Jones Soda

2007 ANNUAL REPORT

Comparison Of 5-year Cumulative Total Return*
Among Jones Soda Co., The S & P 500 Index, a new peer group and an old peer group

$6,000

$5,000

$4,000

$3,000

$2,000

$1,000

$0

12/02

12/03

12/04

12/05

12/06

12/07

Jones Soda Co.

S & P 500

New Peer Group

Old Peer Group

* $100 invested on 12/31/02 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.

12/02

12/03

12/04

12/05

12/06

12/07

Jones Soda Co.

S & P 500

New Peer Group

Old Peer Group

100.00

100.00

100.00

100.00

874.48

128.68

146.47

148.53

1443.51

2259.41

5146.44

3112.97

142.69

152.31

155.60

149.70

187.16

192.61

173.34

274.03

279.44

182.87

287.05

272.36

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

The graph above compares the cumulative 5-year total return of holders of Jones Soda Co.’s common stock with the cumulative total

returns of the S & P 500 Index as well as Old and New peer groups of companies. The New a peer group consists of fi ve companies,

which are: Clearly Canadian Beverage Corp., Cott Corp., Hansen Natural Corp., Leading Brands Inc and National Beverage

Corportaion. The Old Peer Group consists of six companies which are Clearly Canadian Beverage Corp., Cott Corp., Hansen Natural

Corp., Leading Brands Inc, National Beverage Corp. and Triarc Companies Inc. The graph assumes that the value of the investment

in the company’s common stock, in each of the peer groups, and the index (including reinvestment of dividends) was $100 on

12/31/2002 and tracks it through 12/31/2007.

Dear Shareholders,

In Fiscal 2007, Jones Soda Co. experienced both major successes and challenges. Most importantly, the
transition from a niche business to main market availability helped to generate case sales volume and revenue
levels for 2007 that were the highest in our history, which we believe proves that continued prudent investments
in expansion are appropriate. However, extraordinary expenses were incurred to achieve these results, leading to
disappointing financial performance. Specifically, Jones Soda reported a loss of $11 million or ($0.42 cents per
share) for 2007. We also recognize that our stock price fluctuated significantly over the course of the year. I
would like to expand on these topics, discuss our near-term business objectives, and expand on our vision for the
future.

As you know, at year-end Peter van Stolk resigned as Chairman & Chief Executive Officer. Peter has been a

creative and dynamic leader who not only invented an extraordinary brand but a revolutionary marketing model
for how consumers connect to and define a brand. He was the marketing campaign behind Jones, with endless
appearances and promotion of the brand. He will be missed by his Jones compatriots but will remain an
inspirational leader on the board.

Following Peter’s resignation, the board appointed Scott Bedbury Chairman and me Interim Chief

Executive Officer. I intend to remain CEO at least through the current year in order to maintain continuity in our
management team as we execute on our 2008 initiatives. We are rebuilding the senior leadership ranks with new
high performing talent. Joth Ricci, whose varied working experience includes seven years in the beverage
industry at Columbia Distributing, most recently as General Manager, has joined Jones as Chief Operating
Officer and he has already made significant changes to our distribution infrastructure and in-store execution
capability. We continue to strengthen our great team of people with important systems and processes that are
designed to help them achieve a much higher level of success. The entire management team is committed to
making Jones a high growth, profitable enterprise.

Jones Soda is in the middle of a transition from a niche business model to a main market business model,
which began in 2006. The objective of the transition is to create more sources of growth for the company through
additional channels, retailers, packages, products, and ultimately more people enjoying our products.

This transition continued throughout 2007 with many exciting initiatives. Jones introduced 12 ounce cans in

multi-packs through our partnership with National Beverage Corp. allowing us to compete in more retail
channels including mass merchandisers and grocery stores across the U.S. and Canada. We ended 2007 with
Jones Soda cans on the shelves in approximately 15,000 new outlets that gave us an in-store presence in
approximately 25% of the market for canned soda. The expansion to cans and more grocery outlets is an
important new source of growth and is critical to our transition to main market availability.

Early in 2007, we improved the quality of our product by converting from high fructose corn syrup to pure
cane sugar, which we believe is a superior quality sweetener that adds more flavor and creates a smoother taste.
This leadership initiative continues to differentiate Jones from other national brands.

We introduced Jones Cola, which we also sweetened with pure cane sugar, allowing us to compete in the

largest CSD flavor category. National roll out is well under way and you should be able to purchase it at a local
store soon.

In late spring, Jones secured the pouring rights at Qwest Field and launched an important partnership with
the Seattle Seahawks. This hometown community initiative provides us with a new opportunity to expand our
presence in the Northwest and draw new consumers to the brand.

Discussions with Alaska Airlines, another hometown leader, started later in 2007 and we are pleased to
announce that the April 1st kickoff as Alaska Airlines’ and Horizon Air’s official soft drink provider was a great
success. We look forward to introducing our products to millions of Alaska and Horizon customers on their 1000
daily flights across the country and beyond.

We believe the introduction of cans, Jones Cola, 15,000 more listings, a better sweetener system and

business partnerships all create new sustainable sources of growth for the Jones Soda Co. and legitimize the
brand as a national main market player with very edgy brand spirit.

We also entered the bottled water market, which ACNielsen estimates at just over a $7 billion market with
the introduction of 24C, an enhanced water beverage, which we believe presents a higher growth opportunity for
our business. Since our 2007 test market exceeded our expectations, we are working to roll out 24C rapidly to
more distributors and customers. We are pleased with the progress we have made in this market.

Despite the quality of our transition strategy and everyone’s hard work, we were disappointed in our 2007
financial results. While record case sales and 22% year-over-year case sales growth were achieved, these results
were well short of our expectations. Consequently, revenue did not meet our expectations. In addition, we made
considerable investments in listing fees and price discounts, wrote off raw materials, packages and finished
goods, and incurred unexpected severance costs. We recorded a $9.4 million loss before taxes and a valuation
allowance on our deferred taxes which resulted in a total loss of $11 million or $0.42 cents per share.

As we move forward, our transition agenda is focused on six very important initiatives.

1) We are strengthening and expanding our distribution infrastructure. This is the backbone of our
business. Stronger distribution capability will enable us to increase our reach into additional
markets more effectively. We recently reached agreement with Phoenix in Manhattan and
reconnected with Haralambos in Los Angeles, both examples of upgrading our system.

2) We are upgrading our sales and customer management team with a focus on maximizing our sales
potential at current retail outlets and expanding into new outlets where appropriate. As part of this
initiative, we are implementing new in-store merchandising programs that are designed to increase
volume at each of our current outlets thereby leveraging our new listings. We are reducing out of
stocks and working to make our brands available at multiple locations through each store.
Efficient in-store inventory management is a high priority for us in 2008.

3) We will improve Supply Chain Management to increase average margin per case.

4) We will upgrade our marketing team and develop programs that are capable of generating brand

love, buzz and purchases.

5) New products, packages and approaches are imperative to growth. We are investing in the

innovation and commercialization of products and packages to attract new users.

6)

Systems and processes which enable us to control our business and help us make better judgments
are keys to improving performance. Our people are getting the tools they need to perform well.

The Jones Soda transition is focused on these six initiatives in order to create new sources of growth and
return us to a profitable enterprise. And while 2007 was a difficult year for everyone, we are excited about our
transition to the main market and we are confident that profitable growth is attainable in the future.

To all of our employees, partners and customers who are working hard to implement these initiatives, I

would like to thank you for your dedication and determination to succeed.

I’d also like to thank our many shareholders for your continued support.

Sincerely,

Stephen C. Jones
Interim Chief Executive Officer

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

FORM 10-K

È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

For the fiscal year ended December 31, 2007

EXCHANGE ACT OF 1934

For the transition period from

to

Commission File Number: 000-28820

JONES SODA CO.

(Exact name of registrant as specified in its charter)

Washington
(State or other jurisdiction of
incorporation or organization)

91-1696175
(I.R.S. Employer
Identification No.)

234 Ninth Avenue North
Seattle, WA 98109
(Address of principal executive offices)
(206) 624-3357
(Registrant’s telephone number)

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

Title of Each Class

Common Stock, no par value

Name of Each Exchange on
Which Registered

The NASDAQ Stock Market LLC

Securities registered under Section 12(g) of the Exchange Act: None
Check whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes ‘ No È

Check whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ‘
Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes È No ‘

Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-K is contained in this form, and no

disclosure will 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. ‘

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or

a smaller reporting company. See definition of “accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Accelerated Filer È
Large Accelerated Filer ‘
Non-Accelerated Filer ‘ (Do not check if a smaller reporting company)
Smaller Reporting Company ‘
Check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È
Registrant’s revenues for its most recent fiscal year: $39,830,933
As of March 6, 2008, there were 26,273,388 shares of the Company’s common stock issued and outstanding. As of the

last business day of the second fiscal quarter, June 30, 2007, the aggregate market value of such common stock held by
non-affiliates was approximately $345,780,000 using the closing price on that day of $14.02.

Documents Incorporated By Reference: The information required by Part III of this Report, to the extent not set
forth herein, is incorporated in this Report by reference to the Company’s definitive proxy statement relating to its 2008
annual meeting of shareholders. The definitive proxy statement will be filed with the Securities and Exchange Commission
within 120 days after the end of the 2007 fiscal year.

EXPLANATORY NOTE

Unless otherwise indicated or the context otherwise requires, all references in this Annual Report on Form

10-K to “we,” “us,” “our,” and the “Company” are to Jones Soda Co.®, a Washington corporation, and our
wholly-owned subsidiaries Jones Soda Co. (USA) Inc., Jones Soda (Canada) Inc., myJones.com Inc. and
Whoopass USA Inc.

In addition, unless otherwise indicated or the context otherwise requires, all references in this Annual

Report to “Jones Soda” and “Jones Pure Cane Soda” refer to our premium soda sold under the trademarked
brand name “Jones Soda Co.”

CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act

of 1995. This Annual Report on Form 10-K and the documents incorporated herein by reference contain a
number of forward-looking statements that reflect management’s current views and expectations with respect to
our business, strategies, products, future results and events and financial performance. All statements made in
this Report other than statements of historical fact, including statements that address operating performance,
events or developments that management expects or anticipates will or may occur in the future, including
statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of
funds from operations, statements expressing general optimism about future operating results and non-historical
information, are forward looking statements. In particular, the words such as “believe,” “expect,” “intend,”
“anticipate,” “estimate,” “may,” “will,” “should,” “plan,” “predict,” “could,” “future,” “stock,” “target,”
variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive
means of identifying such statements and their absence does not mean that the statement is not forward-looking.

Readers should not place undue reliance on these forward-looking statements, which are based on

management’s current expectations and projections about future events, are not guarantees of future
performance, are subject to risks, uncertainties and assumptions and apply only as of the date of this Report. Our
actual results, performance or achievements could differ materially from historical results as well the results
expressed in, anticipated or implied by these forward-looking statements. Except as required by law, we
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.

For a discussion of some of the factors that may affect our business, results and prospects, see “Item 1A.
RISK FACTORS.” Readers are urged to carefully review and consider the various disclosures made by us in this
Report and in our other reports we file with the Securities and Exchange Commission, including our periodic
reports on Forms 10-Q and 8-K, and those described from time to time in our press releases and other
communications, which attempt to advise interested parties of the risks and factors that may affect our business,
prospects and results of operations.

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

JONES SODA CO.

Table of Contents

PART I

Item 1.

Our Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 2.

Item 3.

Item 4.

Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Item 5. Market for Common Stock, Related Shareholder Matters and Issuer Purchases of Equity

Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 6.

Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .

Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 8.

Item 9.

Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . .

Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

PART III

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . .

Item 14.

Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV

Page

1

15

27

27

27

28

29

30

30

44

44

44

44

49

49

49

49

50

50

50

54

ITEM 1. OUR BUSINESS.

Overview

PART I

We develop, produce, market and distribute “New Age” or “Premium” beverages. We currently produce,

market and distribute six beverage brands:

• Jones Pure Cane Soda™, a “premium” soda;

• Jones 24C™, an enhanced water beverage;

• Jones Organics™, a ready-to-drink organic tea;

• Jones Energy™, a citrus energy drink;

• Whoop Ass Energy Drink®, a citrus energy drink; and

• Jones Naturals®, a non-carbonated juice & tea.

Our business strategy is to increase sales by expanding distribution of our brands in new and existing
markets, stimulating consumer trial of our products and increasing consumer awareness of, and brand loyalty to,
our brands and products. Key elements of our business strategy include:

• creating strong distributor relationships and key accounts;

• stimulating strong consumer demand for our existing brands and products, with primary emphasis in the

United States and Canada;

• developing innovative alternative beverage brands and products; and

• licensing our brand equity for the creation of other beverage or non-beverage products.

We currently sell and distribute our products throughout the United States and Canada through our network
of independent distributors, which we refer to as our “direct store delivery” channel (DSD) and our national retail
accounts, which we refer to as our “direct to retail” channel (DTR), as well as through licensing and distribution
arrangements.

We also participate in the carbonated soft drink (CSD) industry through distribution and sales of our

12-ounce cans of Jones Pure Cane Soda through an exclusive arrangement with National Beverage Corp. in
grocery and mass merchant channels in the U.S.

With respect to our “direct store delivery” channel (DSD), we have focused our sales and marketing
resources on the expansion and penetration of our products through our independent distributor network in our
core markets consisting of the Northwest, Southwest and Midwest U.S., and Western Canada, as well as targeted
expansion into our less penetrated markets consisting of the Northeast and Southeast U.S., and Eastern Canada.

We launched our “direct to retail” business strategy in 2003 as a complementary channel of distribution to

our DSD channel, targeting large national retail accounts. Through these programs, we negotiate directly with
large national retailers, primarily premier food-service based businesses, to carry our products, serviced through
the retailer’s appointed distribution system. We currently have distribution arrangements with Barnes & Noble,
Inc., Panera Bread Company, Target Corporation, Sam’s Club and Wal-Mart Stores, Inc.

Beginning in 2004, we launched our licensing business strategy as a method to extend our brand into
non-alternative beverage products and non-beverage products. We currently have licensing arrangements with
two companies: Big Sky Brands, Inc. and J&J Snack Food Corp. With these licensing agreements, we believe
that we are able to partner with companies that can manufacture Jones related-products and extend our Jones
brand into select products that we feel enhance our brand image.

1

In December 2006, we announced the transition from high-fructose corn syrup to pure cane sugar for all our

bottled and canned products. Our co-packers commenced production of Jones Pure Cane Soda in January 2007
and it was launched in the second quarter of 2007.

We entered into Sponsorship Agreements with Football Northwest LLC (d/b/a Seattle Seahawks) and

First & Goal, Inc. on May 22, 2007, and Brooklyn Arena LLC and New Jersey Nets Basketball, LLC on
November 8, 2007 that provide us with the exclusive beverage rights for certain soft drinks as well as signage,
advertising and other promotional benefits to enhance our brand awareness.

Our company is a Washington corporation formed in 2000 as a successor to Urban Juice and Soda Company
Ltd., a Canadian company formed in 1987. Our principal place of business is located at 234 Ninth Avenue North,
Seattle, Washington 98109. Our telephone number is (206) 624-3357.

The New Age or Alternative Beverage Industry

Jones Pure Cane Soda™, Jones Organics™, Jones Energy, Whoop Ass Energy Drink® and Jones
Naturals®, which are classified as New Age or alternative beverages, as well as other brands and products that
we may develop in the future, compete with beverage products of all types, including soft drinks, fruit juices and
drinks and bottled water.

The New Age or alternative beverage markets are estimated at over $16 billion in total annual sales.

New Age or alternative beverages are distinguishable from mainstream carbonated soft drinks in that they

tend to contain natural ingredients combined with less sugar and carbonation. As a general rule, three criteria
have been established for the New Age or alternative beverage classification: (1) relatively new introduction to
the market-place; (2) a perception by consumers that consumption is healthful compared to mainstream
carbonated soft drinks; and (3) the use of natural ingredients and flavors in the products. According to market
research, the New Age or alternative beverage categories include: energy drinks; premium soda; ready-to-drink
(RTD) coffee; RTD tea; RTD tea (nutrient-enhanced); shelf-stable dairy (regular/diet); shelf-stable dairy
(nutrient-enhanced); single-serve-fruit beverages (regular/diet); single-serve-fruit beverages (nutrient enhanced);
smoothies; sparkling water; sports drinks; vegetable/fruit juice blends; and other New Age beverages.

The Carbonated Soft Drink (CSD) Industry

We currently participate in the carbonated soft drink (CSD) industry through the distribution and sale of our

12-ounce cans of Jones Pure Cane Soda.

The CSD industry includes all soda products that are sold primarily in 12-ounce cans and generally compete

on price. The carbonated soft drink category is estimated at approximately $70.0 billion in total annual sales.
Following many years of growth, in 1999, the CSD category began to experience six straight years of sub-1%
growth and showed per capita consumption declines. However, the CSD category remains significant in size, in
terms of both volume and sales, and its market share is far larger than any other beverage category. The primary
companies participating in this category include The Coca-Cola Company, PepsiCo, Inc., Cadbury Schweppes
plc, Cott Corporation and National Beverage Corp.

In October 2004, we entered the mainstream segment of the carbonated soft drink industry with the launch

of our Jones Soda product in the 12-ounce can format. These 12-ounce cans of Jones Soda were sold under a
two-year exclusive marketing and distribution agreement with Target Corporation, which expired on
December 31, 2006.

In September 2006, we entered into an exclusive manufacturing and distribution agreement with National
Beverage Corp. to manufacture and distribute Jones Soda 12-ounce cans and Jones Energy in 16-ounce cans to
the grocery and mass merchant channel in the U.S. Beginning in January 2007, National Beverage Corp. started
selling Jones Pure Cane Soda to retailers in the U.S.

2

Business Strategy

In late 1995, we launched Jones Soda, our premium soda product under our trademarked brand. By
launching Jones Soda, we believed we were creating a new category in the New Age beverage market and that
we were offering distributors something new to sell. In its January 1998 issue, Beverage Aisle magazine changed
the name of the “all-natural soda” segment to the “premium soda” segment and cited Jones Soda as an example
of a beverage in this category. Thus, we believe that the Jones Soda brand and product line helped to create a
new segment in the New Age or alternative beverage industry. In developing the Jones Soda brand, we have
marketed our products with a distinct fashion component consisting of black and white photos on our labels,
which we believe is representative of current overall fashion trends.

Utilizing creative but relatively low cost marketing and brand promotion techniques, we have focused on
building a strong distributor network and presence with national retail accounts for our lead brand, Jones Soda.
We believe that our past experience as a distributor of licensed and non-licensed New Age beverage brands has
given, and will continue to give, our company credibility in connection with our efforts to build a quality network
of independent distributors. Sales of our products through our distributor network, and the strength of our brand,
provided us with opportunities to implement and grow our DTR strategy through national retail accounts. We
have also entered into sports franchise sponsorship arrangements with the Seattle Seahawks of the National
Football League and the New Jersey Nets of the National Basketball Association. The sponsorship arrangements
provide us with exclusive rights to sell our beverages at sports venues. We expect these national accounts and
sponsorship arrangements to continue to increase the public awareness and strength of our brand and provide us
with other cross-selling opportunities through our licensing business strategy.

Our business strategy is to attempt to increase sales by expanding product distribution in new and existing
markets (primarily within North America), stimulating consumer trial of our products and creating and increasing
consumer awareness of, and brand loyalty to, our brands and products. In 2007, through our independent
distributor network, we continued to focus on our core markets, as well as targeted expansion into our less
penetrated markets consisting of the Northeast and Southeast U.S., and Eastern Canada.

Since 2003, we grew our “direct to retail” distribution strategy to large national retail accounts, currently

consisting of Target Corporation, Panera Bread Company, Barnes & Noble, Inc., Sam’s Club and Wal-Mart
Stores, Inc. During 2008, we intend to continue servicing and expanding our “direct to retail” channel to national
retail accounts.

In 2004, we also launched our licensing business strategy as a method to extend our brand into
non-alternative beverage products and non-beverage products. In July 2004, we entered into a licensing
agreement with Target Corporation to market and sell Jones Soda in a 12-ounce can format and we now compete
directly in the carbonated soft drink industry. This agreement with Target expired on December 31, 2006. In
September 2005, we entered into a licensing agreement with Big Sky Brands, Inc. to manufacture and distribute
Jones Soda Flavor Booster hard candy. In February 2007, we entered into a licensing agreement with J&J Snack
Foods for the use of our flavors and brand name for their slurpee and iced beverages.

Jones Soda understands the importance of creating new beverage items and enhancing our existing beverage
items to meet the ever changing consumer taste profile. Our strategy is to be focused on innovative products that
will be accepted by retailers, distributors and consumers. We believe this is accomplished by keeping open dialog
with our retail and distributor partners to ensure we are current with the consumer trends in the beverage
industry.

Key elements of our business strategy include the following:

Building our Brand

We believe the market for alternative beverages is dependent to a large extent on image as well as taste, and

that this market is driven by trendy, young consumers between the ages of 12 and 29. Accordingly, our strategy

3

is to develop innovative brand names, slogans and trade dress. In addition to creative labeling on our products,
we provide each of our distributors with point-of-sale promotional materials and branded apparel items. We
promote interaction with our customers through the use of these point-of-sale items, such as posters, stickers,
table cards, shelf danglers, post cards, hats, pins, T-shirts, and our proprietary lighted display box. In addition,
through the labels on our bottles, we invite consumers to access our website and to send in photographs to be
featured on the Jones Soda and Jones Naturals labels. We believe that our labeling, marketing and promotional
materials are important elements to creating and increasing distributor, retailer and consumer awareness of our
brands and products.

Independent Distributor Network (“DSD”)

We distribute our finished products through a network of independent distributors in the United States and

Canada. We have also obtained listings for selected skus of our Jones Pure Cane Soda™, Jones Organics™,
Jones Energy, Whoop Ass Energy Drink® and Jones Naturals® brands with certain key retail grocery accounts,
including Quality Food Centers (QFC), Meijer, Allsups Convenience Stores, The Kroger Co., Albertsons,
Safeway Inc., and Speedway Super America LLC, which are serviced through our independent distributor
network. We have pursued this strategy both in an effort to increase sales and to encourage distributors to
distribute our brands and products to our key accounts and other accounts of our distributors.

We usually grant independent distributors the exclusive right to distribute finished cases of one or more of
our brands in a particular region, province, state or local territory, subject to our overall management directives.
We have entered into written agreements with many of our top distributors for varying terms of years. However,
most of our distribution relationships are oral (based solely on purchase orders) and are terminable by either
party. In most of our written agreements, we would have to pay a fee to a distributor with an exclusive territory
in the event we provided product directly to one of our national retailers located in the distributor’s region. We
are also obligated to pay termination fees for cancellations of most of these written distributor agreements, which
have terms ranging from one to three years.

We select distributors who we believe will have the ability to get our brands and products on the “street

level” retail shelves in convenience stores, delicatessens, sandwich shops and selected supermarkets.

Ultimately, we have chosen, and will continue to choose, our distributors based on their perceived ability to
build our brand franchise. We currently maintain a network of approximately 265 distributors in 48 states in the
United States and 9 provinces in Canada.

“Direct to Retail” National Accounts (“DTR”)

Beginning in 2003, we launched our “direct to retail” business strategy as a complementary channel of

distribution, targeting large national retail accounts. Through these programs, we negotiate directly with large
national retailers, primarily premier food-service based businesses, to carry our products, serviced by the
retailer’s appointed distribution system. As of the date of this Report, our most significant “direct to retail”
accounts are the following:

• Target Corporation—launched in October 2004, currently for 3 flavors of Jones Soda;

• Panera Bread Company—launched in June 2003, currently for 4 flavors of Jones Soda, 3 flavors of Jones

Naturals, and 2 flavors of Jones Organics in all Panera bakery-cafes in the United States;

• Barnes & Noble, Inc.—launched in February 2003, currently for 5 flavors of Jones Naturals in all

Barnes & Noble stores in the United States;

• Sam’s Club—launched in March 2007, currently for a 6 flavor, 24-bottle Jones Soda variety pack; and

• Wal-Mart—launched in May 2007, currently for 4 flavors of Jones Soda.

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These arrangements are not long term and are terminable at any time by these retailers. There are no

minimum purchase commitments for these retailers.

Carbonated Soft Drink

In October 2004, we entered the carbonated soft drink industry with the launch of our Jones Soda product in

the 12-ounce can format under a two-year exclusive marketing and distribution agreement with Target
Corporation. With the expiration of this exclusive agreement on December 31, 2006, beginning in 2007 we
expanded distribution to the grocery and mass merchant channel in the United States with our exclusive
manufacturing and distribution agreement with National Beverage Corp. Through this arrangement, we are
identifying and securing retailers across the United States for our premium carbonated 12-ounce soft drinks and
16-ounce energy drink products, and we are solely responsible for all sales efforts, marketing, advertising and
promotion. Using concentrate supplied by Jones, National Beverage will both manufacture and sell on an
exclusive basis the products directly to retailers. National Beverage is responsible for the manufacturing, delivery
and invoicing of the sales of our products in this channel.

Licensing Arrangements

Beginning in 2004, we launched our licensing business strategy as a method to extend our brand into
non-alternative beverage products and non-beverage products. We currently have licensing arrangements with
two companies. In September 2005, we entered into a licensing agreement with Big Sky Brands, Inc. to
manufacture and distribute Jones Soda Flavor Booster hard candy. In February 2007, we entered into a licensing
agreement with J&J Snack Foods for the use of our flavors and brand name for their slurpee and iced beverages.
With these licensing agreements, we believe that we are able to partner with companies that are able to
manufacture Jones related products and extend our Jones brand into select products that we feel enhance our
brand image.

Sponsorship Arrangements

In May 2007, we entered into a Sponsorship Agreement with the Seattle Seahawks of the National Football
League and First and Goal, Inc. in exchange for exclusive beverage rights for certain soft drinks at Qwest Field
as well as signage, advertising and other promotional benefits to enhance our brand awareness, including
sponsorship and trademark rights regarding the use of Seattle Seahawks trademarks. In consideration for our
rights under the agreement, we are obligated to pay annual sponsorship fees, as well as provide beverage
products as payment-in-kind. The agreement has an effective date of July 1, 2007 and expires on February 28,
2012, and provides Jones Soda with a right of first renewal with respect to its renewal or extension. Generally,
either party may terminate the agreement only if the other breaches any material term of the agreement and fails
to cure such breach within 30 days of receiving notice of the breach. In addition, the Seattle Seahawks may
terminate the agreement if Jones Soda fails to make a required payment and such failure continues for 30 days
after Jones Soda receives written notice of the failure.

In November 2007, we announced our entry into a Sponsorship & Beverage Availability Agreement with

Brooklyn Arena, LLC and New Jersey Nets Basketball, LLC. The agreement has a commencement date of
October 29, 2007; however, the agreement is subject to the approval of NBA Properties, Inc. and will not be
effective until expressly approved by NBA Properties. As of the date of the filing of this Annual Report on Form
10-K, NBA Properties has not approved the agreement.

The agreement with Brooklyn Arena LLC and New Jersey Nets Basketball, LLC provides us with exclusive

beverage rights for all carbonated soft-drinks and certain other non-alcoholic beverages, as well as sponsorship,
promotional, media, hospitality and other rights in connection with the New Jersey Nets basketball team and a
proposed new sports and entertainment arena that the Brooklyn Arena and the New Jersey Nets intend to develop
in Brooklyn, New York. In consideration for our rights under the agreement, we are obligated to pay annual

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sponsorship fees, as well as provide beverage products as payment-in-kind. The Brooklyn Arena and the New
Jersey Nets may terminate the agreement if we commit one of several events of default and subsequently fail to
cure such event of default within the applicable cure period. We may terminate the agreement only if the
Brooklyn Arena and the New Jersey Nets commit one of several events of default and subsequently fail to cure
such event of default within the applicable cure period, but only if equitable adjustment, make-goods or other
remedies implemented by the Brooklyn Arena and the New Jersey Nets are not suitable or appropriate for such
event of default.

In-House Brand and Product Development

We have developed and intend to continue to develop the majority of our brands and products in-house. We
used a similar process initially to create the Jones Soda brand, and we intend to continue utilizing this process in
connection with the creation of our future brands. This process primarily consists of the following steps:

Market Evaluation. We evaluate the strengths and weaknesses of certain categories and segments of

the beverage industry with a view to pinpointing potential opportunities.

Distributor Evaluation. We prepare an analysis of existing and potential distribution channels,
whether DSD or DTR. This analysis addresses, among other things, which companies will distribute
particular beverage brands and products, where such companies may distribute such brands and products,
and what will motivate these distributors to distribute such brands and products.

Production Evaluation. We review all aspects of production in the beverage industry, including
current contract packing capacity, strategic production locations, and quality control, and prepare a cost
analysis of the various considerations that will be critical to producing our brands and products.

Image and Design.

In light of our market, distributor and production evaluations, we create and
develop the concept for a beverage brand or product extension. Although we control all aspects of the
creation of each brand or product extension, we contract with outside creative artists to help design our
brand labels and imagery. Our technical services department then works with various flavor concentrate
houses to test, choose and develop product flavors for the brand.

Due to the limited life cycle of beverages in the New Age or alternative category, we believe that the
ongoing process of creating new brands, products and product extensions will be an important factor in our long-
term success.

Products

We currently produce, market and distribute six beverage brands: Jones Pure Cane Soda™, Jones 24C™
Jones Organics™, Jones Energy, Whoop Ass Energy Drink®, and Jones Naturals®. We are also in the process of
developing a new product, Jones GABA™.

Jones Pure Cane Soda™

We believe that our trademarked Jones Soda brand and product line is a leader in the Premium Soda

segment of the New Age beverage category. We originally launched Jones Soda in November 1995.

In December 2006, we announced a changeover to pure cane sugar for our entire product line-up. We started

producing pure cane soda products in the first quarter of 2007. We have rebranded our soda to Jones Pure Cane
Soda. The Jones Soda product line currently consists of 11 flavors.

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In 2003, we launched a sugar-free version of our Jones Soda line. These sugar-free sodas are sweetened
with Splenda® and have zero calories and zero carbohydrates. We believe that the launch of our sugar-free Jones
Soda provides a healthier alternative to our regular Jones Soda line and is an important product extension,
especially in light of the recent concern and media coverage regarding obesity in young people. We currently
have five flavors of sugar-free Jones Soda.

Jones Soda beverage products come in 12-ounce (355 ml) clear long-neck bottles with primarily black and

white photos on our labels displaying a variety of urban images. We also encourage consumers of Jones Soda,
through the labels on our bottles, to send in photographs that may potentially be used on one of the Jones Soda
labels. We launched the 12-ounce can format in 2004.

Jones 24C™

In June 2006, we purchased the trademark rights to 24C. Jones 24C, an enhanced water beverage, has 100%
natural flavors and contains daily vitamin requirements and is available in six flavors. We began production and
distribution of Jones 24C in the first quarter of 2007. 24C is available in 20oz PET bottles and a powdered drink
mix.

Jones Organics™

In April 2005, we launched Jones Organics, a ready-to-drink organic tea, with 60 calories per serving,
sweetened with organic cane sugar. Jones Organics comes in 14-ounce proprietary clear glass bottles with a
design of the fruit on the front label, but does not contain the usual black and white photograph labels used on
Jones Soda and Jones Naturals product labels. The Jones Organics line currently consists of six flavors.

Jones Energy

In November 2001, we launched Jones Energy, a citrus energy drink containing vitamin B6, riboflavin,
niacin, thiamin, caffeine and coQ-10. Jones Energy is currently available in a 16-ounce can and in an 8.4 ounce
“four-pack” carrier format in three different flavors. Our Jones Energy products compete in the Energy Drink
category of the New Age beverage industry.

Whoop Ass Energy Drink®

We originally launched Whoop Ass in October 1999. Whoop Ass is a citrus energy drink in an 8.4- ounce

(250 ml) slim can containing riboflavin, niacin, vitamin B6 and thiamin. In 2005, we launched a 16-ounce
version of our Whoop Ass Energy Drink. Whoop Ass competes in the Energy Drink category of the New Age
beverage industry.

Jones Naturals®

In April 2001, we launched Jones Naturals, our non-carbonated beverage. The Jones Naturals products

have 100% natural flavors and contain ingredients such as ginseng, zinc, and various vitamins. Jones Naturals
comes in 20-ounce (591 ml) clear bottles with primarily black and white photograph labels, similar to the Jones
Soda product labels. The Jones Naturals line currently consists of six flavors. In 2007, we introduced Jones
Naturals in 14-ounce glass bottles.

Jones GABA™

In line with producing new beverage items, in June 2007, we entered into an agreement with Pharma Foods

International Co., LTD., of Kyoto, Japan; Mitsubishi Corporation (MC), of Tokyo, Japan; and Mitsubishi
International Food Ingredients, Inc. (MIFI), of Dublin, Ohio that grants us rights in the United States, Canada and

7

Mexico to use PHARMA GABA in beverage applications subject to certain purchase commitments. PHARMA
GABA is a naturally produced form of the amino acid gamma aminobutyric acid (GABA), a key
neurotransmitter in the human brain that exerts a number of anti-stress effects, among other benefits. We intend
to introduce our first beverage product containing PHARMA GABA during 2008.

Marketing, Sales and Distribution

Marketing

Our pricing policies for our products take into consideration competitors’ prices and our perception of what
a consumer is willing to pay for the particular brand and product. The goal is to price our products at a premium
to other premium sodas and New Age beverages.

We primarily use point-of-sale materials such as posters, stickers, table cards, shelf danglers, post cards,
hats, pins, T-shirts and jackets to create and increase consumer awareness of our proprietary products and brands.
In response to consumer demand, we also sell our products and our wearables on our website. Through
cooperative advertising, the majority of our independent distributors fund a portion of our marketing budget,
based upon case sales. In selected cities, we participate on a “grass roots” level at certain events in an attempt to
create and increase brand awareness and loyalty. We also have a program of sponsoring alternative sport athletes
to promote our products, and we have signed up several athletes in the skateboard, snowboard and BMX bike
arenas. We also use recreational vehicles and vans painted with the Jones colors and logos to create consumer
awareness and enthusiasm to assist distributors as they open new retail accounts and markets. In addition to these
marketing techniques, we also pursue cross-promotional campaigns with other companies.

We maintain and utilize our website to allow our Jones Soda consumers to create their own personalized

12-pack of Jones Soda (12-ounce bottles) with their unique photo in the labels. The strategy of
www.myjones.com is to provide a personalized product offering to our consumers as well as provide an
innovative marketing opportunity for our Jones Soda brand. Consumers can upload their photos through the web
and crop and create their own “myjones” labels. The personalized labels are downloaded at our warehouse and
we send out 12-packs of the personalized soda to the consumer. We believe this strategy has increased awareness
for the Jones Soda brand as well as provided for increased consumer interactivity with the Jones Soda brand, and
we anticipate that it will continue to do so. In December 2002, we received notice of issuance of a patent (Patent
No. 6,493,677) from the U.S. Patent and Trademark Office for our myjones.com business operation. The patent
is titled “Method and Apparatus for Creating and Ordering Branded Merchandise over a Computer Network.” In
January 2005, we were granted a second patent by the U.S. Patent and Trademark Office (Patent No. 6,845,362
B2) which is also entitled “Method and Apparatus for Creating and Ordering Branded Merchandise over a
Computer Network.”

In 2002, we launched the yourjones program, which allows the customization of the front panel of the label

of Jones Soda in a manner similar to our myjones business, but on a larger, commercial scale. The premise
behind “yourjones” is to create customized Jones Soda or Jones Naturals bottles, with a personalized photo or
brand image, for cross promotion and co-branding purposes or for sale in retail accounts. Like myjones.com, the
Jones Soda name always appears on the labels and customers can add their own photo/brand and words. We have
negotiated arrangements with our co-packing facilities to create short-run productions for these purposes.

In September 2007, we selected Cole & Weber United to create an advertising campaign that will support

the sale of our Jones Soda products throughout the United States. Cole & Weber is a full-service marketing
agency known for creating innovative campaigns. Our goal is to increase awareness of our products as we
expand distribution in the marketplace.

Sales

Our products are sold in 48 states in the United States and 9 provinces in Canada primarily in convenience
stores, delicatessens, sandwich shops and selected supermarkets, as well as through our national accounts with

8

several large retailers. During 2006, sales in the U.S. represented approximately 88% of total sales, while sales in
Canada represented approximately 11%, and we had approximately 1% in other international sales. In 2007, sales
in the U.S. represented approximately 85% of total sales, while sales in Canada represented approximately 14%,
and we had approximately 1% in other international sales. We may consider expanding sales of our products to
select international markets in the future.

During 2007, our DSD sales force was organized into seven regional groups, consisting of the Northwest,
Southwest, Midwest, Northeast and Southeast regions of the United States and Western and Eastern regions of
Canada. Our Chief Operating Officer oversees all sales and marketing efforts and has five Vice Presidents of
DSD Sales, one of whom is responsible for each of the following regions: Midwest U.S., Eastern and Southern
U.S., Northwest U.S., Western U.S. and Canada. Regional Managers are ultimately responsible for the separate
regions. Senior sales personnel are responsible for large retail grocery accounts located in their regions, the
management of existing independent distributor relations and the selection of new independent distributors as
may be required. Junior sales personnel work closely with our independent distributors and their sales
representatives to help them open street level retail accounts and train them in our sales and marketing
techniques.

During 2007, our CSD sales were coordinated and led by our Executive Vice President of Sales and our
Vice President Sales CSD East. They and the CSD Regional Managers are responsible for calling on all national
and regional grocery and mass merchant accounts in the CSD category. National Beverage Corp. manufactures,
packs and distributes directly to retailers.

Distribution

We sell a majority of our products through our DSD network, and we currently have relationships with

approximately 265 independent distributors throughout North America. Our policy is to grant our distributors
exclusive rights to sell particular brands within a defined territory. We believe that substantially all of our
distributors also carry other beverage products. Agreements with our distributors vary. We have entered into
written agreements with many of our top distributors for varying terms of years. However, most of our
distribution relationships are oral (based solely on purchase orders) and are terminable by either party. In most of
our written agreements, we would have to pay a fee to a distributor with an exclusive territory in the event we
provided product directly to one of our national retailers located in the distributor’s region. We are also obligated
to pay termination fees for cancellations of most of these written distributor agreements, which have terms
ranging from one to three years.

In addition, we sell our products directly to certain large national retail accounts, such as Target

Corporation, Panera Bread Company, Barnes & Noble, Inc., Sam’s Club and Wal-Mart Stores, Inc. Distribution
of our products into these DTR accounts is handled by the retailer’s distribution system or by its designated food-
service or other distributors.

For the year ended December 31, 2007, three of our customers represented approximately 29% of total

revenues, with sales to Wal-Mart Stores, Inc. (including Sam’s Club) representing revenues of approximately
13%. We anticipate that, as consumer awareness of our brands develops and increases, we will continue to
upgrade and expand our distributor network and DTR accounts, which may result in a decreased dependence on
any one or more of our independent distributors or accounts.

We generally require our independent distributors to place their purchase orders for our products at least 10
days in advance of delivery. To the extent we have additional product available in inventory, we will fulfill other
purchase orders when and as received. We contract with independent trucking companies to have product
shipped from our contract packers to independent warehouses, and then on to our distributors. Distributors then
sell and deliver our products either to subdistributors or directly to retail outlets, and such distributors or
subdistributors stock the retailers’ shelves with our products. We recognize revenue upon receipt by our

9

distributors and customers of our products, net of discount and allowances, and all sales are final with a “no
return” policy; however, in limited instances, due to credit issues, quality or damage issues, or distributor
changes, we may take back product.

Production

Contract Packing Arrangements

We do not directly manufacture our products but instead outsource the manufacturing process to third party

bottlers and contract packers.

For our bottle products, we purchase certain raw materials such as concentrates, flavors, supplements, sugar,

bottles, labels, trays and caps and other ingredients for our beverage products; the raw materials are delivered to
our various third party co-packers. We currently use six primary independent contract packers known as
“co-packers” to prepare, bottle and package our bottle products. Our contract packers are located in the Canadian
Provinces of British Columbia and Ontario, Oregon, Washington, Minnesota, and California. Once the product is
manufactured, we purchase and store the finished product in nearby third party warehouses.

We continually review our contract packing needs in light of regulatory compliance and logistical

requirements and may add or change co-packers based on those needs. A majority of our co-packing is handled
in Canada, and with the recent strengthening of the Canadian dollar against the U.S. dollar, our co-packing costs
have increased. We experienced increases in co-packing fees for 2007 and expect these increases to continue into
2008. We expect to continue to look for alternative or lower-cost co-packing arrangements for our products in the
United States and in Canada.

As is customary in the contract packing industry, we are expected to arrange for our contract packing needs

sufficiently in advance of anticipated requirements. Accordingly, it is our business practice to require our
independent distributors to place their purchase orders for our products at least 10 days in advance of delivery.
Other than minimum case volume requirements per production run for most co-packers, we do not have annual
minimum production commitments with our co-packers. Our co-packers may terminate their arrangements with
us at any time, in which case we could experience disruptions in our ability to deliver products to our customers.

With respect to our 12-ounce cans of Jones Soda and 16-ounce cans of Jones Energy sold by National
Beverage Corp. through the grocery products and mass merchant channel, National Beverage is responsible for
all manufacturing, packing and distribution. Under the agreement, sales of product may be made only to our
authorized retail accounts purchasing through warehouse distribution, and we are solely responsible for all sales
efforts, marketing, advertising and promotion. We sell concentrate to National Beverage Corp. for the
manufacture of the product, and National Beverage Corp. is responsible for the manufacture, storage, inventory,
delivery, invoicing, customer credit review and approval, and receivables collection with respect to sales of
products to our authorized accounts. National Beverage carries, stores and maintains the finished products.

The agreement has an initial term of five years, expiring on December 31, 2011. Thereafter, the agreement
automatically renews in perpetuity for successive additional five-year periods, unless terminated by either party
as specified in the agreement. We may not terminate the agreement prior to that date unless National Beverage is
in material default, and National Beverage will have the right to terminate our agreement upon six months notice
at any time after December 31, 2009. The agreement also provides National Beverage Corp. the first right to pack
and distribute any new products that we desire to sell through warehouse distribution.

Raw Materials

Substantially all of the raw materials used in the preparation, bottling and packaging of our bottle products
are purchased by us or by our contract packers in accordance with our specifications. The raw materials used in

10

the preparation and packaging of our products consist primarily of concentrate, flavors, supplements, sugar,
bottles, labels, trays, caps and packaging. These raw materials are purchased from suppliers selected by us or by
our contract packers.

We believe that we have adequate sources of raw materials, which are available from multiple suppliers.

The prices of raw materials such as bottles, sugar and certain other ingredients continued to increase in

2007. These increased costs, together with increased costs primarily of energy, gas and freight resulted in
increases in certain product costs which are ongoing and expected to continue to exert pressure on our gross
margins in 2008.

Currently, we purchase our flavor concentrate from our three flavor concentrate suppliers. Generally, flavor

suppliers hold the proprietary rights to the flavors. Consequently, we do not have the list of ingredients or
formulae for our flavors. In connection with the development of new products and flavors, independent suppliers
bear a large portion of the expense for product development, thereby enabling us to develop new products and
flavors at relatively low cost. We anticipate that for future flavors and additional products, we may purchase
flavor concentrate from other flavor houses with the intention of developing other sources of flavor concentrate
for each of our products. If we have to replace a flavor supplier, we could experience disruptions in our ability to
deliver products to our customers, which could have a material adverse effect on our results of operations.

In addition, with our shift to production using pure cane sugar rather than high fructose corn syrup, we
utilize considerable quantities of pure cane sugar. We have four pure cane sugar suppliers and usually enter into
one to two year supply agreements.

The water used to produce our products is filtered and is also treated to reduce alkalinity.

Quality Control

Our products are made from high quality ingredients and natural and/or artificial flavors. We seek to ensure

that all of our products satisfy our quality standards. Contract packers are selected and monitored by our own
quality control representatives in an effort to assure adherence to our production procedures and quality
standards. Samples of our products from each production run undertaken by each of our contract packers are
analyzed and categorized in a reference library.

For every run of product, our contract packer undertakes extensive on-line testing of product quality and
packaging. This includes testing levels of sweetness, carbonation, taste, product integrity, packaging and various
regulatory cross checks. For each product, the contract packer must transmit all quality control test results to us
for reference following each production run.

Testing includes microbiological checks and other tests to ensure the production facilities meet the standards

and specifications of our quality assurance program. Water quality is monitored during production and at
scheduled testing times to ensure compliance with beverage industry standards. Flavors are pre-tested before
shipment to contract packers from the flavor manufacturer. We are committed to an on-going program of product
improvement with a view toward ensuring the high quality of our product through a program for stringent
contract packer selection, training and communication.

We believe we source and select only those suppliers that use quality components.

Regulation

The production and marketing of our licensed and proprietary beverages are subject to the rules and
regulations of various federal, provincial, state and local health agencies, including in particular Health Canada,

11

Agriculture and Agri-Food Canada and the U.S. Food and Drug Administration (“FDA”). The FDA and
Agriculture and Agri-Food Canada also regulate labeling of our products. From time to time, we may receive
notifications of various technical labeling or ingredient reviews with respect to our licensed products. We believe
that we have a compliance program in place to ensure compliance with production, marketing and labeling
regulations on a going-forward basis.

Packagers of our beverage products presently offer non-refillable, recyclable containers in the United States

and various other markets. Some of these packagers also offer refillable containers, which are also recyclable.
Legal requirements have been enacted in jurisdictions in the United States and Canada requiring that deposits or
certain ecotaxes or fees be charged for the sale, marketing and use of certain non-refillable beverage containers.
The precise requirements imposed by these measures vary. Other beverage container–related deposit, recycling,
ecotax and/or product stewardship proposals have been introduced in various jurisdictions in the United States
and Canada. We anticipate that similar legislation or regulations may be proposed in the future at local, state and
federal levels, both in the United States and Canada.

Trademarks, Flavor Concentrate Trade Secrets and Patent

We own a number of trademarks, including, in the United States and Canada, “Jones Soda Co.®,” “Jones
Pure Cane Soda™,” “Jones Naturals®”, “Jones Energy”, “Whoop Ass Energy Drink®”, and “Jones 24C™.” In
the United States our trademarks expire 10 years from the registration date and in Canada 15 years from the
registration date, although in both Canada and the United States, they may be renewed for a nominal fee. In
addition, we have trademark protection in the United States and Canada for a number of other trademarks for
slogans and product designs, including “Wet Yourself®,” “I’ve Got A Jones For A Jones®,” “Jones Soda Co. and
Design™,” “Whoop Ass and Design®”, “Corn Is For Cars… Sugar Is For Soda™,” “Run with the Little Guy!®”
and “My Jones®”. We have also applied for trademark protection for several marks, including “Jones Soda
Co.®”, in the United Kingdom, Germany, Japan, and other foreign jurisdictions.

We have the exclusive rights to 37 flavor concentrates developed with our current flavor concentrate
suppliers, which we protect as trade secrets. We will continue to take appropriate measures, such as entering into
confidentiality agreements with our contract packers and exclusivity agreements with our flavor houses, to
maintain the secrecy and proprietary nature of our flavor concentrates.

We have two patents on our “myjones.com” business operation. In December 2002, the U.S. Patent and
Trademark Office issued us Patent No. 6,493,677, and in January 2005 they issued to us Patent No. 6,845,365
B2, both entitled “Method and Apparatus for Creating and Ordering Customized Branded Merchandise over a
Computer Network”. The term of U.S. patents is 20 years from the date of filing. We intend to explore potential
licensing arrangements with third parties to commercialize this patented methodology and defend patent
violations.

We consider our trademarks, patent and trade secrets to be of considerable value and importance to our

business.

Competition

The beverage industry is highly competitive. Principal methods of competition in the beverage industry

include:

• distribution;

• sponsorships;

• licensing;

• brand name;

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• brand image;

• price;

• labeling and packaging;

• advertising;

• product quality and taste;

• trade and consumer promotions; and

• development of new brands, products and product extensions.

We compete with other beverage companies not only for consumer acceptance but also for shelf space in

retail outlets and for marketing focus by our distributors, all of whom also distribute other beverage brands. Our
products compete with all non-alcoholic beverages, most of which are marketed by companies with substantially
greater financial resources than ours. We also compete with regional beverage producers and “private label” soft
drink suppliers. Our direct competitors in the alternative beverage industry include Cadbury Schweppes
(Stewarts and IBC) and Thomas Kemper. We also compete against Coca Cola, Pepsi, Hansen’s, Stewarts, IBC
and other traditional soft drink manufacturers and distributors, as well as against other category leaders such as
Red Bull and Monster for the energy drink category.

In order to compete effectively in the beverage industry, we believe that we must convince independent

distributors that Jones Pure Cane Soda™ is a leading brand in the premium soda segment of the alternative or
New Age beverage industry. In connection with or as a follow-up to the establishment of an independent
distributor relationship for the Jones Pure Cane Soda™ brand, we sell Jones Organics™, Jones Energy, Whoop
Ass Energy Drink®, Jones Natural® and Jones 24C™ as complementary products that may replace other
non-carbonated single-serve fruit beverages or ready-to-drink (RTD) teas or energy drinks. In addition, we have
created Jones Pure Cane Soda™ in a 12-ounce can format that allows us to compete directly in the carbonated
soft drink industry. As a means of maintaining and expanding our distribution network, we intend to introduce
new products and product extensions, and when warranted, new brands. Although we believe that we will be able
to continue to create fashionable brands, there can be no assurance that we will be able to do so or that other
companies will not be more successful in this regard over the long term.

In addition, in light of the competition for product placement with independent distributors, we obtained

several national retail accounts as an additional distribution channel for our products. We currently have
distribution arrangements with National Beverage, Target Corporation, Panera Bread Company, Barnes & Noble,
Sam’s Club and Wal-Mart Stores, Inc. We believe that this diversification strategy is helpful in alleviating the
risk inherent in competition for independent distributors.

Pricing of the products is also important. We believe that our Jones Pure Cane Soda™, Jones Organics™,

Jones Energy, Whoop Ass Energy Drink®, Jones 24C™ and Jones Naturals® products are priced in the same
price range or higher than competitive New Age beverage brands and products.

Seasonality

As is typical in the beverage industry, our sales are seasonal. In a typical year, approximately 60% of our

sales by volume occur from April to September and approximately 40% occur from October to March. As a
result, our working capital requirements and cash flow vary substantially throughout the year. Consumer demand
for our products is also affected by weather conditions. Cool, wet spring or summer weather could result in
decreased sales of our beverages and could have an adverse effect on our results of operations.

13

Employees

As of December 31, 2007, we had 82 full-time employees: 46 were employed in sales and marketing
capacities, 18 were employed in administrative capacities, and 18 were employed in manufacturing and quality
control capacities. None of our employees is represented by labor unions. We believe that our relationships with
our employees are good.

Securities Exchange Act Reports and other Available Information

We make available on or through our website at www.jonessoda.com (under “About Jones—Investor

Relations—Financial Reports”) certain reports and amendments to those reports that we file with or furnish to the
Securities and Exchange Commission (the “SEC”) in accordance with the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These include our annual reports on Form 10-K, our quarterly reports on Form
10-Q, our current reports on Form 8-K, and Section 16 filings. We make this information available on our
website free of charge as soon as reasonably practicable after we electronically file the information with, or
furnish it to, the SEC.

In addition, the following corporate governance materials are also available on our website under “About

Jones—Investor Relations—Corporate Governance:”

•

•

•

Audit Committee Charter.

Code of Conduct applicable to all directors, officers and employees of Jones Soda Co.

Code of Ethics for our CEO and senior financial officers.

If we waive any material provision of our Code of Conduct or Code of Ethics for our CEO and senior
financial officers or substantively change the codes, we will disclose that fact on our website within four business
days. A copy of any of the materials filed with or furnished to the SEC or copies of the corporate governance
materials described above are also available free of charge and can be mailed to you upon request to Jones Soda
Co., Corporate Offices, 234 Ninth Avenue North, Seattle, Washington 98109.

EXECUTIVE OFFICERS

Our executive officers as of March 17, 2008 are as follows:

Name

Age

Position

Scott Bedbury . . . . . . . .
Stephen Jones . . . . . . . .
. . . . . . . . . . .
Joth Ricci
Hassan Natha . . . . . . . .
Peter Burns . . . . . . . . . .

Interim Chairman of the Board and Director
Interim Chief Executive Officer and Director

51
52
39 Chief Operating Officer
48 Chief Financial Officer and Secretary
47

Senior Executive Vice President of Sales and
Marketing

Lars P. Nilsen . . . . . . . .

46 Executive Vice President of Sales

Officer
Since

2008
2008
2008
2006
2007

2006

Mr. Bedbury has served as one of the Company’s directors since August 2003. Mr. Bedbury is also chief

executive officer of Brandstream, an independent brand consultancy, and a speaker for the Leigh Bureau.
Mr. Bedbury was a senior vice president of marketing at Starbucks Coffee Company from 1995 to 1998. Prior to
that, he spent seven years as head of advertising for Nike, Inc. In addition, Mr. Bedbury is the author of A New
Brand World: Eight Principles for Achieving Brand Leadership in the 21st Century. Mr. Bedbury holds a
Bachelor of Arts degree from the University of Oregon.

Mr. Jones has served as one of the Company’s directors since March 2006. Mr. Jones is also a consultant to

Denneen and Company, a Boston-based strategy consulting business, where he served as president and partner

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from October 2006 to June 2007. Since June 2007, Mr. Jones has also served as vice president of Calabria Mia
Fine Foods, an Italian food producer and distributor, and since 2003 he has been the chief executive officer of
Brand Ignition Group, a private company that works with private equity funds to identify and acquire emerging
high growth consumer products companies, of which he was also a founder. From 1986 to 2003, Mr. Jones
worked in various positions with The Coca-Cola Company, most recently serving as its chief marketing officer.

Mr. Ricci joined Jones Soda as Chief Operating Officer in January 2008. From May 2003 to January of

2008, Mr. Ricci served as General Manager of Columbia Distributing Company, a beverage distribution
company, and previously served as its Vice President of Human Resources and Process Improvement from
November 2002 to May 2003 and as its Regional Vice President of Sales and Marketing from November 2000
until October 2002. Mr. Ricci received a B.S. in Business Education from Oregon State University.

Mr. Natha joined Jones Soda in April 2006. Prior to joining Jones Soda, Mr. Natha served as an associate

with CFO Selections, a professional CFO services firm from August 2005 to January 2006, a principal of
B2BCFO, a CFO professional services firm, from March 2003 to July 2005, and Chief Financial Officer of
Washington Gaming Inc., a private real estate and gaming company, from January 2002 to December 2002.
From October 2000 to December 2001, he served as senior manager of Accenture Inc. Mr. Natha is Certified
Public Accountant and received a Bachelor of Commerce (Accounting) from Concordia University and a
Graduate Diploma of Public Accountancy from McGill University.

Mr. Burns was hired as our Senior Executive Vice President of Sales and Marketing in April 2007. His
employment with the Company will terminate on March 31, 2008. From July 2005 to October 2006, Mr. Burns
was the Vice-President of Sales for Izze Beverage Company, a new age beverage company. Prior to that, from
January 2001 to June 2005, he was the Executive Vice-President of Sales of Mauna Loa Macadamia Nut
Corporation, a food manufacturer and distributor. Mr. Burns received a Bachelor of Science from Randolph
Macon College.

Mr. Nilsen was hired as our Executive Vice President of Sales in February 2006. Mr. Nilsen joined us from

Northwest Horticulture, where he served in the roles of Chief Operating Officer and President/CEO, from
September 2001 to December 2005. Mr. Nilsen’s education includes an MBA from the University of
Washington, a B.Sc. from the University of Utah with a major in Finance and an extensive management training
program from Coca-Cola University.

ITEM 1A. RISK FACTORS.

The following factors may materially adversely affect our business, financial condition or results of

operations. In that event, the trading price of our common stock could decline and shareholders may lose part or
all of their investment. Therefore, shareholders should carefully consider the risks described below before
making an investment decision.

Risk Factors Relating to Our Company and Our Business

Our business plan and future growth is dependent to a significant extent on our CSD strategy. If we are
unable to successfully implement this strategy, our results of operations and financial condition could be
adversely affected.

We have allocated significant resources to our efforts to penetrate the CSD market through the introduction
of our canned soda product. These efforts may prove to be unsuccessful or unprofitable, in which case our results
of operations and financial condition will suffer. Our ability to establish a market for our brands and products in
the CSD channel is dependent on our ability to establish and maintain successful relationships with retailers,
including grocery stores and other retailers who will carry our CSD products. Our success in the CSD channel will
therefore depend on our ability to secure and maintain favorable listing arrangements with retailers.

15

Our ability to maintain our network of retailers and attract additional retailers will depend on a number of

factors, many of which are outside our control. Some of these factors include:

•

•

•

•

the level of demand for our brands and products in a particular regions;

our ability to price our products at competitive levels;

our ability to promote and advertise our products; and

our ability, through National Beverage Corp., to deliver products in the quantity and at the time ordered
by retailers.

We may not be able to perform on all or any of these factors in any of our current or prospective geographic

areas of distribution, which would have a material adverse effect on our revenues and financial results.

Because products in the CSD industry compete primarily on price, we may not be able to distinguish our
CSD products from those of larger, more well-established and substantially better financed companies in this
industry, such as the Coca- Cola Company and PepsiCo, Inc., and may not be able to compete with these
companies based solely on price. Our inability to successfully execute on our CSD strategy will adversely affect
our revenues and financial results.

We are dependent on National Beverage’s production capacity and capabilities to meet the demand for
Jones products in the grocery and mass merchant channel in the U.S.

In 2006, we entered into an agreement with National Beverage Corp, pursuant to which, beginning in 2007,

National Beverage Corp. generally has the exclusive right in the United States to manufacture and distribute
Jones Soda 8-ounce and 12-ounce cans and 1-liter PET bottles and Jones Energy in 16-ounce cans in the grocery
and mass merchant channel. The agreement has an initial term of five years, expiring on December 31, 2011, and
we may not terminate the agreement prior to that date unless National Beverage is in material default. As a result,
our success in the CSD industry will depend to a significant extent on the performance of National Beverage. If
National Beverage fails to perform adequately, because, for example, it is unable to manufacture our products in
sufficient quantities to meet demand in a timely manner (due to a shortfall in agreed upon capacity in one or all
of their factories or significantly increased demand or other reasons) or does not provide acceptable customer
service to our grocery and mass merchant customers, our ability to gain market acceptance in the CSD industry
could be materially adversely affected and our results of operations would suffer. In addition, National Beverage
may be unable to pass cost increases to retailers, thereby reducing our profits from sales in the CSD channel.

Moreover, National Beverage will have the right to terminate our agreement upon six months notice at any

time after December 31, 2009. If National Beverage were to terminate the agreement, we would need to find
alternative manufacturing and distribution arrangements for the CSD channel, which we may be unable to do in a
timely manner or on favorable terms, which could adversely affect our results of operations.

Finally, National Beverage Corp. purchases concentrate from us in order to manufacture our products, and it
places orders for concentrate as required by its production and inventory needs. National Beverage is not required
to place any minimum monthly or quarterly concentrate orders with us. This could lead to fluctuating sales of
concentrate during any given quarter or year and have an adverse effect on our results of operations. For
example, in light of lower than expected retail customer orders and its existing inventory levels during the fourth
quarter of 2007, National Beverage did not place any concentrate orders in the fourth quarter, which adversely
impacted our results of operations for the quarter.

16

We rely on our distributors, retailers and brokers, and this could affect our ability to efficiently and
profitably distribute and market our products, maintain our existing markets and expand our business into
other geographic markets.

Our ability to establish a market for our brands and products in new geographic distribution areas, as well as

maintain and expand our existing markets, is dependent on our ability to establish and maintain successful
relationships with reliable distributors, retailers and brokers strategically positioned to serve those areas. Most of
our distributors, retailers and brokers sell and distribute competing products, including non-alcoholic and
alcoholic beverages, and our products may represent a small portion of their business. To the extent that our
distributors, retailers and brokers are distracted from selling our products or do not employ sufficient efforts in
managing and selling our products, including re-stocking the retail shelves with our products, our sales and
profitability will be adversely affected. Our ability to maintain our distribution network and attract additional
distributors, retailers and brokers will depend on a number of factors, some of which are outside our control.
Some of these factors include:

•

•

•

the level of demand for our brands and products in a particular distribution area;

our ability to price our products at levels competitive with those offered by competing products; and

our ability to deliver products in the quantity and at the time ordered by distributors, retailers and
brokers.

We may not be able to meet all or any of these factors in any of our current or prospective geographic areas of

distribution. Our inability to achieve any of these factors in a geographic distribution area will have a material
adverse effect on our relationships with our distributors, retailers and brokers in that particular geographic area, thus
limiting our ability to expand our market, which will likely adversely effect our revenues and financial results.

We generally do not have long-term agreements with our distributors, and we incur significant time and
expense in attracting and maintaining key distributors.

Our marketing and sales strategy depends in large part on the availability and performance of our

independent distributors. We have entered into written agreements with many of our top distributors for varying
terms and duration; however, most of our other distribution relationships are based solely on purchase orders and
are terminable by either party at will. We currently do not have, nor do we anticipate in the future that we will be
able to establish, long-term contractual commitments from many of our distributors. In addition, despite the
terms of the written agreements with many of our top distributors, there are no minimum levels of purchases
under many of those agreements, and any of the agreements may be terminated at any time. We may not be able
to maintain our current distribution relationships or establish and maintain successful relationships with
distributors in new geographic distribution areas. Moreover, there is the additional possibility that we may have
to incur additional expenditures to attract and maintain key distributors in one or more of our geographic
distribution areas in order to profitably exploit our geographic markets.

Because our distributors are not required to place minimum orders with us, we need to carefully manage
our inventory levels, and it is difficult to predict the timing and amount of our sales.

Our independent distributors are not required to place minimum monthly or annual orders for our products.

In order to reduce inventory costs, independent distributors endeavor to order products from us on a “just in
time” basis in quantities, and at such times, based on the demand for the products in a particular distribution area.
Accordingly, there is no assurance as to the timing or quantity of purchases by any of our independent
distributors or that any of our distributors will continue to purchase products from us in the same frequencies and
volumes as they may have done in the past. In order to be able to deliver our products on a timely basis, we need
to maintain adequate inventory levels of the desired products, but we cannot predict the number of cases sold by
any of our distributors. If we fail to meet our shipping schedules, we could damage our relationships with
distributors and/or retailers, increase our shipping costs or cause sales opportunities to be delayed or lost, which
would unfavorably impact our future sales and adversely affect our operating results. In addition, if the inventory
of our products held by our distributors and/or retailers is too high, they will not place orders for additional
products, which would also unfavorably impact our future sales and adversely affect our operating results.

17

Our business plan and future growth is dependent in part on our distribution arrangements directly with
retailers and national retail accounts. If we are unable to establish and maintain these arrangements, our
results of operations and financial condition could be adversely affected.

We currently have distribution arrangements with several large national retail accounts to distribute our
products directly through their stores; these retailers include Barnes & Noble, Panera Bread Company, Target
Corporation, Sam’s Club and Wal-Mart Stores, Inc. We believe that our “direct to retail” program has increased
our national visibility among consumers; however there are several risks associated with this distribution
strategy. First, we do not have long-term agreements in place with any of these accounts. We operate based
solely on purchase orders we receive from them. We may not be able to maintain continuing relationships with
any of these national accounts, and we may not be able to renew any of these accounts upon expiration of the
term of the existing arrangements. Any of these agreements may be terminated by the retailer at any time. A
decision by any of these retailers, or any other large retail accounts we may obtain, to decrease the amount
purchased from us or to cease carrying our products could have a material adverse effect on our reputation,
financial condition and consolidated results of operations. For example, in 2007, Starbucks Coffee Company
stopped carrying our product in its U.S. stores, which negatively impacted our sales and results of operations in
2007. In addition, we may not be able to establish additional distribution arrangements with other national
retailers.

Second, as we become more dependent on national retail chains, these retailers may assert pressure on us to
reduce our pricing to them or seek significant product discounts. In general, our margins are lower on our sales to
these customers because of these pressures. Any increase in our costs for these retailers to carry our product,
reduction in price, or demand for product discounts could have a material adverse effect on our profit margin.

Finally, our “direct to retail” distribution arrangements may have an adverse impact on our existing
relationships with our independent regional distributors, who may view our “direct to retail” accounts as
competitive with their business, making it more difficult for us to maintain and expand our relationships with
independent distributors.

We have dedicated, and will continue to dedicate, significant resources to our sponsorship agreements and
may not realize the benefits expected from those agreements.

Our sponsorship agreements with the Seattle Seahawks and the New Jersey Nets require us to make
substantial annual payments in exchange for certain promotional and branding benefits. There can be no
assurance, however, that the benefit we anticipate from those and similar agreements, including exclusive
beverage rights and other branding opportunities, will compensate for the annual payment commitments required
by the agreements. These commitments are significant, representing approximately 50% of our purchase
obligations outstanding as of December 31, 2007 (see the table of “Contractual Obligations” included under
Item 7 of this Report). Moreover, there can be no assurance that our association with these particular teams will
have a positive effect on our image and brand. There is a risk that we will be unable to recover the costs
associated with our sponsorship agreements, which would have an adverse effect on our results of operations.

We rely on third-party packers of our products, and this dependence could make management of our
marketing and distribution efforts inefficient or unprofitable.

We do not own the plants and equipment required to manufacture and package our beverage products and

do not anticipate having such capabilities in the future. As a consequence, we depend on third parties and
contract packers to produce our beverage products and deliver them to distributors. Our ability to attract and
maintain effective relationships with contract packers and other third parties for the production and delivery of
our beverage products in a particular geographic distribution area is important to the achievement of successful
operations within each distribution area. Competition for contract packers’ business is intense, especially in the
western United States, and this could make it more difficult for us to obtain new or replacement packers, or to

18

locate back-up contract packers, in our various distribution areas, and could also affect the economic terms of our
agreements with our packers. Our co-packers may terminate their arrangements with us at any time, in which
case we could experience disruptions in our ability to deliver products to our customers. We may not be able to
maintain our relationships with current contract packers or establish satisfactory relationships with new or
replacement contract packers, whether in existing or new geographic distribution areas. The failure to establish
and maintain effective relationships with contract packers for a distribution area could increase our
manufacturing costs and thereby materially reduce profits realized from the sale of our products in that area. In
addition, poor relations with any of our contract packers could adversely affect the amount and timing of product
delivered to our distributors for resale, which would in turn adversely affect our revenues and financial condition.

As is customary in the contract packing industry for comparably sized companies, we are expected to
arrange for our contract packing needs sufficiently in advance of anticipated requirements. To the extent demand
for our products exceeds available inventory and the capacities produced by contract packing arrangements, or
orders are not submitted on a timely basis, we will be unable to fulfill distributor orders on demand. Conversely,
we may produce more product than warranted by the actual demand for it, resulting in higher storage costs and
the potential risk of inventory spoilage. Our failure to accurately predict and manage our contract packaging
requirements may impair relationships with our independent distributors and key accounts, which, in turn, would
likely have a material adverse effect on our ability to maintain profitable relationships with those distributors and
key accounts.

Our business and financial results depend on the continuous supply and availability of raw materials.

The principal raw materials used by us include aluminum cans, glass bottles and PET plastic bottles as well

as juices, sucrose/inverted cane sugar and sucralose, the costs of which are subject to fluctuations. In addition,
with our shift to production using pure cane sugar rather than high fructose corn syrup, we utilize considerable
quantities of pure cane sugar. If our supply of these raw materials is impaired or if prices increase significantly,
our business would be adversely affected.

Due to the consolidations that have taken place in the glass industry over the past few years, the prices of
glass bottles continue to increase. The prices of PET plastic bottles and aluminum cans increased in 2006 and
again in 2007. The prices of pure cane sugar, sucrose, trays and labels increased in 2007 and certain of these
ingredients continued to increase in early 2008. These increased costs, together with increased costs primarily of
energy, gas and freight resulted in increases in certain product costs which are ongoing and are expected to
continue to exert pressure on our gross margins in 2008. In addition, certain of our co-packing arrangements
allow such co-packers to increase their charges based on certain of their own cost increases. We are uncertain
whether the prices of any of the above or any other raw materials or ingredients will continue to rise in the future
and whether we will be able to pass any such increases on to our customers.

We may not correctly estimate demand for our products. Our ability to estimate demand for our products is
imprecise, particularly with new products, and may be less precise during periods of rapid growth, particularly in
new markets. If we materially underestimate demand for our products or are unable to secure sufficient
ingredients or raw materials including, but not limited to, PET plastic bottles, cans, glass, labels, flavors,
supplements, certain sweeteners, or packing arrangements, we might not be able to satisfy demand on a short-
term basis. Moreover, industry-wide shortages of certain concentrates, supplements and sweeteners have been
and could, from time to time in the future, be experienced, which could interfere with and/or delay production of
certain of our products and could have a material adverse effect on our business and financial results. We do not
use hedging agreements or alternative instruments to manage this risk.

Disruption of our supply chain could have an adverse effect on our business, financial condition and results
of operations.

Our ability and that of our suppliers, business partners (including packagers), contract manufacturers,
independent distributors and retailers to make, move and sell products is critical to our success. Damage or

19

disruption to our or their manufacturing or distribution capabilities due to weather, natural disaster, fire or
explosion, terrorism, pandemics such as avian flu, strikes or other reasons, could impair our ability to
manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of
such events, or to effectively manage such events if they occur, could adversely affect our business, financial
condition and results of operations, as well as require additional resources to restore our supply chain.

We rely upon our ongoing relationships with our key flavor suppliers. If we are unable to source our flavors
on acceptable terms from our key suppliers, we could suffer disruptions in our business.

Currently, we purchase our flavor concentrate from three flavor concentrate suppliers, and we anticipate that

we will purchase flavor concentrate from other flavor houses for future flavors and additional products, with the
intention of developing other sources of flavor concentrate for each of our products. The price of our
concentrates is determined by our flavor houses and us, and may be subject to change. Generally, flavor suppliers
hold the proprietary rights to their flavors. Consequently, we do not have the list of ingredients or formulae for
our flavors and concentrates and we may be unable to obtain these flavors or concentrates from alternative
suppliers on short notice. If we have to replace a flavor supplier, we could experience disruptions in our ability to
deliver products to our customers, which could have a material adverse effect on our results of operations.

If we are unable to maintain brand image and product quality, or if we encounter other product issues such
as product recalls, our business may suffer.

Our success depends on our ability to maintain brand image for our existing products and effectively build

up brand image for new products and brand extensions. There can be no assurance, however, that additional
expenditures and our advertising and marketing will have the desired impact on our products’ brand image and
on consumer preferences. Product quality issues, real or imagined, or allegations of product contamination, even
when false or unfounded, could tarnish the image of the affected brands and may cause consumers to choose
other products. Moreover, we focused significant resources in 2007 in introducing our canned soda product in the
CSD channel. There can be no assurance that our canned soda product will not have a negative impact on our
brand image, particularly with respect to our traditional bottled product.

In addition, because of changing government regulations or implementation thereof, allegations of product

contamination or lack of consumer interest in certain products, we may be required from time to time to recall
products entirely or from specific markets. Product recalls could affect our profitability and could negatively
affect brand image. Also, adverse publicity surrounding obesity concerns, water usage and the like could
negatively affect our overall reputation and our products’ acceptance by consumers.

The inability to attract and retain key personnel would directly affect our efficiency and results of
operations.

Our success depends on our ability to attract and retain highly qualified employees in such areas as
production, distribution, sales, marketing and finance. We compete to hire new employees, and, in some cases,
must train them and develop their skills and competencies. Our operating results could be adversely affected by
increased costs due to increased competition for employees, higher employee turnover or increased employee
benefit costs. Any unplanned turnover, particularly involving one of our key personnel, could negatively impact
our operations, financial condition and employee morale.

Peter M. van Stolk, our founder, President and Chief Executive Officer, and a member of our Board of

Directors, stepped down as an employee and officer of the Company effective December 31, 2007. Since our
inception, we have been dependent upon the creative skills and leadership of Mr. van Stolk, and there can be no
assurance that his departure will not have a material adverse effect on our business, including our relationships
with key customers and independent distributors, and employee morale. The Board of Directors has appointed
Stephen C. Jones, a member of our Board since 2006, to the position of interim Chief Executive Officer. Our

20

success will depend in part on Mr. Jones’ interim leadership and, in the future, on our ability to attract and retain
a highly qualified permanent chief executive officer.

We need to effectively manage our growth and resources in order to execute on our business plan. Any
failure to do so would negatively impact our results of operations.

To manage operations effectively, we must continue to improve our operational, financial and other
management processes and systems. Our success also depends largely on our ability to maintain high levels of
employee utilization, manage our production costs, sales and marketing costs and general and administrative
expenses, and otherwise execute on our business plan. In addition, in order to grow and execute on our business
plan and opportunities, we need to have available to us adequate resources, including capital and personnel,
which may not be available when needed. We also need to maintain adequate operational controls and focus as
we add new brands and products, distribution channels, and business strategies. We may not be able to
effectively and efficiently manage our growth. Any inability to do so could increase our expenses and negatively
impact our results of operations.

Our growth and operating results could be impaired if we are unable to meet our future capital needs.

Our ultimate success depends on our ability to continue to generate revenue through our operations. If our

operations are impaired for any reason, including an impairment in the availability of our Key Bank loan facility
to supply working capital for operations and we do not have another source of funding readily available to fund
our continued operations, we may be unable to meet our future capital needs. If we encounter some impairment
in our ability to operate, there is no assurance that funds will be available from any source or, if available, that
they can be obtained on terms acceptable to us. If unavailable, our operations could be severely limited, and we
may not be able to implement our business plan in a timely manner or at all. If equity financing is used to raise
additional working capital, the ownership interests of our existing shareholders will be diluted.

Our inability to protect our trademarks, patent and trade secrets may prevent us from successfully
marketing our products and competing effectively.

Failure to protect our intellectual property could harm our brand and our reputation, and adversely affect our

ability to compete effectively. Further, enforcing or defending our intellectual property rights, including our
trademarks, patents, copyrights and trade secrets, could result in the expenditure of significant financial and
managerial resources. We regard our intellectual property, particularly our trademarks, patent and trade secrets to
be of considerable value and importance to our business and our success. We rely on a combination of trademark,
patent, and trade secrecy laws, confidentiality procedures and contractual provisions to protect our intellectual
property rights. We are pursuing the registration of our trademarks in the United States, Canada and
internationally. There can be no assurance that the steps taken by us to protect these proprietary rights will be
adequate or that third parties will not infringe or misappropriate our trademarks, trade secrets or similar
proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims
against us, and we may have to pursue litigation against other parties to assert our rights. Any such claim or
litigation could be costly. In addition, any event that would jeopardize our proprietary rights or any claims of
infringement by third parties could have a material adverse effect on our ability to market or sell our brands,
profitably exploit our products or recoup our associated research and development costs.

As part of the licensing strategy of our brands, we enter into licensing agreements under which we grant our

licensing partners certain rights to use our trademarks and other designs. Although our agreements require that
the licensing partner’s use of our trademarks and designs is subject to our control and approval, any breach of
these provisions, or any other action by any of our licensing partners that is harmful to our brands, goodwill and
overall image, could have a material adverse impact on our business.

21

We have obtained two U.S. patents on our “myjones.com” methodology. While the number of business
method patents issued by the U.S. Patent and Trademark Office has been growing substantially in recent years,
there is still a significant degree of uncertainty associated with these patents. It is possible that our patent may be
construed by a court of competent jurisdiction in a very limited manner such that it offers little or no basis for us
to deter competitors from employing similar processes or does not allow us to defend against third party claims
of patent infringement.

Litigation or legal proceedings (including pending securities class actions) could expose us to significant
liabilities and damage our reputation.

Securities class action derivative lawsuits have been filed against us and current officers and members of the
Board of Directors. These lawsuits are described more fully in Part I, Item 3. “Legal Proceedings” and in Note 12
to our consolidated financial statements contained in this Form 10-K. Defending these lawsuits will result in
significant expenditures and the continued diversion of our management’s time and attention from the operation
of our business, which could have a negative effect on our business operations.

We may also become party to other litigation claims and legal proceedings. Litigation involves significant

risks, uncertainties and costs, including distraction of management attention away from our current business
operations. We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes
and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we
establish reserves and/or disclose the relevant litigation claims or legal proceedings, as appropriate. These
assessments and estimates are based on the information available to management at the time and involve a
significant amount of management judgment. We caution you that actual outcomes or losses may differ
materially from those envisioned by our current assessments and estimates. Our policies and procedures require
strict compliance by our employees and agents with all United States and local laws and regulations applicable to
our business operations, including those prohibiting improper payments to government officials. Nonetheless,
there can be no assurance that our policies, procedures and related training programs will always ensure full
compliance by our employees and agents with all applicable legal requirements. Improper conduct by our
employees or agents could damage our reputation in the United States and internationally or lead to litigation or
legal proceedings that could result in civil or criminal penalties, including substantial monetary fines, as well as
disgorgement of profits.

Failure to remediate a material weakness in our internal control over financial reporting could adversely
impact our ability to report accurate financial results in a timely manner.

In connection with management’s assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2007, management identified the following material weakness: the Company has
limited accounting personnel with expertise in generally accepted accounting principles and regulatory financial
reporting requirements. This lack of sufficient accounting personnel with an appropriate level of accounting
knowledge and training reduced the likelihood that the Company could detect the need for a material adjustment
to the Company’s books and records or anticipate, identify, and resolve accounting issues in the normal course of
performing their assigned functions. As a result of this material weakness, management concluded that our
internal control over financial reporting and our disclosure controls and procedure were not effective as of
December 31, 2007. The material weakness and some of the steps we are taking to remediate such material
weakness are described in Item 9A “Controls and Procedures” of this report.

We are taking steps to improve the reliability of our internal controls and eliminate the material weakness.
Until we are successful in our effort to remediate the weakness in our internal control over financial reporting, it
may prevent us from accurately reporting our financial results, result in material misstatements in our financial
statements or cause us to fail to meet our reporting obligations. In addition, we cannot assure you that we will not
in the future identify further material weaknesses in our internal control over financial reporting that we have not
discovered to date, which may impact the reliability of our financial reporting and financial statements. Deficient

22

internal controls could also cause investors to lose confidence in our reported financial information, which could
lead to a decline in our stock price, limit our ability to access the capital markets in the future, and require us to
incur additional costs to improve our internal control systems and procedures.

Changes in accounting standards and subjective assumptions, estimates and judgments by management
related to complex accounting matters could significantly affect our financial results.

Generally accepted accounting principles and related pronouncements, implementation guidelines and
interpretations with regard to a wide variety of matters that are relevant to our business, such as, but not limited
to, revenue recognition, stock-based compensation, trade promotions, sports sponsorship agreements and income
taxes are highly complex and involve many subjective assumptions, estimates and judgments by our
management. Changes to these rules or their interpretation or changes in underlying assumptions, estimates or
judgments by our management could significantly change our reported or expected financial performance.

If we are unable to build and sustain proper information technology infrastructure, our business could
suffer.

We depend on information technology as an enabler to improve the effectiveness of our operations and to
interface with our customers, as well as to maintain financial accuracy and efficiency. If we do not allocate and
effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be
subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of
or damage to intellectual property through security breach. Our information systems could also be penetrated by
outside parties intent on extracting information, corrupting information or disrupting business processes. Such
unauthorized access could disrupt our business and could result in the loss of assets.

We face currency risks associated with fluctuating foreign currency valuations.

For the year ended December 31, 2007, approximately 14.0% of our sales were denominated in the
Canadian dollar. A decrease in the value of the Canadian dollar in relation to the U.S. dollar after establishing
prices and before our receipt of payment and conversion of such payment to U.S. dollars would have an adverse
effect on our operating results. Although the recent strengthening of the Canadian dollar has had a positive
impact on our revenues attributable to sales in Canada, it has also negatively impacted our costs of goods. The
majority of our products are produced and bottled in Canada through two of our co-packers. Accordingly, an
increase in the value of the Canadian dollar in relation to the U.S. dollar has an adverse effect on our production
costs. In addition, the financial statements for our Canadian subsidiary are denominated in Canadian dollars;
accordingly, on a consolidated financial statement reporting basis, these numbers are converted into U.S. dollars
and are affected by currency conversion rates. As of December 31, 2007, we have not entered into foreign
currency contracts or other derivatives to mitigate the potential impact of foreign currency fluctuations.

Risk Factors Relating to Our Industry

We compete in an industry that is brand-conscious, so brand name recognition and acceptance of our
products are critical to our success.

Our business is substantially dependent upon awareness and market acceptance of our products and brands
by our target market, consumers between the ages of 12 and 29. In addition, our business depends on acceptance
by our independent distributors and retailers of our brands as beverage brands that have the potential to provide
incremental sales growth. Although we believe that we have been relatively successful in establishing our brands
as recognizable brands in the New Age beverage industry, it may be too early in the product life cycle of these
brands to determine whether our products and brands will achieve and maintain satisfactory levels of acceptance
by independent distributors and retail consumers. We believe that the success of the Jones Energy, Jones
Naturals, Whoop Ass, Jones Organics and Jones 24C brands will also be substantially dependent upon

23

acceptance of the Jones Pure Cane Soda brand. Accordingly, any failure of our Jones Pure Cane Soda brand to
maintain or increase acceptance or market penetration would likely have a material adverse effect on our
revenues and financial results.

Competition from traditional non-alcoholic beverage manufacturers may adversely affect our distribution
relationships and may hinder development of our existing markets, as well as prevent us from expanding our
markets.

The beverage industry is highly competitive. We compete with other beverage companies not only for
consumer acceptance but also for shelf space in retail outlets and for marketing focus by our distributors, all of
whom also distribute other beverage brands. Our products compete with a wide range of drinks produced by a
relatively large number of manufacturers, most of which have substantially greater financial, marketing and
distribution resources than ours. Some of these competitors are placing severe pressure on independent
distributors not to carry competitive alternative or New Age beverage brands such as ours. We also compete with
regional beverage producers and “private label” soft drink suppliers.

Our direct competitors in the alternative beverage industry include Cadbury Schweppes (Stewarts and IBC)

and Thomas Kemper. We also compete against Coca Cola, Pepsi, Hansen’s and other traditional soft drink
manufacturers and distributors. We compete against other category leaders such as Red Bull and Monster for the
energy drink category. These national and international competitors have advantages such as lower production
costs, larger marketing budgets, greater financial and other resources and more developed and extensive
distribution networks than ours. There can be no assurance that we will be able to grow our volumes or be able to
maintain our selling prices in existing markets or as we enter new markets.

Increased competitor consolidations, market-place competition, particularly among branded beverage
products, and competitive product and pricing pressures could impact our earnings, market share and volume
growth. If, due to such pressure or other competitive threats, we are unable to sufficiently maintain or develop
our distribution channels, we may be unable to achieve our current revenue and financial targets. As a means of
maintaining and expanding our distribution network, we intend to introduce product extensions and additional
brands. There can be no assurance that we will be able to do so or that other companies will not be more
successful in this regard over the long term. Competition, particularly from companies with greater financial and
marketing resources than ours, could have a material adverse effect on our existing markets, as well as on our
ability to expand the market for our products.

We compete in an industry characterized by rapid changes in consumer preferences and public perception,
so our ability to continue developing new products to satisfy our consumers’ changing preferences will
determine our long-term success.

Our current market distribution and penetration may be too limited with respect to the population as a whole
to determine whether the brand has achieved initial consumer acceptance, and there can be no assurance that this
acceptance will ultimately be achieved. Based on industry information and our own experience, we believe that,
in general, alternative or New Age beverage brands and products may be successfully marketed for five to nine
years after the product is introduced in a geographic distribution area before consumers’ taste preferences
change, although some brands or products have longer lives. In light of the limited life of alternative or New Age
beverage brands and products, a failure to introduce new brands, products or product extensions into the
marketplace as current ones mature could prevent us from achieving long-term profitability. In addition,
customer preferences also are affected by factors other than taste, such as health and nutrition considerations and
obesity concerns, shifting consumer needs, changes in consumer lifestyles, increased consumer information and
competitive product and pricing pressures. Sales of our products may be adversely affected by the negative
publicity associated with these issues. If we do not adjust to respond to these and other changes in customer
preferences, our sales may be adversely affected.

24

Our results of operations may fluctuate from quarter to quarter for many reasons, including seasonality.

As is typical in the beverage industry, our sales are seasonal. In a typical year, approximately 60% of our

sales by volume occur from April to September and approximately 40% occur from October to March. As a
result, our working capital requirements and cash flow vary substantially throughout the year. Consumer demand
for our products is also affected by weather conditions. Cool, wet spring or summer weather could result in
decreased sales of our beverages and could have an adverse effect on our results of operations.

We have experienced significant fluctuations in quarterly results that have been the result of many factors.

In particular, like many other companies in the beverage industry, we generate a substantial percentage of our
revenues during the warm weather months of April through September. Management believes that the demand
for our products will continue to reflect such seasonal consumption patterns.

In addition, our operating results may fluctuate due to a number of other factors including, but not limited to:

•

•

•

•

•

•

•

•

•

•

Our ability to secure favorable and timely listing arrangements with retailers in the CSD channel in an
effort to increase the distribution of our product, the timing of the retailers’ reset periods, competitive
response by much larger, well-funded and established companies currently operating in the CSD
channel, our ability to manage all the expenses of our continuing CSD roll-out, our ability to execute
our CSD marketing programs to increase the sales velocity of our products and product sell- through,
market acceptance of our products, our ability to attract qualified employees with experience in the
CSD channel, our ability to fully recover our investment in slotting fees and the impact of the can
expansion on our other distribution channels;

Our ability to develop and expand distribution channels for current and new products, develop
favorable arrangements with third party distributors of our products and minimize or reduce issues
associated with engaging new distributors and retailers, including, but not limited to, transition costs
and expenses and down time resulting from the initial deployment of our products in each new
distributor’s network;

Our ability to manage our operating expenses to sufficiently support general operating activities,
slotting fees, promotion and sales activities, and capital expansion, and our ability to sustain
profitability;

Our ability to meet the competitive response by much larger, well-funded and established companies
currently operating in the beverage industry, as we introduce new competitive products, such as cola,
diet cola, lemon lime, vitamin-enhanced water beverages and energy drinks and enter into sponsorship
agreements;

Our ability to meet the financial covenants of our Key Bank Loan Agreement if and when we borrow
any funds under this arrangement;

Our ability to develop, expand and implement our direct-to-retail sales channels and national retail
accounts, as well as our “myjones” programs;

Our ability to increase distribution in our four core regions consisting of the Northwest, the Southwest,
the Midwest and Western Canada, and our ability to expand and manage distributor growth in areas
outside of the core regions;

Unilateral decisions by distributors, grocery store chains, specialty chain stores, club stores, mass
merchandisers and other customers to discontinue carrying all or any of our products that they are
carrying at any time;

Competitive products and pricing pressures and our ability to gain or maintain share of sales in the
marketplace as a result of actions by competitors; and

Our ability to develop and market various products under our sports sponsorship agreements.

25

Due to these and other factors, our results of operations have fluctuated from period to period and may
continue to do so in the future, which could cause our operating results in a particular quarter to fail to meet
market expectations.

We could be exposed to product liability claims for personal injury or possibly death.

Although we have product liability insurance in amounts we believe are adequate, there can be no assurance
that the coverage will be sufficient to cover any or all product liability claims. To the extent our product liability
coverage is insufficient, a product liability claim would likely have a material adverse effect upon our financial
condition. In addition, any product liability claim successfully brought against us may materially damage the
reputation of our products, thus adversely affecting our ability to continue to market and sell that or other
products. Additionally, we may be required from time to time to recall products entirely or from specific
co-packers, markets or batches. Product recalls could adversely affect our profitability and our brand image. We
do not maintain recall insurance.

Our business is subject to many regulations and noncompliance is costly.

The production, marketing and sale of our beverages, including contents, labels, caps and containers, are

subject to the rules and regulations of various federal, provincial, state and local health agencies. If a regulatory
authority finds that a current or future product or production run is not in compliance with any of these
regulations, we may be fined, or production may be stopped, thus adversely affecting our financial condition and
results of operations. Similarly, any adverse publicity associated with any noncompliance may damage our
reputation and our ability to successfully market our products. Furthermore, the rules and regulations are subject
to change from time to time and while we closely monitor developments in this area, we have no way of
anticipating whether changes in these rules and regulations will impact our business adversely. Additional or
revised regulatory requirements, whether labeling, environmental, tax or otherwise, could have a material
adverse effect on our financial condition and results of operations.

Significant additional labeling or warning requirements may inhibit sales of affected products.

Various jurisdictions may seek to adopt significant additional product labeling or warning requirements
relating to the chemical content or perceived adverse health consequences of certain of our products. These types
of requirements, if they become applicable to one or more of our major products under current or future
environmental or health laws or regulations, may inhibit sales of such products. In California, a law requires that
a specific warning appear on any product that contains a component listed by the state as having been found to
cause cancer or birth defects. This law recognizes no generally applicable quantitative thresholds below which a
warning is not required. If a component found in one of our products is added to the list, or if the increasing
sensitivity of detection methodology that may become available under this law and related regulations as they
currently exist, or as they may be amended, results in the detection of an infinitesimal quantity of a listed
substance in one of our beverages produced for sale in California, the resulting warning requirements or adverse
publicity could affect our sales.

Risk Factors Related to Our Common Stock

The price of our common stock may be volatile, and a shareholder’s investment in our common stock could
suffer a decline in value.

There has been significant volatility in the volume and market price of our common stock, and this volatility

may continue in the future. In addition, factors such as quarterly variations in our operating results, changes in
financial estimates by securities analysts or our failure to meet our or their projected financial and operating
results, litigation involving us, general trends relating to the beverage industry, actions by governmental
agencies, national economic and stock market considerations as well as other events and circumstances beyond
our control could have a significant impact on the future market price of our common stock and the relative
volatility of such market price.

26

If we are not able to achieve our objectives for our business, the value of an investment in our Company
could be negatively affected.

In order to be successful, we believe that we must, among other things:

•

•

•

•

•

increase the sales volume and gross margins for our brands and products;

achieve and maintain efficiencies in operations;

manage our operating expenses to sufficiently support operating activities;

maintain fixed costs at or near current levels; and

avoid significant increases in variable costs relating to production, marketing and distribution.

We may not be able to meet these objectives, which could have a material adverse affect on our results of

operations. We have incurred significant operating expenses in the past and may do so again in the future and, as
a result, will need to increase revenues in order to improve our results of operations. Our ability to increase sales
will depend primarily on success in expanding our current markets, improving our distribution base, entering into
“direct to retail” arrangements with national accounts, and introducing new brands, products or product
extensions to the market. Our ability to successfully enter new distribution areas and obtain national accounts
will, in turn, depend on various factors, many of which are beyond our control, including, but not limited to, the
continued demand for our brands and products in target markets, the ability to price our products at competitive
levels, the ability to establish and maintain relationships with distributors in each geographic area of distribution
and the ability in the future to create, develop and successfully introduce one or more new brands, products, and
product extensions.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTY.

We lease approximately 13,534 square feet of office space in Seattle, Washington for our principal

executive and administrative offices, and for warehouse purposes. Effective September 1, 2006, we entered into a
five-year lease agreement, with the first-year’s monthly rent equal to $12,710.00, plus payment of taxes and
utilities. The rent is subject to annual four percent increases. The landlord may terminate the lease agreement at
any time by delivering nine months’ advance written notice to us. Our new lease agreement is discussed in
further detail in Note 12 to the Notes to Consolidated Financial Statements contained herein.

We believe our leased premises are suitable and adequate for their use and, in the opinion of management,

are adequately covered by insurance.

We own no real property. We do not have a policy pertaining to investments in real estate. Our current

practice is to invest solely in short-term money market securities.

ITEM 3. LEGAL PROCEEDINGS.

Federal Securities Class Action

On September 4, 2007, a putative class action complaint was filed against us, our former CEO, Peter van

Stolk, and our CFO in the U.S. District Court for the Western District of Washington, alleging claims under
Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated there
under. The case is entitled Saltzman v. Jones Soda Company, et al., Case No. 07-cv-1366-RSL, and purports to
be brought on behalf of a class of purchasers of our common stock during the period from March 9, 2007 to
August 2, 2007. Six substantially similar complaints subsequently were filed in the same court, some of which

27

allege claims on behalf of a class of purchasers of our common stock during the period November 1, 2006 to
August 2, 2007. Some of the subsequently filed complaints added as defendants certain directors and another
officer. The complaints generally allege violations of federal securities laws based on, among other things, false
and misleading statements and omissions about our financial results and business prospects. The complaints seek
unspecified damages, interest, attorneys’ fees, costs, and expenses. All seven lawsuits have been consolidated
into one action, captioned In re Jones Soda Company Securities Litigation, Case No. 07-cv-1366-RSL. On
March 5, 2008, the Court appointed a lead plaintiff and approved his selection of lead counsel. No consolidated
complaint has yet been filed.

Shareholder Derivative Litigation

On September 5, 2007, a shareholder derivative action was filed in the Superior Court for King County,
Washington, allegedly on behalf of and for the benefit of the Company, against certain of our current and former
officers and current directors. The case is entitled Cramer v. van Stolk, et al., Case No. 07-2-29187-3 SEA. The
Company also was named as a nominal defendant. Four other shareholders filed substantially similar derivative
cases. Two of these actions were filed in Superior Court for King County, Washington. One of these two actions
has been consolidated with the Cramer Action. The shareholder who brought the unconsolidated state-court
action voluntarily moved to have her suit dismissed on January 30, 2008, and on February 12, 2008 the Court
dismissed that action. The two remaining shareholder derivative actions were filed in the U.S. District Court for
the District of Washington. One of the shareholders in the two federal actions has moved to consolidate the
federal derivative actions. The Court has not ruled on the motion to consolidate. All of the derivative complaints
are based on the same allegations of fact as in the securities class actions filed in the U.S. District Court for the
Western District of Washington and allege, among other things, that certain of our directors and officers
breached their fiduciary duties and were unjustly enriched in connection with the public disclosures that are the
subject of the federal securities class actions. The complaints seek unspecified damages, restitution,
disgorgement of profits, equitable and injunctive relief, attorneys’ fees, costs, and expenses. The complaints are
derivative in nature and do not seek monetary damages from us. However, we may be required, throughout the
pendency of the action, to advance payment of legal fees and costs incurred by the defendants.

We are unable to predict the outcome of these actions. These actions could result in significant liability and

could have a material adverse effect on our business, results of operations, or financial condition.

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

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2007.

28

PART II

ITEM 5. MARKET FOR COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER

PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is currently traded on the NASDAQ Capital Market under the symbol “JSDA” and in

Canada on the TSX Venture Exchange under the symbol “JSD”.

On November 28, 2005, we qualified for trading on the NASDAQ Capital Market. Prior to that time, our

common stock had been traded on the OTC Bulletin Board since June 23, 2000. The following table shows, for
each quarter of fiscal 2007 and 2006, the high and low closing sales prices as reported by the NASDAQ Capital
Market.

2007:
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2006:
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Nasdaq Capital Market

High

Low

$12.32
17.93
31.54
22.20

$12.84
9.45
10.94
8.44

$ 5.94
8.80
13.83
11.67

$ 8.52
7.57
7.41
5.28

Holders

As of March 6, 2008, there were 26,273,388 shares of common stock issued and outstanding, held by

approximately 282 holders of record, although there are a much larger number of beneficial owners.

Dividends

We have never declared or paid any cash dividends with respect to our common stock. We anticipate that
we will retain future earnings for use in the operation and expansion of our business and do not anticipate paying
cash dividends on the common stock in the foreseeable future. Any future determination with regard to the
payment of dividends will be at the discretion of the Board of Directors and will be dependent upon our future
earnings, financial condition, applicable dividend restrictions and capital requirements and other factors deemed
relevant by the Board of Directors.

29

ITEM 6. SELECTED FINANCIAL DATA.

The following selected financial and operating data are derived from our consolidated financial statements

and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements.

Dollars in thousands,
except per share data

Year Ended December 31,

2007

2006

2005

2004

2003

Results of Operations:
Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from Operations . . . . . . . . . . . . . . . . . . . . . . .

Per Share Data:
Income (loss) from Operations per Common Share . . . . . . .

Dollars in thousands,
except per share data

$ 39,831
(11,629)

$39,035
4,574

$33,511
1,283

$27,449
1,330

$20,101
324

$

(0.45) $

0.19

$

0.06

$

0.06

$

0.02

As of December 31,

2007

2006

2005

2004

2003

Balance Sheet Data:
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 41,625
474

$47,952
15

$10,452
88

$ 7,851
114

$ 4,666
20

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS.

The following discussion of our financial condition and results of operations contains forward-looking
statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and
intentions. As described at the beginning of this Annual Report, our actual results could differ materially from
those anticipated in these forward-looking statements. Factors that could contribute to such differences include
those discussed below and in the section above entitled “Risk Factors.” You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this Annual Report on Form 10-K. Except as
required by law, we undertake no obligation to update publicly any forward-looking statements to reflect new
information, events or circumstances after the date of this Report, or to reflect the occurrence of unanticipated
events You should read the following discussion and analysis in conjunction with our consolidated financial
statements and the accompanying notes thereto included elsewhere in this Report.

Our Business

We develop, produce, market and distribute “Premium” or “New Age” beverages. We currently produce,

market and distribute six beverage brands:

•

•

•

•

Jones Pure Cane Soda™, a “premium” soda;

Jones 24C™, an enhanced water beverage;

Jones Organics™, a ready-to-drink organic tea;

Jones Energy™, a citrus energy drink;

• WhoopAss™, a citrus energy drink; and

•

Jones Naturals®, a non-carbonated juice & tea

We currently sell and distribute our products throughout the United States and Canada through our network

of independent distributors, which we refer to as our “direct store delivery” channel (DSD), and our national
retail accounts, which we refer to as our “direct to retail” channel (DTR), as well as through licensing and
distribution arrangements.

30

In 2007, we entered the carbonated soft drink market (CSD) with the introduction of 12-ounce cans of Jones

Pure Cane Soda, which are manufactured and distributed by National Beverage Corp. in grocery and mass
merchant channels in the U.S. pursuant to an exclusive agreement we entered into with National Beverage in
September 2006. Through this arrangement, we identify and secure retailers across the United States for our
premium carbonated 12-ounce soft drinks and 16-ounce energy drink products, and we are responsible for all
sales efforts, marketing, advertising and promotion. Using concentrate supplied by Jones, National Beverage both
manufactures and sells on an exclusive basis the products directly to retailers. National Beverage is responsible
for the manufacturing, delivery and invoicing of the sales of our products in this channel.

With respect to our DSD channel, we have focused our sales and marketing resources on the expansion and

penetration of our products through our independent distributor network in our core markets consisting of the
Northwest, Southwest and Midwest U.S. and Western Canada, as well as targeted expansion into our less
penetrated markets consisting of the Northeast and Southeast U.S. and Eastern Canada.

We launched our DTR business strategy in 2003 as a complementary channel of distribution to our DSD

channel, targeting large national retail accounts. Through these programs, we negotiate directly with large
national retailers, primarily premier food service-based businesses, to carry our products, serviced through the
retailer’s appointed distribution system. We currently have distribution arrangements with Barnes & Noble,
Panera Bread Company, Target Corporation, Sam’s Club and Wal-Mart Stores, Inc.

Beginning in 2004, we launched our licensing business strategy as a method to extend our brand into
non-alternative beverage products and non-beverage products. We currently have licensing arrangements with
two companies: Big Sky Brands, Inc. and J&J Snack Foods. With these licensing agreements, we believe that we
are able to partner with companies that can manufacture Jones related products and extend our Jones brand into
select products that we feel enhance our brand image. We do not expect this business to be a material part of our
operations in 2008.

Critical Accounting Estimates and Policies

The discussion and analysis of our financial condition and results of operations is based upon our

consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our estimates including, but not limited to,
among others, those affecting revenues, the allowance for doubtful accounts, the salability of inventory, the
useful lives of tangible and intangible assets, valuation allowances for receivables, stock-based compensation
expense, valuation allowances for deferred income taxes and liabilities and contingencies. The brief discussion
below is intended to highlight some of the judgments and uncertainties that can impact the application of these
policies and the specific dollar amounts reported on our financial statements. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the
results of which form our basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions, or if management made different judgments or utilized different estimates. Many of
our estimates or judgments are based on anticipated future events or performance, and as such are forward-
looking in nature, and are subject to many risks and uncertainties, including those discussed below and elsewhere
in this Report. We do not undertake any obligation to update or revise this discussion to reflect any future events
or circumstances.

We have identified below some of our accounting policies that we consider critical to our business

operations and the understanding of our results of operations. This is not a complete list of all of our accounting
policies, and there may be other accounting policies that are significant to us. For a detailed discussion on the
application of these and our other accounting policies, see Note 2 to the Consolidated Financial Statements
included in this Report.

31

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales

price is fixed or determinable and collectability is reasonably assured.

With respect to our DSD and DTR channels, our products are sold on various terms for cash or credit. Our

credit terms, which are established in accordance with local and industry practices, typically require payment
within 30 days of delivery. We recognize revenue upon receipt of our products by our distributors and retail
customers in accordance with written sales terms, net of provisions for discounts and allowances. All sales to
distributors and customers are final sales and we have a “no return” policy, however, in limited instances, due to
credit issues, or product quality issues, we may take back product.

With respect to our CSD channel, we recognize revenue from the sale of concentrate to National Beverage

Corp. on a gross basis and recognize income upon receipt of concentrate by National Beverage. The selling price
and terms of sale of concentrate to National Beverage are determined in accordance with our manufacturing and
distribution agreement with them. Our credit terms from the sale of concentrate typically require payment within
30 days of delivery. All sales of concentrate to National Beverage are final sales and we have a “no return”
policy with them, however, in limited instances, due to product quality or other custom package commitments,
we may take back product.

Licensing revenue is recorded when we receive a sale confirmation from the third party.

We pay for slotting fees or similar arrangements in accordance with Emerging Issues Task Force Issue
(“EITF”) No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor’s Products). Generally, this incentive is recognized as a reduction in revenue at the later of the date on
which the related revenue is recognized or a commitment is made. If we receive a benefit from any such
incentives over a period of time and we meet certain other criteria, such as retailer performance, recoverability
and enforceability, such incentives are recorded as an asset and are amortized as a reduction of revenue over the
term of the arrangement. Typically, we amortize slotting fees over a period of 12 months. We evaluate the
recoverability of any deferred slotting fees on a quarterly basis.

Cash consideration and promotion allowances (including slotting fees) that we pay to customers or
distributors are accounted for as a reduction of revenue when expensed or amortized in our statements of
operations. For the years ended December 31, 2007 and 2006, our revenue was reduced by $5,499,000 and
$480,000, respectively, on account of cash considerations, slotting fees, and promotion allowances.

We entered into Sponsorship Agreements with Football Northwest LLC (d/b/a Seattle Seahawks) and

First & Goal, Inc. on May 22, 2007 and Brooklyn Arena LLC and New Jersey Nets Basketball, LLC on
November 8, 2007 that provide us with the exclusive beverage rights for certain soft drinks as well as signage,
advertising and other promotional benefits to enhance our brand awareness. We have allocated amounts under
the agreements to the identifiable benefits including signage, advertising and other promotional benefits based on
their fair value and are recognizing such costs in promotion and selling expenses based on our existing policy for
such expenses. The remaining amounts due under the agreement in excess of the fair value of the identifiable
benefits, if any, are recorded as an expense.

Allowance for Doubtful Accounts; Bad Debt Expense

Management routinely estimates the collectability of our accounts receivable. Management analyzes

accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful
accounts. In general, we have historically, and continue today, to provide an allowance for doubtful accounts
equal to 100% of any unpaid balance outstanding greater than 90 days since invoice, unless considered

32

collectible. We believe that, in general, bad debt reserves for other companies in the beverage industry represent
approximately 2% of total sales. Historically, our bad debt reserve has represented approximately 0.3% of total
sales. Bad debt expense is classified within general and administrative expenses in our Consolidated Statements
of Operations.

Additionally, if we receive notice of a disputed receivable balance, we accrue such additional amount as

management determines is reflective of the risk of non-collection. In considering the amount of bad debt
allowance, we rely heavily on our history of no material write-offs and that our revenue is not dependent on one
or a few customers, but is spread among a number of customers. However, other factors which could cause
management to change its estimates would be a downturn in the economy that management determines has the
potential to affect collections if we see a greater concentration of our receivables from fewer customers. In such
events, we may be required to record additional charges to cover this exposure. Material differences may result in
the amount and timing of our bad debt expenses for any period if management made different judgments or
utilized different estimates.

Inventory

We hold raw materials and finished goods inventories, which are manufactured and procured based on our

sales forecasts. We value inventory at the lower of cost and estimated net realizable value, and include
adjustments for estimated obsolescence, on a first in-first out basis. These valuations are subject to customer
acceptance and demand for the particular products, and our estimates of future realizable values based on these
forecasted demands. We regularly review inventory detail to determine whether a write-down is necessary. We
consider various factors in making this determination, including recent sales history and predicted trends,
industry market conditions and general economic conditions. Differences could result in the amount and timing
of write-downs for any period if we make different judgments or use different estimates. We also determine an
allowance for obsolescence based on products that are over 12 months from production date. During the year
ended December 31, 2007, we recorded inventory provisions and write-downs of approximately $1,700,000 as
we discontinued the production of high fructose corn syrup inventory and discontinued the sales of 16 ounce
Jones Soda cans and various other special packs. At December 31, 2007 and 2006, we had an inventory
obsolescence provision of $565,000 and $76,000, respectively.

Deferred Income Taxes

The determination of our provision of income taxes requires significant judgment, the use of estimates, and
the interpretation and application of complex tax laws. To the extent management believes it is more likely than
not that we will not be able to utilize some or all of our deferred tax assets prior to their expiration, we are
required to establish valuation allowances against that portion of deferred tax assets. The determination of
required valuation allowances involves significant management judgment and is based upon our best estimate of
anticipated taxable profits in various jurisdictions with which the deferred tax assets are associated. Changes in
expectations could result in significant adjustments to the valuation allowances and material changes to our
provision for income taxes.

Prior to the second quarter of 2006, we maintained a valuation allowance for all of the U.S. and foreign
deferred taxes in accordance with Statement of Financial Accounting Standards 109 (“SFAS 109,”) “Accounting
for Income Taxes” due to the uncertainty regarding the full utilization of our deferred tax asset.

During the fourth quarter of fiscal 2007, we concluded that it was appropriate to record a charge of
approximately $5,482,785 to establish a full valuation allowance against the tax benefits arising from losses in
our U.S operations. During the fourth quarter of fiscal 2007, the Company experienced significant losses due to
lower margins and the recording charges such as severance costs, promotions, slotting fee costs, inventory
provisions for discontinued product and legal and professional fees which negatively impacted U.S. pretax
income and caused the Company to be in the position as of December 31, 2007 of having cumulative losses in

33

recent years with respect to our U.S. operations. Although we do not expect to incur some of these costs in future
years, we do not know yet if these investments are an aberration and the success of our incremental investments
in the business remains unknown. In accordance with the relevant accounting guidance, we considered future
projections of U.S. pretax income as a material factor in our analysis of the realizability of our net U.S. deferred
tax assets, however, it was difficult to overcome the cumulative loss. The negative events mentioned above,
while not necessarily recurring in nature and maybe beneficial to our long-term future prospects, were material to
our decision to establish a full valuation allowance against our net U.S. deferred tax assets. This is due to the fact
that the relevant accounting guidance puts more weight on the negative objective evidence of cumulative losses
in recent years than the positive subjective evidence of future projections of pretax income. We continually
analyze the realizability of our deferred tax assets, but reasonably expect to continue to record a full valuation
allowance on future U.S. tax benefits until we sustain an appropriate level of taxable income through improved
U.S. operations and tax planning strategies. No valuation allowance was recorded for deferred tax assets recorded
in the Canadian subsidiary, as this subsidiary remains profitable.

We adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”) on

January 1, 2007. The adoption of FIN 48 did not impact the consolidated financial condition, results of
operations or cash flows. We believe that we have appropriate support for the income tax positions taken and to
be taken on our tax returns and that our accruals for tax liabilities are adequate for all open years based on an
assessment of many factors including past experience and interpretations of tax law applied to the facts of each
matter. Therefore, no reserves for uncertain income tax positions have been recorded for the year ended
December 31, 2007 pursuant to FIN 48.

Contingencies

We are subject to the possibility of losses from various contingencies. See Item 3.—Legal Proceedings.
Considerable judgment is necessary to estimate the probability and amount of loss from such contingencies. An
accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the
amount of loss can be reasonably estimated. We accrue a liability and charge to operations for estimated costs of
adjudication or settlement and unasserted claims existing as of the balance sheet date.

As of December 31, 2007, no loss contingencies have been accrued for any class action or derivative
lawsuits, as we are unable to predict the outcome of these cases. An adverse court determination in any of these
actions against us could result in significant liability and could have a material adverse effect on our business,
results of operations or financial condition, subject to the limits of our insurance policies.

Stock-based Compensation

We have adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS
123R), using the modified prospective transition method in 2006. Under this method, stock-based compensation
expense is recognized using the fair-value based method for all awards granted on or after the date of adoption.
We have adopted the Black-Scholes option pricing model to estimate fair value of each option grant.
Determining the fair value of share-based awards at the grant date requires judgment. In addition, judgment is
also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results
differ significantly from these estimates, stock-based compensation expense and our results of operations could
be materially impacted.

During the year ended December 31, 2007, the Board of Directors granted restricted stock awards of
140,000 shares under our 2002 Stock Option and Restricted Stock Plan, which was amended and approved by
our shareholders in May 2007. Under the fair value recognition provision of SFAS 123R, share-based
compensation cost for stock awards is measured at the grant date based on the fair value of the award and is
recognized as expense over the requisite service period.

34

We amortize stock-based compensation for both stock option grants and stock awards over a period of 42

months, with the first 1/7th, vesting six months from the grant date and the balance vesting in equal amounts
every six months thereafter.

On May 22, 2007, our Board of Directors determined that the following policy will apply to grants of stock

options under any of the Jones Soda Co. existing stock option plans: Without the prior approval of the Jones
Soda Co.’s shareholders, stock option grants under any of the Jones Soda Co. stock option plans will not be
repriced, replaced or regranted in the form of replacement options, stock awards, or by lowering the option
exercise price of a previously granted option.

Results of Operations for the Year Ended December 31, 2007

For ease of presentation in the following discussions of “Results of Operations” and “Liquidity and Capital
Resources”, we round amounts less than one million dollars to the nearest thousand dollars and amounts greater
than one million dollars to the nearest hundred thousand dollars.

Revenue

(Dollars in Thousands)

Year Ended
December 31,

2007

2006

2005

Gross Revenue (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Promotion allowances and slotting fees (2) . . . . . . . . . . . . . . .
Net Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$45,330
5,499
$39,831

$39,515
480
$39,035

$33,804
293
$33,511

2.0%

16.5%

22.1%

(1) Gross revenues, which excludes the impact of slotting fees and promotional allowances, is a non-GAAP
financial measure. The most directly comparable GAAP measure is net revenues. Under GAAP, slotting
fees and promotional allowances are recorded as a reduction of revenue in calculating net revenues. Gross
revenues is used by management to monitor operating performance, including in comparison to prior years,
as it allows evaluation of sales performance before the effects of any slotting fees and promotional items,
which can mask certain performance issues. Management believes that the presentation of gross revenues
provides useful information to investors because it allows a more comprehensive presentation of the
Company’s operating performance. However, gross revenues should not be used alone as an indicator of
operating performance in place of net revenues. Gross revenues may not be realized in the form of cash
receipts as slotting fees and promotional payments and allowances may be deducted from payments
received from customers. This table reconciles gross revenues to net revenues.

(2) Although the expenditures described in this line item are determined in accordance with GAAP and meet
GAAP requirements, the disclosure thereof does not conform with GAAP presentation requirements.
Additionally, the presentation of promotional allowances and slotting fees may not be comparable to similar
items presented by other companies. The presentation of promotional allowances and slotting fees facilitates
an evaluation of the impact thereof on the determination of net revenues and illustrates the spending levels
incurred to secure such sales.

Fiscal 2007 to 2006

For the year ended December 31, 2007, net revenues were approximately $39,831,000, an increase of
$796,000, or 2% over the approximately $39,035,000 in net revenues for the year ended December 31, 2006. The
increase in net revenues was primarily attributable to increased case sales through our DTR and DSD network, as
well as a higher overall price per case in 2007.

For the year ended December 31, 2007, our gross revenue was reduced by $5,499,000 on account of slotting

fees and promotion allowances, compared to a reduction of $480,000 for the year ended December 31, 2006.

35

During 2007, the total amount of slotting fees recorded as a reduction of revenue was approximately $2,707,000,
cash considerations and discounts amounted to approximately $738,000 and the remaining amount of
approximately $2,054,000 was for promotion allowances. The slotting fees were incurred to gain entry into the
CSD channel for our 12oz cans. We do not expect the same level of investments in slotting fees for 2008. We
expect promotional allowance spending to be flat for 2008 compared to 2007 levels.

The increase in revenues in our DTR channel for 2007 compared to 2006 was due to increased case sales of
Jones Soda 12-ounce bottles to Wal-Mart, Sam’s Club and shipments of 24C to WinCo Foods. This was offset by
the reduction of sales to Starbucks in 2007, as Starbucks stopped purchasing Jones Pure Cane Soda for its stores
in the U.S. in the second quarter of 2007.

Revenues in our DSD network increased for the year. Increased case sales in the Northeast, Southeast,
Northwest, Eastern Canada and Western Canada were partially offset by decreased case sales in the Midwest and
Southwest. The decreased case sales in the Midwest and Southwest were due to changeover of distributors and
soft market conditions.

Concentrate sales to National Beverage in 2007, included primarily sales of Jones Pure Cane Soda
concentrate, were primarily made during the first three quarters of 2007. There was very minimal shipment of
concentrate in the fourth quarter of 2007 due to promotion programs not generating expected sell through to
generate production orders from National Beverage. Concentrate case sales for the year ended December 31,
2007, include sales of concentrate of Jones Pure Cane Soda and Jones Energy to National Beverage Corp.
Concentrate case sales in fiscal 2006 consisted solely of sales during the second quarter of 2006 of Jones Energy
concentrate to National Beverage for sale through Costco and Jones Soda concentrate sales in the fourth quarter.
During 2007, we have significantly increased the number of retail stores carrying our 12-ounce can product. The
number of stores available to carry our product increased from approximately 1,400 stores in 2006 to
approximately 14,500 stores in 2007. We acquired this increased distribution through our sales and marketing
efforts in the CSD channel throughout the year and also through the payment of slotting fees.

In addition, revenues for the year ended December 31, 2007 include sales of 24C, our enhanced water

beverage, and sales under our Sponsorship Agreement with the Seattle Seahawks, for which we had no
comparable sales in fiscal 2006. In 2007, we commenced shipment of 24C to retailers and distributors in various
focus markets. We anticipate shipping out 24C to other markets in the U.S. and Canada in 2008.

Consolidated case sales of all products (including all finished products and concentrate sales through our
DSD, DTR and CSD channels) for the year ended December 31, 2007, expressed as 288-ounce equivalent cases,
were 5,796,000. This is an increase of 1,037,000 cases or 21.8% over total case sales for the year ended
December 31, 2006.

288-ounce equivalent case sales

Finished products case sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concentrate case sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,126,000
2,670,000

2,592,000
2,167,000

2,569,000
—

Total case sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,796,000

4,759,000

2,569,000

2007

2006

2005

Fiscal 2006 to 2005

For the year ended December 31, 2006, revenues were approximately $39,035,000, an increase of

$5,524,000, or 16.5% over the $33,511,000 in revenues for the year ended December 31, 2005. The increase in
revenues in fiscal 2006 over fiscal 2005 was due to increased revenue through our DTR channel offset by a

36

decrease in revenues in our DSD channel in 2006 compared to 2005. In addition to the above factor, the increase
in revenue for 2006 reflects sales of our Valentines packs (for which we had no similar promotion in 2005) and
sales of concentrate for our Jones Energy cans during the second quarter of 2006 and sales of concentrate for our
Jones Pure Cane Soda cans during the fourth quarter of 2006. We had no concentrate sales in the comparable
period in 2005.

The overall decrease in revenues in our DSD network in 2006 compared to 2005 was due primarily to

decreased case sales of Jones Soda and Jones Organics through our distributor network in the Northwest,
Midwest and Southwest U.S. These decreases were partially offset by slight increases in case sales in the
Northeast, Southeast, Eastern and Western Canada.

The increase in revenues in our DTR network was also due to our strategy of growing national retail
accounts. In 2006 we recorded increased revenues over fiscal 2005 from certain of our existing national retail
accounts including Target Corporation, Starbucks Coffee Company, Panera Bread Company, and Barnes &
Noble. Starbucks Coffee Company stopped ordering Jones Pure Cane Soda for its stores in the U.S. in the second
quarter of 2007.

Revenues for the fiscal 2006 year also reflect a price increase for certain products implemented during the

first quarter of 2006.

Consolidated case sales of all products (finished products and concentrate) for the year ended December 31,
2006 expressed as 288-ounce equivalent cases were 4,759,000, an increase of 85% or 2,190,000 cases from total
case sales of 2,569,000 in 2005. We had no case sales of concentrate in 2005.

Gross Profit

(Dollars in Thousands)

Year Ended
December 31,

2007

2006

2005

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit increase (decrease) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit as a percentage of revenue . . . . . . . . . . . . . . . . . . . . . . . .

$9,444

$15,305

$11,595

(38.3)%
23.7%

32.0%
39.2%

21.2%
34.6%

Fiscal 2007 to 2006

For the year ended December 31, 2007, gross profit decreased by approximately $5,861,000 or 38.3% as
compared to $15,305,000 in gross profit for the year ended December 31, 2006. For fiscal 2007, gross profit as a
percentage of revenue decreased to 23.7% from 39.2% for fiscal 2006.

The decrease in gross profit and gross profit as a percentage of revenue for the year ended December 31,
2007, was attributable to increased recording of slotting fees and promotion allowances which reduced revenues
by $5,499,000 and inventory provisions and write-downs of approximately $1,700,000 related to, among other
items, the transition from high fructose corn syrup to pure cane sugar production during the first three quarters
and the discontinuance of our 16-ounce Jones Soda cans and certain special packs and flavors in the fourth
quarter. Changes in product mix and sales mix in the DSD and DTR channels also contributed to the lower
margins as we shipped more product to our DTR customers where we receive lower gross margins than
shipments to our distributors.

We continued to experience higher co-packing costs for some of our products due to increases in energy

costs, co-packing fees, currency fluctuations with the Canadian dollar and freight costs. During 2007, we
continued to shift a portion of our bottling requirements to our U.S co-packers in an effort to reduce freight and
co-packing costs. We expect similar margin pressure from these factors in 2008.

37

Fiscal 2006 to 2005

For the year ended December 31, 2006, gross profit increased by approximately $3,710,000 or 32.0% over

the $11,595,000 in gross profit for the year ended December 31, 2005. For fiscal 2006, gross profit as a
percentage of revenue increased to 39.2% from 34.6% for fiscal 2005. The increase in gross profit was primarily
attributable to increased revenues and improved product mix. The increase in gross profit as a percentage of
revenue was primarily attributable to improved product mix and the overall increase in the average selling price
per case. Higher margins on the sales of concentrate for the Jones Energy 16-ounce, Jones 12-ounce Pure Cane
Soda and Valentines Packs improved the product mix and gross margin improvement.

In 2006, we continued to experience higher co-packing costs for some of our products due to increases in

energy costs, co-packing fees and freight costs. In response, we continued to shift a portion of our bottling
requirements to our U.S co-packers in an effort to reduce freight and co-packing costs.

Licensing Revenue

(Dollars in Thousands)

Licensing revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licensing revenue increase (decrease) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended
December 31,

2007

2006

2005

$ 334
(51.2)% (5.5)% 564.2%

$ 724

$684

Fiscal 2007 to 2006

Licensing revenue during the year ended December 31, 2007 was primarily due to our exclusive

arrangements with Big Sky Brands for Jones Soda Flavor Booster Hard Candy and remaining royalties on the
sale of remaining high fructose corn syrup inventory through Target Corporation. In contrast, for the year ended
December 31, 2006, licensing revenue consisted primarily of royalty payments on the sale of 12-ounce cans
pursuant to our exclusive licensing arrangement with Target Corporation that expired on December 31, 2006, and
to a lesser extent our licensing arrangement with Big Sky Brands.

For the year ended December 31, 2007, we received royalty payments under these arrangements of

approximately $334,000 as compared to licensing revenue of $684,000 for the year ended December 31, 2006, a
decrease of 51.2%. We do not expect licensing revenue to represent a material portion of our overall revenues in
2008.

Fiscal 2006 to 2005

For the year ended December 31, 2006, we received licensing revenue of approximately $684,000, a
decrease of $40,000, or 5.5%, over licensing revenue of $724,000 for the year ended December 31, 2005. The
majority of our licensing revenue was from our exclusive arrangement with Target Corporation to sell Jones
Soda in a 12-ounce can fridge pack. This agreement expired on December 31, 2006. During 2006, Target
licensing revenue decreased from comparable periods in the prior year due to reduced promotion spending. Some
of this decrease was offset by increased licensing revenue from Big Sky Brand for the Jones Soda Flavor Hard
Candy.

Licensing revenue also includes revenue from our license arrangements with Lime-Lite Marketing

Corporation for Jones Soda lip balms and The Kroger Co. for Jones Soda Frozen Soda Pops. We discontinued the
licensing agreement with Kroger for Jones Soda Frozen Soda Pops in 2006.

38

Total Operating Expenses

(Dollars in Thousands)

Year Ended
December 31,

2007

2006

2005

Promotion and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,857
$ 8,893

$ 8,480
4,750

$ 7,667
$ 3,347

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses increase . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses as a percentage of revenue . . . . . . . . . . . .

$20,750

$13,230

$11,014

56.8%
52.1%

20.1%
33.9%

31.4%
32.9%

Fiscal 2007 to 2006

Total operating expenses for the year ended December 31, 2007, were approximately $20,750,000, an
increase of $7,520,000 or 56.8% over operating expenses of $13,230,000 for the year ended December 31, 2006.
The increase in total operating expenses was primarily attributable to an increase in trade promotion expenses in
the CSD and DSD channels, costs related to the Seahawks Sponsorship agreement, increased salaries for new
employees in the sales group, recording of severance expense related to the termination of various employees,
depreciation, stock-based compensation expenses, and professional and legal fees.

For the year ended December 31, 2007, total operating expenses as a percentage of revenue increased to

52.1% from 33.9% in fiscal 2006. The increase in total operating expenses was primarily attributable to an
increase in trade promotion expenses in the CSD and DSD channels, costs related to the Seahawks Sponsorship
agreement, increased salaries for new employees in the sales group, recording of severance expense related to the
termination of various executives, depreciation, stock-based compensation expenses, and professional and legal
fees.

Changes in promotion and general and administrative expenses are explained in greater detail below.

Fiscal 2006 to 2005

Total operating expenses for the year ended December 31, 2006 were approximately $13,230,000, an
increase of $2,216,000 or 20.1% over operating expenses of $11,014,000 for the year ended December 31, 2005.
For fiscal 2006, total operating expenses as a percentage of revenue increased to 33.9% from 32.9% over the
comparable period in 2005. The increase in total operating expenses was primarily attributable to an increase in
promotion and selling expenses which was due primarily to the recording of stock-based compensation expense,
and to a lesser extent, an increase in general and administrative expense.

Promotion and Selling Expenses

(Dollars in Thousands)

Year Ended
December 31,
2006

2007

2005

Promotion and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Promotion and selling increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Promotion and selling as a percentage of revenue . . . . . . . . . . . . . . . . .

$11,857

$8,480

$7,667

39.8%
29.8%

10.6%
21.7%

28.8%
22.9%

Fiscal 2007 to 2006

Promotion and selling expenses for the year ended December 31, 2007, were $11,857,000, representing an

increase of $3,377,000 over promotion and selling expenses of $8,480,000 for the year ended December 31,
2006. Promotion and selling expenses as a percentage of revenue increased to 29.8% for the year ended

39

December 31, 2007, from 21.7% in fiscal 2006. The increase in promotion and selling expenses was due to an
increase in promotion and selling expenses for the CSD and DSD channels. Increased promotion expenses were
incurred in the CSD channel as we entered into this new category. DSD promotion increased due to the
introduction of 24C in various markets and overall increased spending on various DSD customers. We will
continue to make investments for these new channel and platform introductions in 2008 to increase penetration in
the marketplace. Expenses for the year also include salaries for various senior and regional sales and marketing
vice-presidents hired during 2007. We did not have comparable executive level positions and expenses in 2006.

The increase in promotion and selling expenses in 2007 was also due to hiring a national advertising agency

to develop an advertising campaign for our Jones Soda products. We expect to develop more integrated
marketing programs in 2008 to support the sell through of our products.

This was the first year we incurred expenses related to our Sponsorship Agreement with the Seahawks and
New Jersey Nets. A significant amount of the expenses incurred were for our Sponsorship Agreement with the
Seahawks and included amortization of the sponsorship fees, product development costs and marketing costs.
The agreement with the Nets is subject to the approval of NBA Properties, Inc. and will not be effective until
expressly approved by NBA Properties. As of the date of the filing of this Annual Report on Form 10-K, NBA
Properties has not approved the agreement.

At December 31, 2007, we had 46 employees in sales and marketing compared to 38 such employees at
December 31, 2006. The increase in hiring additional personnel also contributed significantly to the total increase
in promotion and selling expenses.

Fiscal 2006 to 2005

Promotion and selling expenses for the year ended December 31, 2006 were $8,480,000, an increase of
$813,000, or 10.6% over promotion and selling expenses of $7,667,000 for the year ended December 31, 2005.
Promotion and selling expenses as a percentage of revenue decreased to 21.7% for fiscal 2006 from 22.9% over
the comparable period in 2005. The increase in promotion and selling expenses for the year ended December 31,
2006 was attributable to an increase in consolidated case sales volume, an increase in salaries and wages,
commissions and related DSD sales team expenses associated with our expanding DSD and CSD sales force, as
well as expenses associated with the launch of the Jones Pure Cane Soda and Jones 24C product line and stock
compensation expense. At December 31, 2006 we had 38 employees in sales and marketing, compared to 29
such employees at December 31, 2005.

General and Administrative Expenses

(Dollars in Thousands)

Year Ended
December 31,

2007

2006

2005

General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative increase . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative as a percentage of revenue . . . . . . . . . . . . . .

$8,893

$4,750

$3,347

87.2%
22.4%

41.9%
12.2%

37.9%
10.0%

Fiscal 2007 to 2006

General and administrative expenses for the year ended December 31, 2007 were $8,893,000, representing

an increase of $4,143,000, or 87.2% compared to $4,750,000 for the year ended December 31, 2006. General and
administrative expenses as a percentage of revenue increased to 22.4% for the year ended December 31, 2007,
from 12.2% in fiscal 2006. The increase in general and administrative expenses was due to the recording of
severance expenses of approximately $1,147,300 for the termination of various employees, a significant increase

40

in legal fees due to defending against the class action and derivative lawsuits and increased negotiation costs of
various customer and supplier agreements, audit and consulting fees related to Sarbanes-Oxley Section 404
compliance, depreciation and amortization and stock-based compensation.

Fiscal 2006 to 2005

General and administrative expenses for the year ended December 31, 2006 were $4,750,000, an increase of

$1,402,000, or 41.9%, compared to $3,347,000 for the year ended December 31, 2005. General and
administrative expenses as a percentage of revenue increased to 12.2% for fiscal 2006 from 10.0% for 2005. The
increase in general and administrative expenses is primarily due to the recording of the stock-based
compensation expense of approximately $734,000 (compared to approximately $6,000 of stock-based
compensation expense in 2005) as well as increases in audit, consulting fees related to Sarbanes-Oxley
Section 404 compliance regarding internal controls and legal fees related to general counsel work and contract
negotiation for the DSD and CSD categories.

Interest / Other Income, Net

Fiscal 2007 to 2006

For the year ended December 31, 2007, interest/other income was approximately $1,498,000 compared to

interest/other income of approximately $913,000 in fiscal 2006. The increase in interest income/other income
was due to interest income from the funds we received from our June 2006 equity offering that were available for
the entire year and foreign currency translation gains. Interest income consists of interest income earned on cash
on-hand and short-term investments and increased cash from operations. Currently, cash and cash from
operations are invested in money market and short-term fixed-income instruments.

Fiscal 2006 to 2005

For the year ended December 31, 2006 interest/other income was approximately $913,000 compared to

approximately $29,000 in the same period in 2005. Interest income consisted of interest income earned on the
proceeds from our equity offering in June 2006 and increased cash from operations during the year.

Income Taxes

(Dollars in Thousands)

Year Ended
December 31,

2007

2006

2005

Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 903
$(2,155)
(22.35)% (25.6)% (3.9)%

$ (51)

Fiscal 2007 to 2006

For the year ended December 31, 2007, we recorded a valuation allowance on our deferred taxes in the forth

quarter and, thus, recorded a net income tax expense of $2,155,000 compared to an income tax benefit of
$903,000 in fiscal 2006.

The tax provision for the year ended December 31, 2007, is based on an expected annual effective tax rate

of (22.35)%, compared to a U.S. statutory rate of 34%. The actual effective tax rate for the year ended
December 31, 2007 differs from 2006 due primarily to the recording of the valuation allowance on the U.S.
deferred tax assets.

The tax provision for the year ended December 31, 2006, is based on an effective tax rate of (25.6) %

compared to a U.S. statutory rate of 34%.

41

Our effective tax rate is based on recurring factors, including the forecasted mix of income before taxes in

various jurisdictions, estimated permanent differences and the related effective tax rates in those jurisdictions. In
addition, our effective tax rate will change based on discrete or other nonrecurring events that may not be
predictable.

Fiscal 2006 to 2005

For the year ended December 31, 2006, we recorded an income tax benefit of approximately $903,000
compared to a tax expense of $51,000 in fiscal 2005. The tax benefit is primarily due to the reversal of the
valuation allowance on the deferred tax assets primarily to prior year’s tax losses.

Net Income (Loss)

Fiscal 2007 to 2006

Net loss for the year ended December 31, 2007 was approximately ($11,629,000) as compared to net
income of $4,574,000 for the year ended December 31, 2006. The decrease in net income was due to an increase
in slotting fees costs, promotion allowances and operating expenses. Operating expenses increased due to
increased trade promotion spending for CSD and DSD channels, increased expenses related to increased hiring in
sales, marketing and operations departments, depreciation and amortization and legal and compliance costs.

Fiscal 2006 to 2005

Net income for the year ended December 31, 2006 was approximately $4,574,000 compared to net income

of $1,283,000 for fiscal 2005. The increase in net income for the comparable year was due primarily to increased
revenues from sales in the DTR channels and the sale of concentrate for Jones Energy and Jones Pure Cane Soda.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments were approximately $27,793,000 as of December 31,
2007 compared to approximately $30,224,000 as of December 31, 2006. Net cash used in operating activities
was approximately $3,311,000 for the year ended December 31, 2007, primarily due to loss from earnings
partially offset by cash increases related to working capital items, such as accounts receivable, inventory and
accounts payable and accrued liabilities. Investing activities provided approximately $5,786,000 for the year
ended December 31, 2007, primarily due to sale of short-term investments offset by purchases of capital assets
and other assets. Net cash provided by financing activities was approximately $1,477,000 for the year ended
December 31, 2007, and consisted of primarily of proceeds from the exercise of stock options.

As of December 31, 2007, we had working capital of approximately $31,483,000 compared to working
capital of approximately $39,474,000 as of December 31, 2006. The decrease in working capital was primarily
due to cash used in operating activities of $3,311,000, due to the net loss for the year, reduced accounts
receivable and inventory balances, the purchase of capital assets and other assets of $630,000, offset by proceeds
from exercise of stock options of approximately $1,604,000.

We expect cash flows from operations, cash, cash equivalents, short-term investments and our revolving

line of credit with Key Bank to provide sufficient liquidity to meet our foreseeable cash requirements for
operations, projected working capital requirements, planned capital expenditures and commitments for at least
the next twelve months.

Accounts receivable decreased from December 31, 2006, to December 31, 2007, from approximately

$6,914,000 to approximately $4,475,000. This decrease was primarily due to decreased shipments of our
products in the fourth quarter of 2007. Accounts payable increased from December 31, 2006 to December 31,
2007 from approximately $5,447,000 to approximately $6,993,000. This increase was primarily due to increased
accruals for purchases of inventory, severance, professional fees and trade promotion expenses.

42

Various class action lawsuits and derivative suits have been filed against us and certain directors and
officers during the third quarter of 2007. We are unable to predict the outcome of these cases. An adverse court
determination in any of these actions against us could result in significant liability and could have a material
adverse effect on our business, results of operations or financial condition, subject to the limits of our insurance
policies.

On June 8, 2006, we completed an equity offering of 3,157,895 shares of common stock and received

approximately $28,077,000 in net proceeds after payment of offering expenses and commissions to our
placement agent and financial advisor. Net proceeds will continue to be used for working capital and general
corporate purposes, and to fund our growth objectives. Currently, the funds from the offering are invested in
money market and short term fixed income instruments.

On August 21, 2007, we entered into a Loan Agreement with Key Bank National Association, providing for
a revolving line of credit in principal amount of up to $15 million. The new credit facility replaces the $5 million
revolving line of credit with Greater Bay Business Funding, which expired by its terms on August 25, 2007, with
no borrowings outstanding upon the expiration of the term. The new credit facility matures on August 21, 2009.
The credit facility is not subject to any borrowing base computations or limitations, but does contain certain
financial covenants that the Company must meet. We must maintain a minimum Current Ratio (Current Assets to
Current Liabilities, each as defined in the Loan Agreement) of 2.00 to 1.00. Also, our ratio of Total Debt to
Tangible Net Worth (each as defined in the Loan Agreement) cannot exceed 1.00 to 1.00. At our election, the
interest rate on the credit facility will be based on either (a) Key Bank’s prime rate minus 1.50% per annum, or
(b) LIBOR plus 1.00% per annum. The credit facility is secured by a grant of a first priority security interest in
all of our assets. Concurrently with the Loan Agreement, on August 21, 2007, we entered into a Security
Agreement in favor of Key Bank. The Loan Agreement and Security Agreement contain customary
representation and warranties, affirmative and negative covenants and events of default. Upon an event of
default, outstanding amounts under the credit facility accrue interest at the prime rate plus 5.00%. As of the date
of this Annual Report, we were in compliance with the above financial covenants and we had not borrowed any
amounts under the credit facility.

Contractual Obligations and Off-Balance Sheet Arrangements

Our commitments as of December 31, 2007 with respect to known contractual obligations were as follows:

Contractual obligations

Total

Capital lease obligations . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . .
Capital expenditure commitments . . . . . . .

$

740,726
648,548
21,908,568
1,012,100

Payments Due by Period

Less than 1
year

$ 201,554
190,988
3,658,627
1,012,100

2-3 years

4-5 years

$

346,185
339,611
11,958,500
—

$ 192,987
117,949
4,227,350

—

More than
5 years

—
—

2,064,091

—

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,309,942

$5,063,269

$12,644,296

$4,538,286

2,064,091

Purchase obligations reflect commitments made by us to various suppliers of raw materials and finished
goods and commitments under our Sponsorship Agreements with the Seattle Seahawks and the New Jersey Nets,
which represent approximately 50% of the total purchase obligations. These obligations vary in terms and
commit us to payments from 2008 to 2016.

Capital expenditure commitments reflect the purchase of co-packing equipment related to the conversion to

pure cane sugar.

We have no off-balance sheet arrangements.

43

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

In the normal course of our business, our financial position is routinely subject to a variety of risks. The
principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we
are exposed are fluctuations in energy and commodity prices affecting the cost of raw materials (including, but
not limited to, increases in the price of aluminum for cans, resin for PET plastic bottles, as well as cane sugar),
and the limited availability of certain raw materials and co-packer capacity. We are also subject to market risks
with respect to the cost of commodities because our ability to recover increased costs through higher pricing is
limited by the competitive environment in which we operate. In addition, we are subject to interest rate risk on
our investment portfolio and foreign exchange risk due to our sales and co-packing operations in Canada. We are
also subject to other risks associated with the business environment in which we operate, including the
collectability of accounts receivable and obsolescence of inventory due to changes in market conditions or new
product initiatives. We believe that our exposure to these risks as of December 31, 2007 is not material.

We do not use derivative financial instruments to protect ourselves from fluctuations in interest rates or
foreign currency fluctuations, and do not hedge against fluctuations in commodity prices. We do not use hedging
agreements or alternative instruments to manage the risks associated with securing sufficient ingredients or raw
materials, including, but not limited to, cans, PET plastic bottles, glass, labels, pure cane sugar or packaging
arrangements, or protecting against shortages of raw materials.

With respect to foreign currency risk, the functional currency for substantially all of our operations is the

U.S. dollar. However, we held aggregate cash and operating assets in Canadian dollars valued at approximately
U.S. $3,697,000 as of December 31, 2007.

At December 31, 2007, the majority of our debt consisted of fixed rate debt under our capital leases and we
have no long term debt. During the year ended December 31, 2007, we did not make any draws on our line of credit.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Item 15 for an index to the consolidated Financial Statements and supplementary data required by this

Item, which are included as a separate section beginning on page F-1 and which are incorporated herein by
reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Disclosure Control and Procedures

Under the supervision and with the participation of the Company’s management, including our Interim
Chief Executive Officer and our Chief Financial Officer, the Company has evaluated the effectiveness of its
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as
of December 31, 2007, the end of the period covered by this report. Based upon that evaluation, our Interim
Chief Executive Officer and our Chief Financial Officer have concluded that these disclosure controls and
procedures were not effective as of December 31, 2007. The basis for this determination was that, as discussed
below, we have identified a material weakness in our internal control over financial reporting, which we view as
an integral part of our disclosure controls and procedures.

44

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our
management, including our Interim Chief Executive Officer and our Chief Financial Officer, we conducted an
evaluation of our internal control over financial reporting as of December 31, 2007, based on the framework in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”) of the
Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated
Framework, we have identified a material weakness in our internal control over financial reporting. As a result,
our management has concluded that our internal control over financial reporting was not effective as of
December 31, 2007.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial

reporting such that there is a reasonable possibility that a material misstatement of our annual or interim
consolidated financial statements will not be prevented or detected on at timely basis.

Management has identified the following material weakness: The Company has limited accounting
personnel with sufficient expertise, accounting knowledge and training in generally accepted accounting
principles and financial reporting requirements. Specifically, we lack sufficient personnel to anticipate, identify,
resolve and review complex accounting issues and to complete a timely review of the financial statements. This
deficiency resulted in adjustments to the financial statements for stock based compensation and the recording of
transactions associated with complex agreements and also resulted in adjustments to financial statement
presentation. This control deficiency, which is pervasive in impact, did not result in any material adjustments to
the financial statements: there is a reasonable possibility that a material misstatement of the annual or interim
financial statements would not be prevented or detected on a timely basis.

Management has discussed the material weaknesses and related corrective actions with the Audit
Committee and our independent registered public accounting firm. Other than as described above, we are not
aware of any other material weakness in our internal control over financial reporting. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our independent registered public accounting firm, KPMG LLP, has issued an attestation report on the
Company’s internal control over financial reporting. The attestation report is included on page 47 of this report.

The Remediation Plan and Changes in Internal Control Over Financial Reporting

There were no changes in internal control over financial reporting during the fourth quarter that has
materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

However, as discussed above, we have identified a material weakness in our internal control over financial

reporting. Although we have not fully remediated the material weakness in our internal control over financial
reporting as of December 31, 2007, we have made and will continue to make, improvements to our policies,
procedures, systems and staffing who have significant roles in internal control to address the internal control
deficiencies identified by us and our independent registered public accounting firm. Consequently, management
has initiated the following remediation steps to address the material weakness described above:

•

•

The Company will continue to add additional accounting and finance staff with the commensurate
knowledge, experience and training necessary to complement the current staff in the financial reporting
functions, in addition to the staff hired in 2007.

In the first quarter of 2008, the Company hired a Manager of Legal Affairs to support all contract
analysis and SEC compliance filings

45

•

•

The Company also hired in the first quarter of 2008 an experienced Manager of SEC and GAAP
reporting to support and prepare all SEC filings in 2008.

In the first half of 2008, the Company intends to hire additional experienced accounting personnel with
expertise in generally accepted accounting principles and regulatory financial reporting requirements.

• We will continue to focus on improving the skill sets of our accounting and finance staff through

education and training.

•

The Company has previously engaged qualified professional consultants where the Company did not
have sufficient internal resources, with management reviewing both the inputs and outputs of the
services provided. The Company will continue to seek employees for its accounting and finance staff
with expertise with appropriate expertise and, as necessary, will continue to engage qualified
professional consultants to supplement the Company’s accounting and finance staff.

46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Jones Soda Co.:

We have audited Jones Soda Co.’s internal control over financial reporting as of December 31, 2007, based

on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Jones Soda Co.’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.

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

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or
interim financial statements will not be prevented or detected on a timely basis. A material weakness related to
limited accounting personnel with expertise in generally accepted accounting principles and financial reporting
requirements has been identified and included in management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Jones Soda Co. and subsidiaries as of December 31, 2007 and
2006, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31, 2007. This material weakness was
considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated
financial statements, and this report does not affect our report dated March 13, 2008, which expressed an
unqualified opinion on those consolidated financial statements.

47

In our opinion, because of the effect of the aforementioned material weakness on the achievement of the

objectives of the control criteria, Jones Soda Co. has not maintained effective internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG LLP

Chartered Accountants
Vancouver, Canada
March 13, 2008

48

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Information regarding our Code of Ethics, as well as a listing of and certain information about our executive
officers as of March 17, 2008, is included in Item 1 of Part I, and that information is incorporated by reference herein.

The other information called for by Part III, Item 10, is included in our proxy statement relating to our 2008
annual meeting of shareholders, and is incorporated herein by reference to the sections captioned “Directors and
Executive Officers,” “Section 16 Beneficial Ownership Reporting Compliance,” “Board Meetings and
Committees,” and “Audit Committee”. The proxy statement will be filed within 120 days of December 31, 2007,
our fiscal year end.

ITEM 11. EXECUTIVE COMPENSATION.

Information called for by Part III, Item 11, is included in our proxy statement relating to our 2008 annual

meeting of shareholders, and is incorporated herein by reference to the sections captioned “Executive
Compensation,” “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Director
Compensation” and “Compensation Committee Interlocks and Insider Participation.” The proxy statement will
be filed within 120 days of December 31, 2007, our fiscal year end.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED SHAREHOLDER MATTERS.

Certain information called for by Part III, Item 12, is included in our proxy statement relating to our 2008

annual meeting of shareholders, and is incorporated herein by reference to the section captioned “Principal
Shareholders.” The proxy statement will be filed within 120 days of December 31, 2007, our fiscal year end.

Equity Compensation Plan Information

The following table gives information as of December 31, 2007, the end of the most recently completed
fiscal year, about shares of common stock that may be issued under our 1996 Stock Option Plan, 2002 Stock
Option and Restricted Stock Plan and 2007 Employee Stock Purchase Plan, all of which have been approved by
shareholders.

Plan Category

Equity Compensation Plans Approved by Shareholders . . . .
Equity Compensation Plans Not Approved by

(a)
No. of
Shares to be
Issued Upon
Exercise of
Outstanding
Stock
Options,
Warrants and
Rights

1,072,736

Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

N/A

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,072,736

(b)
Weighted
Average
Exercise
Price of
Outstanding
Stock
Options,
Warrants and
Rights

$8.91

N/A

$8.91

(c)

Number of Securities
Remaining available
for Issuance Under
Equity
Compensation Plans
(excluding Securities
Reported in Column
(a))

1,668,572(1)

N/A

1,668,572(1)

(1)

Includes 1,668,572 shares available for issuance under the 2002 Stock Option and Restricted Stock Plan,
under which we may grant restricted stock awards in addition to stock options. Each non-employee director

49

receives an annual stock option grant of up to 20,000 shares of common stock pursuant to a program
administered under our 2002 Stock Option and Restricted Stock Plan. Also includes 300,000 shares
available for issuance under the 2007 Employee Stock Purchase Plan. The 1996 Stock Option Plan has been
terminated and no additional options may be granted under the plan, although currently outstanding options
will continue in accordance with their terms

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE.

Information called for by Part III, Item 13, is included in our proxy statement relating to our 2008 annual

meeting of shareholders, and is incorporated herein by reference to the sections captioned “Related-Party
Transactions,” “Board Meetings and Committees” “and “Directors and Executive Officers.” The proxy statement
will be filed within 120 days of December 31, 2007, our fiscal year end.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information called for by Part III, Item 14, is included in our proxy statement relating to our 2008 annual
meeting of shareholders and is incorporated herein by reference to the sections captioned “Policy for Approval of
Audit and Permitted Non-Audit Services” and “Audit and Related Fees.” The proxy statement will be filed
within 120 days of December 31, 2007, our fiscal year end.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

Documents filed as part of this Report are as follows:

1.

Financial Statements: The following consolidated financial statements, related notes and report of
independent registered public accounting firm are incorporated by reference into Item 8 of Part II of this
2007 Annual Report on Form 10-K:

Page

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-2

Consolidated Financial Statements:

Consolidated balance sheets as of December 31, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated statements of operations for the years ended December 31, 2007, 2006 and 2005 . . . . . .

Consolidated statements of shareholders’ equity and comprehensive income for the years ended

December 31, 2007, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated statements of cash flows for the years ended December 31, 2007 and 2006 . . . . . . . . . . .

Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-3

F-4

F-5

F-6

F-7

2.

Financial Statement Schedules: All schedules have been omitted because they are not applicable or not
required, or the required information is included in the financial statements or notes thereto.

50

3.

Exhibits:

3.1

Articles of Incorporation of Jones Soda Co. (Previously filed with, and incorporated herein by
reference to, Exhibit 3.1 to our annual report on Form 10-KSB for the fiscal year ended
December 31, 2000, filed on March 30, 2001; File No. 333-75913.)

3.2

Bylaws of Jones Soda Co. (Previously filed with, and incorporated herein by reference to, Exhibit 3.2

to our annual report on Form 10-KSB for the fiscal year ended December 31, 2000, filed on
March 30, 2001; File No. 333-75913.)

4.1

Escrow Agreement dated November 15, 2002, between Jones Soda Co., Pacific Corporate Trust

Company, and the Shareholders named therein. (Previously filed with, and incorporated herein by
reference to, our definitive proxy statement on Schedule 14A, filed on May 24, 2002; File No.
000-28820.)

10.1++

Bottling Agreement dated January 1, 2002, between Jones Soda Co. and Polaris Water Company Inc.
(Previously filed with, and incorporated herein by reference to, Exhibit 10.1 to our annual report
on Form 10-KSB for the year ended December 31, 2001, filed on April 1, 2002; File No.
333-75913.)

10.2++

Bottling Agreement dated December 13, 2001, between Jones Soda Co. and J. Lieb Foods Inc.

(Previously filed with, and incorporated herein by reference to, Exhibit 10.2 to our annual report
on Form 10-KSB for the year ended December 31, 2001, filed on April 1, 2002; File No.
333-75913.)

10.3++

Supply Agreement dated January 1, 2004, between Jones Soda Co. and Zuckerman-Honickman, Inc.
(Previously filed with, and incorporated herein by reference to, the Company’s quarterly report on
Form 10-QSB for the quarter ended Jun 30, 2004, filed on August 6, 2004; File No. 000-28820.)

10.4++

Amendment No. 1 to Supply Agreement, dated June 27, 2004, between Jones Soda Co. and

Zuckerman-Honickman, Inc. (Previously filed with, and incorporated herein by reference to, the
Company’s quarterly report on Form 10-QSB for the quarter ended June 30, 2004, filed on
August 6, 2004; File No. 000-28820.)

10.5++

Distributor Agreement dated September 12, 2001, between Jones Soda Co. and Jones Soda of

Michigan LLC. (Previously filed with, and incorporated herein by reference to, Exhibit 10.4 to our
annual report on Form 10-KSB for the year ended December 31, 2001, filed on April 1, 2002; File
No. 333-75913.)

10.6

Lease Agreement dated September 15, 2006, between R2H2 LLC and Jones Soda Co. (Previously

filed with, and incorporated herein by reference to, Exhibit 10.1 to our current report on Form 8-K,
filed on September 22, 2006; File No. 000-28820.)

10.7

Guaranty, dated June 25, 2006, by Jones Soda Co. in favor of CAPCO Financial Company.

(Previously filed with, and incorporated herein by reference to, Exhibit 10.2 to our current report
on Form 8-K, filed on June 30, 2006; File No. 000-28820.)

10.8

Contract of Sale Security Agreement, dated June 25, 2006, between Jones Soda (USA), Inc. and

CAPCO Financial Company, as amended by Amendment No. 1, dated June 25, 2006. (Previously
filed with, and incorporated herein by reference to, Exhibit 10.1 to our current report on Form 8-K,
filed on June 30, 2006; File No. 000-28820.)

10.9*

Employment Agreement with Peter M. van Stolk, dated effective December 1, 2004. (Previously

filed with, and incorporated herein by reference to, Exhibit 10.1 to our current report on Form 8-K
dated February 14, 2005, filed on February 16, 2005; File No. 000-28820.)

51

10.10*

Memorandum of Understanding, dated December 5, 2007, between Jones Soda Co. and Peter van

Stolk. (Previously filed with, and incorporated herein by reference to, Exhibit 10.1 to our current
report on Form 8-K, filed on December 5, 2007; File No. 000-28820.)

10.11*

Separation Agreement and Release, dated February 13, 2008, by and between the Company and

Peter M. van Stolk. (Previously filed with, and incorporated herein by reference to, Exhibit 10.1
to our current report on Form 8-K, filed on February 20, 2008; File No. 000-28820)

10.12*

Urban Juice & Soda Co. Ltd. 1996 Stock Option Plan. (Previously filed with, and incorporated

herein by reference to, Exhibit 10.10 to our annual report on Form 10-KSB for the year ended
December 31, 2001, filed on April 1, 2002; File No. 333-75913.)

10.13*

Jones Soda Co. 2002 Stock Option and Restricted Stock Plan. (Previously filed with, and

incorporated herein by reference to, Appendix B to our definitive proxy statement for our 2007
annual meeting of shareholders, filed on April 18, 2007, File No. 000-28820.)

10.14++

10.15++

10.16++

Supply Agreement with Panera, LLC, dated May 28, 2003. (Previously filed with, and incorporated
herein by reference to, Exhibit 10.1 A to our quarterly report on Form 10-QSB for the quarter
ended March 31, 2005, filed on May 16, 2005; File No. 000-28820.)

First Amendment to Supply Agreement with Panera, LLC, dated May 27, 2004. (Previously filed
with, and incorporated herein by reference to, Exhibit 10.1B to our quarterly report on Form
10-QSB for the quarter ended March 31, 2005, filed on May 16, 2005; File No. 000-28820.)

Second Amendment to Supply Agreement with Panera, LLC, dated April 1, 2005. (Previously filed
with, and incorporated herein by reference to, Exhibit 10.1C to our quarterly report on Form 10-
QSB for the quarter ended March 31, 2005, filed on May 16, 2005; File No. 000-28820.)

10.17++

Co-Packers® and Distribution Agreement, dated September 18, 2006, among Jones Soda Co.,

National Retail Brands Inc. and Shasta Beverages Inc. (Previously filed with, and incorporated
herein by reference to, Exhibit 10.1 to our quarterly report on Form 10-Q for the quarter ended
September 30, 2006, filed on November 14, 2006; File No. 000-28820.)

10.18*

10.19++

Employment Agreement with Hassan Natha, dated effective January 1, 2007. (Previously filed with,
and incorporated herein by reference to, Exhibit 10.1 to our current report on Form 8-K, filed
March 6, 2007; File No. 000-28820.)

Sponsorship Agreement among Jones Soda Co., Football Northwest, LLC (d/b/a Seattle Seahawks)
and First & Goal, Inc., entered into May 22, 2007. (Previously filed with, and incorporated herein
by reference to, Exhibit 10.1 to our quarterly report on Form 10-Q, filed August 9, 2007; File No.
000-28820.)

10.20*

Employment offer letter with Peter Burns, dated April 3, 2007. (Previously filed with, and

incorporated herein by reference to, Exhibit 10.2 to our quarterly report on Form 10-Q, filed
August 9, 2007; File No. 000-28820.)

10.21++

Sponsorship and Beverage Availability Agreement among Brooklyn Arena, LLC, New Jersey

Basketball, LLC and Jones Soda Co., dated effective October 29, 2007. (Previously filed with,
and incorporated herein by reference to, Exhibit 10.2 to our quarterly report on Form 10-Q, filed
November 9, 2007; File No. 000-28820.)

10.22

Loan Agreement, dated August 21, 2007, between Jones Soda Co. and KeyBank National

Association. (Previously filed with, and incorporated herein by reference to, Exhibit 10.1 to our
current report on Form 8-K, filed August 27, 2007; File No. 000-28820.)

10.23

Commercial Security Agreement, dated August 21, 2007, by Jones Soda Co. for the benefit of

KeyBank National Association. (Previously filed with, and incorporated herein by reference to,
Exhibit 10.2 to our current report on Form 8-K, filed August 27, 2007; File No. 000-28820.)

52

10.24*

Form of Stock Option Agreement under 2002 Stock Option and Restricted Stock Plan (Filed

herewith.)

10.25*

Form of Restricted Stock Purchase Agreement under 2002 Stock Option and Restricted Stock Plan.

(Previously filed with, and incorporated herein by reference to, Exhibit 10.1 to our quarterly report
on Form 10-Q, filed November 9, 2007; File No. 000-28820.)

10.26*

Jones Soda Co. 2007 Employee Stock Purchase Plan. (Previously filed with, and incorporated herein
by reference to, the Company’s definitive proxy statement on Schedule 14A, filed on April 18,
2007; File No. 000-28820.)

10.27*

Compensation for Directors of Jones Soda Co. (Filed herewith.)

10.28*

Employment Letter, dated January 3, 2008, between the Company and Joth Ricci. (Previously filed

with, and incorporated herein by reference to, Exhibit 99.2 to our current report on Form 8-K, filed
January 9, 2008; File No. 000-28820)

21.1

Subsidiaries of Jones Soda Co. (Previously filed with, and incorporated herein by reference to,

Exhibit 21.1 to our annual report on Form 10-KSB for the year ended December 31, 2002, filed on
March 28, 2003; File No. 000-28820.)

23.1

31.1

Consent of KPMG LLP (Filed herewith.)

Certification by Stephen C. Jones, Interim Chief Executive Officer, pursuant to Rule 13a-14(a),

pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)

31.2

Certification by Hassan N. Natha, Chief Financial Officer, pursuant to Rule 13a-14(a), pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)

32.1

Certification by Stephen C. Jones, Interim Chief Executive Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)

32.2

Certification by Hassan N. Natha, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as

adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)

* Management contract or compensatory plan or arrangement.
++ Portions of the marked exhibits have been omitted pursuant to requests for confidential treatment filed with

the SEC.

53

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly

caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

JONES SODA CO.

By:

/s/ STEPHEN C. JONES

Stephen C. Jones
Interim Chief Executive Officer

Dated: March 17, 2008

In accordance with 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 and on the dates indicated.

Signature

Capacities

Date

/s/ STEPHEN C. JONES

Stephen C. Jones

Interim Chief Executive Officer and
Director (Principal Executive
Officer)

March 17, 2008

/s/ HASSAN N. NATHA

Chief Financial Officer (Principal

March 17, 2008

Hassan N. Natha

Financial and Accounting Officer)

/s/ SCOTT BEDBURY

Chairman

March 14, 2008

Scott Bedbury

/s/ PETER M. VAN STOLK

Director

March 17, 2008

Peter M. van Stolk

/s/ RICHARD S. EISWIRTH, JR.

Director

March 17, 2008

Rick Eiswirth, Jr.

/s/ MICHAEL M. FLEMING

Director

March 17, 2008

Michael M. Fleming

/s/

JOHN J. GALLAGHER, JR.
John J. Gallagher, Jr.

Director

March 17, 2008

/s/ ALFRED W. ROSSOW, JR.

Director

March 17, 2008

Alfred W. Rossow, Jr.

54

JONES SODA CO.

2007 FORM 10-K ANNUAL REPORT

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-2

Consolidated Financial Statements:

Consolidated balance sheets as of December 31, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated statements of operations for the years ended December 31, 2007, 2006 and 2005 . . . . . .

Consolidated statements of shareholders’ equity and comprehensive income for the years ended

December 31, 2007, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated statements of cash flows for the years ended December 31, 2007 and 2006 . . . . . . . . . . .

Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-3

F-4

F-5

F-6

F-7

Page

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Jones Soda Co.:

We have audited the accompanying consolidated balance sheets of Jones Soda Co. and subsidiaries as of
December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.

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

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

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), Jones Soda Co.’s internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)”), and our report dated March 13, 2008 expressed an
adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Chartered Accountants
Vancouver, Canada
March 13, 2008

F-2

JONES SODA CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2007 and 2006

2007

2006

Current assets:

ASSETS

Cash and cash equivalents (note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments (note 3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable (note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory (note 5)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax asset (note 13)
Prepaid expenses and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 17,857,805
9,935,400
4,474,559
5,745,888
—
822,620

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax asset (note 13)
Capital assets (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets (note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets (note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38,836,272
117,850
1,078,916
1,418,516
173,040

$13,905,870
16,318,510
6,914,422
5,783,067
1,507,145
712,690

45,141,704
427,993
756,618
1,414,138
211,931

$ 41,624,594

$47,952,384

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,993,226
203,379
156,847

$ 5,446,953
150,141
70,471

Capital lease obligations, less current portion (note 10) . . . . . . . . . . . . . . . . . . . . . .
Commitments and Contingencies (note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity (note 11):

Common stock:

7,353,452
474,226
—

5,667,565
15,329
—

Authorized: 100,000,000 common stock, no par value Issued and

outstanding: 26,251,183 (2006—25,637,491) common stock . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deficit

43,855,928
3,990,711
129,471
(14,179,194)

41,890,777
2,832,865
96,016
(2,550,168)

33,796,916

42,269,490

$ 41,624,594

$47,952,384

See accompanying notes to consolidated financial statements.

F-3

JONES SODA CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2007, 2006 and 2005

2007

2006

2005

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 39,830,933
30,387,170

$39,035,125
23,730,059

$33,511,053
21,915,930

Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licensing revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,443,763
334,252

15,305,066
684,256

11,595,123
724,183

Operating expenses (1):

Promotion and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,856,959
8,893,307

8,480,088
4,750,102

7,666,733
3,347,615

9,778,015

15,989,322

12,319,306

20,750,266

13,230,190

11,014,348

Earnings (loss) before interest income and incomes taxes . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest/other income, net

(10,972,251)
1,498,452

2,759,132
912,557

1,304,958
28,600

Earnings (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) (note 13)

(9,473,799)

3,671,689

1,333,558

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(293,116)
(1,862,111)

(241,741)
1,144,491

(2,155,227)

902,750

(50,532)
—

(50,532)

Earnings (loss) for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(11,629,026) $ 4,574,439

$ 1,283,026

Earnings (loss) per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

(0.45) $
(0.45) $

0.19
0.19

$
$

0.06
0.06

Weighted average number of common stock:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25,977,832
25,977,832

23,890,313
24,629,318

21,412,214
22,593,127

(1)

Includes non-cash stock-based compensation as follows:

Promotion and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

524,950
993,855

$

323,085
734,042

$ 1,518,805

$ 1,057,127

$

$

—
5,745

5,745

See accompanying notes to consolidated financial statements.

F-4

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S

JONES SODA CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2007, 2006 and 2005

Cash flows from (used in) operating activities:

(Loss) earnings for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Items not involving cash:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation (note 11)
. . . . . . . . . . . . . . . .
Excess tax benefit from exercise of stock options . . . . . .

Changes in assets and liabilities:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . .
Changes related to shareholders’ equity accounts . . . . . .

2007

2006

2005

$(11,629,026) $ 4,574,439

$ 1,283,026

1,015,445
1,862,111
1,518,805
—

2,439,863
37,179
(154,753)
53,238
1,546,273
—

256,046
(1,144,491)
1,057,127
(1,109,458)

(3,214,428)
(1,088,854)
(566,076)
150,141
1,543,300
198,591

220,283
—
5,745
—

(865,112)
(1,143,618)
253,165

—

1,058,051

—

Net cash (used in) from operating activities . . . . . . .

(3,310,865)

656,337

811,540

Cash flows from (used in) investing activities:

Short-term investments—net
. . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of capital assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,416,565
(317,230)
(313,264)

—

(16,318,510)
(313,556)
(1,414,138)
(174,594)

Net cash from (used) in investing activities . . . . . . .

5,786,071

(18,220,798)

Cash flows from (used in) financing activities:

Proceeds from exercise of options . . . . . . . . . . . . . . . . . . . . . .
Repayment of capital lease obligations . . . . . . . . . . . . . . . . . . .
Repayment under line of credit . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from PIPE (note 11)
. . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from exercise of stock options . . . . . . . . . .

1,604,192
(127,463)

—
—
—

1,223,951
(116,529)

—

28,077,350
1,109,458

Cash flows from financing activities . . . . . . . . . . . . .

1,476,729

30,294,230

Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year

3,951,935
13,905,870

12,729,769
1,176,101

—
(50,871)
—
(42,072)

(92,943)

710,137
(105,881)
(480,285)

—
—

123,971

842,568
333,533

Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . .

$ 17,857,805

$ 13,905,870

$ 1,176,101

Supplemental disclosure of non-cash financing and investing

activities:

Bad debt recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets acquired under capital leases . . . . . . . . . . . . . . . . . . . . .

$

— $

672,736

7,633
—

Cash paid (received) during year for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (1,684,791) $
591,977

9,965
135,134

$

$

6,951
131,152

20,000
55,373

See accompanying notes to consolidated financial statements.

F-6

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2007 and 2006

1. Nature and continuance of operations:

Jones Soda Co. develops, produces, markets, licenses and distributes premium beverages and related
products. Our primary product lines include the brands Jones Soda Co.®, Jones Pure Cane Soda™, Jones 24C™,
an enhanced water beverage, Jones Organics™, a ready to drink organic tea, Jones Energy, a high energy drink,
Whoop Ass Energy Drink®, a high energy drink, and Jones Naturals®, a non-carbonated juice and tea drink. We
have two operating subsidiaries, Jones Soda Co. (USA) Inc. and Jones Soda (Canada) Inc., as well as two
non-operating subsidiaries, Whoopass USA Inc and myJones.com.

2. Significant accounting policies:

(a) Basis of presentation:

The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All material inter-company transactions between the Company and its subsidiaries have been
eliminated in consolidation.

The Company, in accordance with Staff Accounting Bulletin No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatement in Current Year Financial Statements” (SAB 108), adjusted
its beginning retained earnings for the fiscal year 2006 in the accompanying financial statements. See Note 14 for
additional information on the adoption of SAB 108.

(b) Use of estimates:

The preparation of the consolidated financial statements requires management to make a number of
estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions
include, but are not limited to, the inventory valuation, depreciable lives of capital assets, prepaid assets,
intangible assets, valuation allowances for receivables, stock-based compensation expense, income taxes,
valuation allowance for deferred income tax assets, and contingencies. Actual results could differ from those
estimates.

(c) Foreign currency translation:

Except where otherwise stated, these consolidated financial statements are presented in U.S. dollars. All

foreign exchange gains or losses, including those arising from translating the net monetary assets of the
Company’s Canadian operations to the Company’s functional currency of US dollars, have been included in
income. For the twelve month period ended December 31, 2007, the Company incurred a foreign exchange gain
(loss) of $68,542 (2006—$58,122, 2005—$3,835).

(d) Cash and cash equivalents:

The Company considers all short-term investments with a maturity date at purchase of three months or less

to be cash equivalents.

(e) Short – term investments:

Short-term investments carried at fair value have a maturity of greater than three months to twelve months

at the date of purchase. The estimate of fair value is based on publicly available market information or other
estimates determined by management and classified as available-for-sale securities.

F-7

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

(f) Concentration of Risk:

The Company maintains cash and cash equivalents with various major financial institutions, which at times

are in excess of the amount insured. In addition, the Company’s marketable securities and money market
accounts are principally held at one brokerage company.

(g)

Inventories:

Inventories consist of raw materials and finished goods and are stated at the lower of cost and estimated net
realizable value and include adjustments for estimated obsolescence. Cost is determined principally using actual
cost on a first-in first-out basis. The provisions for excess inventory are based on estimated forecasted usage of
inventories. A significant change in demand for certain products as compared to forecasted amounts may result
in recording additional provisions for obsolete inventory. Provisions for obsolete are recorded as cost of goods
sold.

(h) Capital assets:

Property and equipment is recorded at cost and depreciated on the declining balance basis over the estimated

useful lives of the assets as follows:

Asset

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles and Office and computer equipment . . . . . . . . . . . . . . . . . . . .
Equipment under capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Rate

20% to 30%
30%
Lease term which
approximates its
useful life

Depreciation expense is generally classified within general and administrative expense on our consolidated

statements of operations. Other asset amortization is classified as “Cost of goods sold”.

(i)

Intangible assets:

The Company’s intangible assets include costs associated with securing trademarks, acquired distribution

rights and patents for the Company’s products and are amortized on a straight-line basis over 3 to 10 years.

(j) Other assets:

Other assets include leased equipment installed at co-packing and sponsorship partner facilities. This

equipment is recorded at cost and amortized over 3 to 5 years.

(k)

Impairment of long-lived assets and long-lived assets to be disposed of:

Long-lived assets, which include capital assets, intangible assets and other assets, are reviewed for

impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of the assets to future undiscounted net cash flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. The Company has not recorded any long-lived asset impairments.

F-8

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

(l) Revenue recognition:

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales

price is fixed or determinable and collectability is reasonably assured.

With respect to our independent distributor direct store delivery (“DSD”) and national retail account direct
to retail (“DTR”) channels, our products are sold on various terms for cash or on credit terms. Our credit terms,
which are established in accordance with local and industry practices, typically require payment within 30 days
of delivery. We recognize revenue upon receipt of our products by our distributors and retail customers in
accordance with written sales terms, net of provisions for discounts and allowances. All sales to distributors and
customers are final sales and we have a “no return” policy. However, in limited instances, due to credit or
product quality issues or distributor terminations, we may take back product.

With respect to our 12-ounce can sales in the carbonated soft drink (“CSD”) channel, we recognize revenue
from the sale of concentrate to National Beverage Corp, on a gross basis, using the criteria outlined in Emerging
Issues Task Force Issue (“EITF”) No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent ,
upon receipt of concentrate by National Beverage, net of provisions for discounts and promotion allowances. The
selling price and terms of sale of concentrate to National Beverage are determined in accordance with our
manufacturing and distribution agreement with them. Our credit terms from the sale of concentrate typically
require payment within 30 days of delivery. All sales of concentrate to National Beverage are final sales and we
have a “no return” policy with them. However, in limited instances, due to product quality or other custom
package commitments, we may take back product.

Licensing revenue is recorded when we receive a sale confirmation from the third party.

We account for slotting fees or similar arrangements in accordance with EITF No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). This incentive
is recognized as a reduction in revenue when payment is made to the customer (or at the time we have incurred
the obligation, if earlier) unless we receive a benefit over a period of time and we meet certain other criteria, such
as retailer performance, recoverability and enforceability, in which case the incentive is recorded as an asset and
is amortized as a reduction of revenue over the term of the arrangement. Typically, we amortize slotting fees over
a period of 12 months. We evaluate slotting fees recoverability on a quarterly basis.

Slotting fees, cash consideration and promotion allowances that we pay to customers or distributors are
accounted for as a reduction of revenue when expensed or amortized in our statements of operations. For the year
ended December 31, 2007, our revenue was reduced by $5,499,802 (2006—$479,744, 2005—$293,295) on
account of slotting fees, promotion allowances and cash considerations.

We entered into Sponsorship Agreements with Football Northwest LLC (d/b/a Seattle Seahawks) and

First & Goal, Inc. on May 22, 2007 and Brooklyn Arena LLC and New Jersey Nets Basketball, LLC on
November 8, 2007 that provide us with the exclusive beverage rights for certain soft drinks as well as signage,
advertising and other promotional benefits to enhance our brand awareness. We have allocated amounts under
the agreements to the identifiable benefits including signage, advertising and other promotional benefits based on
their fair value and are recognizing such costs in promotion and selling expenses based on our existing policy for
such expenses. The remaining amounts due under the agreement in excess of the fair value of the identifiable
benefits, if any, are recorded as an expense.

F-9

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

(m) Research and development:

Research and development costs, which consist primarily of product development costs, are expensed in the

period incurred and are included in general and administrative expenses. During the year ended December 31,
2007, the Company incurred research and development costs of $216,268 (2006—$128,743, 2005—$41,406).

(n) Selling and promotion costs:

Selling and promotion costs include advertising costs, sales and marketing expenses, salary and benefit
expenses for the sales and sales support workforce, promotional activity expenses, sponsorship costs and point of
sale items. The Company expenses advertising and promotion costs as incurred. During the year ended
December 31, 2007, the Company incurred advertising costs of $6,596,665 (2006—$5,032,520, 2005—
$5,120,326).

(o) Stock-based compensation:

Prior to January 1, 2006, we accounted for our employee stock compensation arrangements using the

intrinsic method, under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” and related Interpretations and provided the disclosure-only provisions of the fair value method
under SFAS 123. Under the intrinsic value method, no stock-based compensation related to employee options
had been recognized in our consolidated statement of operations, because the exercise price of our stock options
granted to employees and directors equaled the fair market value of the underlying stock at the date of grant. For
stock options issued to non-employees for services received, the fair value of the stock options issued at the date
of the performance completion was recognized as a compensating expense.

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, “Share-
Based Payment” (SFAS 123R), using the modified prospective transition method. Under this method, stock-
based compensation expense is recognized using the fair-value based method for all awards granted on or after
the date of adoption. In addition, compensation expense for unvested stock options that were outstanding on
January 1, 2006 is recognized over the requisite service period based on the grant-date fair value of those options
and awards as previously calculated for the pro forma disclosures under SFAS 123, as adjusted for estimated
forfeitures.

SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In our pro forma information required under SFAS 123
for the periods prior to January 1, 2006, we accounted for forfeitures as they occurred.

The adoption of this standard resulted in a $1,057,127 decrease in earnings and income before taxes, or

$0.04 basic and $0.04 diluted earnings per share for the twelve-month period ended December 31, 2006.
Non-cash stock based compensation expense of $1,057,127 was added back to cash flows from operating
activities during the twelve-month period ended December 31, 2006. There was no cumulative effect on
adoption.

F-10

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

The following table illustrates the effect on net loss and loss per share if we had applied the fair value
recognition principles of SFAS 123 to stock-based employee compensation during the corresponding periods in
fiscal 2005.

Net Income :

As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Stock-based employee compensation expense included in

reported income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deduct: Total stock-based employee compensation expense

determined under fair value method for all awards . . . . . . . . . . . .
Pro forma income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Basic earnings per share:

As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted earnings per share:

As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Twelve months
ended
December 31, 2005

$1,283,026

5,745

(908,834)
$ 379,937

$
$

$
$

0.06
0.02

0.06
0.02

For our pro forma disclosure we recognized the fair value calculated at the grant date of the stock options on

a straight-line basis consistent with the vesting terms.

(p)

Income taxes:

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income

Taxes.” The objectives of accounting for incomes taxes are to recognize the amount of taxes payable for the
current year and deferred tax assets and liabilities for future tax consequences of events at enacted tax rates that
have been recognized in the Company’s financial statements or tax returns. The Company performs periodic
evaluations of recorded tax assets and liabilities and maintains a valuation allowance, if considered necessary.
The determination of taxes payable for the current year includes estimates. In the event that actual results differ
materially from management’s expectations, the estimated taxes payable could materially change, directly
impacting the Company’s financial position or results of operations.

In September 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in

Income Taxes” (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes.”
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS 109. The first step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step is to measure the tax
benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We
consider many factors when evaluating and estimating our tax positions and tax benefits, which may require
periodic adjustments and which may not accurately forecast outcomes. The interpretation also provides guidance
on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

We and our subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S.

F-11

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

income tax examinations by tax authorities for years prior to 2003. However, net operating losses not yet utilized
can be subject to adjustment by the Internal Revenue Service (IRS). We may from time to time be assessed
interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and
immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it
has been classified in the financial statements as interest expense. There is no material interest expense or
penalties accrued at December 31, 2007. We believe that we have appropriate support for the income tax
positions taken, and to be taken, on our tax returns and that our accruals for tax liabilities are adequate for all
open years based on an assessment of many factors including past experience and interpretations of tax law
applied to the facts of each matter. Therefore, no reserves for uncertain income tax positions have been recorded
pursuant to FIN 48.

We adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not impact the

consolidated financial condition, results of operations or cash flows.

As of December 31, 2007, we are evaluating the deductibility of stock option expenses not included in

previously filed tax returns. To the extent these unrecognized potential tax benefits may be ultimately
recognized, they will impact the effective tax rate in a future period. The amount of this unrecognized benefit has
not been determined. This evaluation does not meet the more-likely-than-not recognition threshold test and, as
such, this potential benefit has not been recognized.

(q) Earnings per share:

Basic earnings per share is computed using the weighted average number of common shares outstanding
during the periods, excluding reacquired stock and common stock held in escrow that is subject to cancellation if
certain criteria are not achieved. Diluted earnings per share are computed by adjusting the weighted average
number of common shares by the effective net exercise or conversion of all dilutive securities. In 2007, due to
the net loss, all outstanding equity options are anti-dilutive.

(r) Comprehensive income:

SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for reporting and disclosure of
comprehensive income and its components in a full set of general-purpose financial statements. The Company
discloses the comprehensive income in the Consolidated Statements of Shareholders’ Equity and Comprehensive
Income.

The amount of comprehensive income related to available for sale investments is not significant in the prior

year. The amount of accumulated other comprehensive income relates to the translation of the Company’s U.S.
operation prior to the Company’s migration from Canada to the U.S.

(s) Volume rebates from vendors:

Consideration received by the Company from a vendor is accounted for as a reduction of cost of goods sold
or inventory, as appropriate, as required under EITF 02-16 “Accounting by a Customer for Certain Consideration
Received from a Vendor”. For the year ended December 31, 2007, the reduction of cost of goods sold is $52,863
(2006—$254,371, 2005—$191,112) and inventory is $0 (2006—$108,584, 2005—$10,534).

(t) Seasonality:

Our sales are seasonal and we experience significant fluctuations in quarterly results as a result of many
factors. We generate a substantial percentage of our revenues during the warm weather months of April through

F-12

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

September. Timing of customer purchases will vary each year and sales can be expected to shift from one quarter
to another. As a result, management believes that period-to-period comparisons of results of operations are not
necessarily meaningful and should not be relied upon as any indication of future performance or results expected
for the fiscal year.

(u) Recent accounting pronouncements:

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and

Financial Liabilities—Including an amendment of FASB Statement No. 115,” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized
gains and losses on items for which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. Early adoption, as of the beginning of an entity’s fiscal year, is also permitted, provided
interim financial statements have not yet been issued. The Company is currently evaluating the impact this
statement will have on its financial position and results of operations.

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value

Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently
assessing the impact, if any, this provision may have on our financial position or results of operations.

(v) Reclassifications:

Certain prior year amounts have been reclassified to conform to the 2007 presentation.

3. Cash equivalents and short-term investments:

We generally invest cash in highly liquid debt securities that are classified as available for sale and are
reflected in the balance sheet based on maturity dates. Investments in debt securities with original maturities of
three months or less are considered to be cash equivalents.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . .

2007

2006

Cash and
cash equivalents

Short-term
Investments

Cash and
cash equivalents

Short-term
Investments

$

$ 3,358,060
14,499,745
—

17,857,805

$

— $ 1,857,154
10,535,007
—
1,513,709
—

—

13,905,870

—
—
—

—

Available-for sale securities:

Corporate notes . . . . . . . . . . . . . . . . . . . . . . . . .

—

9,935,400

—

16,318,510

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$17,857,805

$9,935,400

$13,905,870

$16,318,510

F-13

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

4. Accounts receivable:

Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . .

$4,346,294
445,093
(316,828)

$6,579,195
519,959
(184,732)

2007

2006

Supplementary information on the allowance for doubtful accounts:

$4,474,559

$6,914,422

2007

2006

Allowance for doubtful accounts:

Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (recoveries) and write offs . . . . . . . . . . . . . . . . . . . . . . . . .

$184,732
146,538
(14,442)

$107,406
69,693
7,633

End of year

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$316,828

$184,732

5.

Inventory:

Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,797,884
1,948,004

$2,919,396
2,863,671

2007

2006

$5,745,888

$5,783,067

6. Capital Assets:

Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office and computer equipment . . . . . . . . . . . . . . . . . . . . . . . .

$

418,987
1,304,086
1,264,293

$

294,278
1,303,943
804,427

2007

2006

Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,987,366
(1,908,450)

2,402,648
(1,646,030)

$ 1,078,916

$

756,618

Included in capital assets are assets under capital leases with a cost of $576,356 (2006—$586,492) and

accumulated depreciation of $378,402 (2006—$274,654).

F-14

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

7. Other Assets:

Leased equipment at co-packing facilities . . . . . . . . . . . . . . . . .
Leased equipment at sponsorship partner facilities . . . . . . . . . .

$1,731,001
405,249

$1,414,138

—

2007

2006

Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,136,250
(717,734)

1,414,138
—

$1,418,516

$1,414,138

Included in other assets are assets under capital leases with a cost of $405,249 (2006—$0) and accumulated

depreciation of $47,279 (2006—$0).

8.

Intangible assets:

Trademarks and patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 541,191
(368,151)

$ 544,791
(332,860)

2007

2006

$ 173,040

$ 211,931

During the year ended December 31, 2007 amortization of $35,291 (2006—$35,416, 2005—

$18,762) related to intangible assets was recognized.

9. Bank indebtedness:

On August 21, 2007, we entered into a Loan Agreement with Key Bank National Association, providing for
a revolving line of credit in principal amount of up to $15 million. The new credit facility replaces the $5 million
revolving line of credit with Greater Bay Business Funding, which expired by its terms on August 25, 2007, with
no borrowings outstanding upon the expiration of the term. The new credit facility matures on August 21, 2009.
The credit facility is not subject to any borrowing base computations or limitations, but does contain certain
financial covenants that the Company must meet. We must maintain a minimum Current Ratio (Current Assets to
Current Liabilities, each as defined in the Loan Agreement) of 2.00 to 1.00. Also, our ratio of Total Debt to
Tangible Net Worth (each as defined in the Loan Agreement) cannot exceed 1.00 to 1.00. At our election, the
interest rate on the credit facility will be based on either (a) Key Bank’s prime rate minus 1.50% per annum, or
(b) LIBOR plus 1.00% per annum. The credit facility is secured by a grant of a first priority security interest in
all of our assets. Concurrently with the Loan Agreement, on August 21, 2007, we entered into a Security
Agreement in favor of Key Bank. The Loan Agreement and Security Agreement contain customary
representation and warranties, affirmative and negative covenants and events of default. Upon an event of
default, outstanding amounts under the credit facility accrue interest at the prime rate plus 5.00%. As of date of
this Annual Report, we were in compliance with the above financial covenants and we had not borrowed any
amounts under the credit facility.

F-15

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

10. Capital lease obligations:

The Company’s scheduled payments, including interest ranging from 5% to 8% at December 31, 2007 are

as follows:

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total minimum capital lease payments . . . . . . . . . . . . . . . . . . . . . . . .
Less amount representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Present value of total minimum capital lease payments . . . . . . . . . . .
Less current portion of capital lease obligations . . . . . . . . . . . . . . . . .

2007

2006

$ —
201,554
185,927
160,258
125,334
67,653

740,726
109,653

631,073
156,847

$73,214
15,637
—
—
—
—

88,851
3,051

85,800
70,471

Capital lease obligations excluding current portion . . . . . . . . . . . . . .

$474,226

$15,329

11. Shareholders equity:

(a) Common stock:

On June 8, 2006, we completed a private placement in public equity (“PIPE”) of 3,157,895 shares of our
common stock at a price of $9.50 per share, and received $28,077,350 in net proceeds after underwriting costs
and expenses.

(b) Stock options:

In 1996, we adopted a stock option plan (the 1996 Plan) that provides for the issuance of incentive and
non-qualified stock options to officers, directors, employees and consultants. In addition, in 2002 we adopted a
second stock option plan for the issuance of incentive and non-qualified stock options to officers, directors,
employees and consultants (the 2002 Plan). (The 1996 Plan and 2002 Plan are collectively referred to as the
“Plans”). On May 18, 2006, at the annual shareholders meeting, the shareholders ratified the amendment to the
2002 Plan to increase the total number of shares of common stock authorized for issuance during the life of the
plan from an aggregate 3,750,000 shares to 4,500,000 shares. The 1996 Plan terminated by its terms on June 18,
2006 and no additional options may be granted there under, but all outstanding options continue for their
respective remaining terms. On May 31, 2007, at the annual shareholders meeting, the shareholders approved the
amendment to the 2002 Plan to permit awards of restricted stock grants.

Under the terms of our 2002 Stock Option and Restricted Stock Plan, our Board of Directors may grant
options or RSU’s to employees, officers, directors and consultants. The plan provides for granting of options or
RSU’s at the fair market value of our stock at the grant date. Historically, options generally vested over a period
of eighteen months, with the first 25% vesting at the date of grant and the balance vesting in equal amounts every
six months thereafter. Effective during the quarter ended September 30, 2006, we changed the vesting schedule
for our prospective stock option grants, to vest over a period of forty-two months, with the first 1/7th vesting six
months from the grant date and the balance vesting in equal amounts every six months thereafter. We determine
the term of each option at the time it is granted, historically, options granted generally have a five-year term.

F-16

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

A summary of our stock option activity is as follows:

Balance at December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding options

Number of
shares

2,032,250
613,500
(660,250)
(203,500)

1,782,000
585,400
(863,000)
(80,375)

1,424,025
339,500
(613,692)
(77,097)

Average
exercise
price

$ 1.06
4.00
(1.08)
(3.32)

1.83
7.08
(1.42)
(5.02)

4.05
19.19
(2.61)
(14.60)

Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,072,736

$ 8.91

Exercisable, December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

765,039

$ 5.57

The following table summarizes information about stock options outstanding and exercisable under our

stock incentive plans at December 31, 2007:

$0.25 to $0.50 . . . . . . . . .
$1.10 to $2.99 . . . . . . . . .
$3.00 to $4.00 . . . . . . . . .
$4.01 to $5.01 . . . . . . . . .
$5.02 to $9.33 . . . . . . . . .
$9.34 to $22.95 . . . . . . . .

Weighted
average
remaining
contractual
life (years)

0.28
1.01
1.95
2.61
3.44
4.35

2.95

Weighted
average
exercise
price

$ 0.30
2.15
3.98
5.01
7.27
19.15

$ 8.91

Weighted
average
remaining
contractual
life (years)

0.28
1.01
1.95
2.61
3.25
4.35

2.37

Weighted
average
exercise
price

$ 0.30
2.15
3.98
5.01
6.98
19.24

$ 5.57

Number
exercisable

80,000
97,000
202,500
4,500
336,929
44,110

765,039

Number
outstanding

80,000
97,000
202,500
4,500
394,983
293,753

1,072,736

(c) Restricted Stock awards:

During the year ended December 31, 2007, the Board of Directors granted 140,000 restricted shares

(“RSUs”) to certain employees under our revised 2002 Stock Option and Restricted Stock Plan, which was
approved by our shareholders in May 2007. No monetary payment is required from the employees upon receipt
of the RSUs. The RSUs vest over a period of forty-two months in equal amounts every six months.

F-17

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

A summary of our RSU activity is as follows:

Non-vested RSUs at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted-
Average
Contractual
Life

Restricted
Shares

—

140,000
—
(10,500)

Weighted-
Grant Date
Fair Value

—

$ 10.12
—
(10.18)

Non-vested RSUs at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

129,500

$ 10.12

3.28 yrs

(d) Stock-based compensation expense:

We account for stock-based compensation in accordance with FASB Statement No. 123(R), “Share-Based
Payment” (“FAS 123R”), using the fair-value based method. Stock-based compensation expense is recognized
using the straight-line attribution method over the employees’ requisite service period.

The following table summarizes the stock-based compensation expense by type of awards:

Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,369,223
149,582

$1,057,127

—

$1,518,805

$1,057,127

December 31,
2007

December 31,
2006

We employ the following key weighted average assumptions in determining the fair value of stock options,

using the Black-Scholes option pricing model:

Twelve months ended December 31,

2007

2006

2005

Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average grant date fair-value . . . . . . . . . . . . . . . . .

—
55.9%
4.38%

—
55.5%
4.82%

—
80.0%
3.26%

4.4 years
8.58

$

2.75 years
2.82

$

1.5 years
1.86

$

During the year ended December 31, 2007, no modifications were made to outstanding stock options, and

there were no stock-based compensation costs capitalized as part of the cost of any asset.

The aggregate intrinsic value of stock options outstanding at December 31, 2007 was $2,061,000 (2006—

$11,747,000) and for options exercisable was $2,061,000 (2006—$10,188,000). The intrinsic value of
outstanding and exercisable stock options is calculated as the quoted market price of the stock at the balance
sheet date less the exercise price of the option. The total intrinsic value of options exercised during the year
ended December 31, 2007 was $8,713,290 (2006—$4,967,000).

RSUs are valued at the grant date market price of the underlying securities, and the compensation expense is

recognized on a straight-line basis over the forty-two months vesting period based on the estimated number of
awards expected to vest. At December 31, 2007 the RSUs had an intrinsic value of nil.

F-18

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

SFAS 123R also requires that we recognize compensation expense for only the portion of stock options or

RSUs that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical
employee termination behavior. If the actual number of forfeitures differs from those estimated by management,
additional adjustments to stock-based compensation expense may be required in future periods.

At December 31, 2007, the unrecognized compensation expense related to stock options and non-vested

restricted stocks were $2,458,000 and $1,112,000, respectively, which are to be recognized over weighted-
average periods of 2.61 years and 3.28 years, respectively.

12. Commitments and contingencies:

Commitments

During the year ended December 31, 2007 we had commitments to various suppliers of raw materials and
finished goods, to co-packers for production equipment and commitments under our Sponsorship Agreements
with the Seattle Seahawks and the New Jersey Nets in exchange for exclusive beverage rights for certain soft
drinks at Qwest Field and the proposed new arena in Brooklyn, New York, as well as signage, advertising and
other promotional benefits to enhance our brand awareness. These obligations vary in terms. Purchase
obligations in future periods under these commitments are expected to occur as follows:

Purchase Obligations . . . . . . . . . . . . . . . . .

$22,921,000

$4,671,000

$11,959,000

$4,227,000

$2,064,000

Total

2008

2009-2010

2011-2012

2013 and
thereafter

The Company has lease commitments for its executive and administrative offices and warehouse premises

expiring on August 31, 2011. Future minimum rent payments under this lease are:

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$190,988
166,755
172,856
117,949

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$648,548

During the year ended December 31, 2007, the Company incurred rental expenses of $185,173 (2006—

$113,421, 2005—$95,670).

Legal proceedings

Federal Securities Class Action

On September 4, 2007, a putative class action complaint was filed against us, our former CEO, Peter van

Stolk, and our CFO in the U.S. District Court for the Western District of Washington, alleging claims under
Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated there
under. The case is entitled Saltzman v. Jones Soda Company, et al., Case No. 07-cv-1366-RSL, and purports to
be brought on behalf of a class of purchasers of our common stock during the period from March 9, 2007 to
August 2, 2007. Six substantially similar complaints subsequently were filed in the same court, some of which
allege claims on behalf of a class of purchasers of our common stock during the period November 1, 2006 to

F-19

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

August 2, 2007. Some of the subsequently filed complaints added as defendants certain directors and another
officer. The complaints generally allege violations of federal securities laws based on, among other things, false
and misleading statements and omissions about our financial results and business prospects. The complaints seek
unspecified damages, interest, attorneys’ fees, costs, and expenses. All seven lawsuits have been consolidated
into one action, captioned In re Jones Soda Company Securities Litigation, Case No. 07-cv-1366-RSL. On
March 5, 2008, the Court appointed a lead plaintiff and approved his selection of lead counsel. No consolidated
complaint has yet been filed.

Shareholder Derivative Litigation

On September 5, 2007, a shareholder derivative action was filed in the Superior Court for King County,
Washington, allegedly on behalf of and for the benefit of the Company, against certain of our current and former
officers and current directors. The case is entitled Cramer v. van Stolk, et al., Case No. 07-2-29187-3 SEA. The
Company also was named as a nominal defendant. Four other shareholders filed substantially similar derivative
cases. Two of these actions were filed in Superior Court for King County, Washington. One of these two actions
has been consolidated with the Cramer Action. The shareholder who brought the unconsolidated state-court
action voluntarily moved to have her suit dismissed on January 30, 2008, and on February 12, 2008 the Court
dismissed that action. The two remaining shareholder derivative actions were filed in the U.S. District Court for
the District of Washington. One of the shareholders in the two federal actions has moved to consolidate the
federal derivative actions. The Court has not ruled on the motion to consolidate. All of the derivative complaints
are based on the same allegations of fact as in the securities class actions filed in the U.S. District Court for the
Western District of Washington and allege, among other things, that certain of our directors and officers
breached their fiduciary duties and were unjustly enriched in connection with the public disclosures that are the
subject of the federal securities class actions. The complaints seek unspecified damages, restitution,
disgorgement of profits, equitable and injunctive relief, attorneys’ fees, costs, and expenses. The complaints are
derivative in nature and do not seek monetary damages from us. However, we may be required, throughout the
pendency of the action, to advance payment of legal fees and costs incurred by the defendants.

We are unable to predict the outcome of these actions. These actions could result in significant liability and

could have a material adverse effect on our business, results of operations, or financial condition, subject to the
limits of our insurance policies.

We are involved in various claims and legal actions arising in the ordinary course of business, including
proceedings involving product liability claims and other employee claims, and tort and other general liability
claims, for which we carry insurance, as well as trademark, copyright, and related claims and legal actions. In the
opinion of our management, the ultimate disposition of these matters will not have a material adverse effect on
our consolidated financial position, results of operations or liquidity.

Other Contingencies

We have an employment agreement with one of our executive officers. The agreement continues until
terminated by the executive or by us, and provides for severance payments under certain circumstances. As of
December 31, 2007, if the executive was to be terminated by us without cause (as defined) or upon a change of
control (as defined), our severance liability, including salary continuation, continuation of health care and
insurance benefits, would have been approximately $229,000.

We are party to many agreements executed in the ordinary course of business that provide for

indemnification of third parties, under specified circumstances, such as lessors of real property leased by the

F-20

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

Company, distributors, suppliers, co-packers, customers, service providers for various types of services
(including commercial banking, investments and other services), software licensors, marketing and advertising
firms, and others. Generally, these agreements obligate the Company to indemnify the third parties only if certain
events occur or claims are made, as these contingent events or claims are defined in each of these agreements.
The Company believes that the resolution of any claims that might arise in the future, either individually or in the
aggregate, would not materially affect the earnings or financial condition of the Company.

13.

Income taxes:

The (recovery) provision for income taxes consisted of the following:

2007

2006

2005

Current

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

(3,164)
(1,170)
297,450

293,116

$

—
5,591
236,150

241,741

$10,532
40,000
—

50,532

Deferred . . . . . . . . . . . . . . . . . . . . . . . . .

1,862,111

(1,144,491)

—

Provision for income taxes . . . . . . . . . . . . . . . . . . .

$2,155,227

$ (902,750)

$50,532

Income (loss) before provision for income taxes was as follows:

United States . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(10,688,147)
1,043,103

$2,704,673
827,722

$ 766,811
535,241

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (9,645,044)

$3,532,395

$1,302,052

The items accounting for the difference between income taxes computed at the federal statutory rate and the

provision for income taxes are as follows:

Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of:

2007

2006

2005

34%

34%

34%

Permanent differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal benefit
Alternative minimum tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net

(0.71)% 6.28% 2.4%
1.22% 0.29% 3.1%
0.00% 0.00% 0.8%
(56.85)% (69.97)% (44.1)%
(0.01)% 3.85% 7.7%

Provision (recovery) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(22.35)% (25.56)% 3.9%

F-21

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant
components of the Company’s deferred income taxes were as follows:

2007

2006

2005

Deferred tax assets

Net operating loss carry forwards . . . . . . . . . . . . . . .
Capital assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,172,094
188,403
333,167
906,971

$1,401,117
—
384,657
198,185

$ 1,731,023
82,258
420,753
120,971

Total deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . .

5,600,635
(5,482,785)

1,983,959
—

2,355,005
(2,355,005)

Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . .

$

117,850

$1,983,959

$

Deferred tax liabilities

Capital assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(48,821)

Total deferred tax asset balance . . . . . . . . . . . . . . . . . . . .

$

117,850

$1,935,138

Classified as current . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

1,507,145

Long-term asset

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

117,850

$ 427,993

$

$

—

—

—

—

—

We account for income taxes in accordance with SFAS 109, “Accounting for Income Taxes,” which
requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements which differ from our tax returns.

The determination of our provision of income taxes and valuation allowances requires significant judgment,

the use of estimates, and the interpretation and application of complex tax laws. To the extent management
believes it is more likely than not that we will not be able to utilize some or all of our deferred tax assets prior to
their expiration, we are required to establish valuation allowances against that portion of deferred tax assets.

Prior to the second quarter of 2006, we maintained a valuation allowance for all of the U.S. and foreign
deferred taxes in accordance with Statement of Financial Accounting Standards 109 (“SFAS 109,” “Accounting
for Income Taxes”) due to the uncertainty regarding the full utilization of our deferred tax asset. During the
second quarter of 2006, we re-evaluated our valuation allowance after recording taxable income for two
successive years and we determined that was more likely than not we would realize the deferred tax assets.
Accordingly, during the year ended December 31, 2006, we recorded a tax benefit in the amount of $2,471,790
by reversing the valuation allowance and recording the tax benefit against the 2006 tax provision resulting in a
net deferred income tax benefit of $1,144,491.

During the fourth quarter of fiscal 2007, we recognized a full valuation allowance against our net U.S.
deferred tax assets in the amount of approximately $5,482,785. During the fourth quarter of fiscal 2007, the
Company experienced significant losses in its U.S. operations due to lower margins, the recording of charges
such as severance costs, marketing and promotions costs, slotting fee costs, inventory provisions for discontinued
product and legal and professional fees which negatively impacted U.S. pretax income and caused the Company
to be in a loss position as of December 31, 2007 and of having cumulative losses in recent years with respect to
its U.S. operations. These are one time costs that the Company does not expect to incur in future years. However,
the Company does not know if these investments are an aberration yet and the success of our incremental

F-22

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

investments in the business remains unknown. In accordance with the relevant accounting guidance, the
Company did consider future projections of U.S. pretax income as a material factor in its analysis of the
realizability of its net U.S. deferred tax assets, however, it was difficult to overcome the cumulative loss. The
negative events mentioned above, while not recurring in nature and/or beneficial to the Company’s long-term
future prospects, were material to the Company’s decision to establish a full valuation allowance against its net
U.S. deferred tax assets. This is due to the fact that the relevant accounting guidance puts more weight on the
negative objective evidence of cumulative losses in recent years than the positive subjective evidence of future
projections of pretax income. The Company continually analyzes the realizability of its deferred tax assets, but
reasonably expects to continue to record a full valuation allowance on future U.S. tax benefits until the Company
sustains an appropriate level of taxable income through improved U.S. operations and tax planning strategies.

No valuation allowance was recorded for deferred tax assets recorded in the Canadian subsidiary, as this

subsidiary remains profitable.

At December 31, 2007, the Company has net operating loss carry-forwards in the United States for income

tax purposes of $11,935,000, which expire at various times commencing in 2020. Net operating loss carry-
forwards may be subject to certain limitations under Section 382 of the Internal Revenue Code.

14. Staff Accounting Bulletin No. 108

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior

Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108), to
address diversity in practice in quantifying financial statement misstatements. SAB 108 requires the
quantification of misstatements based on their impact to both the balance sheet and the income statement to
determine materiality. SAB 108 is effective the fiscal year ending December 31, 2006.

The transition provisions of SAB 108 provide for a one-time cumulative effect adjustment on deficit to
correct for misstatements of errors relating to prior periods that were not deemed material under the Company’s
prior approach, but are material under the SAB 108 approach. Effective the beginning of the fiscal year ended
December 31, 2006, the Company adopted SAB 108. In accordance with SAB 108 during 2006, the Company
has adjusted opening deficit for fiscal 2006 in the accompanying consolidated financial statements for the items
described below. The Company considers these adjustments to be immaterial to prior periods.

Intercompany balances

During 2006, the Company adjusted its beginning retained earnings for fiscal 2006 for a historical
misstatement in intercompany balances of intangible transfers and accounts receivable balances. These
differences had accumulated over a period of several years and were not material in any one year.

Impact of adjustments

The impact of each of the items noted above on the fiscal 2006 beginning balances are presented below:

Reduction of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction of receivable balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 70,979
36,756

Increase in deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$107,735

F-23

JONES SODA CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended December 31, 2007 and 2006

15. Segmented information and export sales:

The Company operates in one industry segment, with operations during 2007 primarily in the United States

and Canada. During the year ended December 31, 2007, sales in the United States were approximately
$33,949,000 (2006—$34,209,000, 2005—$29,620,000), sales in Canada were approximately $5,393,000
(2006—$4,662,000, 2005—$3,788,000), and sales to other countries totaled $489,000 (2006—$165,000, 2005—
$103,000). Sales have been assigned to geographic locations based on the location of customers.

As at December 31, 2007, the net book value of long-lived assets held in the United States was

approximately $2,471,000 (2006—$2,111,000, 2005—$604,000). The net book value of long-lived assets held in
Canada was approximately $26,000 (2006—$59,000, 2005—$59,000).

16. Financial instruments:

(a) Fair values:

As of December 31, 2007, the carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, line of credit, accounts payable and accrued liabilities and capital lease
obligations, approximate their fair values due to the short-term to maturity of these instruments.

(b) Concentration of credit risk:

The Company mainly sells its products to customers in the United States and Canada. Customers in the
United States represent 83% (2006—95%, 2005—92%) while customers in Canada represent 17% (2006—5%,
2005—8%) of year end accounts receivable balances. Three of the Company’s customers represent
approximately 29% of revenues for the year ended December 31, 2007, one of which represented revenue of
approximately 13% during the period. Three customers represented approximately 28% of revenues for the year
ended December 31, 2006. Three customers represented approximately 21% of revenues for the year ended
December 31, 2005.

17. Selected Quarterly Financial Information (unaudited)

Summarized quarterly financial information for fiscal years 2007 and 2006 is as follows (dollars in

thousands, except per share data):

Q1

Q2

Q3

Q4

2007 quarter:

Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . .

$9,189
3,517
58
0.00
0.00

$13,012
4,449
41
0.00
0.00

$11,732
3,196
(1,524)
(0.06)
(0.06)

$ 5,898
(1,718)
(10,204)
(0.39)
(0.39)

2006 quarter:

Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,760
3,120
3
0.00
0.00

$10,026
3,806
2,314
0.10
0.10

$10,202
3,617
194
0.01
0.01

$ 10,047
4,762
2,063
0.08
0.08

Q1

Q2

Q3

Q4

F-24

This annual report contains information about future expectations, plans and prospects of the company
which constitute forward-looking statements for purposes of the safe harbor provisions under the Private
Securities Litigation Reform Act of 1995. Forward-looking statements include, for example, such words as
“aims,” “anticipates,” “estimates,” “expects,” “believes,” “intends,” “plans,” “predicts,” “projects” or
“targets,” the negatives of these words, or similar words or expressions. Forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to differ materially from those
indicated by the forward-looking statements. Some of these risks and uncertainties are described in this
report and in the other documents we file publicly with the Securities and Exchange Commission. Readers
are cautioned not to place undue reliance upon these forward-looking statements that speak only as to the
date of this annual report. Except as required by law, we do not assume any obligation to update the
forward-looking statements we make herein.

Investor Facts

Jones Soda Co.
234 Ninth A
Seattle, W
USA, 98109
tel

ve N
ashington

800 656 6050
206 624 3357
206 624 6857

fax

www.jonessoda.com

Corporate Information:
Jones Soda Co.
Legal Counsel:
US – Perkins Coie LLP
Canada – Boughton Law

Corporation

Auditors:
KPMG LLP
Transfer Agent:
Computershare Trust Company, N.A.
800 962 4284
Stock Exchange Listing:
NASDAQ: JSDA TSX-V: JSD