
            6,778,457
            
            
            
            -95.2
            %
            
            
            (4,310,291
            )
            
            
            153.3
            %Net
      loss
            
            $
            (7,448,936
            )
            
            $
            (9,926,072
            )
            
            $
            (4,844,148
            )
            
            $
            2,477,136
            
            
            
            -25.0
            %
            
            $
            (5,081,924
            )
            
            
            104.9
            %





11





* The
2007 Net Loss includes non-cash option compensation expense of $964 thousand and
depreciation and amortization expense of $5.2
million.  Approximately $4.5 million of this $5.2 is reported in
interest expense and was for accretion of debt discount/premium. In addition it
includes non-cash derivative of income of $5.1 million.




**The
2006 Net 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 and depreciation and amortization
expense of $5.385 million, as well as non-cash derivative income of $405
thousand.




***The
Warrant liability represents the fair value of warrants to purchase 7,195,844
shares of the Company’s Common Stock, which is recorded as a derivative
liability. The fair value of the warrants was determined using the Black Scholes
Valuation Model. The warrants have strike prices from $1.79 to $2.24 per
share.  The Company would receive an additional $14.9 million in
equity capital if these warrants were exercised at the current strike
prices.  The warrants expire on December 2011, if not
exercised.




REVENUES





In 2007,
the Company achieved gross revenues of $12.5 million, an increase of $2.21
million, or 21.7% growth, over 2006.  The Company increased sales of
its hot and iced dispensed coffee by 59% in 2007 over 2006.  This
increase was primarily the result of its ability to install additional
dispensing locations, which increased from 1,500 at the end of 2006 to 4,300 at
the end of 2007.  Each installed dispenser generates an estimated
$3,000 to $6,000 in annual gross revenue per year and the Company’s historical
dispenser turn over rate has been less than 2% per annum.  The
Company’s non-dispensed revenue decreased by 14% in 2007 over 2006, the
reduction primarily the result of lower bulk ingredient sales.  The
Company expects its non-dispensed revenues in 2008 will be at or slightly above
its 2007 sales level.





For 2006,
the Company achieved record revenues of $10.3 million, an increase of $4.1
million or 66.5% over 2005. The Company increased sales in each of its product
categories: hot-dispensed, iced-dispensed, syrups and mixes and
ingredients.





With
expected growth in revenues in 2008 related to greater iced coffees sales, the
Company will see continued seasonality in its quarterly gross sales as iced
coffee sales are higher in the 2nd and
3rd
quarters and hot coffee sales are higher in the 1st and
4th
quarters of the year.





GROSS
PROFIT AND GROSS PROFIT MARGIN





In 2007,
the Company’s gross profit increased to $3.9 million up from $3.5 million in
2006 or an increase of 14.9%.  The increase was primarily due to
increased sales in 2007.  Gross profit margin declined by 1.9% from
33.7% in 2006 to 31.8% in 2007. The reduction was primarily due to increased
costs for freight as it expanded nationally and to increased costs for roasted
coffee.





For 2008,
we expect that gross profit margins will improve several percentage
points.  In 2007, the Company invested in in-house roasting,
processing and packaging infrastructure, which will reduce the cost of
production of its products and should improve margins in 2008.





In 2006,
the Company’s gross profit increased to $3.5 million up from $2.1 million in
2005, or an increase of 67.2%. The increase was primarily due to increased sales
in 2006.  Gross profit margin in 2006 increased slightly to 33.7% from
33.5% in 2005.  This increase was primarily due to changes in the
sales mix.





SELLING
AND MARKETING EXPENSES





In 2007,
the Company increased sales and marketing expenses significantly over 2006 by
building a national sales force, expanding sales prospects through agreements
with major convenience store chains, group purchasing organizations and broad
line and specialty distributors.  The Company anticipates in 2008 and
beyond its sales and marketing expense will significantly reduce as a percentage
of its gross revenue.  Actual sales and marketing expenses in 2008
will increase modestly with the addition of a small number of sales and sales
operations personnel and with the increase in variable marketing expenses such
as commissions, marketing, and promotion expense.  The Company
increased selling and marketing expenses in 2007 to compete for and take
advantage of the expanding opportunities with national coffee
contracts.





Selling
and marketing expenses for 2007 were $4.68 million compared to $2.40 million in
2006, or an increase of 94.6%.  These increases were the result of
increased sales expenditures and the addition of sales professionals with their
related expenses. More specifically, approximately $854,000 of the increase was
due to an increase in sales and marketing payroll expenses, $129,000 was
attributable to related travel and entertainment expenses, $605,000 was
attributable to increased marketing expenses, $292,000 was attributable to
expenditures on promotional materials, $201,000 on tradeshow expenses and
$198,000 on other sales expenses.   These increased expenses
position the Company to take advantage of new customer opportunities, expanded
national distribution and expansion of sales within our current customer
base.


12





Selling
and marketing expenses for 2006 were $2.40 million compared to $1.24 million in
2005. The increase of $1.16 million or 93.3% is primarily attributed to an
increase in sales and marketing payroll expenses of $491,000, an increase in
travel and entertainment expenses of $197,000, an increase in marketing expenses
of $441,000, an increase of $136,000 attributable to marketing and promotional
materials, an increase in tradeshow expenses of $28,000 and an decrease of
$130,000 for other sales costs. The increases include additional variable
commission and marketing allowance due to greater sales and the cost of
identifying and developing further national distribution
opportunities.





GENERAL
AND ADMINISTRATIVE EXPENSES





In 2007,
the Company increased general and administrative expenses to prepare for
anticipated growth in 2008 with the addition of key support personnel and
systems improvements.   Included in the increase were expenses
related to efforts in investor relations.  Javo hired an outside
investor relations firm and participated in non-deal road shows. The Company
paid bonuses and made deferred compensation option grants to key
executives.





General
and administrative expenses for 2007 were $6.47 million compared to $3.90
million in 2006, the increase of $2.57 million or 66% was primarily due to an
increase in executive expenses for payroll and benefits of $1.6 million which
included non-cash option expenses of $960,000 and benefits, and bonuses of
$640,000 and, an increase in other general and administrative expenses of
$969,000. The increase also included an increase in overhead, warehouse and
quality control expenses of $50,000, an increase in outside investor relations
consultant fees and expenses of $103,000,  increased accounting,
auditing and SEC and Sarbanes-Oxley compliance fees and expenses of
$274,000, increased
dispenser lease costs of $346,000, and an increase in depreciation expense of
$196,000.  Cost increases included expansion of basic staff and
services and increases in costs for legal, auditors, internal control
consultants and improved insurance coverage reflecting the growth in
sales.





General
and administrative expenses for 2006 were $3.91 million compared to $2.88
million in 2005. The increase of $1.03 million or 36% was primarily due to an
increase in research and development and quality assurance expenses of $215,000,
an increase in warehouse expenses such as payroll and repairs and maintenance of
$101,000, an increase in finance and accounting expenses for payroll and outside
accounting fees of $153,000, an increase in overhead expenses of $565,000, and
an increase in bad debt allowance of $55,000. These cost increases were
primarily due to expansion of basic staff and services commensurate with the
Company’s expanding sales. In addition, the general liability and directors and
officers insurance and investor relations programs costs increased
substantially.





In 2007,
the Company’s general and administrative expenses before non-cash option
expenses and depreciation were $5.0 million. The Company anticipates general and
administrative expenses will increase modestly in 2008.  It
anticipates further additions to accounting and administrative staff and
proportionate increases in auditing and Sarbanes-Oxley Act compliance as sales
continue to grow.





In 2008,
the Company expects to report non-cash expense for deferred option expense of
$361,630 per quarter (or $1.45 million for the year) as part of its general and
administrative expense.  The Company expects depreciation expense in
2008 to be approximately $1.2 million.




OTHER
INCOME/EXPENSES





Other
income/expenses were $344,000 in 2007 compared to $7.12 million in 2006. The
decrease in other income/expenses of $6.77 million was primarily due to the
non-cash recognition of derivative income of $5.14 million reported in
connection with warrants issued to our senior convertible debt holders, a
decrease in interest expense of $1.35 million, an increase in interest income of
$645,000, other income of $46,000 and a $2,000 decrease in the loss on disposal
of assets.  The 2007 interest expense of $6,200,874 includes non-cash
amortization of debt discount of $4.58 million and $1.03 million of accrued
interest on the senior convertible debt that was paid by the issuance of Common
Stock.





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% was primarily
attributable to a one-time expense of $5.39 million taken in connection with the
conversion of promissory notes in the principal amount of $13,750,000,
offset by a reduction in interest expense of $69,000 and non-cash derivative
income of $405,000 taken in connection with the Company’s issuance of $21
million of senior convertible debt and related warrants.





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 EITF 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 mark to market each quarter the value of the warrants
issued in connection with its senior convertible debt. The Company revalues
these warrants at the end of each reporting period.  The periodic
change in value of the warrants is recorded 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 $14.9
million at their current strike prices.  The Company recorded non-cash
derivative income of $5.14 million in 2007 as a result of a decline in our stock
price from the date of issuance.


13





The
Company’s net other income/expenses in 2008 will include $3.9 million of
non-cash interest expense for accretion of the debt discount recorded in
connection with its  senior convertible debt.  In 2008, the
Company anticipates the accrued interest on its senior convertible debt interest
in 2008 will be approximately $1.07 million.  The Company anticipates
this accrued interest will be converted to its Common Stock.





NET
LOSS





The net
loss for the Company for 2007 was $7.45 million compared to $9.93 million in
2006, a decrease in loss of $2.48 million or 25%. The decrease in loss was
primarily due to recognition of $5.14 million of non-cash derivative income and
increased interest income of $645,000, offset by the increase in operating
expenses as the Company built its sales and general administrative organization
to prepare it for anticipated increased sales.  Excluding the non-cash
derivative income, the Company’s year-over-year change in net loss would have
been an increased loss of approximately $2.7 million, or 27%.  This
increase is due to increased sales and marketing expenses of $2.28 million as we
built out a national distribution and sales organization, increased general and
administrative expenses of $2.57 as we added administrative staff and incurred
costs for system and software process improvements, recorded non-cash option
expense of $964,000 and increased compliance costs.  These increases
were offset by increased gross profit of $544,000.  These additional
expenses prepared the Company for anticipated increased sales in
2008.





The net
loss for the Company for 2006 was $9.93 million compared to $4.84 million in
2005, an increase of $5.09 million or 105%. The increase is primarily due to an
expense of $5.39 million taken in connection with the conversion of promissory
notes in the principal amount of $13.75 million.





OUTLOOK





The
Company expects its net loss will decrease in 2008 with anticipated growth in
gross revenues, improved gross profit margin with managed growth in sales
marketing and general and administrative expenses. However, offsetting the
anticipated improvements in revenues and margins will be an increase in non-cash
expenses for equity compensation, depreciation expense and amortization and
accretion of debt discount.





The
Company anticipates a substantial increase in gross revenue during 2008 as it
executes against national account business won in 2007 (7 Eleven, BP Products,
Premier Healthcare along with other national and regional
customers.  Javo expects to grow the number of deployed dispensers
selling its products to between 7,500 to 10,000 locations by year-end
2008.   The Company expects to earn between $3,000 and $6,000 per
dispenser location per year in revenue.  Management anticipates
achieving net positive cash flows from operations in 2008.





The other
income or expense reported by the Company for 2008 is unpredictable because of
dependence on the Black Scholes value of the warrants issued in connection with
the issuance of $21 million of senior convertible debt.  The key
component in the valuation of the warrants using the Black Scholes Valuation
Model is the Company’s stock price.  If the Company’s stock price
declines the Company will report non-cash derivative income.  If the
Company’s stock price climbs, the Company will report non-cash derivative
expense.





LIQUIDITY
AND CAPITAL RESOURCES





The
Company has experienced net losses and negative cash flows from operations each
year since inception through December 31, 2007.  It has an accumulated
deficit of $49.5 million and has consumed cash from operations and financing in
excess of $29 million. It financed operations since inception primarily through
capital contributions, related-party loans, and private-placements of equity and
debt securities. The Company anticipates that current cash and cash equivalents,
as well as expected cash flows from anticipated increased sales and gross
profits in 2008, and anticipated dispenser financing, will provide adequate
capital to fund operations, sales growth and any required capital expenditures
needs through the Company's cash flow breakeven point.





The
Company repaid its $713,000 working capital line of credit balance through
Comerica Bank in July 2007.  Also, in July 2007, the Company entered
into a $5,000,000 working capital loan with Wells Fargo Bank, N.A. that matures
July 1, 2009.  The loan is secured by cash and cash equivalents
totaling $5,000,000 and carries an interest rate that floats at 1.25% over
LIBOR, rounded up to the next eighth of a point or a maximum of bank
prime.  The loan balance and current interest rate as of December 31,
2007, are $3,863,000 and 6.375%, respectively.  As of December 31,
2007, the amount available on the line of credit was
$1,137,000.


14





The
Company used $5.9 million in cash and cash equivalents in operating activities
in 2007, versus $1.9 million and $2.7 million respectively in 2006 and
2005.  The increase in the use of cash in operating activities in 2007
is the result of increased accounts receivable of $818,000, increased pre-paids
and deposits of $575,000, increased selling, marketing and general and
administrative expenses of $3.7 million.  The decrease in use of cash
in operating activities in 2006 is the result of increased 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 $274,000 is primarily the result of increased
accounts receivable and 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.





The
Company used approximately $4.1 million in cash and cash equivalents to purchase
dispensers, roasting, process and packaging equipment in 2007, versus $127,000
and $291,000, respectively in 2006 and 2005.  The 2007 increase in
capital purchases has positioned the Company to improve it gross profit margins
and provided dispensers for its growth in dispenser placements.  The
Company anticipates that current cash and cash equivalents, as well as expected
cash flows from anticipated increased sales and gross profits in 2008,
anticipated dispenser financing, will provide adequate capital to fund
operations, sales growth and any required capital expenditures needs through the
Company's cash flow breakeven point.





FACTORS
AFFECTING QUARTERLY PERFORMANCE





The
Company experienced variations in sales from quarter to quarter due to the sales
mix of 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
2008.  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.




CRITICAL
ACCOUNTING POLICIES





Application
of Critical Accounting Policies





Application
of our accounting policies requires management to make certain judgments and
estimates about the amounts reflected in the financial statements. Management
uses historical experience and all available information to make these estimates
and judgments, although differing amounts could be reported if there are changes
in the assumptions and estimates. Estimates are used for, but not limited to,
the accounting for the allowance for doubtful accounts, inventory allowances,
impairment costs, depreciation and amortization, warranty costs, taxes and
contingencies. Management has identified the following accounting policies as
critical to an understanding of our financial statements and/or as areas most
dependent on management's judgments and estimates.





Revenue
Recognition




We
recognize revenue in accordance with Staff Accounting Bulletin No. 104,
"Revenue Recognition." Sales are recorded when persuasive evidence of an
arrangement exists, title transfer has occurred, the price is fixed or readily
determinable, and collectability is probable. We record sales net of returns and
discounts, which are estimated at the time of shipment based upon historical
data.  The Company generally does not receive and does not anticipate
receiving any material amount of product returns.  Periodically, after
requests in writing from a distributor/customer and after confirmation and
approval of quantities, dates and amount of credit, the Company will grant a
distributor a credit to be applied for out-of-code product.  Total
credits issued in 2007 for out-of-code product were $31,355 or 0.025% of gross
sales.  The Company has a limited number of distributors which have
negotiated payment terms with cash discounts for early payments, usually 2%, 10
net 30.  In 2007, the cash discounts taken were $47,944 or 0.4% of
gross revenue.





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). In
2007, the Company issued 5,000,000 employee options or share-based payment
awards with market or performance conditions. The shares vest over a 5-year
period with the first vesting in the third year.


15








Derivative
Income





In
accordance with Emerging Issues Task Force (“EITF”) No. 00-19, the Company is
required to account for the warrants issued in connection with the Company’s
senior convertible debt as derivative liabilities.  The Company is
required to mark to market each quarter the value of the warrants issued in
connection with its senior convertible debt. The Company revalues these warrants
at the end of each reporting period.  The periodic change in value of
the warrants is recorded 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.




RECENT
ACCOUNTING PRONOUNCEMENTS




In
December 2007, the FASB issued SFAS No. 141(revised 2007), "Business
Combinations" ("SFAS No. 141R"). SFAS No. 141R will significantly
change the accounting for business combinations in a number of areas, including
the treatment of contingent consideration, contingencies, acquisition costs,
in-process research and development and restructuring costs. SFAS No. 141R
includes an amendment to SFAS No. 109, "Accounting for Income Taxes." This
statement is effective for fiscal years beginning after December 15, 2008.
The Company is assessing the impact of SFAS No. 141R and has not determined
whether it will have a material impact on the Company's results of operations or
financial position.




In
February 2007, the FASB issued SFAS No. 159, which permits entities to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 also includes an amendment to SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" which applies
to all entities with available-for-sale and trading securities. This Statement
is effective as of the beginning of an entity's first fiscal year that begins
after November 15, 2007. The Company is assessing the impact of SFAS
No. 159 and has not determined whether it will have a material impact on
the Company's results of operations or financial position.





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”), a related party, to rent liquid concentrate dispensers for placement at
its customer locations.  The LLC is a Delaware limited liability
company owned by Company directors, Baker, Hackett, and Solomon, two former
directors, 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, 2007, the LLC had purchased 896
dispensers at a cost of $2,153,060.  The Company has rented these
machines from the LLC and had incurred a dispenser rental expense of
$716,640, $370,791, and $7,291 in 2007,  2006, and 2005,
respectively.  The LLC has purchased all the dispensers it was
contracted for and will not purchase additional dispensers beyond the 896 it has
already purchased.





16


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 PeriodTotal
            
            
            Less
      than
              1
      Year
            
            
            2-3
      Years
            
            
            4-5
      Years
            
            
            More
      than
              5
      YearsSenior
      Convertible debt obligations
            
            $
            17,731,461
            
            
            $
            4,666,668
            
            
            $
            9,333,336
            
            
            $
            3,731,457
            
            
            $
            --Other
      long-term debt obligations
            
            
            846,875
            
            
            
            323,895
            
            
            
            373,212
            
            
            
            135,123
            
            
            
            14,645Capital
      lease obligations
            
            
            551,024
            
            
            
            283,704
            
            
            
            267,320
            
            
            
            --
            
            
            
            --Total
            
            $
            19,129,360
            
            
            $
            5,274,267
            
            
            $
            9,973,868
            
            
            $
            3,866,580
            
            
            $
            14,645





ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK





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





Green
coffee prices are subject to substantial price fluctuations due to various
factors including weather and political and economic conditions in
coffee-producing countries.  Gross profit margins can be impacted by
changes in the price of green coffee.  The Company enters into
commitments with coffee brokers to purchase, on a forward-looking basis,
commercial grade coffees, which give it significant flexibility in selecting the
date of the market price and timing of delivery.   Depending on
the demand and the condition of the coffee markets, the Company will generally
make commitments for one to six months ahead; as of December 31, 2007, Javo had
approximately $511,000 in green coffee purchase
commitments.


17


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.


18







Javo
      Beverage Company, Inc.Index
      to Financial StatementsDecember
      31, 2007PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            F-2FINANCIAL
      STATEMENTSBalance
      Sheets
            
            F-3Statements
      of Operations
            F-4Statements
      of Stockholder's Equity
            F-5Statements
      of Cash Flows
            F-8Notes
      to Financial Statements
            F-10




F-1







REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Board of Directors and


Stockholders
of Javo Beverage Company, Inc.






We have
audited the accompanying balance sheets of Javo Beverage Company, Inc. as of
December 31, 2007 and 2006 , and the related statements of operations,
stockholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2007. Javo Beverage Company, Inc.’s management is
responsible for these financial statements. 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Javo Beverage Company, Inc. as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2007 in
conformity with accounting principles generally accepted in the United States of
America.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Javo Beverage Company, Inc.’s internal control
over financial reporting as of December 31, 2007 based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 14, 2008 expressed an
unqualified opinion on management’s assessment and an adverse opinion on the
effectiveness of the Company’s internal control over financial
reporting.






/s/
Farber Hass Hurley LLP


Granada
Hills, CA


March 14,
2008





F-2







JAVO
      BEVERAGE COMPANY, INC.BALANCE
      SHEETSAs
      of December 31, 2007 and 20062007
            
            
            2006ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            6,636,908
            
            
            $
            18,324,161Restricted
      cash
            
            
            3,863,000
            
            
            
            -Total
      cash, restricted cash and cash equivalents
            
            
            10,499,908
            
            
            
            18,324,161Accounts
      receivable, less allowances
            
            
            1,481,924
            
            
            
            844,144Inventory,
      net of reserve for obsolescence
            
            
            691,420
            
            
            
            708,166Prepaid
      expenses
            
            
            293,025
            
            
            
            148,736Employee
      advances
            
            
            --
            
            
            
            1,362Total
      current assets
            
            
            12,966,277
            
            
            
            20,026,569Property
      and equipment, net
            
            
            4,644,993
            
            
            
            880,559Intangibles,
      net
            
            
            750,060
            
            
            
            247,696Deposits
            
            
            20,242
            
            
            
            20,242Total
      assets
            
            $
            18,381,572
            
            
            $
            21,175,066LIABILITIES
      AND STOCKHOLDERS EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            2,024,062
            
            
            $
            1,176,683Accrued
      payroll and related benefits
            
            
            139,358
            
            
            
            41,014Accrued
      short-term interest payable
            
            
            399,808
            
            
            
            289,360Working
      capital line of credit
            
            
            3,863,000
            
            
            
            713,000Warrants
      liability
            
            
            2,389,215
            
            
            
            7,532,370Current
      portion of long-term debt
            
            
            4,990,563
            
            
            
            3,678,882Total
      current liabilities
            
            
            13,806,006
            
            
            
            13,431,309Long-term
      debt, net of current portion
            
            
            13,587,773
            
            
            
            18,423,854Unamortized
      discount on long-term debt
            
            
            (9,216,562
            )
            
            
            (13,818,233
            )Accrued
      long-term interest payable
            
            
            52,444
            
            
            
            95,847Total
      liabilities
            
            
            18,229,661
            
            
            
            18,132,777Commitments
      and contingencies
            
            
            --
            
            
            
            --Stockholders'
      equity:Preferred
      stock, $0.001 par value, 10,000,000 shares authorized,
              1,952,683
      shares issued  and outstanding as of December 31,
      2007,
              1,775,166
      shares issued and outstanding as of December 31, 2006
            
            
            1,953
            
            
            
            1,775Common
      Stock, $0.001 par value, 300,000,000 shares authorized,
              153,378,797
      shares issued and outstanding as of December 31, 2007,
              149,504,927
      shares issued and outstanding as of December 31, 2006
            
            
            153,379
            
            
            
            149,504Additional
      paid in capital
            
            
            53,549,821
            
            
            
            43,196,496Deferred
      compensation
            
            
            (4,023,653
            )
            
            
            --Accumulated
      deficit
            
            
            (49,529,589
            )
            
            
            (40,305,486
            )Total
      stockholders' equity
            
            
            151,911
            
            
            
            3,042,289Total
      liabilities and stockholders' equity
            
            $
            18,381,572
            
            
            $
            21,175,066




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




F-3




JAVO
      BEVERAGE COMPANY, INC.STATEMENTS
      OF OPERATIONSFor
      the Years Ended December 31, 2007, 2006 and 20052007
            
            
            2006
            
            
            2005Net
      sales
            
            $
            12,559,132
            
            
            $
            10,321,655
            
            
            $
            6,200,327Cost
      of sales
            
            
            (8,504,863
            )
            
            
            (6,811,319
            )
            
            
            (4,107,634
            )Gross
      profit
            
            
            4,054,269
            
            
            
            3,510,336
            
            
            
            2,092,693Operating
      expenses:Selling
      and marketing
            
            
            (4,687,083
            )
            
            
            (2,408,265
            )
            
            
            (1,245,971
            )General
      and administrative
            
            
            (6,472,440
            )
            
            
            (3,906,004
            )
            
            
            (2,879,022
            )Total
      operating expenses
            
            
            (11,159,523
            )
            
            
            (6,314,269
            )
            
            
            (4,124,993
            )Loss
      from operations
            
            
            (7,105,254
            )
            
            
            (2,803,933
            )
            
            
            (2,032,300
            )Other
      income (expenses):Interest
      income
            
            
            673,597
            
            
            
            28,963
            
            
            
            17,720Interest
      expense
            
            
            (6,200,874
            )
            
            
            (2,162,999
            )
            
            
            (2,855,638
            )Accelerated
      interest expense
            
            
            --
            
            
            
            (5,384,964
            )
            
            
            --Income
      from derivatives
            
            
            5,143,156
            
            
            
            404,721
            
            
            
            --Other
      income
            
            
            46,297
            
            
            
            --
            
            
            
            26,070Loss
      on disposal of assets
            
            
            (5,858
            )
            
            
            (7,860
            )
            
            
            --Total
      other expense
            
            
            (343,682
            )
            
            
            (7,122,139
            )
            
            
            (2,811,848
            )Net
      loss
            
            $
            (7,448,936
            )
            
            $
            (9,926,072
            )
            
            $
            (4,844,148
            )Basic
      and diluted loss per share
            
            $
            (0.05
            )
            
            $
            (0.07
            )
            
            $
            (0.03
            )Weighted
      average number of shares outstanding, basic and diluted
            
            
            150,709,665
            
            
            
            149,494,203
            
            
            
            149,441,676







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




F-4





JAVO
      BEVERAGE COMPANY, INC.STATEMENTS
      OF STOCKHOLDERS' EQUITYFor
      the Years Ended December 31, 2005, 2006 and 2007Common
      Stock
            
            
            Additional
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Paid-in-Capital
            
            
            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' EQUITYFor
      the Years Ended December 31, 2005, 2006 and
2007




Common
      Stock
            
            
            Preferred
      Stock
            
            
            Additional
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Paid-in-Capital
            
            
            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.STATEMENTS
      OF STOCKHOLDERS' EQUITYFor
      the Years Ended December 31, 2005, 2006 and
2007




AdditionalCommon
      Stock
            
            
            Preferred
      Stock
            
            
            Paid-in
            
            
            Accumulated
            
            
            DeferredShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            Compensation
            
            
            TotalBalances
      at January 1, 2007
            
            
            149,504,927
            
            
            $
            149,504
            
            
            
            1,775,166
            
            
            $
            1,775
            
            
            $
            43,196,496
            
            
            $
            (40,305,486
            )
            
            
            --
            
            
            $
            3,042,289Stock
      returned to treasury by terminated employee
            
            
            (4,000
            )
            
            
            (4
            )
            
            
            --
            
            
            
            --
            
            
            
            4
            
            
            
            --
            
            
            
            --
            
            
            
            --Stock
      options granted to executive team
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            4,988,000
            
            
            
            --
            
            
            
            (4,988,000
            )
            
            
            --Recognition
      of stock option expense
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            964,347
            
            
            
            964,347Stock
      issued in repayment of Sr. Convertible debt
            
            
            3,077,780
            
            
            
            3,079
            
            
            
            --
            
            
            
            --
            
            
            
            2,876,575
            
            
            
            --
            
            
            
            --
            
            
            
            2,879,654Stock
      issued in repayment of Sr. Convertible interest
            
            
            685,330
            
            
            
            685
            
            
            
            --
            
            
            
            --
            
            
            
            704,117
            
            
            
            --
            
            
            
            --
            
            
            
            704,802Preferred
      shares issued as a stock dividend at $.001 per share at $1 per
      share
            
            
            --
            
            
            
            --
            
            
            
            177,517
            
            
            
            178
            
            
            
            1,774,989
            
            
            
            (1,775,167
            )
            
            
            --
            
            
            
            --Warrants
      redeemed at a strike price of $0.085 per agreement with
      consultant
            
            
            114,760
            
            
            
            115
            
            
            
            --
            
            
            
            --
            
            
            
            9,640
            
            
            
            --
            
            
            
            --
            
            
            
            9,755Net
      loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (7,448,936
            )
            
            
            --
            
            
            
            (7,448,936
            )Balance
      at December 31, 2007
            
            
            153,378,797
            
            
            $
            153,379
            
            
            
            1,952,683
            
            
            $
            1,953
            
            
            $
            53,549,821
            
            
            $
            (49,529,589
            )
            
            $
            (4,023,653
            )
            
            
            151,911







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




F-7




JAVO
      BEVERAGE COMPANY, INC.STATEMENT
      OF CASH FLOWSFor
      the Years Ended December 31,




2007
            
            
            2006
            
            
            2005Cash
      flows from operating activities:Net
      loss
            
            $
            (7,448,936
            )
            
            $
            (9,926,072
            )
            
            $
            (4,844,148
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Non-cash
      items:Depreciation
      and amortization
            
            
            5,205,898
            
            
            
            2,415,581
            
            
            
            1,889,966Accelerated
      interest and discount converted to preferred stock
            
            
            --
            
            
            
            5,384,964
            
            
            
            --Gain
      on derivatives
            
            
            (5,143,156
            )
            
            
            (404,721
            )
            
            
            --Deferred
      compensation
            
            
            964,347
            
            
            
            --
            
            
            
            --Provision
      for bad debt
            
            
            179,750
            
            
            
            212,400
            
            
            
            151,969Issuance
      of common stock for compensation
            
            
            --
            
            
            
            7,249
            
            
            
            101,438Issuance
      of warrants for services
            
            
            --
            
            
            
            1,541
            
            
            
            46,712Loss
      on disposal of assets
            
            
            5,858
            
            
            
            7,860
            
            
            
            --Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (817,529
            )
            
            
            (279,784
            )
            
            
            (613,227
            )Inventories
            
            
            16,746
            
            
            
            700,433
            
            
            
            (1,120,644
            )Prepaid
      expenses and other assets
            
            
            (575,132
            )
            
            
            (105,926
            )
            
            
            (128,588
            )Employee
      advances
            
            
            1,362
            
            
            
            (1,362
            )
            
            
            14,174Accounts
      payable and accrued expenses
            
            
            847,382
            
            
            
            (22,475
            )
            
            
            551,402Accrued
      payroll and related benefits
            
            
            98,344
            
            
            
            13,696
            
            
            
            785Accrued
      interest payable
            
            
            771,847
            
            
            
            60,813
            
            
            
            1,228,966Net
      cash used in operating activities
            
            
            (5,893,219
            )
            
            
            (1,935,803
            )
            
            
            (2,721,195
            )Cash
      flows from investing activities:Change
      in restricted cash
            
            
            (3,863,000
            )
            
            
            --
            
            
            
            --Proceeds
      from disposal of equipment
            
            
            7,317
            
            
            
            1,094
            
            
            
            --Purchases
      of property and equipment
            
            
            (4,080,876
            )
            
            
            (127,040
            )
            
            
            (291,048
            )Net
      cash used in investing activities
            
            
            (7,936,559
            )
            
            
            (125,946
            )
            
            
            (291,048
            )Cash
      flows from financing activities:Proceeds
      from long-term debt
            
            
            --
            
            
            
            21,000,003
            
            
            
            1,450,000Proceeds
      from line-of-credit borrowing
            
            
            3,863,000
            
            
            
            713,000
            
            
            
            --Repayment
      on line-of-credit
            
            
            (713,000
            )
            
            
            --
            
            
            
            --Loan
      costs
            
            
            --
            
            
            
            (1,822,449
            )
            
            
            (95,000
            )Payments
      on long-term debt
            
            
            (1,017,230
            )
            
            
            (24,198
            )
            
            
            --Proceeds
      from exercised warrants
            
            
            9,755
            
            
            
            --
            
            
            
            84,625Net
      cash provided by financing activities
            
            
            2,142,525
            
            
            
            19,866,356
            
            
            
            1,439,625Net
      change in cash and cash equivalents
            
            
            (11,687,253
            )
            
            
            17,804,607
            
            
            
            (1,572,618
            )Cash
      and cash equivalents at beginning of period
            
            
            18,324,161
            
            
            
            519,554
            
            
            
            2,092,172Cash
      and cash equivalents at end of period
            
            $
            6,636,908
            
            
            $
            18,324,161
            
            
            $
            519,554






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




F-8




JAVO
      BEVERAGE COMPANY, INC.STATEMENT
      OF CASH FLOWS (Continued)For
      the Years Ended December 31,




2007
            
            
            2006
            
            
            2005Non-cash
      activities:Issuance
      of preferred stock in exchange for debt
            
            
            --
            
            
            $
            17,751,660
            
            
            
            --Issuance
      of preferred stock as in-kind dividend
            
            $
            1,775,167Issuance
      of common stock in exchange for debt
            
            $
            2,879,654
            
            
            
            --
            
            
            
            --Issuance
      of common stock in exchange for interest due
            
            $
            704,802
            
            
            
            --
            
            
            
            --Deferred
      compensation
            
            $
            4,988,000Equipment
      from capital lease
            
            $
            362,982
            
            
            $
            63,726
            
            
            
            --Discount
      for beneficial conversion feature of Senior Convertible
    Debt
            
            
            --
            
            
            $
            4,065,583
            
            
            
            --Warrant
      Liability
            
            $
            5,143,155
            
            
            $
            7,532,370
            
            
            
            --Supplemental
      cash flow information:Cash
      paid for interest
            
            $
            689,806
            
            
            $
            50,854
            
            
            $
            2,954Cash
      paid for income taxes
            
            $
            3,918
            
            
            $
            1,936
            
            
            $
            5,787






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







F-9





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007




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.





Nature of
Operations





Javo
manufactures and sells concentrated beverage solutions that allow restaurants in
the food service industry and food and beverage manufacturers in the retail
industry to serve popular new specialty coffees and teas. For food service
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 flavors for their packaged foods and ready-to-drink beverages, Javo supplies
customized beverage formulations, extracts, and flavors.





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 receivables.




Concentration
of credit risk with respect to cash and cash equivalents and restricted cash is
the result of the Company having $10.5 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 investments are liquid and the Company can access all funds with 3
days or less notice.  The restricted cash amounting to $3,863,000 is
in Restricted Money market accounts and secures a line of credit. The Company
funds are in large financial institutions with less then $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,
2007, the Company had three customers whose balances approximated 20%, 16%, and
13% of gross accounts receivable. No other customer balance exceeded 10% of
gross accounts receivable.






F-10




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007





NOTE
2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Revenue
Recognition




We
recognize revenue when persuasive evidence of an arrangement exists, title
transfer has occurred, the price is fixed or readily determinable, and
collection is probable. We recognize revenue in accordance with Staff Accounting
Bulletin No. 104, "Revenue Recognition." Sales are recorded net of sales
returns and discounts, which are estimated at the time of shipment based upon
historical data.





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 $1,015,270, $707,916, and $271,394 for the years ended December
31, 2007, 2006 and 2005, 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.





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.






F-11





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007





NOTE
2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Derivative
Income





In
accordance with Emerging Issues Task Force (“EITF”) No. 00-19, the Company is
required to account for the warrants issued in connection with the Company’s
senior convertible debt as derivative liabilities.  The Company is
required to mark to market each quarter the value of the warrants issued in
connection with its senior convertible debt. The Company revalues these warrants
at the end of each reporting period.  The periodic change in value of
the warrants is recorded 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.





Loss per
Share





Basic EPS
is computed as net loss, divided by the weighted average shares outstanding
during the period.  The potential common shares that can be issued
total 22,101,690 at December 31, 2007, 19,311,721 at December 31, 2006 and
384,031 at December 31, 2005.  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




The
Company considers all highly liquid instruments with a maturity of three months
or less at purchase date to be cash equivalents. Cash and cash equivalents
include money market funds, which are carried at cost, plus accrued interest,
which approximates market.





Trade Accounts
Receivable





Trade
accounts receivable are recorded on shipment of products to customers and are
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.






F-12




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007




Reclassifications





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




Recent Pronouncements and
Accounting Changes




In
December 2007, the FASB issued SFAS No. 141(revised 2007), "Business
Combinations" ("SFAS No. 141R"). SFAS No. 141R will significantly
change the accounting for business combinations in a number of areas, including
the treatment of contingent consideration, contingencies, acquisition costs,
in-process research and development and restructuring costs. SFAS No. 141R
includes an amendment to SFAS No. 109, "Accounting for Income Taxes." This
statement is effective for fiscal years beginning after December 15, 2008.
The Company is assessing the impact of SFAS No. 141R and has not determined
whether it will have a material impact on the Company's results of operations or
financial position.




In
February 2007, the FASB issued SFAS No. 159, which permits entities to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 also includes an amendment to SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" which applies
to all entities with available-for-sale and trading securities. This Statement
is effective as of the beginning of an entity's first fiscal year that begins
after November 15, 2007. The Company is assessing the impact of SFAS
No. 159 and has not determined whether it will have a material impact on
the Company's results of operations or financial position.




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. In February 2008, the FASB issued FSP
FAS No. 157-1 and FSP FAS No. 157-2. FSP FAS No. 157-1 amends
SFAS No. 157, "Fair Value Measurements" to exclude SFAS No. 13,
"Accounting for Leases," and other accounting pronouncements that address fair
value measurements for purposes of lease classification or measurement under
SFAS No. 13. FSP FAS No. 157-2 delays the effective date of
SFAS 157 for all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually), until fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items
within the scope of this FSP. The Company is assessing SFAS No. 157 and FSP
FAS No. 157-1 and 157-2 and has not determined the impact the adoption of
SFAS No. 157 will have its results of operations or financial
position.






F-13





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007





NOTE
3.    MAJOR CUSTOMERS AND VENDORS





The
Company purchases certain products from five suppliers, which accounted for
approximately 62%, 62% and 60% of total purchases in 2007, 2006 and 2005,
respectively. Management does not believe that the loss of these suppliers would
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, 2007, 2006, and 2005, the Company had sales to three
major customers, which accounted for 20%, 16% and 13% of sales in 2007, 15%, 9%
and 7% of sales in 2006, 19%, 14% and 10% of sales in 2005,
respectively.  The Company expanded its customer base in 2007 and
anticipates that sales in 2008 will be to a broader base of customers and it
will be less reliant on any one customer.





Accounts
receivable consists of the following at December 31, 2007 and 2006





2007
            
            
            2006Accounts
      receivable
            
            $
            1,693,524
            
            
            $
            1,115,742Allowance
      for doubtful accounts
            
            
            (211,600
            )
            
            
            (271,598
            )$
            1,481,924
            
            
            $
            844,144





NOTE
4.    INVENTORY





Inventory
consists of the following at December 31, 2007 and 2006.





2007
            
            
            2006Raw
      Materials
            
            $
            326,170
            
            
            $
            462,558Finished
      Goods
            
            
            403,506
            
            
            
            283,864729,676
            
            
            
            746,422Reserve
      for Obsolescence
            
            
            (38,256
            )
            
            
            (38,256
            )$
            691,420
            
            
            $
            708,166





NOTE
5.    PROPERTY AND EQUIPMENT





Property
and equipment consists of the following at December 31, 2007, and
2006.





2007
            
            
            2006Production
      Equipment
            
            $
            4,524,563
            
            
            $
            1,639,675Construction
      in Process
            
            
            1,017,755
            
            
            
            --Office
      Equipment
            
            
            296,528
            
            
            
            206,926Leasehold
      Improvements
            
            
            381,430
            
            
            
            114,202Total
      Cost
            
            
            6,220,276
            
            
            
            1,960,803Less
      Accumulated Depreciation
            
            
            (1,575,283
            )
            
            
            (1,080,244
            )$
            4,644,993
            
            
            $
            880,559





During
the years ended December 31, 2007, 2006 and 2005 depreciation expense totaled
$506,592, $310,556 and $266,248, respectively.







F-14





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007




NOTE
7.    INTANGIBLE ASSETS





Intangible
assets include loan costs of $1,141,050, net of amortization of $1,131,592, or
$9,458.  These loan costs are being amortized over the five-year life
of the loans.  The loan costs related to promissory notes converted to
preferred stock in 2006 became fully amortized at the time of the
conversion.  Amortization expense as of December 2007, 2006 and 2005
was $16,834, $501,725, 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 food service operator.  In
connection with that contract, the Company agreed to pay a $900,000 conversion
fee that is being amortized based on quantities of product sold over the term of
the contract.  The Company paid $300,000 in 2005 and $600,000 in
2007.  The agreement was modified in April 2007 to include iced
dispensed products and extended the terms of the agreement though
2012.  The Company recorded an amortization expense for 2007, 2006 and
2005 of $80,802, $53,422 and $25,174, respectively.  The conversion
fee net of the $159,398 accumulated amortization is reported on the balance
sheet as part of the Company’s intangible assets.




2007
            
            
            2006Loan
      fees
            
            $
            1,141,050
            
            
            $
            1,141,050Conversion
      fee
            
            
            900,000
            
            
            
            300,0002,041,050
            
            
            
            1,441,050Accumulated
      amortization
            
            
            (1,290,990
            )
            
            
            (1,193,354
            )Net
      intangibles
            
            $
            750,060
            
            
            $
            247,696




Amortization
of the intangibles is as follows:





2007December
      31, 2008
            
            
            $
            70,1252009
            
            
            
            117,6672010
            
            
            
            171,1672011
            
            
            
            231,0002012
            
            
            
            160,101Thereafter
            
            
            
            0$
            750,060





NOTE
8.    WORKING CAPITAL LINE OF CREDIT





The
Company paid off its $713,000 working capital line of credit balance through
Comerica Bank in July 2007.  Also, in July 2007, the Company entered
into a $5,000,000 working capital loan with Wells Fargo Bank, N.A. that matures
July 1, 2009.  The loan is secured by restricted money market accounts
equaling the amount outstanding and carries an interest rate that floats at
1.25% over LIBOR rounded up to the next eighth of a point or a maximum of bank
prime.  The loan balance and current interest rate as of December 31,
2007, are $3,863,000 and ranges from 6.25% to 7.25%, respectively.  As
of December 31, 2007, the amount available on the line of credit was
$1,137,000.





NOTE
9.    LONG-TERM DEBT





Promissory
Notes





On April
11, 2002, the Company issued $5,000,000 in promissory notes bearing 10% interest
per year, which matured 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.  The remaining $500,000 of principal plus accrued interest of
$250,000 was paid by the Company in April 2007.


F-15





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007





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. The
remaining $225,000 plus accrued interest is due in 2008.





In 2004,
the Company issued $2,700,000 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
was converted to Series B Preferred Stock in 2006.  The remaining
$200,000 plus accrued interest is due in 2009.





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. The remaining
$25,000 plus accrued interest is due in 2010.







F-16





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007




NOTE
9.    LONG-TERM DEBT (continued)





Senior Convertible
Debt





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 or equal to $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 payment 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 without 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.





In 2007,
the Company paid $388,889 of principal and $433,796 of accrued interest in cash
and converted $2,879,654 in principal and $704,802 in accrued interest of the
senior convertible debt principal and accrued interest into 3,763,110 shares of
its Common Stock.  The Company recorded a non-cash accretion expense
of $4,496,279 and $186,943, in 2007 and 2006, respectively.





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 EITF 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 a 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 2006.  In
addition, the Company reimbursed Cowen for its out-of-pocket expenses and issued
Cowen Conversion Share Warrants 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.






F-17


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007




NOTE
9.    LONG-TERM DEBT (continued)





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.  The 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. In January 2007,
the Company filed an S-3 Registration Statement with the Securities and Exchange
Commission.  It was declared effective April 25, 2007.





The
Company determined that all the conversion shares and Series 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 to 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, 2007, the Company determined that , using the Black-Scholes
formula, the fair value of the warrants had declined.  Accordingly,
the Company recorded “Income from derivatives” and recorded a corresponding
reduction in the “Warrants liability” of $5,143,156.





Long-term
debt at December 31, 2007 and 2006 consisted of the following:





2007
            
            
            2006Senior
      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.
            
            $
            17,731,461
            
            
            $
            21,000,003Notes
      payable, unsecured, payable at maturity including interest at 10% per
      annum.  Matures 2008.
            
            
            225,000
            
            
            
            225,000Lease
      payable, secured by equipment, payable in monthly installments of $4,991,
      including interest at 13.427% per annum.  Matures
      2013.
            
            
            224,796
            
            
            
            --Notes
      payable, unsecured, payable at maturity including interest at 10% per
      annum.  Matures 2009.
            
            
            200,000
            
            
            
            200,000Lease
      payable, secured by equipment, payable in monthly installments of $1,460,
      including interest at 16.642% per annum.  Matures
      2011.
            
            
            43,741
            
            
            
            53,112Lease
      payable, secured by equipment, payable in monthly installments of $631,
      including interest at 6% per annum.  Matures
    2012.
            
            
            29,795
            
            
            
            --Notes
      payable, unsecured, payable at maturity including interest at 10% per
      annum.  Matures 2010.
            
            
            25,000
            
            
            
            25,000Lease
      payable, secured by equipment, payable in monthly installments of $564,
      including interest at 9.879% per annum.  Matures
      2012.
            
            
            24,510
            
            
            
            --Lease
      payable, secured by equipment, payable in monthly installments of $438,
      including interest at 8.394% per annum.  Matures
      2012.
            
            
            19,040
            
            
            
            --Lease
      payable, secured by equipment, payable in monthly installments of $498 at
      an annual interest rate of 10.741%.  Matures in
      2011.
            
            
            17,386
            
            
            
            21,270








F-18


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007





NOTE
9.    LONG-TERM DEBT (continued)





Lease
      payable, secured by equipment, payable in monthly installments of $3434,
      including interest at 0% per annum.  Matures
    2008.
            
            
            13,772Lease
      payable, secured by equipment, payable in monthly installments of $1,312,
      including interest at 23.38% per annum.  Matures
      2008.
            
            
            11,815
            
            
            
            23,289Note
      payable, unsecured, payable in monthly installments of $1,174, including
      effective interest at 6.09% per annum.  Matures
      2008.
            
            
            8,222
            
            
            
            21,370Lease
      payable, secured by equipment, payable in monthly installments of $485,
      including interest at 6.0% Matures 2008.
            
            
            3,798
            
            
            
            9,218Notes
      payable, unsecured, payable at maturity including interest at 10% per
      annum.  Matured and paid in 2007.
            
            
            --
            
            
            
            500,000Lease
      payable, secured by equipment, payable in monthly installments of $1,150,
      including interest at 14.677%.  Matured and paid in
      2007.
            
            
            --
            
            
            
            12,763Lease
      payable, secured by equipment, payable in monthly installments of $1,701,
      including interest at 27.663% per annum.  Matured and paid in
      2007.
            
            
            --
            
            
            
            10,883Lease
      payable, secured by equipment, payable in monthly installments of $159,
      including interest at 49.273% per annum.  Matured and paid in
      2007.
            
            
            --
            
            
            
            82818,578,336
            
            
            
            22,102,736Less
      current portion
            
            
            4,990,563
            
            
            
            3,678,882$
            13,587,773
            
            
            $
            18,423,854








Long-term
      debt matures as follows:
            
            2007December
      31, 2008
            
            $
            4,990,5632009
            
            
            4,911,1162010
            
            
            4,795,4322011
            
            
            3,803,9192012
            
            
            62,661Thereafter
            
            
            14,645$
            18,578,336








F-19





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007




NOTE
10.    COMMITMENTS AND CONTINGENCIES





Leases





The
Company entered into a non-cancelable operating lease for its office space in
October 2002. The lease expires in October 2009. Total rent expense for all
operating leases for the years ended December 31, 2007, 2006 and 2005 amounted
to $337,624, $324,223 and $313,533, respectively.





The
Company's future annual minimum lease payments as of December 31, 2007 are as
follows:





Year
      Ending2008
            
            $
            283,7042009
            
            
            267,320$
            551,024





Litigation





As of
December 31, 2007 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.





NOTE
11.    STOCK AND WARRANT TRANSACTIONS





Stock Option
Issuances





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





On April
25, 2007, the Company adopted its 2007 Stock Option and Incentive Plan, which
had been recommended by the Compensation Committee of the Board and approved by
the Board.  The Plan allows for the grant of equity options to the
Company’s officers, employees, directors and consultants and currently reserves
15 million shares of the Company’s Common Stock for
issuances.  Details of these actions are set forth in the Company’s
report on Form 8-K filed April 27, 2007.  The expense price under the
plan may not be less than 100% of the fair market value of the Company’s Common
Stock on the date of grant.





On April
25, 2007, a majority of the independent members of the Board approved the award
of incentive options for the purchase of a total of 5,000,000 shares of the
Company’s restricted Common Stock at a strike price of $1.16 to four Company
executives and one key employee.  Sixty percent of the options vest
after 3 years, 20% after 4 years, and the remaining 20% after 5
years.  The fair value of the ten-year options was determined to be
$4,988,000.  This was calculated using Black Scholes with a 105% stock
volatility, 2,555 days for the estimated remaining life of the options, a fixed
interest rate of 4.5%, and the strike price of $1.16.  The Company is
recognizing the value of the options as non-cash deferred compensation over the
term of the options based on their vesting schedule.  In 2007, the
Company recorded a non-cash expense of $964,347 related to the stock
options.  A summary of option activity for 2007 is presented
below:





Options
            
            SharesOutstanding
      at December 31, 2006
            
            
            --Granted
            
            
            5,000,000Exercised
            
            
            --Forfeited
            
            
            --Expired
            
            
            --Outstanding
      at December 31, 2007
            
            
            5,000,000






F-20




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007





NOTE
11.    STOCK AND WARRANT TRANSACTIONS
(Continued)





The
calculation of stock-based compensation requires the Company to make numerous
estimates and assumptions and is particularly sensitive to the expected life of
each stock option and the estimated volatility of its stock, both of which the
Company estimates based primarily on historical
experience.  Accordingly, this expense may not be representative of
that to be expected in future years.




In
connection with the issuance of these options, the Company recorded deferred
compensation of $4,988,000, which is being amortized as an expense based on the
five year vesting period as follows:  $361,630 per quarter until May
2010, $112,230 per quarter until May 2011, and $49,880 until April
2012.





Warrants – Senior
Convertible Debt





The
outstanding warrants for the purchase of the Company’s Common Stock as of
December 31, 2007, are listed below.  None of the warrants is owned by
a director, officer or employee of the Company.





Strike
                Price
              
              
              Number
                of
                Warrants
              
              Exercise
      Period$
              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 20137,195,846
              
              Total
      Outstanding Warrants


If these
warrants were exercised, the Company would receive $14.9 million in additional
capital.  These warrants are being accounted for as derivative
instruments and the fair value is determined on a mark-to-market basis using the
Black Scholes Valuation Model.  During 2007, the Company recorded
non-cash derivative income of $5,143,156.





Warrants - Consulting
Agreements





In 2003,
the Company entered into an agreement with a consultant to implement a national
sales effort for the Company's products.  As of December 31, 2007, the
consultant had exercised warrants for 230,729 shares at $0.085 per
share.  In prior years, the Company had previously recorded expense
totaling $127,858 for issuance of the warrants.  In November 2007, by
agreement of the parties the contract was cancelled and no further warrants are
issuable.  No additional warrants remain to be issued or
exercised.







F-21


JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2007








NOTE
12.    PROVISION FOR INCOME TAXES





No
provision for income taxes was recorded in 2007, 2006 or 2005 since the Company
generated both book and tax losses.  The Company’s deferred tax assets
consist of the following:





PROVISION
      FOR INCOMES TAXES
            
            2007
            
            
            2006
            
            
            2005Net
      operating loss carry forward
            
            $
            49,500,000
            
            
            $
            40,300,000
            
            
            $
            30,300,000Calculated
      deferred tax benefit
            
            $
            19,800,000
            
            
            $
            16,120,000
            
            
            $
            12,120,000Valuation
      allowance
            
            $
            (19,800,000
            )
            
            $
            (16,120,000
            )
            
            $
            (12,120,000
            )Deferred
      tax asset
            
            $
            --
            
            
            $
            --
            
            
            $
            --Provision
      for income tax benefits were as follows:Tax
      benefit, calculated at statutory rate
            
            $
            (3,128,400
            )
            
            $
            (2,546,960
            )
            
            $
            (1,920,000
            )Increase
      in valuation allowance
            
            $
            3,128,400
            
            
            $
            2,546,960
            
            
            
            1,920,000$
            --
            
            
            $
            --
            
            
            $
            --





At
December 31, 2007, the Company had net operating carry forwards for federal and
state purposes that expire in various years through 2026.  The extent
to which these loss carry forwards can be used to offset future taxable income
may be limited.





NOTE  13.    RELATED
PARTY TRANSACTIONS





Debt
Conversion





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.





Dispenser





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, Hackett and Solomon, two former directors 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 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 with non-related
parties.





As of
December 31, 2007, the LLC had purchased 896 dispensers.  The Company
incurred dispenser rental expense of $716,640 and $370,791, in 2007 and 2006,
respectively. Presented below are the Condensed Balance Sheets as of December
31, 2007 and 2006, and the Statements of Operations for the years ended December
31, 2007 and 2006, respectively.







F-22







JAVO
      DISPENSER, LLC.CONDENSED
      BALANCE SHEETSAs
      of December 31, 2007 and 2006(UNAUDITED)




2007
            
            
            2006ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            17,000
            
            
            $
            227,076Accounts
      receivable
            
            
            164,080
            
            
            
            30,700Total
      current assets
            
            
            181,080
            
            
            
            257,776Property
      and equipment, net
            
            
            1,475,782
            
            
            
            1,598,196Total
      assets
            
            $
            1,656,862
            
            
            $
            1,855,972LIABILITIES
      AND MEMBER EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            57,745
            
            
            $
            337,545Long-term
      debt
            
            
            1,378,597
            
            
            
            1,436,373Total
      liabilities
            
            
            1,436,342
            
            
            
            1,773,918Member
      Equity
            
            
            220,520
            
            
            
            82,054Total
      liabilities and member equity
            
            $
            1,656,862
            
            
            $
            1,855,972







JAVO
      DISPENSER, LLC.CONDENSED
      STATEMENTS OF OPERATIONSFor
      the Years Ended December 31, 2007and 2006(UNAUDITED)




2007
            
            
            2006Rental
      Income
            
            $
            716,640
            
            
            $
            370,791Operating
      expenses:General
      and administrative
            
            
            (434,307
            )
            
            
            (216,119
            )Total
      operating expenses
            
            
            (434,307
            )
            
            
            (216,119
            )Income
      from operations
            
            
            282,333
            
            
            
            154,672Other
      income (expenses):Interest
      expense
            
            
            (143,887
            )
            
            
            (81,828
            )Net
      Income
            
            $
            138,466
            
            
            $
            72,844






F-23





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, 2007.   Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the 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 a
material weakness.  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





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in the Exchange Act Rule
13a-15(f).  The Company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
responsible 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 (iii) provide reuse, or disposition of the Company’s assets
that could have a material effect on the financial statements.





Internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements prepared for external purposes in accordance with generally
accepted accounting principles.  Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





Under the
supervision and with the participation of management, including the principal
executive officer and principal financial officer, the Company conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, management
concluded that out internal control over financial reporting was ineffective as
of December 31, 2007.





During
this evaluation, the Company identified a material weakness in its internal
control over financial reporting.  This significant deficiency was in
inventory process where the Company had not fully developed processes to test
and monitor proper tracking of inventory quantities and values within its
inventory program. Specifically, this material weakness consists of the
inventory software not properly including costs of raw material purchased and
used in Javo’s manufacturing process.  Quantities of raw materials, WIP,
and finished goods were found to be correct, but valuation of these quantities
required a re-valuation when being adjusted from the inventory software to the
accounting software.  Because of the large quantity of items used in the
processes, and the numerous times purchased, the current cost of the items are
updated only periodically in the re-valuation sheet.  Testing found that
numerous costs were incorrect; however, the amount of the resulting difference
was immaterial to the financial statements.





Changes
in Internal Control over Financial Reporting





In the
fourth quarter of 2006 and the first quarter of 2007, the Company made several
changes in its internal control over financial reporting to remediate and
correct identified deficiencies and material weaknesses in its internal control
and procedures.  These changes primarily involved further separation
of duties in the control processes, additional review steps in certain
processes, formalization and retention of written documentation of control,
review and approval processes and additional training and staff involved in the
financial process and realignment of certain access rights by position within
its accounting and information reporting departments.  More details of
the changes were disclosed in the Form 10K filed for 2006.








19





The
Company recognized that its inventory software was not properly including costs
of raw material purchased and used in Javo’s manufacturing process. 
Quantities of raw materials, WIP, and finished goods were found to be correct,
but valuation of these quantities required a re-valuation when being adjusted
from the inventory software to the accounting software.  Because of the
large quantity of items used in the processes, and the numerous times purchased,
the current cost of the items are updated only periodically in the re-valuation
sheet.  Testing found that numerous costs were incorrect; however, the
amount of the resulting difference was immaterial to the financial
statements.





The
Company intends to improve the inventory process and eliminate the deficiency in
2008.





We hired
an independent consultant to help the Company develop and implement the best
process to insure that costs built up through the various processes are accurate
and flow through the software system in a timely manner.   In the
meantime, Company personnel including the Chief Financial Officer continue as a
matter of routine, review the final inventory values to insure there is no
material misstatement of the final inventory value in its financial
reports.





The
Company management has and continues to remain vigilant and take actions to
identify and correct any known deficiencies 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 processes involved in its internal control over
financial reporting.





The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007 has been audited by Farber Hass Hurley LLP, an independent
registered public accounting firm, as stated in their report which is included
herein.






REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Board of Directors and


Stockholders
of Javo Beverage Company, Inc.




We have
audited Javo Beverage Company, Inc.’s internal control over financial reporting
as of December 31, 2007 based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Javo Beverage Company, Inc.’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, included in the accompanying Management’s Report on Internal Control.
Our responsibility is to express an opinion on 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 of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A
company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that 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 control deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely basis. The
following material weakness has been identified and included in management’s
assessment:






20




·
              controls
      related to inventory values– The Company’s inventory
      software system was not adequately tested and monitored to insure proper
      valuation as of December 31,
2007.




This
material weakness was considered in determining the nature, timing, and extent
of audit tests applied in our audit of the 2007 financial statements, and this
report does not affect our report dated March 14, 2008 on those financial
statements.




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, 2007, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets and the related statements
of income, stockholders’ equity, and cash flows of Javo Beverage Company, Inc.,
and our report dated March 14, 2008 expressed an unqualified
opinion.










/s/
Farber Hass Hurley LLP


Granada
Hills, CA


March 14,
2008




Item
      9B.
            Other
      Information





Not
applicable.










21








PART
III




ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Directors
and Executive Officers





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





CODY C. ASHWELL,
37





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,
51





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,
59





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.





WILLIAM E. MARSHALL,
37





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,
74





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,
69





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.






22





JERRY W. CARLTON,
66





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,
59





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 School of Law.





STANLEY A. SOLOMON,
67





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,
55





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.




Compliance
With Section 16(a) of the Exchange Act




Under
Section 16(a) of the Securities Exchange Act of 1934 and SEC rules, our
directors, executive officers and beneficial owners of more than 10% of any
class of equity security are required to file periodic reports of their
ownership, and changes in that ownership, with the SEC.  Executive
officers, directors and greater-than-10% stockholders 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% stockholders were timely
filed, other than one report on Form 4 that was filed late on behalf of Richard
Specter reporting a purchase of our common stock.







23





Code
of Ethics




During
2007, the Company 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.  We
have posted a copy of our code of ethics on our website at www.javobeverage.com.  You
may also request a printed copy of the code of ethics, without charge, by
writing us at 1311 Specialty Drive, Vista, California  92081, Attn:
Investor Relations.




Audit
Committee




We
currently do not have a standing audit committee.  As a small company
that is traded on the OTC market, we believe that all members of our Board of
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 an audit committee; therefore, our entire
Board of Directors acts as the audit committee.  The Board of
Directors has determined that William C. Baker qualifies as an audit committee
financial expert as defined in Item 407 of Regulation S-K of the Securities and
Exchange Act of 1934.  We believe that Mr. Baker does not satisfy the
independence standards promulgated by the NASDAQ Stock Market (including
independence standards for audit committee members) due to his ownership of Javo
Dispenser, LLC.  Because we do not have a separate audit committee, we
do not currently have a written audit committee charter or similar
document.  We plan to form a standing audit committee during fiscal
2008.




ITEM
11.                      EXECUTIVE
COMPENSATION




Compensation
Discussion and Analysis




Compensation
Philosophy and Objectives




Our
compensation program is designed to attract, inspire, motivate and reward
executives responsible for attaining the financial and strategic objectives
essential to our long-term success and growth in stockholder value. The key
objectives of the compensation program are to:




•
            
            attract
      and retain executives who are talented, qualified and capable of achieving
      our business objectives;




•
            
            remain
      competitive with the compensation paid to similarly situated executive
      officers at other companies in our
industry;




•
            
            inspire
      and motivate executives to achieve operating goals through
      performance-based compensation;





•
            
            provide
      a strong, direct link between our financial and strategic goals and
      executive compensation;




•
            
            align
      the interests of our executives and stockholders by tying elements of
      compensation to the achievement of Company goals;
  and





•
            
            fairly
      reward executives for their
efforts.








24








Historically,
the sole compensation element had been a base salary.  Due to the
Company’s limited cash resources, cash bonuses had not been awarded and we had
historically not compensated officers with equity awards so as to minimize
stockholder dilution and to avoid the potential negative impact on the Company’s
ability to raise capital in equity financing transactions.  In fiscal
2007, the Company formed a compensation committee tasked with the goal of
reviewing the design and guiding philosophy for the Company’s executive
compensation practices.  Following a review of historical compensation
levels, overall operating performance and individual officer performance, and in
light of the Company’s success in raising a relatively significant amount of
additional operating capital in December 2006, the compensation committee in
April 2007 recommended, and the independent members of the Board approved, the
establishment of an equity incentive plan and the issuance of equity awards
thereunder, as described more fully below. The adoption of an equity
compensation plan reflects the compensation committee’s desire to align the
long-term financial interests of the management team with the interests of the
stockholders, as well as to reinforce a sense of ownership and overall
entrepreneurial spirit.  The Board in fiscal 2007 also approved a
performance-based discretionary cash bonus program to further inspire and
motivate executives, as more fully described below.




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 by the Board and other members of management 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.  In April 2007, the compensation committee reviewed
officer salaries and concluded that salary levels of the Company’s executive
officers were below competitive levels within the Company’s industry and
geographic areas.  The Compensation Committee recommended, and a
majority of the independent members of the Board approved, certain compensation
changes for the Company’s executive officers.  In approving these
changes, the independent directors considered historical compensation levels,
including the lack of equity awards, bonus payments and general salary increases
in prior periods, and individual and Company performance in prior
periods.





Elements
of Executive Officer Compensation





Base Salary. We seek to
provide our executive officers with competitive annual base salaries in order to
attract and retain key employees.  The base salary component of our
executive officer compensation program is not designed to incentivize our
near-term performance (as performance-based cash bonuses are designed to do),
but rather to provide the baseline level of compensation to executive
officers.  In most cases, the base salary component will represent the
largest annual form of compensation to executive officers, although we have no
formal policy regarding the allocation between base salary and other forms of
compensation.  In making decisions regarding base salary levels, the
compensation committee will consider and evaluate the total compensation
package, including possible performance-based cash bonuses and periodic equity
awards, received or to be received by a particular executive officer, and seek
to ensure that the executive officer’s total compensation package is fair,
reasonable and competitive, as determined by the committee, based on the
experience of its members and on comparable compensation levels in our
industry.  In determining appropriate salary levels for a given
executive officer, the compensation committee considers the following
factors:




•
            
            individual
      performance of the executive, as well as our overall performance, during
      the prior year;





•
            
            level
      of responsibility;




•
            
            breadth,
      scope and complexity of the
position;





•
            
            internal
      review of the executive’s compensation relative to other executives to
      ensure internal equity; and




•
            
            executive
      officer compensation levels at other similar companies to ensure
      competitive compensation.











25





Prior to
December 2006, because the Company had only limited operating capital, the
Company had 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 2007, after the
compensation committee reviewed officer salaries and concluded that salary
levels of the Company’s executive officers were below competitive levels within
the Company’s industry and geographic areas, the base salaries of the executive
officers were increased.  These base salary increases for fiscal 2007,
effective as of April 2007, are set forth in the table below for each of our
named executive officers.  We expect the compensation committee will
conduct similar reviews periodically and adjust salaries as necessary.





Name
              
              2006 Base
                Salary
              
              
              2007 Base
                Salary
              
              
              IncreaseC     Cody
      C. Ashwell
              
              $
              180,000
              
              
              $
              210,000
              
              
              16.7
              %Ga   Gary
      A. Lillian
              
              
              180,000
              
              
              
              200,000
              
              
              11.1Ri    Richard
      A. Gartrell
              
              
              180,000
              
              
              
              200,000
              
              
              11.1William
      E. Marshall
              
              
              162,750
              
              
              
              200,000
              
              
              22.9





The base
salaries actually paid to each of the named executive officers in fiscal 2007
are set forth below in the Summary Compensation Table.





Cash Bonus.Also starting in fiscal
2007, the compensation committee initiated the practice of providing executive
officers with discretionary performance-based cash bonuses, which are
specifically designed to reward executives for the Company’s overall performance
as well as individual performance in a given year.  In April 2007, the
compensation committee considered the Company’s performance and individual
officer performance in prior periods.  The committee then compared
historical compensation levels to the levels of compensation that was judged by
the members of the committee to be typical within the Company’s industry and in
Southern California.  Based on these considerations, the committee
recommended, and a majority of the independent members of the Board approved,
the following bonus awards for 2007.





Name
              
              
              Bonus for
      Fiscal 2007Cody
      C. Ashwell
              
              
              $
              170,000Gary
      A. Lillian
              
              
              
              100,000Richard
      A. Gartrell
              
              
              
              100,000William
      E. Marshall
              
              
              
              100,000




Equity Awards.  In
April 2007, the compensation committee recommended that the Company adopt an
equity incentive plan, pursuant to which the Company could grant various types
of equity awards to the Company’s employees, including the named executive
officers.  In prior years, the Company had not granted equity awards
to executive officers so as to avoid stockholder dilution, particularly at a
time when the Company was focused on its need to be able to raise additional
capital through equity financings.  Based on the recent stabilization
of the Company’s cash position and improved financial performance, the committee
felt that it would be appropriate to adopt an equity incentive plan and to
provide appropriate equity awards thereunder to the executive
officers.  Accordingly, in April 2007, the Board approved the
Company’s 2007 Stock Option and Incentive Plan, or the 2007 Plan, under which
the Company may grant stock options, restricted stock, performance shares and
unrestricted stock to eligible employees, officers, directors and
consultants.




Initial
option grants were made under the 2007 Plan in April 2007 to five executive
officers, including each of the named executive officers.  These
option grants vest over five years, with 60% of the shares vesting on the third
anniversary of the grant date, 20% of the shares vesting on the fourth
anniversary of the grant date and 20% of the shares vesting on the fifth
anniversary of the grant date. The options have a ten-year term and an exercise
price of $1.16 per share, which was the fair market value of the common stock on
the date of grant.  By providing for an extended vesting period, the
compensation committee sought to create a retention tool that would incentivize
the named executive officers to remain employed with the Company during the
vesting period and build stockholder value over the option term.




The value
of the shares subject to the fiscal 2007 option grants to the named executive
officers is reflected in the Summary Compensation Table below and further
information about these grants is reflected in the Grants of Plan-Based Awards
table below.







26





Other
Benefits




Executive
officers are eligible to participate in all of our employee benefit plans, such
as medical, dental, vision, group life and accidental death and dismemberment
insurance, in each case on the same basis as other employees, subject to
applicable law.  We also provide vacation and other paid holidays to
all employees, including executive officers, all of which we believe to be
comparable to those provided at peer companies. These benefit programs are
designed to enable us to attract and retain our workforce in a competitive
marketplace.  Health, welfare and vacation benefits ensure that we
have a productive and focused workforce through reliable and competitive health
and other benefits.




Tax
and Accounting Considerations




Deductibility of Executive
Compensation. In making compensation decisions affecting our executive
officers, the compensation committee considers our ability to deduct under
applicable federal corporate income tax law compensation payments made to
executives. Specifically, the compensation committee considers the requirements
and impact of Section 162(m) of the Internal Revenue Code, which limits the
tax deductibility to us of compensation in excess of $1.0 million in any year
for certain executive officers, except for qualified “performance-based
compensation” under the Section 162(m) rules. The compensation committee
considers the Section 162(m) rules as a factor in determining compensation,
but will not necessarily limit compensation to amounts deductible under
Section 162(m). No covered executive’s compensation exceeded $1.0 million
for 2007.




Accounting for Stock-Based
Compensation. Effective October 1, 2005, we adopted the fair value
recognition provisions of SFAS No. 123(R) to account for all stock grants
under all of our stock plans. Under SFAS No. 123(R), we are required to
estimate and record an expense for each award of equity compensation over the
vesting period of the award. Although we assessed the desirability of granting
shares of restricted stock to our executive officers and employees in lieu of
stock option grants in light of the accounting impact of SFAS No. 123(R),
we ultimately determined to retain our stock option program as the main
component of our long-term compensation program as that program helps to align
management performance with stockholder goals. Accounting rules also require us
to record cash compensation as an expense at the time the obligation is
incurred.




Role
of Executives in Compensation Decisions




Historically,
compensation decisions have been made by the entire Board of Directors, with the
Chief Executive Officer not participating in any deliberations or decisions
regarding his own compensation.  In 2007, the Board of Directors
formed a compensation committee, which has been delegated the responsibility to
review the performance and compensation of the Chief Executive Officer on an
annual basis and make recommendations to the independent members of the Board of
Directors regarding the Chief Executive Officer’s compensation
level.  For the remaining executives, the Chief Executive Officer
makes recommendations to the compensation committee, which the compensation
committee takes into account when making its recommendations to the independent
directors regarding officer compensation.




Allocation
of Compensation




There is
no pre-established policy or target for the allocation of compensation. The
factors described above, as well as the overall compensation philosophy, are
reviewed to determine the appropriate level and mix of compensation.
Historically, and in 2007, the largest portion of compensation to named
executive officers was granted in the form of base salary.




Timing
of Compensation




Compensation,
including base salary adjustments, for our named executive officers is reviewed
annually, usually in the first quarter of the fiscal year and upon promotion or
other change in job responsibilities.




Minimum
Stock Ownership Requirements




There are
no minimum stock ownership guidelines for our executives or employees, although
senior members of our management team are encouraged and expected to have a
significant direct interest in the value of our common stock through open market
purchases and/or receipt of equity awards.




Conclusion




Our
compensation policies are designed and are continually being developed to retain
and motivate our executive officers and to reward them for outstanding
individual and corporate performance.







27





Compensation
Committee Report




The
compensation committee has reviewed and discussed with management the
Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K
and, based on such review and discussion, has recommended to the Board that such
report be included in this Annual Report on Form 10-K for the fiscal year ended
December 31, 2007.




COMPENSATION
COMMITTEE




Ronald S.
Beard, Chairman


William
C. Baker


Jerry W.
Carlton


Terry C.
Hackett


Richard
B. Specter




Summary
Compensation Table




The
following table summarizes compensation paid, awarded or earned for services
rendered during each of the last two fiscal years by our Chief Executive
Officer, Chief Financial Officer and the two other most highly compensated
executive officers in fiscal 2007.  We refer to these executive
officers as our “named executive officers.”




Name
      and Principal Position
            Fiscal
      Year
            Salary
            Bonus
            Option
              Awards
      (1)
            All
      Other
              Compensation
              (2)
            TotalCody
      C. Ashwell
              Chairman
      and Chief Executive Officer
            2007
              2006
            $  202,500
              180,000
            $  170,000
              --
            $  289,304
              --
            $  6,207
              2,616
            $  668,011
              182,616Gary
      A. Lillian
              President
            2007
              2006
            194,167
              180,000
            100,000
              --
            192,869
              --
            6,515
              2,616
            493,551
              182,616Richard
      A. Gartrell
              Chief
      Financial Officer
            2007
              2006
            194,167
              180,000
            100,000
              --
            192,869
              --
            2,428
              2,616
            489,464
              182,616William
      E. Marshall
              General
      Counsel, Sr. Executive
              Vice
      President and Secretary
            2007
              2006
            194,167
              162,750
            100,000
              --
            192,869
              --
            6,515
              2,616
            493,551
              165,366





(1)
            The
      value of the option awards has been computed in accordance with SFAS No.
      123(R), which requires that we recognize as compensation expense the value
      of all stock-based awards, including stock options, granted to employees
      in exchange for their services over the requisite service period, which is
      typically the vesting period, but excluding forfeiture assumptions that
      are used in calculating equity award expense in the Company’s financial
      statements.(2)
            Amounts
      include medical, dental, vision and life insurance premiums paid the
      Company.







28





Grants
of Plan-Based Awards




The
following table sets forth certain information regarding grants of plan-based
awards to the named executive officers during fiscal 2007.




Grant
      Date
            
            Option
      Awards:
              Number
      of
              Securities
              Underlying
      Options
              Granted
              (#)
      (1)
            
            Exercise
      Price of
              Option
      Awards
              ($/Sh)
            
            Grant
      Date Fair
              Value
      of Option
              Awards
      (2)Cody
      C. Ashwell
            
            4/25/2007
            
            1,500,000
            (3)
            $  1.16
            
            $  1,496,400Gary
      A. Lillian
            
            4/25/2007
            
            1,000,000
            (3)
            1.16
            
            997,600Richard
      A. Gartrell
            
            4/25/2007
            
            1,000,000
            (3)
            1.16
            
            997,600William
      E. Marshall
            
            4/25/2007
            
            1,000,000
            (3)
            1.16
            
            997,600





(1)
            The
      amounts listed reflect stock options granted under our 2007 Stock Option
      and Incentive Plan and are described in the Outstanding Equity Awards at
      Fiscal Year-End Table below.(2)
            The
      grant date fair value of the option awards has been computed in accordance
      with SFAS No. 123(R), which requires that we recognize as compensation
      expense the value of all stock-based awards, including stock options,
      granted to employees in exchange for services over the requisite service
      period, which is typically the vesting period, but excluding forfeiture
      assumptions that are used in calculating equity award expense in the
      Company’s financial statements.(3)
            These
      option awards vest over five years, with 60% of the shares vesting on the
      third anniversary of the grant date, 20% of the shares vesting on the
      fourth anniversary of the grant date and 20% of the shares vesting on the
      fifth anniversary of the grant
date.




Outstanding
Equity Awards at Fiscal Year-End




The
following table shows information regarding outstanding equity awards at
December 31, 2007 for our named executive officers.




Option
      AwardsNumber
      of Securities Underlying
              Unexercised
      Options
            
            Option
      Exercise Price
              ($)
            
            Option
              Expiration
      DateName
            
            Exercisable
            
            UnexercisableCody
      C. Ashwell
            
            --
            
            1,500,000
            
            $  1.16
            
            4/25/2017Gary
      A. Lillian
            
            --
            
            1,000,000
            
            1.16
            
            4/25/2017Richard
      A. Gartrell
            
            --
            
            1,000,000
            
            1.16
            
            4/25/2017William
      E. Marshall
            
            --
            
            1,000,000
            
            1.16
            
            4/25/2017




Option
Exercises and Stock Vested




No
options were exercised by our named executive officers during fiscal
2007.  As of December 31, 2007, no restricted stock has been granted
under the 2007 Plan.




Pension
Benefits




We do not
have a defined benefit plan. Our named executive officers did not participate
in, or otherwise receive any special benefits under, any pension or defined
benefit retirement plan sponsored by us during fiscal 2007.




Nonqualified
Deferred Compensation




During
fiscal 2007, our named executive officers did not contribute to, or earn any
amount with respect to, any defined contribution or other plan sponsored by us
that provides for the deferral of compensation on a basis that is not
tax-qualified.




29




Employment,
Severance and Change in Control Agreements
  We have
entered into employment agreements with each of the named executive
officers.  These agreements set forth the individual’s base salary,
bonus eligibility, equity compensation and other employee benefits, which are
described above in the Compensation Discussion and Analysis.  Pursuant
to their employment agreements, in January 2002 each named executive officer
received a restricted stock award upon commencement of employment.  At
the end of 2003 and 2005, the five top officers of the Company, including the
named executive officers, forfeited their shares of restricted common stock when
they collectively contributed an aggregate of 41,550,002 shares of common
stock to the Company treasury in order to facilitate the raising of $9.7 million
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
employment agreements of each of the named executive officers provide that, in
the event of a termination by the executive for good reason or by the Company
without cause, the executive will be entitled to all accrued salary, vacation
time and benefits under any applicable benefit plans of the Company through the
date of termination, as well as a prorated bonus for the year in which the
termination occurs for any then applicable bonus or bonus plan payable in
accordance with the Company’s normal bonus payment
policy.  Additionally, upon the execution of a release by the
executive, the Company will pay to the executive severance pay in an amount
equal to his then base salary until one year from the date of
termination.




Potential
Payments Upon Termination or Change In Control




We
currently have no change in control agreements in place for any of our named
executive officers. However, our 2007 Plan contains, and certain option awards
granted thereunder contain, provisions regarding the accelerated vesting of
options in the event of a change in control or a “Sale Event,” which is defined
under the plan as (A) the sale of all or substantially all of the assets of
the Company on a consolidated basis to an unrelated person or entity; (B) a
merger, reorganization or consolidation in which the outstanding shares of
common stock are converted into or exchanged for securities of the successor
entity and the holders of the Company’s outstanding voting power immediately
prior to such transaction do not own a majority of the outstanding voting power
of the successor entity immediately upon completion of such transaction; or (C)
the sale of all or substantially all of the common stock of the Company to an
unrelated person or entity.




Assuming
that a change in control occurred as of the end of fiscal 2007, and based on our
closing stock price on the last day of trading that year ($0.74) the named
executive officers would have received no change in control benefits because the
exercise price of then outstanding options was higher than the closing price of
our stock.




Director
Compensation




Directors
received no compensation for their services as directors during fiscal
2007.




Compensation
Committee Interlocks and Insider Participation




The
Company’s compensation committee currently consists of Ronald S. Beard
(Chairman), William C. Baker, Jerry W. Carlton, Terry C. Hackett and Richard B.
Specter.  No member of the compensation committee was, at any time
during fiscal 2007, an officer or employee of the Company.  There are
no compensation committee 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.







30








ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.




The following table sets forth certain information
regarding the beneficial ownership (as defined by Rule 13d-3 under the
Securities Exchange Act of 1934) of the Company’s voting securities as of
March 31, 2008 based on information available to us and filings with the SEC
by:




·
            each
      person known to the Company to own more than 5% of any class of the
      Company’s voting securities;




·
            each
      of the Company’s directors;




·
            each
      of the named executive officers;
and




·
            all
      of the Company’s directors and executive officers as a
    group.




Beneficial
ownership and percentage ownership are determined in accordance with the rules
of the SEC and include voting or investment power with respect to shares of
stock.  This information does not necessarily indicate beneficial
ownership for any other purpose.  Under these rules, shares of common
stock issuable under stock options that are exercisable within 60 days of March
31, 2008 are deemed outstanding for the purpose of computing the percentage
ownership of the person holding the options, but are not deemed outstanding for
the purpose of computing the percentage ownership of any other
person.




Unless
otherwise indicated and subject to applicable community property laws, to our
knowledge, each stockholder named in the following table possesses sole voting
and investment power over their shares of common stock and/or preferred stock,
except for those jointly owned with that person’s spouse.  Percentage
of beneficial ownership is based on 156,080,826 shares of common stock and
1,952,683 shares of preferred stock outstanding as of March 31,
2008.  Unless otherwise indicated, the address of each person listed
on the table is c/o Javo Beverage Company, 1311 Specialty Drive, Vista,
CA  92081.





Name
      and Address of Beneficial Owner
            
            Shares
      of
              Common
              Stock
              Beneficially
              Held
      (1)
            
            Percentage
              of Common
              Stock
      (2)
            
            
            Shares
      of
              Series
      B
              Preferred
              Stock
              Beneficially
              Held
      (3)
            
            Percentage
              of
      Series B
              Preferred
              Stock
      (4)Cody
      C. Ashwell
            
            9,187,027
            
            5.9
            %
            
            --
            
            --Curci
      Investment Co. (5)
              359
      San Miguel Drive, Suite 201
              Newport
      Beach, CA 92660
            
            8,546,500
            
            5.6
            
            
            207,227
            
            10.6
            %William
      C. Baker
            
            7,666,400
            
            5.0
            
            
            85,009
            
            4.4William
      E. Marshall
            
            1,500,300
            
            1.0
            
            
            --
            
            --Terry
      C. Hackett
            
            1,425,000
            
            *
            
            
            27,751
            
            1.4Jerry
      W. Carlton
            
            1,200,000
            
            *
            
            
            7,855
            
            *Richard
      A. Gartrell
            
            1,015,196
            
            *
            
            
            --
            
            --Richard
      B. Specter
            
            830,215
            
            *
            
            
            3,928
            
            *Stanley
      A. Solomon
            
            810,000
            
            *
            
            
            19,031
            
            1.0Gary
      A. Lillian
            
            750,000
            
            *
            
            
            --
            
            --Ronald
      S. Beard
            
            335,000
            
            *
            
            
            3,928
            
            *All
      executive officers and directors as a group
              (10
      persons)
            
            24,719,138
            
            15.9
            %
            
            147,502
            
            7.6
            %


_____________





*
            Represents
      beneficial ownership of less than 1%.(1)
            Represents
      shares of common stock held as of March 31, 2008, plus shares of common
      stock that may be acquired upon exercise of options exercisable within
      60 days from March 31, 2008.







31








(2)
            Based
      on 156,080,826 shares of common stock outstanding as of March 31, 2008.
      The percentage ownership and voting power for each person (or all
      directors and executive officers as a group) is calculated by assuming the
      exercise of all options exercisable within 60 days of March 31, 2008 held
      by such person and the non-exercise and non-conversion of all other
      outstanding options.(3)
            Represents
      shares of Series B preferred stock held as of March 31,
    2008.(4)
            Based
      on 1,952,683 shares of Series B preferred stock outstanding as of March
      31, 2008.(5)
            Based
      on information reported on a Schedule 13D filed with the SEC on September
      1, 2006, representing shares held by Curci Investments, LLC, and on
      information previously reported to the
Company.








EQUITY
COMPENSATION PLAN INFORMATION





The
following table sets forth certain information, as of December 31, 2007,
regarding the Company’s 2007 Stock Option and Incentive Plan.




Plan
      category
            
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in first
      column)Equity
      compensation plans approved by security holders
            
            --
            
            --
            
            
            --Equity
      compensation plans not approved by security holders
            
            5,000,000
            (1)
            $  1.16
            
            
            10,000,000Total
            
            5,000,000
            
            1.16
            
            
            10,000,000




(1)
            Options
      to purchase an aggregate of 4,500,000 shares of common stock were granted
      to Messrs. Ashwell, Gartrell, Lillian and Marshall on April 25,
      2007.










32







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




Transactions
with Related Parties




Other
than compensation arrangements described above under the caption “Executive
Compensation” and except as disclosed in this Item 13, we are not a party to any
transactions between us and certain “related parties,” which are generally
considered to be our directors and executive officers, nominees for director,
holders of 5% or more of our outstanding common stock and members of their
immediate families.




In 2005,
the Company entered into a seven-year rental agreement with Javo Dispenser, LLC
(“LLC”), a related party, to rent liquid concentrate dispensers for placement at
its customer locations.  The LLC is a Delaware limited liability
company owned by Company directors William C. Baker, Terry C. Hackett and
Stanley A. Solomon, two former directors 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,
2007, the LLC had purchased 896 dispensers at a cost of
$2,153,060.  The Company has rented these machines from the LLC and
had incurred a dispenser rental expense of $716,640, $370,791 and $7,291 in
2007, 2006 and 2005, respectively.  The LLC has purchased all the
dispensers it has contracted for and will not purchase additional dispensers
beyond the 896 it has already purchased.




Related-Party
Transaction Review and Approval




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 determining whether to approve or ratify a related party
transaction, the disinterested directors may consider, among other factors they
deem appropriate, the potential benefits to the Company, the impact on a
director’s or nominee’s independence or an executive officer’s relationship with
or service to the Company, whether the related party transaction is on terms no
less favorable than terms generally available to an unaffiliated third-party
under the same or similar circumstances and the extent of the related party’s
interest in the transaction.  In deciding to approve a transaction,
the disinterested directors may, in their sole discretion, impose such
conditions as they deem appropriate on the Company or the related party in
connection with their approval of any transaction.  Any transactions
involving the compensation of executive officers, however, are to be reviewed
and approved by the compensation committee.




Board
Independence




The
Company believes that Ronald S. Beard, Jerry W. Carlton and Richard B. Specter
satisfy the independence standards set forth under the rules of the NASDAQ Stock
Market; William C. Baker, Terry C. Hackett and Stanley A. Solomon would not
satisfy these independence standards due to their ownership of Javo Dispenser,
LLC and Cody C. Ashwell would not satisfy these standards due to the fact that
he currently serves as our Chief Executive Officer.  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 transactions, 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.




Board
Committees




We do not
have a standing audit or nominating 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 and nominating committees.
Our compensation committee was formed on March 20, 2007.




Audit
Committee.  Because we do not have an audit committee, the
entire Board of Directors acts as the audit committee. The Board of Directors
believes that Cody C. Ashwell, William C. Baker, Terry C. Hackett and Stanley A.
Solomon are not independent under the rules of the NASDAQ Stock
Market.




Compensation Committee. The
compensation committee currently consists of Ronald S. Beard (Chairman), William
C. Baker, Jerry W. Carlton, Terry C. Hackett and Richard B.
Specter.  The Board of Directors has determined that all members of
the compensation committee, with the exception of William C. Baker and Terry C.
Hackett, are independent directors under the rules of the NASDAQ Stock Market.
The compensation committee reviews and advises the Board of Directors on all
compensation arrangements for executive officers and establishes and reviews
general policies relating to the compensation and benefits of our officers and
employees. The compensation committee is governed by a written charter approved
by our Board of Directors. The compensation committee’s report is included in
this Annual Report on Form 10-K.






33




Nominating Committee. Because
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 believes that Cody C. Ashwell, William C. Baker, Terry C. Hackett and
Stanley A. Solomon are not independent under the rules of the NASDAQ Stock
Market. We do not currently have a written nominating committee charter or
similar document.







ITEM
14.                PRINCIPAL
ACCOUNTANT FEES AND SERVICES




Fees
for Independent Registered Public Accounting Firm




The
following is a summary of the fees billed to the Company by Farber Hass Hurley
& McEwen LLP for professional services rendered for the fiscal years ended
December 31, 2007 and 2006. These fees are for work performed in the fiscal
years indicated and, in some instances, we have estimated the fees for services
rendered but not yet billed.




2007
            
            
            2006Audit
      Fees:
            
            $
            106,636
            
            
            $
            104,400Consists
      of fees billed for professional services rendered for the audit of the
      Company’s annual financial statements and review of financial statements
      included in the registrant's quarterly reports or services that are
      normally provided by the accountant in connection with statutory and
      regulatory filings or engagementsAudit-Related
      Fees:
            
            
            0
            
            
            
            0Consists
      of fees billed for assurance and related services that are reasonably
      related to the performance of the audit or review of the Company’s
      financial statementsTax
      Fees:
            
            
            0
            
            
            
            0Consists
      of fees billed for professional services rendered for
      tax  compliance, tax advice and tax planningAll
      Other Fees:
            
            
            0
            
            
            
            0Consists
      of fees billed for other products and services not described
      aboveTotal
      All Fees:
            
            $
            106,636
            
            
            $
            104,400







Pre-Approval
Policies and Procedures




Before
our independent registered public accounting firm is engaged by the Company to
render audit or non-audit services, the engagement and fees are pre-approved by
the Company’s Board of Directors acting as the Company’s audit
committee.  All audit fees were so pre-approved in 2007.









34





ITEM
15.               EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES





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





(b) Exhibits




The
following exhibits are incorporated by reference or filed as part of this
report.




Exhibit
              Number
            
            Description
            
            Incorporated
      by Reference From
            
            Filing
      Date




2.1
            
            Agreement
      and Plan of Merger, dated August 15, 2002, by and between La Jolla Fresh
      Squeezed Coffee Co., Inc. and Javo Beverage Company, Inc.
            
            Current
      Report on Form 8-K, as Exhibit 3.1
            
            August
      19, 20023.1
            
            Amended
      and Restated Certificate of Incorporation of the
Registrant
            
            Current
      Report on Form 8-K, as Exhibit 3.5
            
            November
      6, 20063.2
            
            Bylaws
      of the Registrant, as adopted June 21, 2002
            
            Current
      Report on Form 8-K, as Exhibit 3.3
            
            August
      19, 20024.1
            
            Shareholder
      Rights Agreement, dated July 1, 2002, by and between Javo Beverage
      Company, Inc. and Corporate Stock Transfer, Inc. as Rights
      Agent
            
            Current
      Report on Form 8-K, as Exhibit 4.2
            
            August
      19, 20024.2
            
            Certificate
      of Designation of Series B Preferred Stock
            
            Current
      Report on Form 8-K, as Exhibit 3.4
            
            June
      7, 20064.3
            
            Securities
      Purchase Agreement, dated December 14, 2006, by and among Javo Beverage
      Company, Inc. and the Investors named therein
            
            Current
      Report on Form 8-K, as Exhibit 10.6
            
            December
      18, 20064.4
            
            Registration
      Rights Agreement, dated December 15, 2006, by and among Javo Beverage
      Company, Inc. and the Investors named therein
            
            Current
      Report on Form 8-K, as Exhibit 10.7
            
            December
      18, 20064.5
            
            Form
      of Senior Convertible Note
            
            Current
      Report on Form 8-K, as Exhibit 10.8
            
            December
      18, 20064.6
            
            Form
      of Series A Warrant to Purchase Common Stock
            
            Current
      Report on Form 8-K, as Exhibit 10.9
            
            December
      18, 20064.7
            
            Form
      of Series B Warrant to Purchase Common Stock
            
            Current
      Report on Form 8-K, as Exhibit 10.10
            
            December
      18, 20064.8
            
            Form
      of Series C Warrant to Purchase Common Stock
            
            Current
      Report on Form 8-K, as Exhibit 10.11
            
            December
      18, 200610.1*
            
            Employment
      Agreement by and between La Jolla Fresh Squeezed Coffee Company, Inc. and
      Cody C. Ashwell
            
            Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2001, as
      Exhibit 10.1
            
            April
      16, 200210.2*
            
            Employment
      Agreement by and between La Jolla Fresh Squeezed Coffee Company, Inc. and
      Gary A. Lillian
            
            Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2001, as
      Exhibit 10.2
            
            April
      16, 200210.3*
            
            Employment
      Agreement by and between La Jolla Fresh Squeezed Coffee Company, Inc. and
      Richard A. Gartrell
            
            Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2001, as
      Exhibit 10.3
            
            April
      16, 200210.4*
            
            Employment
      Agreement by and between La Jolla Fresh Squeezed Coffee Company, Inc. and
      William E. Marshall
            
            Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2001, as
      Exhibit 10.4
            
            April
      16, 200210.5*
            
            Employment
      Agreement by and between La Jolla Fresh Squeezed Coffee Company, Inc. and
      Stephen F. Corey
            
            Annual
      Report on Form 10-KSB for the
              Fiscal
      year ended December 31, 2001, as
              Exhibit
      10.5
            
            April
      16, 2002







35







Exhibit
              Number
            
            Description
            
            Incorporated
      by Reference From
            
            Filing
      Date




10.6
            
            Net
      Industrial Lease (Facility Lease), dated August 12, 2002, by and between
      Square One Partners and La Jolla Fresh Squeezed Coffee Company,
      Inc.
            
            Quarterly
      Report on Form 10-QSB for the
              Quarter
      ended June 30, 2002, as Exhibit 10.1
            
            August
      15, 200210.7*
            
            2007
      Stock Option and Incentive Plan
            
            Current
      Report on Form 8-K, as Exhibit 10.1
            
            May
      1, 200810.8*
            
            Form
      of Non-Qualified Stock Option Agreement for Company Employees for use with
      2007 Stock Option and Incentive Plan
            
            Current
      Report on Form 8-K, as Exhibit 10.2
            
            May
      1, 200810.9*
            
            Form
      of Non-Qualified Stock Option Agreement for Company Non-Employee Directors
      for use with 2007 Stock Option and Incentive Plan
            
            Current
      Report on Form 8-K, as Exhibit 10.3
            
            May
      1, 200810.10*
            
            Form
      of Restricted Stock Award Agreement for use with 2007 Stock Option and
      Incentive Plan
            
            Current
      Report on Form 8-K, as Exhibit 10.4
            
            May
      1, 200810.11*
            
            Form
      of Performance Share Award Agreement for use with 2007 Stock Option and
      Incentive Plan
            
            Current
      Report on Form 8-K, as Exhibit 10.5
            
            May
      1, 200810.12
            
            Javo
      Dispenser LLC Master Equipment Lease Agreement
            
            Quarterly
      Report on Form 10-Q for the
              Quarter
      ended June 30, 2008, as Exhibit 10.1
            
            August
      1, 200810.13
            
            Limited
      Liability Agreement of Javo Dispenser, LLC
            
            Quarterly
      Report on Form 10-Q for the
              Quarter
      ended June 30, 2008, as Exhibit 10.2
            
            August
      1, 200810.14
            
            Amendment
      No. 1 to Limited Liability Company Operating Agreement
            
            Quarterly
      Report on Form 10-Q for the
              Quarter
      ended June 30, 2008, as Exhibit 10.3
            
            August
      1, 200823.1
            
            Consent
      of Independent Registered Public Accounting Firm
            
            Annual
      Report on Form 10-K for the year
              ended
      December 31, 2007
            
            March
      20, 200831.1
            
            Certification
      of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley
      Act of 2002
            
            Filed
      herewith31.2
            
            Certification
      of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley
      Act of 2002
            
            Filed
      herewith32.1
            
            Certification
      of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley
      Act of 2002
            
            Filed
      herewith32.2
            
            Certification
      of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley
      Act of 2002
            
            Filed
      herewith




______________




*
Management contract or compensatory plan or arrangement.





36





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 January 13,
2009.




Javo
      Beverage Company, Inc.,
              a
      Delaware corporationBy:
            /s/ Cody
      C. AshwellCody
      C. AshwellIts:   Chairman
      and Chief Executive Officer




By:
            /s/ Richard
      A. GartrellRichard
      A. GartrellIts:   Chief
      Financial 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 January 13, 2009.




Javo
      Beverage Company, Inc.,
              a
      Delaware corporationBy:
            /s/ Cody
      C. AshwellCody
      C. AshwellIts:   Chairman
      and Chief Executive Officer




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




By:
            /s/ Cody
      C. AshwellCody
      C. Ashwell




By:
            /s/ William
      C. BakerWilliam
      C. BakerDirector




By:
            /s/ Ronald
      S. BeardRonald
      S. BeardDirector




By:Jerry
      W. CarltonDirector




By:
            /s/
      Terry C. HackettTerry
      C. HackettDirector




By:
            /s/
      Stanley A. SolomonStanley
      A. SolomonDirector




By:
            /s/
      Richard B. SpecterRichard
      B. SpecterDirector







37