UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K









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




DECEMBER
31, 2008


OR





[  ]  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
transition period from _______________ to _______________





Commission
File Number 0-26897





JAVO
BEVERAGE COMPANY, INC.


(Name of
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, PAR VALUE: $.001 PER SHARE,


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


SERIES-B
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




1




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 oSmaller
      Reporting Company o




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




The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of  June 30, 2008 was $97,732,925 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 193,753,343 as of March 13, 2009.





Documents
Incorporated by Reference




NA




2




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 the
state of Washington to the state of Delaware and simultaneously changed its name
from La Jolla Fresh Squeezed Coffee Company, Inc. to Javo Beverage Company,
Inc.  In September 2008, Sorisole was dissolved.  On
September 24, 2008, the Company incorporated a wholly owned subsidiary Javo
Dispenser, Inc. in the state of Delaware.  Javo Dispenser, Inc. has
not been capitalized and had no business activity in 2008.





BUSINESS
DESCRIPTION





Javo® Beverage Company is an
innovator and leader in the manufacture of coffee and tea-based dispensed
beverages, drink mixes and flavor systems. The Company has successfully
commercialized a proprietary brewing technology that yields fresh brewed coffees
and teas that are flavorful, concentrated and stable. As a result, they have
broad applications in the food service, food manufacturing and beverage
industries.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.





Over the
last ten years, consumers have become accustomed to drinking premium coffees and
teas that they discovered in specialty coffee shops.  Restaurants and
food service institutions wishing to cater to these same consumers are learning
that they must offer and serve a broader, more sophisticated beverage
menu.  Specialty coffee and tea beverages are operationally
challenging due to their 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 and business model benefit from this market trend
because they give foodservice operators a familiar and operationally efficient
dispensing platform from which to serve and profit from these new
beverages.





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





3




Javo was
an early innovator and is now a leading supplier of iced coffees and lattes that
may be dispensed from cold drink concentrate dispensers.The
Company’s earliest application of this program was with 7-Eleven, the leading
convenience retailer in the world. In July 2007, Javo signed an agreement to
supply premium iced coffee beverages to authorized regions within 7-Eleven’s
7,100 store system in the U.S. The Company expanded its iced coffees into
additional 7-Eleven markets during 2008 and anticipates additional growth as
this leading retailer enhances its beverage program in more parts of the
U.S.





The U.S.
convenience store industry, which has more than 140 thousand retailing sites,
has become a strength of the Company’s marketing and distribution system and
many of the largest regional and national chains now feature Javo’s dispensed
program at some or all of their stores.  The largest of these are:
Sunoco (A1), Speedway SuperAmerica, BP Products North America (am/pm and BP),
Exxon-Mobil (On the Run) along with other regional chains and independent
stores.  The Company is currently building on its strong supplier and
distribution relationships within the convenience store channel through the
introduction of dispenser-based iced tea and hot coffee programs.





The
Company’s hot on-demand coffee program caters to large institutions such as
hospitals, airports and government buildings and has gained industry approvals
at many important purchasing organizations that control access to thousands of
potential locations for the Company’s dispensed coffee platform. For
example, the Company enjoys a preferred supplier relationship with Compass Group
Americas, a division of the 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.  Javo’s contract with Compass precludes most of its
competitors from providing coffee programs to these facilities.





The
Company has also earned a multi-year contract for dispensed beverages with
Premier Healthcare, Inc., the largest healthcare group purchasing organization
in the United States. According to the terms of the agreement, Premier offers
Javo specialty hot and iced coffees to its network of more than 50,000 other
healthcare facilities nationwide. Premier members purchase coffee and other
beverage concentrates from more than 50 distribution centers across the
country.  2008 was Javo’s first year of marketing into this important
customer group and the Company successfully converted hundreds of facilities to
its on-demand hot and/or iced coffee systems.





In
addition, Javo has earned Prime Vendor status by the
United States Department of Veterans Affairs, providing it access to more than
250 large VA facilities nationwide. This government sector approval provides
significant opportunities for sales growth since 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 2008, the
Company was able to install its coffee program at a large number of the
Veterans Affairs facilities across the U.S.





The
Company has further penetrated the foodservice industry’s highly networked
health care and institutional markets by earning supply agreements with
MedAssets Supply Chain Systems, one of the largest purchasing organizations for
food and beverages in the healthcare industry; with HPS, a network of more than
2,000 major healthcare facilities across the country; and Creative Dining
Services, a contract operator specializing in contract dining services at
colleges and universities.  These relationships open up tens of
thousands of additional foodservice facilities nationwide for Javo to sell and
install its beverage dispensing programs.





The
Company enhanced its lineup of dispensed specialty beverages with the
introduction of new product lines and flavor extensions to existing
programs.  The Company’s hot on-demand coffee portfolio has been
enhanced by the introduction of the first-ever dispensed coffee certified as
both fair trade and organic, as well as the first on-demand coffee certified by
the Rainforest Alliance®.  Javo’s varieties of iced coffees have grown
to include:  Caramel Latte, Hazelnut Latte, Mocha Mint and Pumpkin
Spice Latte.  During 2008, the Company entered the large and growing
market for iced tea with a line of six specialty tea blends that feature fresh
brewed tea in a bag-in-box format capable of being dispensed from cold drink
concentrate equipment.





PRODUCTS





Javo
employs a proprietary brewing technology to manufacture coffee and tea drink
mixes and flavor systems that are more flavorful, more stable and easier for
customers to operate than competitive solutions.  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.






4




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
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
House Blend in both regular and decaffeinated varieties.  The
Company’s specialty iced coffee 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 and 100% Colombian Iced Coffee.





During
2008, the Company enhanced its line of dispensed hot coffees and introduced a
new line of on-demand iced teas for foodservice operators.  The new
hot coffee products include: Euro Roast, a darker coffee house-style brew, and
Rainforest Blend, a coffee formulated to provide valuable “environmentally
green” benefits for its customers.  Javo also added to its
opportunities with convenience retailers and broaden its appeal to casual dining
and quick service restaurants with the introduction of six concentrated fresh
brewed iced tea beverages that may be dispensed from cold drink equipment
supplied by the Company or hand mixed into traditional tea urns.  The
new teas utilize the same dispensing equipment as the Company’s iced coffee and
feature six flavors ranging from Southern Sweet to Pomegranate iced
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 Latte, French
Vanilla Latte and Chai Tea, all for specialty 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 and its products are currently stocked at
distribution centers operated by Sysco Foods, 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’s distributors deliver its bag-in-box products to the
end user, typically a hospital, casino, hotel or convenience store, when regular
orders are placed for other restaurant supplies.  The end user places
the product into a dispenser usually supplied by Javo and serves fresh hot
and/or iced coffee to their customers, employees and/or
patients.  Javo supplies its industrial flavor systems to its food and
beverage manufacturing customers by shipping bulk extracts directly to the food
processing location.





SALES
AND SERVICE ORGANIZATIONS





Javo
employs a direct national sales force of 27 employees 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 and 2008 to better compete for
national coffee and tea contracts.  As a result of this expansion, the
Company added a number of important new national and regional food purchasing
organizations to its customer group, including: Premier Healthcare, US
Department of Veterans Affairs, Med-Assets, Speedway SuperAmerica, Exxon-Mobil
and other large regional convenience retailers.  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 service its dispensing
equipment.





5





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 brand of
Sara Lee Corporation.  Douwe Egberts originated in Europe where the
market for dispensed coffee is more established and sales are estimated much
larger than in 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 taste, 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 introduced competing liquid coffee concentrate products
in the food service market.  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
our ability to offer freshly produced, refrigerated extracts gives us a
competitive advantage in the market for on-demand coffee that is
increasingly quality and flavor conscious.  While each of these
companies has significantly larger financial resources and brand
awareness  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 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 serving locations
in the United States still utilize traditional roast-and-ground preparation,
leaving a large potential market for conversion of traditional brewing to a
dispensing format offering high quality “on demand” coffee, such as that offered
by Javo.





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.  Recently, Javo upgraded and expanded key aspects of its
manufacturing capabilities.  Specifically, the Company expanded its
in-house roasting capacity and integrated the processing and packaging of iced
coffees and teas.  These initiatives significantly improved product
quality, expanded manufacturing capacity, and reduced 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.  Recent additions to its staff have 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 2009, Javo anticipates that growth in
revenues from the sales of iced dispensed products will exceed growth revenues
from the sales of hot dispensed products.






6




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, or could “reverse-engineer” our processes, 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.  Short-term price movements could affect our results and
long-term price increases could temper demand and growth. 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.





EMPLOYEES





As of
February 25, 2009, the Company employed 59 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 2009 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.





CORPORATE
GOVERNANCE AND EMPLOYEE DEVELOPMENT





The
Company has a Code of Ethics, which is posted on its website
www.javobeverage.com.  In addition, the Company believes it is a
highly inclusive and collaborative work environment that encourages employees’
individual growth and personal awareness through a culture of personal
accountability and continuous learning.





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.




7




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 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.
Additionally, under the terms of our convertible debt securities, we are
required to make regular interest payments, which must be made in cash if our
stock is trading below a certain level. Our stock has traded below this level
for some time now and we have been able to make interest payments in stock with
the consent of the note holders. However, there can be no assurance that the
note holders will continue to allow us to make payments in stock.  If
we were required to make interest payments in cash, our financial results would
be adversely affected and we may not have sufficient capital to sustain our
operations at their current size or to expand our business as currently planned.
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 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 its 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.




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




The
Company’s senior convertible promissory notes and Series A, B and C warrants
contain terms that could result in adjustments to the conversion and exercise
prices applicable to these securities. For example, assuming that the Company’s
stock traded at $0.61 throughout the entire term of the note (i.e., just above
the floor price at which the Company may issue shares in satisfaction of
installment payments due under the note) and assuming that the Company had made
every principal and interest payment in shares of Common Stock at the applicable
15% discount to such $0.61 price, then approximately 31,213,485 million
shares of Common Stock would be issued as principal and interest payments,
excluding potential issuances relating to the warrants. Currently, our stock
price has traded well under this level ($0.13 as of March 6, 2009) and the
note holders have allowed us to make payments in stock notwithstanding the fact
that we are below the floor price. Although making payments in shares has
improved our cash flow, the resulting dilution has been much greater. 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.






8




The
current economic crisis may affect our revenues and our ability to access
capital.





The
ongoing global recession and liquidity crisis may adversely affect our
business.  The recession and higher unemployment rates may result in
lower revenues from product sales as end customers cut back on discretionary
spending.  We may also experience longer payment cycles from our
customers, as they manage their accounts payable in an effort to preserve
cash.  Additionally, the credit crisis has made debt financing much
harder to obtain and, when it is available, the available terms are often
unattractive.  We will need additional capital to service our debt
obligations and to fund our growth and the lack of available capital could
adversely affect our growth potential and results of operations.




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 periodically 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, a disruption in 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 does have business interruption insurance that would protect against
some of this loss.




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, our recent national account status with some customers
provides only a limited competitive advantage. 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 and the inability of competitors to reverse
engineer our processes. 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.




9




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
also 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 deems that a product or
production run is 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 its financial condition and operations.




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 continue 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 its
operating performance.  In 2008, Javo recorded non-cash
derivative income of $2.3 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 the stock price are
likely to result in the recording of significant gains or losses on these
instruments to the extent they remain outstanding in existence.




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 continued growth in sales in fiscal 2009 and
anticipates the need to continue 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 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. Javo
faces competition for and cannot assure that it 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.






10




The
Company’s customer contracts generally do not provide for guaranteed sales
levels and 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 it will actually realize 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 loss of a major customer could
render a larger than usual number of dispensers as non-productive until they
could be redeployed to new accounts.  Such interruptions would cause a
loss of revenue.




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 is currently in the process of raising $20 million in a private
offering.  Through March 12, 2009, the Company had raised $5.1
million, has an additional $2 million in escrow and has commitments and letters
of intent for the remaining $12.9 million of the anticipated $20
million.  Given the current financing market there is
no  assurance the Company will be successful in raising the additional
debt which it intends to use for working capital, retirement of other debt and
dispensers purchases.




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
Company extended the lease for an additional year in December
2008.  The Vista facility houses Javo's entire
operations.  In January 2008, the Company rented on a month-to-month
basis additional 5,000 square feet of warehouse space near its Vista facility to
store certain raw and packaging 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 2008




11




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 2009 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.







2007
            High
            LowFirst
      Quarter
            $1.41
            $0.81Second
      Quarter
            $1.61
            $1.07Third
      Quarter
            $1.48
            $0.91Fourth
      Quarter
            $1.23
            $0.692008First
      Quarter
            $0.88
            $0.42Second
      Quarter
            $0.94
            $0.48Third
      Quarter
            $0.75
            $0.40Fourth
      Quarter
            $0.45
            $0.092009First
      Quarter (through March 13, 2009)
            $0.28
            $0.10





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





SHAREHOLDERS





As of
December 31, 2008, the Company had approximately 500 holders of record of its
Common Stock and 186,403,648 shares of Common Stock outstanding.  In
addition the Company had approximately 160 holders of record of its Series B
Preferred Stock and 2,147,952 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
2008, the Company issued 195,269 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 2,147,952.






12




STOCK
PERFORMANCE GRAPH




Javo 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 2003 and each year end through December 2008.





RECENT
SALES OF UNREGISTERED SECURITIES





In
December 2008, the Company received $3,240,000 in investments in units of its
current private debt offering which included a 8 year promissory note and the
right to five shares of common stock for each dollar invested.  In
connection with those investments, the investors will receive their stock
certificates at closing in 1st Quarter
2009, 16,200,000 shares of the Company’s common stock.   One
of the Board of Directors invested $2 million and received 10 million of
the 16.2 million shares of common stock in January 2009.





PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED ENTITIES





None.




13




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.





2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(In
      thousands $)Net
      sales
            
            
            19,449
            
            
            
            12,559
            
            
            
            10,322
            
            
            
            6,200
            
            
            
            2,084Gross
      profit
            
            
            8,225
            
            
            
            4,054
            
            
            
            3,510
            
            
            
            2,093
            
            
            
            688Loss
      from operations
            
            
            (7,689
            )
            
            
            (7,105
            )
            
            
            (2,804
            )
            
            
            (2,032
            )
            
            
            (2,922
            )Net
      loss
            
            
            *(10,769
            )
            
            
            **(7,449
            )
            
            
            ***(9,926
            )
            
            
            (4,844
            )
            
            
            (4,855
            )Total
      assets
            
            
            20,249
            
            
            
            18,382
            
            
            
            21,175
            
            
            
            4,579
            
            
            
            4,556Warrant
      liability ****
            
            
            57
            
            
            
            2,389
            
            
            
            7,532
            
            
            
            --
            
            
            
            --Debt
      obligations
            
            
            9,525
            
            
            
            9,414
            
            
            
            8,609
            
            
            
            12,192
            
            
            
            8,860Stockholders’
      equity/(deficit)
            
            
            (2,029
            )
            
            
            152
            
            
            
            3,042
            
            
            
            (8,873
            )
            
            
            (5,053
            )Loss
      per share
            
            $
            (0.07
            )
            
            $
            (0.05
            )
            
            $
            (0.07
            )
            
            $
            (0.03
            )
            
            $
            (0.03
            )







*The 2008
net loss includes non-cash option compensation expense of $1.4 million and
depreciation and amortization expense of $6.2 million.  Approximately
$4.3 million of this $6.2 million is reported in interest expense and was for
non-cash accretion of debt discount/premium. In addition it includes non-cash
derivative of income of $2.3 million.




**The
2007 net loss includes non-cash option compensation expense of $964 thousand and
depreciation and amortization expense of $5.1 million.  Approximately
$4.5 million of this $5.1 million is reported in interest expense and was for
non-cash 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 non-cash 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 $5.4 million, as well as non-cash derivative income of
$405 thousand.




****The
Warrant liability represents the fair value of warrants to purchase 6,531,391
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 $13.5 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 2008 and 2007 follows (in
thousands):





First
            
            
            Second
            
            
            Third
            
            
            Fourth
            
            
            Total2008
      quarterNet
      sales
            
            $
            3,887
            
            
            $
            6,684
            
            
            $
            5,660
            
            
            $
            3,218
            
            
            $
            19,449Loss
      from Operations
            
            
            (1,675
            )
            
            
            (576
            )
            
            
            (2,405
            )
            
            
            (3,033
            )
            
            
            (7,689
            )Net
      income/loss fourth quarter
            
            
            (1,838
            )
            
            
            (2,220
            )
            
            
            (2,684
            )
            
            
            (4,028
            )
            
            
            (10,770
            )(Loss)
      per share
            
            $
            (0.01
            )
            
            $
            (0.01
            )
            
            $
            (0.02
            )
            
            $
            (0.02
            )
            
            $
            (0.06
            )2007
      quarterNet
      sales
            
            $
            2,748
            
            
            $
            3,195
            
            
            $
            3,922
            
            
            $
            2,694
            
            
            $
            12,559Loss
      from Operations
            
            
            (563
            )
            
            
            (2,183
            )
            
            
            (1,784
            )
            
            
            (2,575
            )
            
            
            (7,105
            )Net
      income/loss fourth quarter
            
            
            409
            
            
            
            (5,668
            )
            
            
            (127
            )
            
            
            (2,063
            )
            
            
            (7,449
            )(Loss)
      per share
            
            $
            0.01
            
            
            $
            (0.04
            )
            
            $
            (0.00
            )
            
            $
            (0.01
            )
            
            $
            (0.05
            )






14




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.  See “Forward
Looking Statements” under Part I. Item 1.





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.





The
expansion of the Company’s dispensed beverage programs at large national chains
and networked customers were key to its growth.  The Company
entered into agreements with Premier Healthcare, Department of Veteran Affairs
Med-Assets, Speedway, SuperAmerica, Exxon Mobil and BP products, which resulted
in 5,779 additional dispenser units deployed during 2008.  This
resulted in significant revenue growth, but also required the deployment of
significant additional capital as it funded the purchase of the dispensing
equipment utilized in these customer installations.





The
Company expects its dispensed product revenue to continue to grow in
2009.  Javo does not anticipate a major impact from the economic
turbulence or reduced consumer spending. To the extent it
is successful in growing its base of installed dispensers, the
Company will need significant additional capital to fund this expansion,
and the availability of this capital may place strains on its liquidity and
working capital at times.






15




Results
of Operations





Comparative
Summary of GAAP Income Statements





The
following is a comparative table of income statements for years ended December
31, 2008, 2007, and 2006.  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
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2008
      to 2007
                        
                        
                        2007
      to 2006Net
      sales
                        
                        $
                        19,448,822
                        
                        
                        $
                        12,559,132
                        
                        
                        $
                        10,321,655
                        
                        
                        $
                        6,889,690
                        
                        
                        
                        54.9%
                        
                        
                        $
                        2,237,477
                        
                        
                        
                        21.7%Cost
      of sales
                        
                        
                        (11,223,960
                        )
                        
                        
                        (8,504,863
                        )
                        
                        
                        (6,811,319
                        )
                        
                        
                        (2,719,097
                        )
                        
                        
                        32.0%
                        
                        
                        
                        (1,693,544
                        )
                        
                        
                        24.9%Gross
      profit $
                        
                        
                        8,224,862
                        
                        
                        
                        4,054,269
                        
                        
                        
                        3,510,336
                        
                        
                        
                        4,170,593
                        
                        
                        
                        102.9%
                        
                        
                        
                        543,933
                        
                        
                        
                        15.5%Gross
      profit %
                        
                        
                        42.3%
                        
                        
                        
                        32.3%
                        
                        
                        
                        34.0%
                        
                        
                        
                        
                        
                        
                        
                        10.0%
                        
                        
                        
                        
                        
                        
                        
                        (1.7%
                        )Operating
      expenses:Selling
      and marketing
                        
                        
                        (7,249,467
                        )
                        
                        
                        (4,687,083
                        )
                        
                        
                        (2,408,265
                        )
                        
                        
                        (2,562,384
                        )
                        
                        
                        54.7%
                        
                        
                        
                        (2,278,818
                        )
                        
                        
                        94.6%General
      and administrative
                        
                        
                        (8,664,409
                        )
                        
                        
                        (6,472,440
                        )
                        
                        
                        (3,906,004
                        )
                        
                        
                        (2,191,969
                        )
                        
                        
                        33.9%
                        
                        
                        
                        (2,566,436
                        )
                        
                        
                        65.7%Total
      operating expenses
                        
                        
                        (15,913,876
                        )
                        
                        
                        (11,159,523
                        )
                        
                        
                        (6,314,269
                        )
                        
                        
                        (4,754,353
                        )
                        
                        
                        42.6%
                        
                        
                        
                        (4,845,254
                        )
                        
                        
                        76.7%Loss
      from operations
                        
                        
                        (7,689,014
                        )
                        
                        
                        (7,105,254
                        )
                        
                        
                        (2,803,933
                        )
                        
                        
                        (583,760
                        )
                        
                        
                        8.2%
                        
                        
                        
                        (4,301,321
                        )
                        
                        
                        153.4%Other
      income (expenses):Interest
      income
                        
                        
                        165,058
                        
                        
                        
                        673,597
                        
                        
                        
                        28,963
                        
                        
                        
                        (508,539
                        )
                        
                        
                        -75.5%
                        
                        
                        
                        644,634
                        
                        
                        
                        2225.7%Interest
      expense
                        
                        
                        (5,897,573
                        )
                        
                        
                        (6,200,874
                        )
                        
                        
                        (2,162,999
                        )
                        
                        
                        303,301
                        
                        
                        
                        -4.9%
                        
                        
                        
                        (4,037,875
                        )
                        
                        
                        186.7%Accelerated
      interest expense
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        (5,384,964
                        )
                        
                        
                        --
                        
                        
                        
                        0.00%
                        
                        
                        
                        5,384,964
                        
                        
                        
                        100.0%Other
      income
                        
                        
                        339,121
                        
                        
                        
                        46,297
                        
                        
                        
                        --
                        
                        
                        
                        292,824
                        
                        
                        
                        632.5%
                        
                        
                        
                        46,297
                        
                        
                        
                        100.0%Income
      from derivatives****
                        
                        
                        2,332,444
                        
                        
                        
                        5,143,156
                        
                        
                        
                        404,721
                        
                        
                        
                        (2,810,712
                        )
                        
                        
                        -54.6%
                        
                        
                        
                        4,738,435
                        
                        
                        
                        1170.8%Gain/(loss)
      on disposal of assets
                        
                        
                        (20,014
                        )
                        
                        
                        (5,858
                        )
                        
                        
                        (7,860
                        )
                        
                        
                        (14,156
                        )
                        
                        
                        241.7%
                        
                        
                        
                        2,002
                        
                        
                        
                        -25.5%Total
      other expense
                        
                        
                        (3,080,964
                        )
                        
                        
                        (343,682
                        )
                        
                        
                        (7,122,139
                        )
                        
                        
                        (2,737,282
                        )
                        
                        
                        796.5%
                        
                        
                        
                        6,778,457
                        
                        
                        
                        -95.2%Net
      loss
                        
                        $
                        *(10,769,978
                        )
                        
                        $
                        **(7,448,936
                        )
                        
                        $
                        ***(9,926,072
                        )
                        
                        $
                        (3,321,042
                        )
                        
                        
                        44.6%
                        
                        
                        $
                        2,477,136
                        
                        
                        
                        -25.0%




*The 2008
net loss includes non-cash option compensation expense of $1.4 million and
depreciation and amortization expense of $6.2 million.  Approximately
$4.3 million of this $6.2 million is reported in interest expense and was for
non-cash accretion of debt discount/premium. In addition it includes non-cash
derivative of income of $2.3 million.




**The
2007 net loss includes non-cash option compensation expense of $964 thousand and
depreciation and amortization expense of $5.1
million.  Approximately $4.5 million of this $5.1 million is reported
in interest expense and was for non-cash 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 6,531,391
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 $13.5 million in
equity capital if these warrants were exercised at the current strike
prices.  The warrants expire on December 2011, if not
exercised.




16




REVENUES





In 2008,
the Company achieved net sales (revenue) of $19.4 million, an increase of $6.9
million, or 54.9% growth, over 2007.  The Company increased sales of
its hot and iced dispensed coffee by 95.7% in 2008 over 2007.  This
increase was primarily the result of an increase in dispensing locations which
increased from 4,300 at the end of 2007 to 10,084 by the end of
2008.  Each installed dispenser generates an estimated $2,500 to
$6,000 in annual gross revenue per year and the Company’s historical dispenser
turn over rate has been less than 5% per annum.  The Company’s
non-dispensed gross revenue decreased by 7.4% in 2008 over 2007, with the
increase in bulk ingredient sales of 24.2% offset by the decrease in syrups and
mixes of 25.9%.  The Company expects substantial growth in hot and
iced dispensed coffee and teas in 2009 as it recognizes a full year of revenue
from the current dispensing locations and the revenues from new dispensing
locations added in 2009.  The Company expects to maintain
non-dispensed product revenues at the 2008 level.





In 2007,
the Company achieved net sales (revenue) of $12.5 million, an increase of $2.2
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.   The Company’s non-dispensed revenue decreased by
14% in 2007 over 2006, the reduction primarily the result of lower bulk
ingredient sales.





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.





The
Company expects substantial annual growth in its gross revenue in
2009.  In particular, it anticipates growth in its hot and iced
dispensed beverage products.  Based on the dispensing locations
serving its products at the end of 2008, the Company estimates its 2009 gross
revenue run rate will be approximately $35 million.





The
Company will see continued seasonality in its quarterly gross sales as iced
coffee sales are higher in the second and third quarters and hot coffee sales
are higher in the first and fourth quarters of the year.





GROSS
PROFIT AND GROSS PROFIT MARGIN





In 2008,
the Company’s gross profit increased to $8.2 million from $4.1 million in 2007
or an increase of 102.9%.  The gross profit increase was due in part
to increased sales in 2008 but also due to the increase in its gross profit
margin which accompanied the integration of certain processing and packaging
operations for its dispensed products.  Gross profit margin improved
by 10.0% from 32.3% in 2007 to 42.3% in 2008.





In 2007,
the Company’s gross profit increased to $4.1 million up from $3.5 million in
2006 or an increase of 15.5%.  The increase was primarily due to
increased sales in 2007.  Gross profit margin declined by 1.7% from
34.0% in 2006 to 32.3% in 2007. The reduction was primarily due to increased
costs for freight as it expanded nationally and to increased costs for roasted
coffee.





For 2009,
the Company expects that gross profit and gross margins will continue to improve
with additional efficiencies gained from economies of scale and the full year
operating with in-house roasting, processing and packaging of its dispensed
products.





SELLING
AND MARKETING EXPENSES





In 2008,
the Company’s sales and marketing expenses increased $2.6 million or 54.7% over
the $4.7 million in 2007. The increased expenses were primarily due to added
variable sales costs related to increased sales; a full year’s payroll,
benefits,  travel and entertainment expenses for the sales staff
expansion in 2007; and to promotional materials and programs related to the
increase in dispensing locations. More specifically, the increases were due to
increased expenditures in sales and marketing payroll expenses of $709,000,
related travel and entertainment expenses of $280,000, marketing expenses of
$1,368,000, promotional materials of $117,000, tradeshow expenses of $104,000,
and other sales expenses of $22,000.    The Company anticipates
that sales and marketing expenses will increase in 2009 but at a rate that will
reduce sales and marketing expense as a percentage of gross sales.






17




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.





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.





GENERAL
AND ADMINISTRATIVE EXPENSES





In 2008,
general and administrative expenses for 2008 were $8.7 million compared to $6.5
million in 2007.  The increase of $2.2 million or 33.9% was primarily
due to an increase in other general and administrative expenses of $2,365,000
offset by a decrease in executive expenses for payroll and benefits of $165,000.
The increase in non-executive expenses included an increase in overhead,
warehouse and quality control expenses of $441,000; an increase in outside
investor relations consultant fees and expenses of $430,000, of which $378,000
is a non-cash stock expense incurred for the payment of services to the current
Board of Directors; increased accounting, auditing and SEC and Sarbanes-Oxley
compliance fees and expenses of $102,000; increased dispenser lease
costs of $12,000; and an increase in depreciation and amortization expense of
$1,380,000.  The significant increase in depreciation expense was due
to depreciation on the Company’s substantial investment in processing systems
and purchases of dispensers.





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, 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.  The 2007 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. The 2006 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 2009,
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.  In addition, the Company anticipates
depreciation expense in 2009 will be at least $2.8 million.





In 2009,
the Company expects that general and administrative expenses will grow modestly
with a limited number of additional staff and expenses.





OTHER
INCOME/EXPENSES





Other
expenses were $3.1 million in 2008 compared to $344,000 in 2007. The increase in
other expenses of $2.7 million was primarily due to a reduction in the non-cash
recognition of derivative income of $2.8 million reported in connection with
warrants issued to our senior convertible debt holders, a decrease in interest
income of $509,000, an increase in other income of $293,000, a decrease in
interest expense of $303,000, and a $14,000 increase in the loss on disposal of
assets.  The 2008 interest expense of $5.9 million includes non-cash
amortization of debt discount of $4.3 million and $1.2 million of accrued
interest on the senior convertible debt that was paid by the issuance of Common
Stock.





18




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 its 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 in 2009 will be affected significantly and
unpredictably by the market price of its Common Stock because it is required
under EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock”, to account for the warrants
issued in connection with the Company’s senior convertible debt as derivative
liabilities.  The Company is required to utilize mark to market
accounting each quarter for 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 $13.5 million at their
current strike prices.  The Company recorded non-cash derivative
income of $2.3 million in 2008 as a result of a decline in its stock price
from the date of issuance.





In 2009,
the Company expects to report at least $3 million in non-cash interest expense
due to accretion of debt discount and an unknown amount of non-cash derivative
income or expense.





NET
LOSS





The net
loss for the Company for 2008 was $10.8 million compared to $7.5 million in
2007, an increase in loss of $3.3 million or 44.6%. The increase in loss was
primarily due to the reduction of $2.8 million in non-cash derivative income and
a decrease in interest income of $509,000, offset by an increase in other income
of $292,000.  Excluding the non-cash derivative income, the Company’s
year-over-year change in net loss would have been an increased loss of
approximately $510,000 or 4.1%.  This increase is due to increased
sales and marketing expenses of $2.6 million and increased general and
administrative expenses of $2.2 million offset by increased gross profit of $4.2
million.  The increase in sales and marketing expense of $2.6 million
was due to an increase in sales costs that vary with sales and the increase in
general and administrative expenses of $2.2 million was due to an increase in
depreciation expense and the non-cash stock compensations expense.





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 it built out a national distribution and sales organization, increased
general and administrative expenses of $2.57 million as it 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.





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.






19




OUTLOOK





Subject
to its concern about the overall economy and the availability of capital to
partially fund expansion, the Company expects continued growth in gross
revenues and 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 2009 as it
executes national account opportunities secured but not yet fully exploited
(7Eleven, BP Products, Premier Healthcare, Compass Group, and Department of
Veterans Affairs, along with other national and regional
customers.)  Javo expects to grow the number of deployed dispensers
selling its products to between 16,000 to 18,000 locations by year-end
2009.   The Company expects to earn on average between $2,500 and
$6,000 per dispenser location per full year in revenue.  The Company’s
2009 annual gross revenue run rate based on customers as of December 31, 2008 is
approximately $35 million before accounting for any additional revenues that may
come from new dispensers deployed in 2009.  Management anticipates net
positive cash flows from operations in 2009.





The other
income or expense reported by the Company for 2009 is unpredictable because of
dependence on the Black Scholes value of the warrants issued in connection with
its 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’s operating activities provided cash and cash equivalents of $76,000 in
2008, versus using $5.9 million, and $1.9 million respectively in 2007 and 2006,
respectively.  The decrease in the use of cash in operating activities in
2008 is the result of a net reduction in cash used in operation of $1.3 million
and a net increased accounts payable and accrued expenses of $3.4 million, a net
reduction in accounts receivable additions of $717 thousand, a net reduction in
additions to prepaid expenses of $381 thousand, offset net additions to
inventory of $111 thousand.





The
Company used approximately $7.6 million in cash and cash equivalents to purchase
dispensers, roasting, processing and packaging equipment in 2008, versus $4.1
million and $127,000 in 2007 and 2006, respectively.  The 2008
increase in capital purchases has positioned the Company to further improve it
gross profit margins and provided dispensers for its growth in dispenser
placements which will generate a substantial increase in the Company’s gross
revenue in 2009.





The
Company’s financing activities provided a net $2.7 million, primarily from its
capital raise which began in December 2008 and is expected to provide an
additional $16.7 million in 2009.  In December 2008, the Company
pre-paid approximately $1.3 million principal due to and retired 10% of the
outstanding A, B and C warrants owned by its Senior Convertible Debt paying 77%
or a 23% discount of the face amount principal in according with a loan
modification agreement entered into in December 17, 2008 attached as Exhibit
4.9.





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, 2008, are $4,777,000 and 3.75%, respectively.  As of
December 31, 2008, the amount available on the line of credit was
$223,000.





The
Company anticipates that current cash and cash equivalents, as well as expected
cash flows from anticipated increased sales and gross profits in 2009,
anticipated dispenser financing and proceeds from its current $20 million
private offering will provide adequate capital to fund operations, sales growth
and any required capital expenditures needs through the Company's cash flow
breakeven point.





As of
March 12, 2009, the Company has raised approximately $5.1 million, has an
additional $2 million in escrow and has commitments and letters of intent for
the remaining $12.9 million of the anticipated $20 million private
offering.  To date, Company directors have invested $2.2 million in
the private offering.  The Company’s management believes it will raise
the full $20 million.




20




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
2009.  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 the Company's accounting policies requires management to make certain
judgments and estimates about the amounts reflected in the financial statements.
Management uses historical experience and all other 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 its financial
statements and/or as areas most dependent on management's judgments and
estimates.





Revenue
Recognition




Jasvo recognizes
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 collection ability is probable. It records 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 2008 for out-of-code product were $100,711 or 0.5% of gross
sales.  The Company has a limited number of distributors that have
negotiated payment terms with cash discounts for early payments, usually
2%.  In 2008, the cash discounts taken were $112,166 or 0.6% 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). The
Company did not issue any employee options in 2008.  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.  The Company reported non-cash option
expense related to the 2007 option grants of $1,446,520 in 2008.





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.  The Company reported non-cash derivative
income of $2,332,444 in connection with the warrants issued in connection with
its 2006 Senior Convertible debt.






21




RECENT
ACCOUNTING PRONOUNCEMENTS




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 provides a framework for
selecting accounting principles for financial statements that are presented in
conformity with GAAP. The Company does not expect that the provisions of SFAS
162 will result in a change in accounting practice for the Company.




In March
2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133. SFAS No. 161 applies to all derivative instruments and
related hedged items accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities,and requires entities to provide
greater transparency about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and
(iii) how derivative instruments and related hedged items affect an
entity’s financial position, results of operations, and cash flows. SFAS
No. 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company believes
that the adoption of SFAS No. 161, effective January 1, 2009, will not
have a material impact on its financial position, results of operations or cash
flows.





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 5” (SFAS
No. 160).
  SFAS No. 160 amends ARB No. 51 to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary.  It also amends certain of ARB No.
51’s consolidation procedures for consistency with the requirements of SFAS No.
141(R).  This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  The statement shall be applied prospectively as of the
beginning of the fiscal year in which the statement is initially
adopted.  The Company is in the process of evaluating the impact of
SFAS No. 160 on its financial statements.





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 adoption of SFAS No. 159 did not 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. SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. However, in
February 2008 the FASB Staff Position No. 157-2 was issued, which delays
the effective date of the requirements of SFAS 157 as to non-financial assets
and non-financial liabilities except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis. The effective
date has been deferred to fiscal years beginning after November 15, 2008
for these non-financial assets and liabilities. Our adoption of SFAS 157 on
January 1, 2008 did not have a material impact on our consolidated
financial position, results of operations or cash flows during the year ended
December 31, 2008. The Company does not expect the deferred portion of the
adoption of SFAS 157 to have a material impact on the financial
statements.





22




OFF-BALANCE
SHEET ARRANGEMENTS





In 2005,
the Company entered into a seven-year rental agreement with Javo Dispenser, LLC
(the “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, 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, 2008, the LLC had purchased 896 dispensers.  The Company
has incurred dispenser rental expense of $728,160, $716,640, and $370,791
in 2008, 2007, and 2006, respectively.  The LLC has purchased all
the dispensers it contracted for and will not purchase additional dispensers
beyond the 896 it has already purchased.





COMMITMENTS
AND CONTINGENCIES





Set forth
below is a table that summarizes our material obligations as of December 31,
2008 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
              
              $
              11,540,487
              
              
              $
              4,666,668
              
              
              $
              6,873,819
              
              
              $
              --
              
              
              $
              --8
      year note holders
              
              
              3,240,000
              
              
              
              --
              
              
              
              --
              
              
              
              1,134,000
              
              
              
              2,106,000Other
      long-term debt obligations
              
              
              925,934
              
              
              
              462,079
              
              
              
              455,123
              
              
              
              8,732
              
              
              
              --Total
              
              $
              15,706,421
              
              
              $
              5,128,747
              
              
              $
              7,328,942
              
              
              $
              1,142,732
              
              
              $
              2,106,000





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 it does buy futures contracts to mitigate against these risks, as
described below.





Green
coffee prices are subject to substantial price fluctuations due to various
factors including weather 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, that 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, 2008, Javo had
approximately $1,576,000 in green coffee purchase commitments.





ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





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





23




Javo
      Beverage Company, Inc.Index
      to Financial StatementsDecember
      31, 2008PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            F-1FINANCIAL
      STATEMENTSBalance
      Sheets
            
            F-2Statements
      of Operations
            F-3Statements
      of Stockholder's (Deficit) Equity
            F-4Statements
      of Cash Flows
            F-7Notes
      to Financial Statements
            F-9







24




REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders of
 Javo
Beverage Company, Inc.
 Vista,
California
  We
have audited the accompanying  balance sheets of Javo Beverage
Company, Inc. (the "Company") as of December 31, 2008 and  2007,
and the related statements of operations, stockholders' deficit, and cash flows
for each of the three years in the period ended December 31, 2008. We also
have audited the Company's internal control over financial reporting as of
December 31, 2008, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for these financial
statements, 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
Over Financial Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on the Company's internal control over
financial reporting 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 and whether effective internal
control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. 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, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
  A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the
financial statements.
  Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
  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, 2008 and 2007, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on the criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
  /s/
Farber Hass Hurley LLP
 Camarillo,
California
 March 16,
2009
  F-1







JAVO
      BEVERAGE COMPANY, INC.BALANCE
      SHEETSAs
      of December 31, 2008 and 20072008
            
            
            2007ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            905,344
            
            
            $
            6,636,908Restricted
      cash
            
            
            4,777,000
            
            
            
            3,863,000Total
      cash, restricted cash and cash equivalents
            
            
            5,682,344
            
            
            
            10,499,908Accounts
      receivable, less allowances
            
            
            1,526,120
            
            
            
            1,481,924Inventory,
      net of reserve for obsolescence
            
            
            785,713
            
            
            
            691,420Prepaid
      expenses
            
            
            103,607
            
            
            
            293,025Total
      current assets
            
            
            8,097,784
            
            
            
            12,966,277Property
      and equipment, net
            
            
            11,365,253
            
            
            
            4,644,993Intangibles,
      net
            
            
            761,979
            
            
            
            750,060Deposits
            
            
            23,858
            
            
            
            20,242Total
      assets
            
            $
            20,248,874
            
            
            $
            18,381,572LIABILITIES
      AND STOCKHOLDERS' (DEFICIT) EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            6,386,952
            
            
            $
            2,024,062Lines
      of credit
            
            
            5,816,230
            
            
            
            3,863,000Accrued
      payroll and related benefits
            
            
            250,369
            
            
            
            139,358Accrued
      short-term interest payable
            
            
            259,629
            
            
            
            399,808Warrants
      payable
            
            
            56,771
            
            
            
            2,389,215Current
      portion of long-term debt
            
            
            5,128,747
            
            
            
            4,990,563Total
      current liabilities
            
            
            17,898,698
            
            
            
            13,806,006Long-term
      debt, net of current portion
            
            
            10,577,674
            
            
            
            13,587,773Unamortized
      discount on long-term debt
            
            
            (6,197,748
            )
            
            
            (9,216,562
            )Accrued
      long-term interest payable
            
            
            15,504
            
            
            
            52,444Total
      liabilities
            
            
            22,294,128
            
            
            
            18,229,661Commitments
      and contingencies
            
            
            --
            
            
            
            --Stockholders'
      (deficit) equity:Preferred
      stock, $0.001 par value, 10,000,000 shares authorized,2,147,952 shares
      issued and outstanding as of December 31, 2008, 1,952,683 shares issued
      and outstanding as of December 31, 2007.  150,000 shares have
      been reserved for the Junior A Participating Preferred
    Stock.
            
            
            2,148
            
            
            
            1,953Common
      stock, $0.001 par value, 300,000,000 shares  authorized,
      186,403,648 shares issued and outstanding as of December 31, 2008,
      153,378,797 shared issued and outstanding as of December 31,
      2007
            
            
            186,404
            
            
            
            153,379Additional
      paid in capital
            
            
            62,595,575
            
            
            
            53,549,821Deferred
      Compensation
            
            
            (2,577,133
            )
            
            
            (4,023,653
            )Accumulated
      deficit
            
            
            (62,252,248
            )
            
            
            (49,529,589
            )Total
      stockholders' (deficit) equity
            
            
            (2,045,254
            )
            
            
            151,911Total
      liabilities and stockholders' (deficit) equity
            
            $
            20,248,874
            
            
            $
            18,381,572




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




F-2




JAVO
      BEVERAGE COMPANY, INC.STATEMENTS
      OF OPERATIONSFor
      the Years Ended December 31, 2008, 2007, and 20062008
            
            
            2007
            
            
            2006Net
      sales
            
            $
            19,448,822
            
            
            $
            12,559,132
            
            
            $
            10,321,655Cost
      of sales
            
            
            (11,223,960
            )
            
            
            (8,504,863
            )
            
            
            (6,811,319
            )Gross
      profit
            
            
            8,224,862
            
            
            
            4,054,269
            
            
            
            3,510,336Operating
      expenses:Selling
      and marketing
            
            
            (7,249,467
            )
            
            
            (4,687,083
            )
            
            
            (2,408,265
            )General
      and administrative
            
            
            (8,664,409
            )
            
            
            (6,472,440
            )
            
            
            (3,906,004
            )Total
      operating expenses
            
            
            (15,913,876
            )
            
            
            (11,159,523
            )
            
            
            (6,314,269
            )Loss
      from operations
            
            
            (7,689,014
            )
            
            
            (7,105,254
            )
            
            
            (2,803,933
            )Other
      income (expenses):Interest
      income
            
            
            165,058
            
            
            
            673,597
            
            
            
            28,963Interest
      expense
            
            
            (5,897,573
            )
            
            
            (6,200,874
            )
            
            
            (7,547,963
            )Income
      (expense) from derivatives
            
            
            2,332,444
            
            
            
            5,143,156
            
            
            
            404,721Other
      income
            
            
            339,121
            
            
            
            46,297
            
            
            
            --Gain/(loss)
      on disposal of assets
            
            
            (20,014
            )
            
            
            (5,858
            )
            
            
            (7,860
            )Total
      other expense
            
            
            (3,080,964
            )
            
            
            (343,682
            )
            
            
            (7,122,139
            )Net
      loss
            
            $
            (10,769,978
            )
            
            $
            (7,448,936
            )
            
            $
            (9,926,072
            )Basic
      and diluted loss per share
            
            $
            (0.07
            )
            
            $
            (0.05
            )
            
            $
            (0.07
            )Weighted
      average number of shares outstanding, basic and diluted
            
            
            160,598,172
            
            
            
            150,709,665
            
            
            
            149,494,203







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




F-3





JAVO
      BEVERAGE COMPANY, INC.STATEMENTS
      OF STOCKHOLDERS' DEFICITFor
      the Years Ended December 31, 2006, 2007 and 2008AdditionalCommon
      Stock
            
            
            Preferred
      Stock
            
            
            Paid-in-
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            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
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            $
            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-4





JAVO
      BEVERAGE COMPANY, INC.STATEMENTS
      OF STOCKHOLDERS' EQUITYFor
      the Years Ended December 31, 2006, 2007 and 2008AdditionalCommon
      Stock
            
            
            Preferred
      Stock
            
            
            Paid-in
            
            
            Deferred
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Deficit
            
            
            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
            
            
            --
            
            
            
            --
            
            
            
            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
            
            
            $
            (4,023,653
            )
            
            $
            (49,529,589
            )
            
            $
            151,911




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, 2006, 2007 and
2008





AdditionalCommon
      Stock
            
            
            Preferred
      Stock
            
            
            Paid-in
            
            
            Deferred
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Deficit
            
            
            TotalBalances
      at January 1, 2008
            
            
            153,378,797
            
            
            $
            153,379
            
            
            
            1,952,683
            
            
            $
            1,953
            
            
            $
            53,549,821
            
            
            $
            (4,023,653
            )
            
            $
            (49,529,589
            )
            
            $
            151,911Stock
      returned to treasury by terminated employee
            
            
            (16,500
            )
            
            $
            (16
            )
            
            
            --
            
            
            
            --
            
            
            $
            16
            
            
            
            --
            
            
            
            --
            
            
            
            --Stock
      issued to non-employee directors
            
            
            900,000
            
            
            $
            900
            
            
            
            --
            
            
            
            --
            
            
            $
            377,100
            
            
            
            
            
            
            
            --
            
            
            $
            378,000Recognition
      of stock option expense
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            $
            1,446,520
            
            
            
            --
            
            
            $
            1,446,520Stock
      issued in repayment of Sr. Convertible debt
            
            
            13,730,093
            
            
            $
            13,730
            
            
            
            --
            
            
            
            --
            
            
            $
            4,276,697
            
            
            
            --
            
            
            
            --
            
            
            $
            4,290,427Stock
      issued in repayment of Sr. Convertible interest
            
            
            2,211,258
            
            
            $
            2,211
            
            
            
            --
            
            
            
            --
            
            
            $
            1,149,650
            
            
            
            --
            
            
            
            --
            
            
            $
            1,151,861Preferred
      shares issued as a stock dividend at $.001 per share
            
            
            --
            
            
            
            --
            
            
            
            195,269
            
            
            $
            195
            
            
            $
            1,952,486
            
            
            
            --
            
            
            $
            (1,952,681
            )
            
            
            --Stock
      issued in 2008 offering
            
            
            16,200,000
            
            
            $
            16,200
            
            
            
            --
            
            
            
            --
            
            
            $
            1,289,805
            
            
            
            --
            
            
            
            --
            
            
            $
            1,306,005Net
      loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            $
            (10,769,978
            )
            
            $
            (10,769,978
            )Balance
      at December 31, 2008
            
            
            186,403,648
            
            
            $
            186,404
            
            
            
            2,147,952
            
            
            $
            2,148
            
            
            $
            62,595,575
            
            
            $
            (2,577,133
            )
            
            $
            (62,252,248
            )
            
            $
            (2,045,254
            )




The
accompanying notes are an integral part of these financial
statements




F-6




JAVO
      BEVERAGE COMPANY, INC.STATEMENTS
      OF CASH FLOWSFor
      the Years Ended December 31, 2008, 2007, 20062008
            
            
            2007
            
            
            2006Cash
      flows from operating activities:Net
      loss
            
            $
            (10,769,978
            )
            
            $
            (7,448,936
            )
            
            $
            (9,926,072
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Non-cash
      items:Depreciation
      and amortization
            
            
            6,241,246
            
            
            
            5,100,958
            
            
            
            2,415,581Accelerated
      interest and discount converted to preferred stock
            
            
            --
            
            
            
            --
            
            
            
            5,384,964Gain
      on derivatives
            
            
            (2,332,444
            )
            
            
            (5,143,156
            )
            
            
            (404,721
            )Deferred
      compensation
            
            
            1,446,520
            
            
            
            964,347
            
            
            
            --Provision
      for bad debt
            
            
            55,901
            
            
            
            179,750
            
            
            
            212,400Issuance
      of common stock for compensation or services
            
            
            378,000
            
            
            
            --
            
            
            
            7,249Issuance
      of warrants for services
            
            
            --
            
            
            
            --
            
            
            
            1,541Loss
      on disposal of assets
            
            
            20,014
            
            
            
            5,858
            
            
            
            7,860Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (100,097
            )
            
            
            (817,529
            )
            
            
            (279,784
            )Inventories
            
            
            (94,293
            )
            
            
            16,746
            
            
            
            700,433Prepaid
      expenses and other assets
            
            
            (193,977
            )
            
            
            (575,132
            )
            
            
            (105,926
            )Employee
      advances
            
            
            --
            
            
            
            1,362
            
            
            
            (1,362
            )Accounts
      payable and accrued expenses
            
            
            4,276,389
            
            
            
            847,382
            
            
            
            (22,475
            )Accrued
      payroll and related benefits
            
            
            111,010
            
            
            
            98,344
            
            
            
            13,696Accrued
      interest payable
            
            
            1,037,612
            
            
            
            876,787
            
            
            
            60,813Net
      cash provided by (used in) operating activities
            
            
            75,903
            
            
            
            (5,893,219
            )
            
            
            (1,935,803
            )Cash
      flows from investing activities:Change
      in restricted cash
            
            
            (914,000
            )
            
            
            (3,863,000
            )
            
            
            --Proceeds
      from disposal of equipment
            
            
            15,726
            
            
            
            7,317
            
            
            
            1,094Purchases
      of property and equipment
            
            
            (7,635,044
            )
            
            
            (4,080,876
            )
            
            
            (127,040
            )Net
      cash used in investing activities
            
            
            (8,533,318
            )
            
            
            (7,936,559
            )
            
            
            (125,946
            )Cash
      flows from financing activities:Proceeds
      from long-term debt
            
            
            3,240,000
            
            
            
            --
            
            
            
            21,000,003Proceeds
      from line-of-credit borrowing
            
            
            4,153,230
            
            
            
            3,863,000
            
            
            
            713,000Repayment
      on line-of-credit
            
            
            (2,200,000
            )
            
            
            (713,000
            )
            
            
            --Loan
      costs
            
            
            --
            
            
            
            --
            
            
            
            (1,822,449
            )Payments
      on long-term debt
            
            
            (2,467,379
            )
            
            
            (1,017,230
            )
            
            
            (24,198
            )Proceeds
      from exercised warrants
            
            
            --
            
            
            
            9,755
            
            
            
            --Net
      cash provided by financing activities
            
            
            2,725,851
            
            
            
            2,142,525
            
            
            
            19,866,356Net
      change in cash and cash equivalents
            
            
            (5,731,564
            )
            
            
            (11,687,253
            )
            
            
            17,804,607Cash
      and cash equivalents at beginning of period
            
            
            6,636,908
            
            
            
            18,324,161
            
            
            
            519,554Cash
      and cash equivalents at end of period
            
            $
            905,344
            
            
            $
            6,636,908
            
            
            $
            18,324,161The
      accompanying notes are an integral part of these financial
      statements.




F-7





JAVO
      BEVERAGE COMPANY, INC.STATEMENT
      OF CASH FLOWS (Continued)For
      the Years Ended December 31, 2008, 2007, 20062008
            
            
            2007
            
            
            2006Non-cash
      activities:Issuance
      of preferred stock in exchange for debt
            
            
            --
            
            
            
            --
            
            
            $
            17,751,660Issuance
      of preferred stock as in-kind dividend
            
            $
            1,952,681
            
            
            $
            1,775,167Issuance
      of common stock in exchange for debt
            
            $
            4,290,427
            
            
            $
            2,879,654
            
            
            
            --Issuance
      of common stock in exchange for interest due
            
            $
            1,151,861
            
            
            $
            704,802
            
            
            
            --Deferred
      compensation
            
            
            --
            
            
            $
            4,988,000
            
            
            
            --Equipment
      from capital lease
            
            $
            732,392
            
            
            $
            362,982
            
            
            $
            63,726Discount
      for beneficial conversion feature of Senior Convertible
    Debt
            
            
            --
            
            
            
            --
            
            
            $
            4,065,583Warrant
      Liability
            
            $
            2,332,444
            
            
            $
            5,143,155
            
            
            $
            7,532,370Supplemental
      cash flow information:Cash
      paid for interest
            
            $
            539,893
            
            
            $
            689,806
            
            
            $
            50,854Cash
      paid for income taxes
            
            $
            18,664
            
            
            $
            3,918
            
            
            $
            1,936




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




F-8




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008




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 the Company’s financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates, judgments 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.The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources.




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 $5.7 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 $4,777,000 is
in Restricted Money Market accounts and secures a line of credit. The Company
funds are in large reputable financial institutions.  The Company does
not believe that it is subject to any unusual credit or market risk because the
funds are invested with a large stable national bank that has not been included
in the group of banks with known financial problems.




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,
2008, the Company had three customers whose balances approximated 12%, 11% and
5% compared to 20%, 16%, and 13% of gross accounts receivable as of December 31,
2007. No other customer balance exceeded 10% of gross accounts
receivable.







F-9




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





NOTE
2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Revenue
Recognition




The
Company recognizes revenue when persuasive evidence of an arrangement exists,
title transfer has occurred, the price is fixed or readily determinable, and
collection is probable. It recognizes 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 $2,300,002, $1,015,270 and $707,916 for the years ended December
31, 2008, 2007 and 2006, 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.





Stock-Based
Compensation





In
accordance with SFAS 123(R), Share-based Payments, on January 1, 2006, the
Company calculates compensation costs for all share-based awards to
employees 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-10




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





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 reporting 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 17,978,590 at December 31, 2008, 22,101,690 at December 31, 2007, and
19,311,721 at December 31, 2006.  Inclusion of these shares is not
incorporated in the computation as their effect would be anti-dilutive. The
number of potential shares to be issued at each December 31 related to the
senior convertible debt is calculated based on the stated conversion price of
$1.79 per share.  If the Company considered the in-kind dividend
accrued on the Series B Preferred Stock in calculating the loss available to
common shareholders the net loss per weighted average common share would
increase from $(0.07) to $(0.08) for 2008 and from $(0.05) to $(0.06) for
2007.





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-11




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008


Reclassifications





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





Fair Value of Financial
Instruments




SFAS 107,
“Disclosures about Fair Value of Financial Instruments” requires disclosure of
the fair value of financial instruments held by the Company. The Company
considers the carrying amount of cash, accounts receivable, other receivables,
accounts payable, accrued liabilities and certain promissory notes, to
approximate their fair values because of the short period of time between the
origination of such instruments and their expected realization.





The
Company adopted SFAS 157, “Fair Value Measurements” on January 1, 2008. SFAS 157
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosure requirements for
fair value measures. The three levels are defined as follows:





·
            Level
      1   inputs to the valuation methodology are quoted prices
      (unadjusted) for identical assets or liabilities in active
      markets.·
            Level
      2   inputs to the valuation methodology include quoted
      prices for similar assets and liabilities in active markets, and inputs
      that are observable for the assets or liability, either directly or
      indirectly, for substantially the full term of the financial
      instruments.·
            Level
      3   inputs to the valuation methodology are unobservable
      and significant to the fair value.





The
Company also analyzes all financial instruments with features of both
liabilities and equity under SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.”





Carrying
      Value
                              December
      31,
                              2008
                            
                            Fair
      Value Measurements
                              December
      31, 2008
                              Using
      Fair Value HierarchyLevel
      1
                            
                            Level
      2
                            
                            Level
      3Senior
      Convertible debt
                            
                            $
                            11,540,487
                            
                            $
                            -
                            
                            $
                            -
                            
                            $
                            8,886,175Promissory
      notes
                            
                            $
                            3,240,000
                            
                            $
                            -
                            
                            $
                            -
                            
                            $
                            2,591,028Warrants
                            
                            $
                            56,711
                            
                            $
                            -
                            
                            $
                            -
                            
                            $
                            56,711





The
Company determined the value of the Senior Convertible debt based on fact and
circumstance and the agreement with debt holders to payoff of 10% of the
outstanding balance at a 23% discount in December 2008.





The
Company determined the value of its promissory notes based on a discount from
the face for the interest rate and delayed payment terms in addition to other
facts and circumstances at the end of 2008.





The
Company carries the warrant on its balance sheet as a liability at fair
market value determine by using the Black Scholes valuation model.  As
of December 31, 2008, the factors used in the valuation of the warrants was the
Company’s stock price of $0.12, interest rate of 1.8%, and volatility percentage
of 90.6%.







F-12




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





Recent Pronouncements and
Accounting Changes




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. However, in
February 2008 the FASB Staff Position No. 157-2 was issued, which delays
the effective date of the requirements of SFAS 157 as to non-financial assets
and non-financial liabilities except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis. The effective
date has been deferred to fiscal years beginning after November 15, 2008
for these non-financial assets and liabilities. Our adoption of SFAS 157 on
January 1, 2008 did not have a material impact on our consolidated
financial position, results of operations or cash flows during the year ended
December 31, 2008. The Company does not expect the deferred portion of the
adoption of SFAS 157 to have a material impact on the financial
statements.





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 adoption of SFAS No. 159 did not
have a material impact on the Company's results of operations or financial
position.




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
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 5” (SFAS
No. 160).
  SFAS No. 160 amends ARB No. 51 to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary.  It also amends certain of ARB No.
51’s consolidation procedures for consistency with the requirements of SFAS No.
141(R).  This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  The statement shall be applied prospectively as of the
beginning of the fiscal year in which the statement is initially
adopted.  The Company is in the process of evaluating the impact of
SFAS No. 160 on its financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133” (SFAS No. 161).  SFAS No. 161 amends and expands the
disclosure requirements of SFAS No. 133 with the intent to provide users of
financial statements with an enhanced understanding of: (i) how and why an
entity uses derivative instruments; (ii) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash
flows.  This statement is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged.  The Company is in the process of
evaluating the impact of SFAS No. 161 on its financial
statements.  The Company does not expect that the provisions of SFAS
No. 161 will result in a change in accounting practice for the
Company.




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 provides a framework for
selecting accounting principles for financial statements that are presented in
conformity with GAAP. The Company does not expect that the provisions of SFAS
162 will result in a change in accounting practice for the Company.







F-13





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





NOTE
3.    MAJOR CUSTOMERS AND VENDORS





The
Company purchases certain products from five suppliers, which accounted for
approximately 68%, 62% and 62% of total purchases in 2008, 2007 and 2006,
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, 2008, 2007, and 2006, the Company had sales to three
major customers, which accounted for 14%, 12% and 9% of sales in 2008, 20%, 16%
and 13% of sales in 2007, 15%, 9% and 7% of sales in 2006,
respectively.  The Company expanded its customer base in 2008 and
anticipates that sales in 2009 will be to a broader base of customers and it
will be less reliant on any one customer.  The Company recorded a bad
debt expense of $55,901, $179,750 and $212,400 in 2008, 2007 and 2006,
respectively.





Accounts
receivable consists of the following at December 31, 2008 and 2007





2008
            
            
            2007Accounts
      receivable
            
            $
            1,542,660
            
            
            $
            1,693,524Allowance
      for doubtful accounts
            
            
            (16,540
            )
            
            
            (211,600
            )$
            1,526,120
            
            
            $
            1,481,924








NOTE
4.    INVENTORY





Inventory
consists of the following at December 31, 2008 and 2007.





2008
            
            
            2007Raw
      Materials
            
            $
            603,845
            
            
            $
            326,170Finished
      Goods
            
            
            220,124
            
            
            
            403,506823,969
            
            
            
            729,676Reserve
      for Obsolescence
            
            
            (38,256
            )
            
            
            (38,256
            )$
            785,713
            
            
            $
            691,420





NOTE
5.    PROPERTY AND EQUIPMENT





Property
and equipment consists of the following at December 31, 2008 and
2007.





2008
            
            
            2007Production
      Equipment
            
            $
            13,831,850
            
            
            $
            4,477,666Construction
      in Process
            
            
            --
            
            
            
            1,017,755Leasehold
      Improvements
            
            
            472,229
            
            
            
            381,430Office
      Equipment
            
            
            302,602
            
            
            
            296,528Vehicles
            
            
            46,897
            
            
            
            46,897Total
      Cost
            
            
            14,653,578
            
            
            
            6,220,276Less
      Accumulated Depreciation
            
            
            (3,288,325
            )
            
            
            (1,575,283
            )$
            11,365,253
            
            
            $
            4,644,993





During
the years ended December 31, 2008, 2007 and 2006 depreciation expense totaled
$1,780,593, $506,592 and $310,556, respectively.







F-14




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008




NOTE
7.    INTANGIBLE ASSETS





Intangible
assets include loan costs of $1,167,954, net of amortization of $1,139,459, or
$28,495.  The loan costs related to the promissory note debt 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.  The loan costs related to the
2008 factoring fee is being amortized over the three year contract term.
 Amortization expense as of December 2008, 2007 and 2006 was $7,867 $16,834
and $532,248, respectively.





In 2005,
the Company entered into a five-year contract to be the primary liquid coffee
provider for a group purchasing organization owned by a large contract
foodservice operator.  In connection with that contract, the Company
agreed to pay the group purchasing organization a $900,000 conversion fee that
is being amortized based on the quantity of product sold over the term of the
contract.  The agreement was modified in April 2007 to include iced
dispensed products and extended the terms of the agreement through 2012. The
Company recorded an amortization expense for 2008, 2007 and 2006 of $87,330,
$80,802 and $53,422, respectively.  The conversion fee net of the
$246,728 accumulated amortization is reported on the balance sheet as part of
the Company’s intangible assets.




In 2008,
the Company entered into one year exclusivity period contracts with three
regional convenience store chains.  The Company will be paying for the
installation of approximately 1,050 machines at an approximate cost of
$215,000.  The installation costs are being amortized over twelve
months.  As of December 31, 2008, the Company has recorded $183,718 in
installation costs and $103,506 in amortization.





Intangible
      assets, net as of
            
            2008
            
            
            2007Loan
      fees
            
            $
            1,167,954
            
            
            $
            1,141,050Conversion
      fee
            
            
            900,000
            
            
            
            900,000Installation
      costs
            
            
            183,718
            
            
            
            --2,251,672
            
            
            
            2,041,050Accumulated
      amortization
            
            
            (1,489,693
            )
            
            
            (1,290,990
            )Net
      intangibles
            
            $
            761,979
            
            
            $
            750,060





Amortization
of the intangibles is as follows:





2008December
      31, 2009
            
            $
            206,8472010
            
            
            180,1352011
            
            
            237,7262012
            
            
            137,2712013
            
            
            --Thereafter
            
            
            --$
            761,979





NOTE
8.    LINES OF CREDIT





In July
2007, the Company entered into a $5,000,000 working capital loan with Wells
Fargo Bank, N.A. which 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.  As of December 31, 2008, the loan balance was
$4,777,000 with an interest rate ranging from 3.25% to 4.0%.  As of
December 30, 2008, the amount available on the line of credit was
$223,000.





In July
2008, the Company entered into a financing arrangement which gave it the ability
to factor its accounts receivable.  The terms provide for the Company
to receive funding of 70% on the balance of receivables it factored up to
$1,250,000.  In July, the Company paid a one-time $6,250 line
fee.  The factor received a 0.9% administrative fee for





F-15





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





NOTE
8.    LINES OF CREDIT (Continued)





factoring
a specific receivable for each thirty (30) day period the receivable is
outstanding plus interest at four percent over prime, on the amount of the
advance by the factor based on the number of days the receivables was
outstanding.





In
October 2008, the Company paid off its accounts receivable factoring line of
credit and replaced it with a facility from another factoring
company.  The initial terms of the new lending facility provide for
the Company to receive advance funding of up to 75% on the balance of its
receivables up to $6,000,000.  In September, the Company paid a due
diligence fee of $29,500 which will be amortized over the life of the contract,
36 months.  The Company pays a 0.465% administrative fee for factoring
a specific receivable for each thirty (30) day period the receivable is
outstanding plus interest at three percent over prime, as of December 31, 2008
the rate was 7.5%, on the amount advanced by the factoring based on the days the
receivables is outstanding.  In addition, the new factoring facility
allows the Company, at its option, to receive as an advance an additional 25% of
the eligible receivables.  This optional advance must be repaid over a
13 week period before it can be advanced again.  The Company pays a
0.5% draw down fee and interest of 0.467% per diem on the outstanding balance
for the optional advance. The amount owed on the factoring line as of December
31, 2008 was $1,039,230.





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 “Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants”,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.





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 $3,365,466 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 $3,365,466 debt discount was recognized on the $6,000,000
principal value of the promissory notes, which is being amortized over the
five-year life of the debt. This accounting makes the effective compound
interest rate on the notes approximately 25% over the life of the
debt.  Of the $6,000,000 in promissory notes, $5,775,000 plus related
accrued interest were converted to Series B Preferred Stock in
2006.





In 2004,
the Company issued $2,700,000 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.






F-16





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





NOTE
9.    LONG-TERM DEBT (continued)





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.





In
December 2008, the Company issued $3,240,000 in promissory notes bearing 10%
interest per year, which mature in 2017.  The proceeds of this funding
provided the Company with working capital to continue operations.  In
connection with these promissory notes, the Company issued 16,200,000 shares of
its restricted Common Stock.  The Company determined that per APBO No.
14 the note holders had effectively purchased the 16,200,000 shares of
restricted Common Stock for $1,306,005 and had paid $1,933,995 for the debt,
based on the relative fair values of the respective equity and debt instruments
issued.  Accordingly, a $1,306,005 debt discount was recognized on the
$3,240,000 principal value of the promissory notes, which is being amortized
over the eight-year life of the debt.  The notes require quarterly
interest payments for the first thirty-six months of the loan.  In
April 2012, principal will be paid in equal quarterly installments, plus accrued
interest until the maturity date of January 2017.





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 of
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 in cash $388,889 of principal and $433,796 of accrued interest
related to its Senior Convertible debt. In addition, the Company issued
3,763,110 shares of its Common Stock in payment of $2,879,654 in principal and
$704,802 in accrued interest of the Senior Convertible debt.





In 2008,
the Company paid in cash $1,603,977 of principal and $22,846 of accrued interest
related to its Senior Convertible debt.  In addition, the Company
issued 15,941,351 shares of its Common Stock in payment $4,290,427 in principal
and $1,151,861 in accrued interest. The Company recorded a non-cash accretion
expense of $4,261,949 and $4,496,279 in 2008 and 2007,
respectively.





F-17




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





NOTE
9.    LONG-TERM DEBT (continued)





In
connection with the Senior Convertible Debt, the Company issued warrants for the
purchase of 6,644,554 of the Company’s Common Stock.  The Company
issued Series A Warrants for 3,519,555 common shares at a strike price of $1.95
per share and Series B Warrants for 3,124,999 at a strike price of $2.24 per
share.  Any or all of the warrants maybe exercised any time between
June 2007 and December 2011.  The Company would receive gross proceeds
of $13,863,130 if these warrants were exercised in full at their current strike
prices. The A and B Warrant agreements are identical except for the strike
price. These warrants were valued at the time of issuance using the
Black-Scholes option valuation, which resulted in a fair value of $3,906,076 for
the A Warrants and $3,406,249 for the B Warrants, representing a total fair
value of these warrants of $7,312,955 as of December 15,
2006.  Because the warrants provide for a strike price reset if the
Company issues stock at a price less than the defined exercise price, the
Company was required under 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 after April 8,
2009.





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.





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, 2008, 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 $2,332,444 and $5,143,156 in 2008 and 2007,
respectively.  The Company used the following factors in calculation
of Black Scholes value, fixed interest of 1.8%, stock price of $0.12, days
remaining of 1,078 and volatility of 90.6% in December 31, 2008 and fixed
interest rate of 4.5%, stock price of $0.74, days remaining of 1,444 and
volatility of 88.0% as of December 31, 2007.






F-18




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008


NOTE
9.    LONG-TERM DEBT (continued)





In
December 2008, the Company entered into an agreement with the Senior Convertible
Debt holders which give it the right to prepay the Senior Convertible Debt at a
discount.  In December 2008, the Company prepaid $1,289,436 of the
then outstanding balance for $928,394.  The Company reported
forgiveness of debt income of $361,042 in connection with the
prepayment.





Long-term
debt at December 31, 2008 and 2007 consisted of the following:


2008
              
              
              2007Senior
      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
              
              $
              11,540,487
              
              
              $
              17,731,461Notes
      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 $631,
      including interest at 6% per annum.  Matures
    2012.
              
              
              23,850
              
              
              
              29,795Notes
      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.
              
              
              19,960
              
              
              
              24,510Lease
      payable, secured by equipment, payable in monthly installments of $438,
      including interest at 8.394% per annum.  Matures
      2012.
              
              
              15,237
              
              
              
              19,040Notes
      payable, unsecured, payable at quarterly starting April
      2012.  Interest paid quarterly starting April 2009 interest at
      10% per annum.  Matures 2016
              
              
              3,240,000
              
              
              
              --Lease
      payable, secured by equipment, payable in monthly installments of
      $16,528.  Interest paid separately at 15.5% per
      annum.  Matures 2011.
              
              
              561,944
              
              
              
              --Lease
      payable, secured by equipment, payable in monthly installments of $6,754,
      including interest at 16.41% per annum. Matures 2010.
              
              
              79,943
              
              
              
              --Notes
      payable, unsecured, payable at maturity including interest at 10% per
      annum.  Matures 2008
              
              
              --
              
              
              
              225,000Lease
      payable, secured by equipment, payable in monthly installments of $4,991,
      including interest at 13.427% per annum.  Matures
      2013.
              
              
              --
              
              
              
              224,796Lease
      payable, secured by equipment, payable in monthly installments of $1,460,
      including interest at 16.642% per annum.  Matures
      2011.
              
              
              --
              
              
              
              43,741Lease
      payable, secured by equipment, payable in monthly installments of $498 at
      an annual interest rate of 10.741%.  Matures in
      2011.
              
              
              --
              
              
              
              17,386Lease
      payable, secured by equipment, payable in monthly installments of $3,434,
      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.
              
              
              --
              
              
              
              11,815Note
      payable, unsecured, payable in monthly installments of $1,174, including
      effective interest at 6.09% per annum.  Matures
    2008
              
              
              --
              
              
              
              8,222Lease
      payable, secured by equipment, payable in monthly installments of $485,
      including interest at 6.0% per annum. Matures 2008.
              
              
              --
              
              
              
              3,798Total
      long-term debt
              
              
              15,706,421
              
              
              
              18,578,336Less
      current portion
              
              
              5,128,747
              
              
              
              4,990,563Long-term
      debt less current portion
              
              $
              10,577,674
              
              
              $
              13,587,773




F-19




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





NOTE
9.    LONG-TERM DEBT (continued)





Long-term
      debt matures as follows:2009
            
            $
            5,128,747
            
            
            $
            4,990,5632010
            
            
            4,938,400
            
            
            
            4,911,1162011
            
            
            2,390,542
            
            
            
            4,795,4322012
            
            
            494,732
            
            
            
            3,803,9192013
            
            
            648,000
            
            
            
            62,661Thereafter
            
            
            2,106,000
            
            
            
            14,645$
            15,706,421
            
            
            $
            18,578,336






F-20





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008




NOTE
10.    COMMITMENTS AND CONTINGENCIES





As of
December 31, 2008, Javo had forward commitments to purchase green coffee beans
of approximately $1,576,000.





Leases





The
Company entered into a non-cancelable operating lease for its office space in
October 2002. The lease was extended for an additional year in December of 2008
and will expire in November 2010. Also, in 2008, the Company entered into a
cancelable operating lease for additional warehouse space.  Total rent
expense for all operating leases for the years ended December 31, 2008, 2007 and
2006 amounted to $393,960, $337,624 and $324,223, respectively.





The
Company's future annual minimum lease payments as of December 31, 2008 are as
follows:





Year
      Ending2009
            
            $
            290,0402010
            
            
            265,870$
            555,910


Litigation





As of
December 31, 2008 there were no material claims filed against the
Company.  The Company in its normal course of doing business is
subject from time to time to disputes and to legal proceedings against
it.





NOTE
11.    STOCK AND WARRANT TRANSACTIONS





Stock Option
Issuances





In 2006,
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. The Company recorded a
non-cash expense of $1,446,520 and $964,347 related to the stock options, in
2008 and 2007 respectively.  A summary of option activity for 2008 is
presented below:





Options
            
            SharesOutstanding
      at December 31, 2007
            
            
            5,000,000Granted
            
            
            --Exercised
            
            
            --Forfeited
            
            
            --Expired
            
            
            --Outstanding
      at December 31, 2008
            
            
            5,000,000






F-21





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





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.





Stock
Issuances





On
September 21, 2008, a majority of the independent members of the Board approved
the awarding of 150,000 shares of Common Stock to each of the non-employee
directors of the Company under the 2007 Stock Option and Incentive
Plan.  In connection with the award, the Company recognized a $378,000
or $0.42 per share non cash stock expense.





During
2008, the Company converted $4,290,427 in principal and $1,151,861 in accrued
interest of its senior convertible debt principal and accrued interest into
15,941,351 shares of its Common Stock.  The conversion price was at a
discount from the weight volume average stock price for the relevant periods or
an average conversion price of $0.34 per share.





In July
2008, the Company issued 195,269 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 Series B Preferred Stock earns a $1 per share dividend payable
in kind or cash at the Company's option each July.





Warrants – Senior
Convertible Debt





The
outstanding warrants for the purchase of the Company’s Common Stock as of
December 31, 2008, 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
            
            3,273,187
            
            June
      2007 through December 2012$2.24
            
            2,906,249
            
            June
      2007 through December 20136,531,391





If these
warrants were exercised, the Company would receive $13.5 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 2008, the Company recorded
non-cash derivative income of $2,332,444.





In 2008,
the Company retired 351,956 warrants with a $1.95 strike price and 312,500
warrants with a $2.24 strike price for a total of 664,455 warrants from the
Senior Convertible debt holders.





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-22




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





NOTE
12.    PROVISION FOR INCOME TAXES





No
provision for income taxes was recorded in 2008, 2007 or 2006 since the Company
generated both book and tax losses.  The Company’s deferred tax assets
consist of the following:





2008
              
              
              2007
              
              
              2006Net
      operating loss carry forward
              
              $
              62,300,000
              
              
              $
              49,500,000
              
              
              $
              40,300,000Calculated
      deferred tax benefit
              
              
              24,900,000
              
              
              
              19,800,000
              
              
              
              16,120,000Valuation
      allowance
              
              
              (24,900,000
              )
              
              
              (19,800,000
              )
              
              
              (16,120,000
              )Deferred tax asset
              
              $
              --
              
              
              $
              --
              
              
              $
              --Provision
      for income tax benefits were as follows:Tax
      benefit, calculated at statutory rate
              
              $
              (3,934,200
              )
              
              $
              (3,128,400
              )
              
              $
              (2,546,960
              )Increase
      in valuation allowance
              
              
              3,924,200
              
              
              
              3,128,400
              
              
              
              2,546,960$
              --
              
              
              $
              --
              
              
              $
              --





At
December 31, 2008, the Company had net operating carry forwards for federal and
state purposes that expire in various years through 2027.  The extent
to which these loss carry forwards can be used to offset future taxable income
may be limited.





NOTE  13.    RELATED
PARTY TRANSACTIONS





Private Debt
Offering





In
December 2008, a member of the Company’s board of directors purchased $2.0
million of promissory notes and common stock in a private
transaction.  For the investment, the director received promissory
notes in the aggregate principal sum of $2.0 million and 10 million shares of
common stock.  The board member invested on the same terms as the
other non-affiliate investors.





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.  Of that
amount, eight then outside Company 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, 2008, the LLC had purchased 896 dispensers.  The Company
incurred dispenser rental expense of $728,160, $716,640 and $370,791, in 2008,
2007 and 2006, respectively.  Presented below are the Condensed
Balance Sheets as of December 31, 2008 and 2007, and the Statements of
Operations for the years ended December 31, 2008, 2007, and 2006
respectively.






F-23





JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





NOTE  13.    RELATED
PARTY TRANSACTIONS (Continued)




JAVO
      DISPENSER, LLC.CONDENSED
      BALANCE SHEETSAs
      of December 31, 2008 and 2007(UNAUDITED)




2008
              
              
              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              704
              
              
              $
              17,000Accounts
      receivable
              
              
              253,326
              
              
              
              164,080Total
      current assets
              
              
              254,030
              
              
              
              181,080Property
      and equipment, net
              
              
              1,041,210
              
              
              
              1,475,782Total
      assets
              
              $
              1,295,240
              
              
              $
              1,656,862LIABILITIES
      AND MEMBER EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
              
              $
              52,284
              
              
              $
              57,745Long-term
      debt
              
              
              806,610
              
              
              
              1,378,597Total
      liabilities
              
              
              858,894
              
              
              
              1,436,342Member
      Equity
              
              
              436,346
              
              
              
              220,520Total
      liabilities and member equity
              
              $
              1,295,240
              
              
              $
              1,656,862







JAVO
      DISPENSER, LLC.CONDENSED
      STATEMENTS OF OPERATIONSFor
      the Years Ended December 31, 2008,  2007 and
  2006(UNAUDITED)






2008
            
            
            2007
            
            
            2006Rental
      Income
            
            $
            728,160
            
            
            $
            716,640
            
            
            $
            370,791Operating
      expenses:General
      and administrative
            
            
            (443,302
            )
            
            
            (434,307
            )
            
            
            (216,119
            )Total
      operating expenses
            
            
            (443,302
            )
            
            
            (434,307
            )
            
            
            (216,119
            )Income
      from operations
            
            
            284,858
            
            
            
            282,333
            
            
            
            154,672Other
      income (expenses):Interest
      expense
            
            
            (69,031
            )
            
            
            (143,887
            )
            
            
            (81,828
            )Net
      Income
            
            $
            215,827
            
            
            $
            138,446
            
            
            $
            72,844





F-24




JAVO
BEVERAGE COMPANY, INC.


NOTES
TO FINANCIAL STATEMENTS


DECEMBER
31, 2008





NOTE
14.    SUBSEQUENT EVENTS (UNAUDITED)





Private Debt
Offering





Through
March 13, 2009, the Company had raised approximately $5.1 million in its Private
Debt Offering plus an additional $2 million in escrow and commitments and
letters of intent for the remainder of its $20 million Private Debt
Offering.





Related
Party Transaction





In
February 2009, a member of the Company’s board of directors purchased $200
thousand of promissory notes and common stock in a Private Debt
Offering.  For the investment, the director received promissory notes
in the aggregate principal sum of $200 thousand and 1.0 million shares of common
stock.  The board member invested on the same terms as the other
non-affiliated investors.








F-25




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, carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of December 31,
2008.   Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934) are effective.





Management’s
Report on Internal Control over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting 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 its
principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of its 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.  Based on its evaluation under this
framework, management concluded that internal control over financial
reporting was effective as of December 31, 2008.





Changes in Internal Control over
Financial Reporting





In the
2008, the Company made several changes to improve the inventory process in order
to eliminate the deficiency identified in 2007.  The Company 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 addition,
the Company personnel including the Chief Financial Officer continue as a matter
of routine, to review the final inventory values to insure there are no material
misstatements of the final inventory value in its financial
reports.





The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008 has been reviewed and attested by Farber Hass Hurley LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.




25




Item
      9B.
            Other
      Information





Not
applicable.




26





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 of
December 2008, as well as certain biographical information.





CODY C. ASHWELL,
38





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 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,
52





Gary A.
Lillian is Javo’s President, responsible for the company's commercial strategy
and the development of key industry alliances. Prior to becoming Javo's
President in January 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,
60





Richard
A. Gartrell has served as Javo's Chief Financial Officer since 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,
38





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 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,
75





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.





27




RONALD S. BEARD,
70





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





JERRY W. CARLTON,
67





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,
60





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 certain real estate assets,
primarily retail properties. 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,
68





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,
56





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 each of
2004 and 2008, each outside director received 150,000 shares of the Company's
Common Stock as compensation for his service on the board of
directors.  No additional compensation has been given or paid to
outside directors or executive committee members.




28





Compliance
With Section 16(a) of the Exchange Act




Under
Section 16(a) of the Securities Exchange Act of 1934 and SEC
rules, the Company's 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 the Company 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 its 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 its common stock.




Code
of Ethics




The
Company has 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.  Javo
has posted a copy of its code of ethics on its website at www.javobeverage.com.  You
may also request a printed copy of the code of ethics, without charge, by
writing the Company at 1311 Specialty Drive, Vista,
California  92081, Attn: Investor Relations.




Audit
Committee




The
company does not have a standing audit committee.  As a small company
that is traded on the OTC market, it believes that all members of its
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, the 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.  It
believes 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 interest in Javo Dispenser,
LLC.  Because Javo does not have a separate audit
committee, it does not currently have a written audit committee charter or
similar document.  We plan to form a standing audit committee during
fiscal 2009.





ITEM
      11.
            EXECUTIVE
      COMPENSATION




Compensation
Discussion and Analysis




Compensation
Philosophy and Objectives




Javo's 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.






29




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 it
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 no
changes were made in the compensation to the executive team in
2008.




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 2008,
no changes were made in executive compensation.





Elements
of Executive Officer Compensation





Base Salary. Javo seeks
to provide its 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 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 the Company has 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.





In 2008,
no changes were made in executive salaries.





Name
            
            2007 Base
              Salary
            
            
            2008 Base
              Salary
            
            IncreaseC     Cody
      C. Ashwell
            
            $
            210,000
            
            
            $
            210,000
            
            0.0%Ga   Gary
      A. Lillian
            
            $
            200,000
            
            
            $
            200,000
            
            0.0%Ri    Richard
      A. Gartrell
            
            $
            200,000
            
            
            $
            200,000
            
            0.0%William
      E. Marshall
            
            $
            200,000
            
            
            $
            200,000
            
            0.0%





The base
salaries actually paid to each of the named executive officers in fiscal 2008
are set forth below in the Summary Compensation Table.





Cash
Bonus





In 2008,
no bonus awards were paid to executives.





Equity
Awards.





No option
grants or other equity awards were made in 2008.






30




Other
Benefits




Executive
officers are eligible to participate in all 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.  The Company also provides vacation and other
paid holidays to all employees, including executive officers, all of
which it believes to be comparable to those provided at peer companies.
These benefit programs are designed to enable the Company to attract
and retain its workforce in a competitive marketplace.  Health,
welfare and vacation benefits ensure that it has 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 its
executive officers, the compensation committee considers the 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 Javo 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 2008.




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




Role
of Executives in Compensation Decisions




The
compensation committee 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 2008, 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 the 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 the executives or employees,
although senior members of the 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




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




31




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, 2008.




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 three fiscal years by the Chief Executive
Officer, Chief Financial Officer and the two other most highly compensated
executive officers in fiscal 2008.  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
              2008
                2007
                2006
              $210,000
                202,500
                180,000
              --
                170,000
                --
              --
                289,304
                --
              $13,076
                6,207
                2,616
              $223,076
                668,011
                182,616Gary
      A. Lillian
                President
              2008
                2007
                2006
              200,000
                194,167
                180,000
              --
                100,000
                --
              --
                192,869
                --
              13,686
                6,515
                2,616
              213,686
                493,551
                182,616Richard
      A. Gartrell
                Chief
      Financial Officer
              2008
                2007
                2006
              200,000
                194,167
                180,000
              --
                100,000
                --
              --
                192,869
                --
              5,050
                2,428
                2,616
              205,050
                489,464
                182,616William
      E. Marshall
                General
      Counsel, Sr. Executive
                Vice
      President and Secretary
              2008
                2007
                2006
              200,000
                194,167
                162,750
              --
                100,000
                --
              --
                192,869
                --
              13,686
                6,515
                2,616
              213,686
                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.




Grants
of Plan-Based Awards




No option
awards were made in fiscal 2008.







32





Outstanding
Equity Awards at Fiscal Year-End




The
following table shows information regarding outstanding equity awards at
December 31, 2008 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 the named executive officers during fiscal
2008.  As of December 31, 2008, no restricted stock have been granted
under the 2007 Plan.





The
Directors were issued 150,000 shares each as compensation for services in
2008.




Pension
Benefits




Javo does
not have a defined benefit plan. The named executive officers did not
participate in, or otherwise receive any special benefits under, any pension or
defined benefit retirement plan sponsored by the Company during fiscal
2008.




Nonqualified
Deferred Compensation




During
fiscal 2008, the named executive officers did not contribute to, or earn
any amount with respect to, any defined contribution or other plan sponsored
by Javo that provides for the deferral of compensation on a basis that is
not tax-qualified.




Employment,
Severance and Change in Control Agreements




Javo has
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 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




Javo currently
has no change in control agreements in place for any of the named executive
officers. However, the 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.






33




Assuming
that a change in control occurred as of the end of fiscal 2008, and based
on the closing stock price on the last day of trading that year ($0.12) 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 the stock.




Director
Compensation




Directors
each received 150,000 shares of common stock as compensation for their services
as directors in fiscal 2008.  The Company recorded $378,000 in
compensation expense for the issuance.




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 2008, 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.






34







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
February 12, 2009 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
February 12, 2009 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 the Company's 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 193,753,343
shares of common stock and 2,147,952 shares of preferred stock outstanding as of
February 12, 2009.  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)William
      C. Baker
            
            
            18,016,400
            
            
            
            9.3%
            
            
            
            93,510
            
            
            
            4.4Cody
      C. Ashwell
            
            
            9,187,027
            
            
            
            4.7
            
            
            
            --
            
            
            
            --Terry
      C. Hackett
            
            
            1,575,000
            
            
            
            *
            
            
            
            30,526
            
            
            
            1.4William
      E. Marshall
            
            
            1,508,000
            
            
            
            *
            
            
            
            --
            
            
            
            --Jerry
      W. Carlton
            
            
            1,350,000
            
            
            
            *
            
            
            
            8,641
            
            
            
            *Richard
      A. Gartrell
            
            
            1,015,196
            
            
            
            *
            
            
            
            --
            
            
            
            --Richard
      B. Specter
            
            
            980,215
            
            
            
            *
            
            
            
            4,321
            
            
            
            *Stanley
      A. Solomon
            
            
            960,000
            
            
            
            *
            
            
            
            20,934
            
            
            
            1.0Gary
      A. Lillian
            
            
            750,000
            
            
            
            *
            
            
            
            --
            
            
            
            --Ronald
      S. Beard
            
            
            485,000
            
            
            
            *
            
            
            
            4,321
            
            
            
            *All
      executive officers and directors as a group
              (10
      persons)
            
            
            35,826,838
            
            
            
            18.5%
            
            
            
            162,253
            
            
            
            7.6%


_____________





*
            Represents
      beneficial ownership of less than 1%.(1)
            Represents
      shares of common stock held as of February 12, 2009, plus shares of common
      stock that may be acquired upon exercise of options exercisable within
      60 days from February 12,
2009.






35





(2)
            Based
      on 193,753,343 shares of common stock outstanding as of February 12, 2009.
      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 February 12, 2009
      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 February 12,
      2009.(4)
            Based
      on  shares of Series B preferred stock outstanding as of
      February 12, 2009.








EQUITY
COMPENSATION PLAN INFORMATION





The
following table sets forth certain information, as of December 31, 2008,
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.







36




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, the Company
is not a party to any transactions between it and certain “related
parties,” which are generally considered to be the directors and executive
officers, nominees for director, holders of 5% or more of the 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
agreed to acquire, as needed, up to $2,000,000 worth of liquid dispensers, which
were 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.  As of December 31, 2008, the
LLC had purchased 896 dispensers.  The Company has rented these
machines from the LLC and had incurred a dispenser rental expense of $728,160,
$716,640 and $370,791 in 2008, 2007 and 2006,
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.





Between
December 31, 2008 and March 1, 2009, two members of the Company’s board of
directors (Messrs. Baker and Carlton) purchased $2.2 million of promissory notes
and common stock in a private transaction.  For their investment, the
directors received promissory notes in the aggregate principal sum of $2.2
million and 11 million shares of common stock.  The board members
invested on the same terms as the other non-affiliate investors.





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 interest in Javo
Dispenser, LLC and Cody C. Ashwell would not satisfy these standards due to the
fact that he currently serves as 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




The
Company does not have a standing audit or nominating committee. As a small
company, it believes that all of its directors acting together, as
opposed to a subset of them acting by means of a committee, is the most
efficient and effective framework for it to perform the functions otherwise
associated with audit and nominating committees. The compensation committee
was formed on March 20, 2007.






37




Audit
Committee.  Because Javo does 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 its officers
and employees. The compensation committee is governed by a written charter
approved by its Board of Directors. The compensation committee’s report is
included in this Annual Report on Form 10-K.




Nominating Committee.
Because the Company does 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. Javo does 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, 2008 and 2007. These fees are for work performed in the fiscal
years indicated and, in some instances, the Company has estimated the
fees for services rendered but not yet billed.




2008
                  
                  
                  2007Audit
      Fees:
                  
                  $
                  104,093
                  
                  
                  $
                  106,636Consists
      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:
                  
                  $
                  104,093
                  
                  
                  $
                  106,636




Pre-Approval Policies and
Procedures




Before the
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 2008.


38




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
      Date3.1
            
            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, 20064.9
            
            Amendment
      Agreement to the Securities Puchase Agreement, Dated December 14, 2006, by
      and amoung Javo Beverage Company, Inc. and the Investors named
      therein
            
            Filed
      herewith.
            
            March
      16, 200910.1*
            
            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 theFiscal
      year ended December 31, 2001, asExhibit
      10.5
            
            April
      16, 2002






39





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 theQuarter
      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 theQuarter
      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 theQuarter
      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 theQuarter
      ended June 30, 2008, as Exhibit 10.3
            
            August
      1, 200823.1
            
            Consent
      of Independent Registered Public Accounting Firm
            
            Filed
      herewith31.1
            
            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.






40




SIGNATURES





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







POWER
OF ATTORNEY




KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Cody Ashwell and Richard Gartrell, jointly and
severally, his attorney-in-fact, each with the power of substitution, for such
person in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection herewith, as fully to all intents and purposes as he
might do or could do in person hereby ratifying and confirming all that each of
said attorneys-in-fact and agents, or his substitute, may do or cause to be done
by virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned in the
City of Vista, California, on March 16, 2008.




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:
            s/
      Jerry W. CarltonJerry
      W. CarltonDirector




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




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




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




41