UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission File Number 0-18761

HANSEN NATURAL CORPORATION

(Exact name of registrant as specified in its charter)

550 Monica Circle, Suite 201, Corona, California 92880

(Address of principal executive offices)       (Zip Code)

Registrant’s telephone number, including area code:  (951) 739 - 6200

Securities registered pursuant to Section 12(b) of the Act:

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

Title of class

Common Stock, $0.005 par value per share

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

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

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X ] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act.)     Yes [   ]  No [X]

The aggregate market value of the common equity held by nonaffiliates of the registrant was $2,180,565,237 computed by reference to the closing sale price for such stock on the NASDAQ Capital Market on June 30, 2008, the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares of the registrant’s common stock, $0.005 par value per share (being the only class of common stock of the registrant), outstanding on February 6, 2009 was 90,401,966 shares.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s Definitive Proxy Statement to be filed subsequent to the date hereof with the Commission pursuant to Regulation 14A in connection with the registrant’s 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2008.

HANSEN NATURAL CORPORATION

FORM 10-K

TABLE OF CONTENTS

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PART I

ITEM 1.         BUSINESS

Overview

Hansen Natural Corporation was incorporated in Delaware on April 25, 1990. Our principal place of business is located at 550 Monica Circle, Suite 201, Corona, California 92880 and our telephone number is (951) 739-6200.  When this report uses the words “Hansen”, “HBC”, “the Company”, “we”, “us”, and “our”, these words refer to Hansen Natural Corporation and our subsidiaries other than Monster LDA Company (“MLDA”), unless the context otherwise requires.

We are a holding company and carry no operating business except through our wholly owned subsidiaries: Hansen Beverage Company (“HBC”) which was incorporated in Delaware on June 8, 1992; MLDA, formerly known as Hard e Beverage Company, and previously known as Hard Energy Company and as CVI Ventures, Inc., which was incorporated in Delaware on April 30, 1990; Monster Energy UK Limited (“Monster UK”), a direct wholly owned subsidiary of HBC, which was incorporated in the United Kingdom on October 9, 2007; Monster Energy AU Pty, Ltd. (“MEAU”), a direct wholly owned subsidiary of HBC, which was incorporated in Australia on August 5, 2008; and Monster Energy Limited (“MEL”), a direct wholly owned subsidiary of HBC, which was incorporated in Ireland on September 24, 2008.  In 2008, HBC and Monster UK generated all of our operating revenues.

We develop, market, sell and distribute “alternative” beverage category natural sodas, fruit juices and juice drinks, energy drinks and energy sports drinks, fruit juice smoothies and “functional” drinks, non-carbonated ready-to-drink iced teas, children’s multi-vitamin juice drinks, Junior Juice® juices and flavored sparkling beverages under the Hansen’s® brand name.  We also develop, market, sell and distribute energy drinks under the following brand names: Monster Energy®; Monster Hitman Energy Shooter™; Lost® Energy™; and Joker Mad Energy™ names as well as Rumba®, Samba and Tango brand energy juices.  We also market, sell and distribute the Java Monster™ line of non-carbonated dairy based coffee drinks. Additionally, we market, sell and distribute natural sodas, premium natural sodas with supplements, organic natural sodas, seltzer waters, sports drinks and energy drinks under the Blue Sky® brand name.  In July 2008 we began to market, sell and distribute enhanced water beverages under the Vidration™ brand name.

Our Monster Energy® brand energy drinks include Monster Energy® drinks (introduced in April 2002), lo-carb Monster Energy® drinks (introduced in August 2003), Monster Energy® Assault® energy drinks (introduced in September 2004), Monster Energy® KhaosTM energy drinks (introduced in August 2005), Monster Energy® M-80TM energy drinks (introduced in March 2007, and named “RIPPER” in certain countries), Monster Energy® Heavy Metal™ energy drinks (introduced in November 2007) and Monster Energy® MIXXD™ (introduced in December 2007).

Corporate History

In the 1930s, Hubert Hansen and his three sons started a business to sell fresh non-pasteurized juices in Los Angeles, California.  This business eventually became Hansen’s Juices, Inc., which subsequently became known as The Fresh Juice Company of California, Inc. (“FJC”).  FJC retained the right to market and sell fresh non-pasteurized juices under the Hansen trademark.  In 1977, Tim Hansen, one of the grandsons of Hubert Hansen, perceived a demand for pasteurized natural juices and juice blends that are shelf stable and formed Hansen Foods, Inc. (“HFI”). HFI expanded its product line from juices to include Hansen’s Natural Sodas®.  The California Co-Packers Corporation (d/b/a/ Hansen Beverage Company) (“CCC”) acquired certain assets of HFI, including the right to market the Hansen’s® brand name, in January 1990.  On July 27, 1992, HBC acquired the Hansen’s® brand natural soda and apple juice business from CCC.  Under our ownership, the Hansen beverage business has significantly

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expanded and includes a wide range of beverages within the growing “alternative” beverage category, including in particular, energy drinks.  In September 1999, we acquired all of FJC’s rights to manufacture, sell and distribute fresh non-pasteurized juice products under the Hansen’s® trademark together with certain additional rights.  In 2000, HBC, through its wholly-owned subsidiary, Blue Sky Natural Beverage Co. (“Blue Sky”), which was incorporated in Delaware on September 8, 2000, acquired the natural soda business previously conducted by Blue Sky Natural Beverage Co., a New Mexico corporation (“BSNBC”), under the Blue Sky® trademark.  In 2001, HBC, through its wholly-owned subsidiary Hansen Junior Juice Company, (“Junior Juice”), which was incorporated in Delaware on May 7, 2001, acquired the Junior Juice business previously conducted by Pasco Juices, Inc. (“Pasco”) under the Junior Juice® trademark.

Industry Overview

The “alternative” beverage category combines non-carbonated ready-to-drink iced teas, lemonades, juice cocktails, single serve juices and fruit beverages, ready-to-drink dairy and coffee drinks, energy drinks, sports drinks, and single-serve still water (flavored, unflavored and enhanced) with “new age” beverages, including sodas that are considered natural, sparkling juices and flavored sparkling beverages.  The “alternative” beverage category is the fastest growing segment of the beverage marketplace according to Beverage Marketing Corporation. According to Beverage Marketing Corporation, wholesale sales in 2008 for the “alternative” beverage category of the market are estimated at $26.0 billion representing a growth rate of approximately 2.8% over the estimated wholesale sales in 2007 of approximately $25.3 billion (revised from previously reported estimate of $25.5 billion).

Reportable Segments

We have two reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise primarily energy drinks, and Warehouse (“Warehouse”), whose principal products comprise juice based and soda beverages.  The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily directly to retailers.  Corporate and unallocated amounts that do not relate to the DSD or Warehouse segments specifically have been allocated to “Corporate & Unallocated.”  Net sales of our DSD segment represented 90.7%, 89.5% and 84.9% of our consolidated net sales for the years ended December 31, 2008, 2007 and 2006, respectively.

For financial information about our reporting segments and geographic areas, refer to Note 16 of Notes to the Consolidated Financial Statements set forth in Part II, Item 8 – “Financial Statements and Supplementary Data” of this report, incorporated herein by reference.  For certain risks with respect to our energy drinks see “Part I, Item 1A – Risk Factors” below.

Products – DSD Segment

Monster Energy® Drinks - In 2002, we launched a new carbonated energy drink under the Monster Energy® brand name in 16-ounce cans, which was almost double the size of our Hansen’s branded energy drinks (in 8.3-ounce cans) and the vast majority of competitive energy drinks on the market at that time.  Our Monster Energy® drinks contain different types and levels of supplements than our Hansen’s® energy drinks and are marketed through our full service distributor network. We offer the following products under the Monster Energy® brand energy drink product line: Monster Energy®, lo-carb Monster Energy®, Monster Energy® Assault®, Monster Energy® Khaos™, Monster Energy® M-80™ (named “RIPPER” in certain countries), Monster Energy® Heavy Metal™ and Monster Energy® MIXXD™.  We package our Monster Energy® drinks in 8.3-ounce and/or 16-ounce and/or 24-ounce and/or 32-ounce and/or 500ml aluminum cans and/or 500ml glass bottles.

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Lost® Energy™ Drinks - In 2004, we launched a new carbonated energy drink under the Lost® brand name. The Lost® brand name is owned by Lost International, LLC and the drinks are produced, sold and distributed by us under an exclusive license from Lost International, LLC. We offer the following products under the Lost® Energy™ brand energy drink product line: Lost®, Lost® Perfect 10™, Lost® Five-O™ and Lost® Cadillac™.  We package our Lost® Energy™ drinks in 8.3-ounce and/or 16-ounce and/or 24-ounce aluminum cans.

Energy Juice - In 2004, we launched a new non-carbonated energy juice under the Rumba® brand name.  Our energy juice is a 100% juice product that targets male and female morning beverage consumers and is positioned as a substitute for coffee, caffeinated sodas and 100% orange or other juices. We offer the following products under the energy juice product line: Rumba®, Samba and Tango.  We package our energy juices in 15.5-ounce aluminum cans.

Joker Mad Energy™ Drinks - In 2005, we introduced Joker Mad Energy™ energy drinks. We offer the following products under the Joker Mad Energy™ product line: Joker Mad Energy™, Joker Mad Energy™ Lo-Carb and Joker Mad Energy™ with Juice. We package our Joker Mad Energy™ drinks in 16-ounce aluminum cans.

Java Monster™ Coffee Drinks - In 2007, we launched a new line of non-carbonated dairy based coffee drinks under the Java Monster™ brand name.  We offer the following products under the Java Monster™ product line: Java Monster™ Originale™, Java Monster™ Loca Moca®, Java Monster™ Mean Bean®, Java Monster™ Russian, Java Monster™ Irish Blend™, Java Monster™ Chai Hai™, Java Monster™ Nut Up™ and Java Monster™ Lo-Ball™.  We package our Java Monster™ coffee drinks in 15-ounce aluminum cans.

Monster Hitman Energy Shooter™ - In 2008, we introduced a new line of energy shooters in 3-ounce polyethylene terephthalate (“PET”) plastic bottles.  We offer the following products under the Monster Hitman Energy Shooter™ product line: Monster Hitman Energy Shooter™, Monster LOBO Energy Shooter™ and Monster Sniper Energy Shooter™.

Vidration® - In July 2008, we introduced our zero calorie, vitamin enhanced, water line under the Vidration® brand name in 20-ounce PET bottles.

Products - Warehouse Segment

Hansen’s Natural Sodas® - Hansen’s Natural Sodas® have been a leading natural soda brand in Southern California for the past 30 years.  According to Information Resources, Inc.’s Analyzer Reports for California, in 2008 our natural sodas recorded the highest sales among comparable carbonated new age category beverages measured by unit volume in the California market. Hansen’s Natural Sodas®, with cane sugar and Hansen’s® Calorie Free Sodas contain no preservatives, no sodium and no caffeine. We offer the following sodas under the Hansen’s® brand name: Hansen’s Natural Sodas®, Hansen’s® Calorie Free Sodas, Hansen’s® Natural Soda Mixers, Hansen’s® Natural Green Tea Sodas, Hansen’s® Diet Green Tea Sodas, Hansen’s® Natural Sparkling Sleek Beverages, Hansen’s® Natural Sparkling Sleek Sugar Free Beverages, Hansen’s® Natural Sparkling Sleek Green Tea Beverages and Hansen’s® Natural Sparkling Sleek Sugar Free Green Tea Beverages. We package our natural sodas in 12-ounce, and recently in 16-ounce, aluminum cans and our sleek beverages in contemporary 10.5-ounce aluminum cans.

Blue Sky® Products - In September 2000, we acquired the Blue Sky® natural soda business from BSNBC.  The Blue Sky® products contain no preservatives, sodium or caffeine (other than the energy drinks) or artificial coloring and are made with sugar and high quality natural flavors. We offer the following under the Blue Sky® product line: Blue Sky® Natural Sodas, Blue Sky® Lite Natural Sodas, Blue Sky® Premium Sodas, Blue Sky® Organic Natural Sodas, Blue Sky® Seltzer Water, Blue Sky®

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Blue Energy® drink, Blue Sky® Café Energy, Blue Sky® Tea Sodas and Blue Sky® Blue Sport Isotonic Sports Drinks.  We package our Blue Sky® Natural Sodas, seltzer waters and tea sodas in 12-ounce aluminum cans. We package our Blue Sky® Café energy drinks in 15-ounce aluminum cans. We package our Blue Sky® Blue Sport Isotonic Sports Drinks in 16-ounce PET plastic bottles.  We package our Blue Sky® energy drinks in 8.3-ounce and/or 16-ounce aluminum cans.

Hansen’s® Energy Drinks - - Our Hansen’s® energy drinks compete in the “functional” beverage category, namely, beverages that provide a real or perceived benefit in addition to simply delivering refreshment.   Our Hansen’s® energy drinks contain vitamins, minerals, nutrients, herbs and supplements (collectively “supplements”). Since 2006, we have marketed our Hansen’s® brand energy drinks through the Warehouse segment. We offer the following under the Hansen’s® energy drink product line: Hansen’s® Energy Pro and Hansen’s Diet Red Energy®.   We package our Hansen’s® energy drinks in 8.3-ounce aluminum cans.

Juice Products and Smoothies - Our fruit juice product line includes Hansen’s® Natural Apple Juice, which is packaged in 64-ounce PET plastic bottles and 128-ounce High Density Polyethylene bottles and Hansen’s® Natural Grape Juice, White Grape Juice, Pineapple Juice, Apple Grape Juice and Apple Strawberry Juice in 64-ounce PET plastic bottles.  These Hansen’s® juice products contain 100% juice as well as 120% of the United States Recommended Daily Allowances (the “USRDA”) for Vitamin C (except Pomegranate which contains 27% juice and 100% of the USRDA for Vitamin C).  Hansen’s® juice products compete in the shelf-stable juice category.

Hansen’s® fruit juice smoothies contain approximately 25% juice and provide 100% of the recommended daily intake for adults of Vitamins A, C & E and represented Hansen’s entry into what is commonly referred to as the “functional” beverage category. Hansen’s® fruit juice smoothies are packaged in 11.5-ounce aluminum cans.

We market the above-mentioned juice and smoothie products to our direct retail customers.

Hansen’s® Iced Teas - In 2006, we introduced a new line of iced teas in sleek 16-ounce wide mouth PET plastic bottles.  We offer varieties sweetened with cane sugar as well as sugar free and unsweetened varieties.  Each bottle of tea contains 75 mg of Epigallocatechin Gallate (EGCG), a natural and powerful antioxidant.

Hansen’s® Primal Energy Tea - In 2008, we introduced a new line of energy green teas in 16-ounce aluminum cans.  Each can of tea contains 100 mg of EGCG.

Juices for Children - Our Juice Blast® line of children’s multi-vitamin juice drinks is a dual-branded 100% juice line which was launched in conjunction with Costco Wholesale Corporation (“Costco”) and is sold through Costco stores.  Our Juice Slam™ line of children’s multi-vitamin juice drinks is a 100% juice line which we market to grocery store chain customers, the health food trade, and other customers. Both Juice Blast® and Juice Slam™ lines of children’s multi-vitamin juice drinks contain eleven essential vitamins and six essential minerals. Both the Juice Blast® and Juice Slam™ lines are marketed in 6.75-ounce aseptic boxes.  In addition, we also offer an organic Juice Slam™ in 6.75-ounce organic pouches.

In May 2001, we acquired the Junior Juice® beverage business.  The Junior Juice® product line is a 100% juice line offered in 4.23-ounce aseptic packages and is targeted at toddlers and preschoolers.  Certain flavors of the Junior Juice® line have calcium added and all flavors contain 100% of the daily recommended allowance of Vitamin C. In 2006, we extended the Junior Juice® line by adding organic juice products in 4.23-ounce aseptic boxes. Each of our organic Junior Juice® products have 100% juice and contain 100% of the daily recommended allowance of Vitamin C.

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Hansen’s® Organic Junior Water™ - In July 2008, we introduced our Hansen’s® Organic Junior Water™ line in 4.23-ounce aseptic packages created specially for children ages two to six years old.  Our Hansen’s® Organic Junior Water™ line of flavored water contains 100% of the daily recommended allowance of Vitamin C per serving, contains no preservatives, no artificial colors, no artificial flavors, no artificial sweeteners, no high fructose corn syrup and contains only thirty calories per serving.

Bottled Water - Our still water product was introduced in 1993 and is now sold in 0.5-liter plastic bottles, primarily to the food service trade. Sales of this product line are very limited.

During 2008, we continued to expand our existing product lines and further develop our markets.  In particular, we continued to focus on developing and marketing beverages that fall within the category generally described as the “alternative” beverage category, with particular emphasis on energy type drinks.

Other Products

We continue to evaluate and, where considered appropriate, introduce additional flavors and types of beverages to complement our existing product lines.  We will also evaluate, and may, where considered appropriate, introduce “functional” foods/snack foods that utilize similar channels of distribution and/or are complementary to our existing products and/or to which our brand names are able to add value.

We also develop and supply, on a limited basis, selected beverages in different formats to a limited number of customers with the objective of solidifying our relationship with those customers.

Manufacture and Distribution

We do not directly manufacture our products but instead outsource the manufacturing process to third party bottlers and contract packers.

We purchase concentrates, juices, flavors, supplements, cans, bottles, aseptic boxes, aseptic pouches, caps, labels, trays, boxes and other ingredients for our beverage products which are delivered to our various third party bottlers and co-packers.  Depending on the product, the third party bottlers or packers add filtered water and/or other ingredients and supplements for the manufacture and packaging of the finished products into Company-approved containers in accordance with our formulas.  In the case of sodas and other carbonated beverages, the bottler/packer adds carbonation to the products as part of the production process.

We are generally responsible for arranging for the purchase of and delivery to our third party bottlers and co-packers of the containers in which our beverage products are packaged.

All of our beverage products are manufactured by various third party bottlers and co-packers situated throughout the United States and in Europe, under separate arrangements with each party.  The majority of our co-packaging arrangements are on a month-to-month basis.  However, certain of our co-packing arrangements are described below:

(a)        Our agreement with Gluek Brewing Company (“Gluek”) pursuant to which Gluek packages certain of our energy drinks. This contract continues until May 2009 and is automatically extended for additional terms of one (1) year each, unless either party notifies the other in writing at least one hundred eighty (180) days prior to the last day of the then current term.

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(b)       Our agreement with Carolina Beer & Beverage (“Carolina”) pursuant to which Carolina packages certain of our energy drinks. This contract continues until April 11, 2009 and is automatically extended  for additional periods of one (1) year each, unless either party notifies the other in writing at least one hundred eighty (180) days prior to the last day of the then current term.

(c)        Our agreement with Lucerne Foods, Inc. (“Safeway Norwalk”) pursuant to which Safeway-Norwalk packages certain of our energy drinks and Hansen’s Natural Sodas®. This contract continues until March 31, 2009 and is automatically renewed annually thereafter, unless terminated by either party upon six (6) months written notice.

(d)       Our agreement with Seven-Up/RC Bottling Company of Southern California, Inc. (“Seven-Up”) pursuant to which Seven-Up packages certain of our energy drinks. This contract continues until March 31, 2009.

(e)        Our agreement with Nor-Cal Beverage Co. Inc. (“Nor-Cal”) pursuant to which Nor-Cal packages certain of our Hansen’s juices in PET plastic bottles. This contract continues until August 2009 and is automatically renewed for one (1) year terms thereafter unless terminated by either party not less than ninety (90) days before the end of the initial term or any renewal period.

(f)          Our agreement with Dairy Farmers of America, Inc. (“DFA”) pursuant to which DFA packages certain of our energy drinks. This contract continues until March 2010 and is automatically renewed for consecutive one (1) year periods, subject to mutually agreeable pricing, unless either party provides notice of cancellation at least ninety (90) days prior to the end of the initial term or subsequent extension period. Further, either party may terminate this agreement at its sole discretion at any time by providing the other party with one hundred eighty (180) days prior written notification specifying the date of termination.

(g)       Our agreement with Dr. Pepper Bottling Co. (“Dr. Pepper”) pursuant to which Dr. Pepper packages certain of our energy drinks. This contract continues until December 31, 2009 and is automatically renewed for additional terms of one (1) year at a time, unless terminated by either party  at least ninety (90) days prior to the last day of the then current term.

(h)       Our agreement with Giumarra & Associates Beverage Company (“Giumarra”) pursuant to which Giumarra packages certain of our energy drinks and juices.  This contract continues until June 28, 2009 and is automatically extended for additional periods of one (1) year, unless either party notifies the other in writing at least one hundred eighty (180) days prior to the last day of the then current term.

(i)           Our agreement with Pri-Pak, Inc. (“Pri-Pak”) pursuant to which Pri-Pak packages certain of our energy drinks. This contract continues indefinitely but may be terminated at any time by either party by giving ninety (90) days prior written notice.

(j)           Our agreement with O-AT-KA Milk Products Cooperative (“O-AT-KA”) pursuant to which O-AT-KA packages certain of our energy drinks. This contract continues until December 2010 and is automatically renewable for consecutive one (1) year periods, subject to mutually agreeable pricing, unless either party provides notice of cancellation at least ninety (90) days prior to the end of the initial term or subsequent extension period.

(k)        Our agreement with Olympic Food, Inc. (“OFI”) pursuant to which OFI packages certain of our energy drinks.  This contract continues until June 1, 2009 and shall automatically renew for successive one (1) year periods, unless one party gives the other written notice of its intention not to renew, at least one hundred twenty (120) days prior to the expiration of the initial term.

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In certain instances, equipment is purchased by us and installed at the facilities of our co-packers to enable them to produce certain of our products.  In general, such equipment remains our property and is to be returned to us upon termination of the packing arrangements with such co-packers or is amortized over a pre-determined number of cases that are to be produced at the facilities concerned.

We pack certain products outside of the West Coast region to enable us to produce products closer to the markets where they are sold and thereby reduce freight costs.  As distribution volumes in markets outside of California grow, we continue to secure additional packing arrangements closer to such markets to further reduce freight costs.

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, aseptic boxes, cans, glass, labels, flavors, juice concentrates, or supplement ingredients or certain sweeteners, or packing arrangements, we might not be able to satisfy demand on a short-term basis. (See “Part I, Item 1A — Risk Factors”).

Although our production arrangements are generally of short duration or are terminable upon our request, we believe a short disruption or delay would not significantly affect our revenues because alternative packing facilities in the United States with adequate capacity can usually be obtained for many of our products at commercially reasonable rates and/or within a reasonably short time period.  However, there are limited packing facilities in the United States, Canada, the United Kingdom and Europe with adequate capacity and/or suitable equipment for certain of our products, including Monster Energy® and Lost® Energy™ energy drinks, and Rumba®,  Samba and Tango energy juice in 8.3-ounce and/or 16-ounce and/or 24-ounce and/or 24-ounce cap-can and/or 32-ounce and/or 500ml aluminum cans and/or 500ml glass bottles, the Java Monster™ line of non-carbonated dairy based coffee drinks in 15-ounce cans and our aseptic juice products. A disruption or delay in production of any of such products could significantly affect our revenues from such products as alternative co-packing facilities in the United States, Canada, the United Kingdom or Europe, as the case may be, with adequate capacity may not be available for such products either at commercially reasonable rates and/or within a reasonably short time period, if at all.  Consequently, a disruption in production of such products could affect our revenues.  We continue to seek alternative and/or additional co-packing facilities in the United States, Canada, the United Kingdom and Europe with adequate capacity for the production of our various products to minimize the risk of a disruption in production.

During the first quarter of 2009, we ascertained that it was likely that our west coast copacker of our aseptic juice products would cease to produce such products in the near future.  We are endeavoring to secure alternative copacking facilities to replace that portion of our volume of such products. However, available copacking capacity for that portion of our volume of such products is limited and we may not be able to secure sufficient production timely or at all, which would cause a disruption in our ability to continue to supply that portion of our volume of such products to customers, either partially or at all.

During the second quarter of 2006, we entered into a distribution agreement with Cadbury Bebidas, S.A. de C.V. (“Cadbury Bebidas”), for exclusive distribution by Cadbury Bebidas throughout Mexico, excluding Baja California, of our Monster Energy® and Lost® EnergyTM energy products.  In December 2008, this distributor was notified of the termination of its distribution agreement on January 25, 2009.  This agreement was terminated on January 25, 2009.

During the second quarter of 2006, we entered into the Monster Beverages Off-Premise Distribution Coordination Agreement and the Allied Products Distribution Coordination Agreement (jointly, the “Off-Premise Agreements”) with Anheuser-Busch, Inc., a Missouri corporation (“AB”).  Under the Off-Premise Agreements, select Anheuser-Busch distributors (the “AB Distributors”) distribute and sell, in markets designated by us, our Monster Energy® and Lost® EnergyTM brands non-alcoholic energy drinks and Rumba®, Samba and Tango brand energy juice, as well as additional products that may be agreed between the parties.

During the first quarter of 2007, we entered into the On-Premise Distribution Coordination Agreement (the “On-Premise Agreement”) with AB.  Under the On-Premise Agreement, AB manages

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and coordinates the sale, distribution and merchandising of Monster Energy® energy drinks to on-premise retailers including bars, nightclubs and restaurants in territories approved by us.

During the first quarter of 2007, we entered into a distribution agreement with Pepsi-QTG Canada, a division of PepsiCo Canada, ULC (“Pepsi Canada”), for the exclusive distribution by Pepsi Canada throughout Canada of our Monster Energy®, Lost® EnergyTM and Hansen’s® energy products.  This agreement was terminated by us effective December 31, 2008.

During the fourth quarter of 2008, we entered into the Monster Energy Distribution Coordination Agreement (the “TCCC North American Coordination Agreement”) with The Coca-Cola Company (“TCCC”).  Pursuant to the TCCC North American Coordination Agreement, we have designated, and in the future may designate, territories in which bottlers from TCCC’s network of partially owned and independent bottlers, including Coca-Cola Enterprises, Inc. (“CCE”), Coca-Cola Bottling Company (“CCBC”), CCBCC Operations, LLC (“Consolidated”), United Bottling Contracts Company, LLC (“United”), and other TCCC independent bottlers (collectively, the “TCCC North American Bottlers”) will distribute and sell primarily our Monster Energy® beverages (the “Products”) in the United States and Canada.

During the fourth quarter of 2008, we entered into the Monster Energy Distribution Agreement with CCE pursuant to which CCE was appointed to distribute, directly and through certain sub-distributors, the Products in portions of twenty-four U.S. states (the “U.S. Territories”). We may designate additional territories within reasonable proximity to the U.S. Territories and CCE will use reasonable good faith efforts to add the additional territories.  During the fourth quarter of 2008, we entered into the Monster Energy Canadian Distribution Agreement with CCBC, pursuant to which CCBC has been appointed to distribute, directly and through certain sub-distributors, the Products in Canada, with performance commencing on January 1, 2009.  In addition, during the fourth quarter of 2008, we entered into distribution agreements with Consolidated, United and other TCCC North American Bottlers for the distribution of the Products in various territories within the United States.

During the fourth quarter of 2008, we entered into the Monster Energy International Coordination Agreement (the “TCCC International Coordination Agreement”) with TCCC.  Pursuant to the TCCC International Coordination Agreement, we have designated, and in the future may designate, countries in which we wish to appoint TCCC distributors to distribute and sell the Products.

During the fourth quarter of 2008, we entered into the Monster Energy International Distribution Agreement and the Monster Energy Belgium Distribution Agreement with CCE pursuant to which CCE has been appointed to distribute directly, and through certain sub-distributors, the Products in Great Britain, France, Belgium, the Netherlands, Luxembourg and Monaco.

During the fourth quarter of 2008, we entered into a distribution agreement with Comercializadora Eloro, S.A., a subsidiary of Grupo Jumex, for exclusive distribution throughout Mexico, excluding the Baja and Sonora regions, of our Monster Energy® and Monster Energy® KhaosTM energy drinks as well as select Java MonsterTM non-carbonated dairy based coffee drinks.  Distribution under this agreement commenced January 26, 2009.

Distribution levels vary from state to state and from product to product.  Certain of our products are sold in Canada and Mexico.  We also sell a limited range of our products to distributors outside of the United States, including in the Caribbean, Central and South America, Japan, Korea, Saudi Arabia, Hong Kong, South Africa, the United Kingdom, Ireland, France, the Netherlands, Spain, Belgium, Luxembourg, Monaco and Sweden.  Gross sales outside the United States accounted for $96.3 million, $55.7 million and $24.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. The reclassification of certain military customers from gross sales to customers within the United States to gross sales to customers outside the United States, resulted in an increase in gross sales

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outside the United States of $14.8 million and $5.5 million for the years ended December 31, 2007 and 2006, respectively, over amounts previously reported.

We continually seek to expand distribution of our products by entering into agreements with regional bottlers or other direct store delivery distributors with established sales, marketing and distribution organizations.  Many of our bottlers and distributors are affiliated with and manufacture and/or distribute other soda and non-carbonated brands and other beverage products.  In many cases, such products compete directly with our products.

During 2008, we continued to expand distribution of our products both outside of California and outside of the United States.  We expanded our sales force to support and grow sales, primarily of Monster Energy® drinks, Java MonsterTM line of non-carbonated dairy based coffee drinks and Monster Hitman Energy ShooterTM’s.

Our Blue Sky® products are sold primarily to the health food trade, natural food chains and mainstream grocery store chains, through specialty health food distributors.

In September 2007, we relocated our corporate offices to newly leased offices in Corona, California. In October 2006, we also entered into a lease agreement pursuant to which we leased 346,495 square feet of warehouse and distribution space located in Corona, California.  This lease commitment provides for minimum rental payments for 120 months, commencing March 2007, excluding renewal options.  The monthly rental payments are $167,586 at the commencement of the lease and increase over the lease term by 7.5% at the end of each 30 month period. The new warehouse and distribution space replaced our previous warehouse and distribution space also located in Corona, California.

In October 2006, we entered into an agreement to acquire 1.8 acres of vacant land for a purchase price of $1.4 million, which is currently in escrow.  In August 2008, we completed the purchase of an additional 1.09 acres of adjacent land for a purchase price of $1.4 million.  The properties are located adjacent to the newly leased warehouse and distribution space.  We are reviewing the feasibility of constructing a new office building and parking lot on these combined parcels of land to replace our existing office space.

We have sublet a small portion of our previous office, warehouse and distribution space on a month to month basis.  In addition, we continue to utilize the remaining portion of this space as overflow warehousing for our main warehouse.  This lease expires in October 2010. (See “Part I, Item 2 – Properties”).

We also rent additional warehouse space on a short-term basis from time to time in public warehouses situated throughout the United States and Canada.

Raw Materials and Suppliers

The principal raw materials used in the manufacturing of our products are aluminum cans, glass bottles and PET plastic bottles as well as juice concentrates, sugar, sucralose, milk and cream, the costs of which are subject to fluctuations. Overall, the prices of aluminum cans, PET plastic bottles, certain juice concentrates and sugar increased in 2008 as compared to 2007. In particular, prices of apple concentrate increased materially; although, such pricing did retreat towards the end of 2008. Furthermore, we have secured a major part of our 2009 supply of apple concentrate at prices below the overall prices incurred in 2008. The dairy components in our Java MonsterTM line of non-carbonated dairy based coffee drinks saw a reduction in 2008 as compared to 2007.  Sucralose prices stayed constant in 2008.

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We purchase beverage flavors, concentrates, juices, supplements, cane sugar, sucrose, sucralose and other sweeteners as well as other ingredients from independent suppliers located in the United States and abroad.

Generally, raw materials utilized by us in our business are readily available from numerous sources.  However, certain raw materials are manufactured by only one company.  We purchase sucralose, which is used alone or in combination with Acesulfame-K in our low-calorie products, flavors, vitamin blends and herbs from single manufacturers.  Additionally, certain of our cans are only manufactured by single companies in the United States.

With regard to our Java MonsterTM line of non-carbonated dairy based coffee drinks, the dairy industry is subject to shortages and higher demand from time to time which may result in higher prices.

With regard to our fruit juice and juice-drink products, the industry is subject to variability of weather conditions, which may result in higher prices and/or lower consumer demand for juices.

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 certain of our concentrates readily available to us and we may be unable to obtain these flavors or concentrates from alternative suppliers on short notice.  We have identified alternative suppliers of many of the supplements contained in many of our beverages.  However, industry-wide shortages of certain fruits and fruit juices, and 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.

We continually endeavor to develop back-up sources of supply for certain of our flavors and concentrates as well as to negotiate arrangements with suppliers which would enable us to obtain access to certain concentrates or flavor formulas in certain circumstances.  We have been partially successful in these endeavors.  Additionally, in a limited number of cases, contractual restrictions and/or the necessity to obtain regulatory approvals and licenses may limit our ability to enter into agreements with alternative suppliers and manufacturers and/or distributors.

In connection with the development of new products and flavors, independent suppliers bear a large portion of the expense of product development, thereby enabling us to develop new products and flavors at relatively low cost.  We have historically developed and successfully introduced new products and flavors and packaging for our products and intend to continue developing and introducing additional new beverages and flavors.

Competition

The beverage industry is highly competitive.  The principal areas of competition are pricing, packaging, development of new products and flavors and marketing campaigns.  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 we do.

Important factors affecting our ability to compete successfully include taste and flavor of products, trade and consumer promotions, rapid and effective development of new, unique cutting edge products, attractive and different packaging, branded product advertising and pricing.  We also compete for distributors who will focus on the sale of our products ahead of those of our competitors, provide stable and reliable distribution and secure adequate shelf space in retail outlets.  Competitive pressures in the “alternative”, energy, coffee and “functional” beverage categories could cause our products to be unable to gain or to lose market share or we could experience price erosion, which could have a material adverse affect on our business and results.

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We have experienced substantial competition from new entrants in the energy drink and energy shot categories.  A number of companies who market and distribute iced teas and juice cocktails in larger volume packages, such as 16- and 20-ounce glass bottles, including Sobe, Snapple Elements, Arizona and Fuse, have added supplements to their products with a view to marketing their products as “functional” or energy beverages or as having “functional” benefits.  We believe that many of those products contain lower levels of supplements and principally deliver refreshment.  In addition, many competitive products are positioned differently from our energy or “functional” drinks.  Our smoothies and tea lines are positioned more closely against those products.

We compete not only for consumer preference, but also for maximum marketing efforts by multi-brand licensed bottlers, brokers and distributors, many of which have a principal affiliation with competing companies and brands.  Our products compete with all liquid refreshments and with products of much larger and substantially better financed competitors, including the products of numerous nationally and internationally known producers such as TCCC, PepsiCo, Inc., Cadbury Schweppes plc, Red Bull Gmbh, Kraft Foods, Inc., Nestle Beverage Company, Tree Top and Ocean Spray. We also compete with companies that are smaller or primarily local in operation.  Our products also compete with private label brands such as those carried by grocery store chains, convenience store chains and club stores.

Our natural sodas compete directly with traditional soda products including those marketed by TCCC, PepsiCo, Inc. and Cadbury Schweppes plc, as well as with carbonated beverages marketed by smaller or primarily local companies such as Jones Soda Co., Clearly Canadian Beverage Company, Crystal Geyser, J.M. Smucker Company and with private label brands such as those carried by grocery store chains, convenience store chains and club stores.

Our fruit juice smoothies compete directly with Kern’s, Jumex, Jugos del Valle and Libby’s Nectars, and V8 Smoothies, as well as with single serve juice products produced by many competitors.  Such competitive products are packaged in glass and PET bottles ranging from 8- to 48-ounces in size and in 11.5-ounce aluminum cans.  The juice content of such competitive products ranges from 1% to 100%.

Our apple and other juice products compete directly with Tree Top, Mott’s, Martinelli’s, Welch’s, Ocean Spray, Tropicana, Minute Maid, Langers, Apple and Eve, Seneca, Northland, Juicy Juice and also with other brands of apple juice and juice blends, especially store brands.

Our energy drinks, including Hansen’s® energy, Diet Red Energy®, Monster Energy®, Lost® Energy™, Joker Mad Energy™ and Rumba®, Samba and Tango energy juice in 8.3-ounce and/or 16-ounce and/or 24-ounce and/or 32-ounce and/or 500ml aluminum cans and/or 500ml glass bottles, and our Monster Hitman Energy Shooter™’s compete directly with Red Bull, Rockstar, Full Throttle, No Fear, Amp, Adrenaline Rush, NOS, Redline, 180, Red Devil, Rip It, Vitaminenergy, 5-Hour Energy Shot, Redline Energy Shot, NOS Energy Shot, Rockstar Energy Shot, Full Throttle Quick Shot, Amp Energy Shot and many other brands.  TCCC and PepsiCo Inc. also market and/or distribute additional products in that market segment such as Pepsi Max, Mountain Dew, Mountain Dew MDX and Vault.

Our Java Monster™ line of non-carbonated dairy based coffee drinks competes directly with Starbucks Frappuccino, Starbucks Double Shot, Starbucks Double Shot Energy Plus Coffee and other Starbucks coffee drinks, Rockstar Roasted, Caribou Coffee, Cinnabon coffee drinks, Godiva dairy based drinks and Full Throttle Coffee.

Sales and Marketing

Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness and trial through sampling both in stores and at events.  We use our branded vehicles and other promotional vehicles at events where we sample our products to consumers.  We utilize “push-pull”

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methods to achieve maximum shelf and display space exposure in sales outlets and maximum demand from consumers for our products, including advertising, in-store promotions and in-store placement of point-of-sale materials and racks, prize promotions, price promotions, competitions, endorsements from selected public and extreme sports figures, coupons, sampling and sponsorship of selected causes such as cancer research.  Our extreme sports team endorsements include teams such as the Pro Circuit – Kawasaki Motocross and Supercross teams, Kawasaki Factory Motocross and Supercross teams, Robby Gordon Racing Team, Ken Block Rally Racing Team and the Tech 3 Moto GP Team (new for 2009).  Our individual athlete and/or personality endorsements include extreme sports figures and athletes such as NASCAR Camping World Truck Series racer Ricky Carmichael, Moto GP motorcycle racer Valentino Rossi (new for 2009), television personalities such as Rob Dyrdek as well as many athletes that compete in other sports related activities, particularly, the Winter and Summer X-Games, supercross, motocross, freestyle motocross, surfing, skateboarding, wakeboarding, skiing, snowboarding, BMX, mountain bike downhill racing, snowmobile freestyle, snowmobile racing, etc.  Our event endorsements include a wide range of events such as the Monster Energy® Supercross Series, the AMA Pro Motocross Championship Series and the Vans Warped Tour. In-store posters, outdoor posters, print, radio and television advertising, together with price promotions and coupons, may also be used to promote our brands.

We believe that one of the keys to success in the beverage industry is differentiation, which entails making our products visually distinctive from other beverages on the shelves of retailers.  We review our products and packaging on an ongoing basis and, where practical, endeavor to make them better and unique.  The labels and graphics for many of our products are redesigned from time to time to maximize their visibility and identification, wherever they may be placed in stores and we will continue to reevaluate the same from time to time.

Where appropriate we partner with retailers to assist our marketing efforts.  For example, while we retain responsibility for the marketing of the Juice Slam® line of children’s multi-vitamin juice drinks, Costco has undertaken partial responsibility for the marketing of the Juice Blast® line.

We increased expenditures for our sales and marketing programs by approximately 24.1% in 2008 compared to 2007.  As of December 31, 2008, we employed 1,020 employees in sales and marketing activities, of which 331 were employed on a full-time basis.

Customers

Our customers are typically retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, full service beverage distributors, health food distributors and food service customers.  Gross sales to our various customer types for the years ended December 2008, 2007 and 2006 are reflected below.  The allocations below reflect changes made by us to the categories historically reported.

Our customers include CCE, CCBC, Consolidated, United and other TCCC North American Bottlers, Wal-Mart, Inc. (including Sam’s Club), AB Distributors, Kalil Bottling Group, Trader Joe’s, John Lenore & Company, Pepsi Canada (terminated by us effective December 31, 2008), Swire Coca-Cola, Costco, The Kroger Co., Safeway Inc. and Albertsons.  A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations.  The Dr. Pepper Snapple Group,

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Inc., a former customer of the DSD division, accounted for approximately 13%, 16% and 19% of our net sales for the years ended December 31, 2008, 2007 and 2006, respectively.  Our distribution agreement with the Dr. Pepper Snapple Group, Inc. was terminated by us effective November 9, 2008.  The related terminated distributor territories are now serviced by a combination of TCCC North American Bottlers and AB Distributors.  Wal-Mart, Inc. (including Sam’s Club), a customer of both the DSD and Warehouse divisions, accounted for approximately 11%, 12% and 12% of our net sales for the years ended December 31, 2008, 2007 and 2006, respectively.

Seasonality

Sales of ready-to-drink beverages are somewhat seasonal, with the second and third calendar quarters accounting for the highest sales volumes.  The volume of sales in the beverage business may be affected by weather conditions.  Sales of our beverage products may become increasingly subject to seasonal fluctuations as more sales occur outside of California with respect to our products.  However, the energy drink category appears to be less seasonal than traditional beverages.  As the percentage of our sales that are represented by such products continues to increase, seasonal fluctuations will be further mitigated.  Quarterly fluctuations may also be affected by other factors, including the introduction of new products, the opening of new markets where temperature fluctuations are more pronounced, the addition of new bottlers and distributors, changes in the mix of sales of our finished products and changes in and/or increased advertising, marketing and promotional expenses.

Intellectual Property

We own numerous trademarks that are very important to our business.  Depending upon the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not been found to have become generic.  Registrations of trademarks can generally be renewed as long as the trademarks are in use.  We also own the copyright in and to numerous statements made and content appearing on the packaging of our products.

We own the Hansen’s®, Monster Energy®, M (stylized)® and the M Monster Energy® trademarks.  These trademarks are crucial to our business and are registered in the U.S. Patent and Trademark Office and in various countries throughout the world. We own a number of other trademark registrations in a number of countries around the world including, but not limited to:  Vidration®, A New Kind a Buzz®, Unleash the Beast!®, AssaultÒ, Mean BeanÒ, Loca MocaÒ, Hansen’s Energy®, Blue Energy®, Energade®, RumbaÒ, FizzitÒ, Hansen’s E2O Energy Water®, Hansen’s Slim Down®, Power Formula®, The Real Deal®, Liquidfruit®, California’s Natural Choice®, Medicine Man®, Hansen’s Power®, B·Well®, Anti-ox®, D-stress®, Stamina®, Immunejuice®, Hansen’s Natural Multi-Vitamin Juice Slam®, Juice Blast®, Red Rocker®, and Hansen’s Natural Soda® in the United States and, the Monster®, Monster Energy®, M(stylized)®, Hansen’s® and Smoothie® trademarks.

We have applied to register a number of trademarks in the United States and elsewhere including, but not limited to:  Monster™, Monster Energy™, M(stylized)™, Khaos™, Monster M-80™, BFCÔ, Predator™, Mutant™, Ace™,  Junior WaterÔ,  Fizz Bomb™, Java Monster™, Java Monster Big Black™, Monster OriginaleÔ, Chai Hai™, Irish Blend™, Java Monster Russian™, Nut-Up™, Lo-Ball™, The Juice is Loose™, Monster MIXXD™, Heavy Metal™, Monster Black IceÔ, Monster HitmanÔ, Monster Hitman Energy ShooterÔ and Energy Pro™.

In September 2000, in connection with the acquisition of the Blue Sky Natural Beverage business, we acquired the Blue Sky® trademark which is registered in the United States and Canada, through our wholly owned subsidiary Blue Sky.

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In May 2001, in connection with the acquisition of the Junior Juice beverage business, we acquired the Junior Juice® trademark, which is registered in the United States, through our wholly owned subsidiary Junior Juice.

In October 2006, we acquired the Unbound Energy® trademark which is registered in the United States. On February 18, 2009, we assigned all of our right, title and interest in and to the Unbound Energy® trademark to BP Products North America, Inc.

Government Regulation

The production, distribution and sale in the United States of many of our products is subject to various federal and state regulations, including but not limited to: the Federal Food, Drug and Cosmetic Act; the Dietary Supplement Health and Education Act of 1994; the Occupational Safety and Health Act; various environmental statutes; and various other federal, state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients of such products.  Outside the United States, the production, distribution and sale of many of our products is also subject to numerous similar and other statutes and regulations.

California law requires that a specific warning appear on any product that contains a component listed by the State of California as having been found to cause cancer or birth defects.  The law exposes all food and beverage producers to the possibility of having to provide warnings on their products because the law recognizes no generally applicable quantitative thresholds below which a warning is not required.  Consequently, even trace amounts of listed components can expose affected products to the prospect of warning labels.  Products containing listed substances that occur naturally in the product or that are contributed to the product solely by a municipal water supply are generally exempt from the warning requirement.  While none of our beverage products are required to display warnings under this law, we cannot predict whether an important component of any of our products might be added to the California list in the future.  We also are unable to predict whether, or to what extent, a warning under this law would have an impact on costs or sales of our products.

Measures have been enacted in various localities and states that require that a deposit be charged for certain non-refillable beverage containers.  The precise requirements imposed by these measures vary.  Other deposit, recycling or product stewardship proposals have been introduced in certain states and localities and in Congress, and we anticipate that similar legislation or regulations may be proposed in the future at the local, state and federal levels, both in the United States and elsewhere.

Compliance with Environmental Laws

Our facilities in the United States are subject to federal, state and local environmental laws and regulations.  Compliance with these provisions has not had, and we do not expect such compliance to have, any material adverse effect upon our capital expenditures, net income or competitive position.

In California, we are required to collect redemption values from our customers and to remit such redemption values to the State of California Department of Conservation based upon the number of cans and bottles of certain carbonated and non-carbonated products sold.  In certain other states and Canada where Hansen’s® products are sold, we are also required to collect deposits from our customers and to remit such deposits to the respective state agencies based upon the number of cans and bottles of certain carbonated and non-carbonated products sold in such states.

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Employees

As of December 31, 2008, we employed a total of 1,270 employees of which 564 were employed on a full-time basis.  Of our 1,270 employees, we employ 250 in administrative and operational capacities and 1,020 persons in sales and marketing capacities.

Available Information

Our Internet address is www.hansens.com.  Information contained on our website is not part of this annual report on Form 10-K.  Our annual report on Form 10-K and quarterly reports on Form 10-Q will be made available free of charge on www.hansens.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”).   In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing or telephoning us at the following address or telephone number:

Hansen Natural Corporation

550 Monica Circle, Suite 201

Corona, CA 92880

(951) 739-6200

(800) HANSENS

(800) 426-7367

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ITEM 1A.               RISK FACTORS

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

Current global economic conditions may adversely affect our industry, business and results of operations.

The global credit and financial markets have been experiencing extreme disruptions in recent months, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. There can be no assurance that there will not be further deterioration in credit and financial markets and confidence in economic conditions. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The current adverse global economic conditions and tightening of credit in financial markets may lead consumers to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers or customers could result in product delays, increased accounts receivable defaults and inventory challenges. We are unable to predict the likely duration and severity of the current disruptions in the credit and financial markets and adverse global economic conditions, and if the current uncertain economic conditions continue or further deteriorate, our business and results of operations could be materially and adversely affected.

Increased competition could hurt our business.

The beverage industry is highly competitive.  The principal areas of competition are pricing, packaging, development of new products and flavors and marketing campaigns.  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 we do.

Important factors affecting our ability to compete successfully include the taste and flavor of our products, trade and consumer promotions, rapid and effective development of new, unique cutting edge products, attractive and different packaging, branded product advertising and pricing.  Our products compete with all liquid refreshments and with products of much larger and substantially better financed competitors, including the products of numerous nationally and internationally known producers such as The Coca-Cola Company, PepsiCo Inc., Cadbury Schweppes plc, Red Bull Gmbh, Kraft Foods Inc., Nestle Beverage Company, Tree Top and Ocean Spray.  We also compete with companies that are smaller or primarily local in operation.  Our products also compete with private label brands such as those carried by grocery store chains, convenience store chains, and club stores.  Our Java Monster™ line of non-carbonated dairy based coffee drinks competes directly with Starbucks Frappuccino, Starbucks Double Shot, Starbucks Double Shot Energy Plus Coffee and other Starbucks coffee drinks, Rockstar Roasted, Caribou Coffee, Cinnabon coffee drinks, Godiva dairy based drinks and Full Throttle Coffee.

There can be no assurance that we will not encounter difficulties in maintaining our current revenues or market share or position due to competition in the beverage industry.  If our revenues decline, our business, financial condition and results of operations could be adversely affected.

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We derive a substantial portion of revenues from our energy drinks and competitive pressure in the “energy drink” category could adversely affect our operating results.

A substantial portion of our sales are derived from our energy drinks, including in particular our Monster Energy® brand energy drinks. Our DSD segment which comprises primarily energy drinks, represented 90.7% of net sales for the year ended December 31, 2008.  Any decrease in the sales of our Monster Energy® brand energy drinks could significantly adversely affect our future revenues and net income. Historically, we have experienced substantial competition from new entrants in the energy drink category.  Our energy drinks compete directly with Red Bull, Rockstar, Full Throttle, No Fear, Amp, Adrenaline Rush, NOS, Redline, 180, Red Devil, Rip It, Vitaminenergy, 5-Hour Energy Shot, Redline Energy Shot, NOS Energy Shot, Rockstar Energy Shot, Full Throttle Quick Shot, Amp Energy Shot and many other brands.  A number of companies who market and distribute iced teas and juice cocktails in different packages, such as 16- and 20-ounce glass bottles, including Sobe, Snapple, Arizona, Fuse, and Vitamin Water, have added supplements to their products with a view to marketing their products as “functional” or energy beverages or as having “functional” benefits.  In addition, certain large companies such as TCCC and PepsiCo Inc., market and/or distribute products in that market segment such as Pepsi Max, Mountain Dew, Mountain Dew MDX and Vault.  Competitive pressures in the energy drink category could impact our revenues or we could experience price erosion or lower market share, any of which could have a material adverse affect on our business and results.

Change in consumer preferences may reduce demand for some of our products.

There is increasing awareness and concern for the health consequences of obesity.  This may reduce demand for our non-diet beverages, which could affect our profitability.

Consumers are seeking greater variety in their beverages. Our future success will depend, in part, upon our continued ability to develop and introduce different and innovative beverages.  In order to retain and expand our market share, we must continue to develop and introduce different and innovative beverages and be competitive in the areas of quality and health, although there can be no assurance of our ability to do so. There is no assurance that consumers will continue to purchase our products in the future.  Additionally, many of our products are considered premium products and to maintain market share during recessionary periods we may have to reduce profit margins which would adversely affect our results of operations.  Product lifecycles for some beverage brands and/or products and/or packages may be limited to a few years before consumers’ preferences change.  The beverages we currently market are in varying stages of their lifecycles and there can be no assurance that such beverages will become or remain profitable for us.  The beverage industry is subject to changing consumer preferences and shifts in consumer preferences may adversely affect us if we misjudge such preferences.  We may be unable to achieve volume growth through product and packaging initiatives.  We also may be unable to penetrate new markets.  If our revenues decline, our business, financial condition and results of operations will be adversely affected.

We rely on bottlers and other contract packers to manufacture our products. If we are unable to maintain good relationships with our bottlers and contract packers and/or their ability to manufacture our products becomes constrained or unavailable to us, our business could suffer.

We do not directly manufacture our products, but instead outsource such manufacturing to bottlers and other contract packers.  In the event of a disruption or delay, we may be unable to procure alternative packing facilities at commercially reasonable rates and/or within a reasonably short time period.  In addition, there are limited alternative packing facilities in the United States with adequate capacity and/or suitable equipment for many of our products, including Hansen’s® brand energy drinks in 8.3-ounce cans, our PET tea line, Hansen’s® Sparkling beverages in 10.5-ounce sleek cans, aseptic juice products, juices in 64-ounce PET plastic bottles,  Monster Energy®, Lost® Energy™, Rumba®, Samba, Tango and Joker Mad EnergyTM energy drinks in 8.3-ounce and/or 16-ounce and/or 24-ounce

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and/or 32-ounce and/or 500ml aluminum cans and/or 500ml glass bottles, our Java MonsterTM line of non-carbonated dairy based coffee drinks in 15-ounce cans, Monster Hitman Energy ShooterTM’s and other products.   A disruption or delay in production of any of such products could significantly affect our revenues from such products as alternative co-packing facilities in the United States with adequate capacity may not be available for such products either at commercially reasonable rates, and/or within a reasonably short time period, if at all.  Consequently, a disruption in production of such products could adversely affect our revenues.

We rely on bottlers and distributors to distribute our DSD products.  If we are unable to secure such bottlers and distributors and/or we are unable to maintain good relationships with our existing bottlers and distributors, our business could suffer.

We continually seek to expand distribution of our products by entering into agreements with regional bottlers or other direct store delivery distributors having established sales, marketing and distribution organizations.  Many of our bottlers and distributors are affiliated with and manufacture and/or distribute other soda and non-carbonated brands and other beverage products (both alcoholic and non-alcoholic), including energy drinks.  In many cases, such products compete directly with our products.

The marketing efforts of our distributors are important for our success.  If our DSD brands prove to be less attractive to our existing bottlers and distributors and/or if we fail to attract additional bottlers and distributors, and/or our bottlers and/or distributors do not market and promote our products with greater focus in preference to the products of our competitors, our business, financial condition and results of operations could be adversely affected.

The TCCC North American Bottlers and AB Distributors are our primary domestic and international distributors of our Monster Energy® beverages.  If we are unable to maintain good relationships with the TCCC North American Bottlers and AB Distributors, or if the TCCC North American Bottlers and/or AB Distributors do not market and promote our products above the products of our competitors, sales of our Monster Energy® beverages could be adversely affected.

Our customers are material to our success.  If we are unable to maintain good relationships with our existing customers, our business could suffer.

Unilateral decisions could be taken by our distributors, convenience chains, grocery chains, specialty chain stores, club stores and other customers to discontinue carrying all or any of our products that they are carrying at any time, which could cause our business to suffer.

The Dr. Pepper Snapple Group, Inc., a former customer of the DSD division, accounted for approximately 13%, 16% and 19% of our net sales for the years ended December 31, 2008, 2007 and 2006, respectively.  Our distribution agreement with the Dr. Pepper Snapple Group, Inc. was terminated by us effective November 9, 2008.  The related terminated distributor territories are now serviced by a combination of the TCCC North American Bottlers and AB Distributors.  If the TCCC North American Bottlers and/or AB Distributors are generally not as successful in selling our products as the Dr. Pepper Snapple Group, Inc. was, this could have a material adverse effect on our financial condition and consolidated results of operations.

Wal-Mart, Inc. (including Sam’s Club), a customer of both the DSD and Warehouse divisions, accounted for approximately 11%, 12% and 12% of our net sales for each of the years ended December 31, 2008, 2007 and 2006, respectively.  A decision by Wal-Mart, Inc. (including Sam’s Club), or any other large customer, to decrease the amount purchased from us or to cease carrying our products could have a material adverse effect on our financial condition and consolidated results of operations.

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Increases in cost or shortages of raw materials or increases in costs of co-packing could harm our business.

The principal raw materials used by us are aluminum cans, glass bottles and PET plastic bottles as well as juice concentrates, sugar, sucralose, milk and cream, the costs of which are subject to fluctuations. Overall, the prices of aluminum cans, PET plastic bottles, certain juice concentrates and sugar increased in 2008 as compared to 2007.  In addition, certain of our co-pack 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 rise in the future and whether we will be able to pass any of such increases on to our customers.  We do not use hedging agreements or alternative instruments to manage the risks associated with securing sufficient ingredients or raw materials.

In addition, some of these raw materials, such as sucralose and certain sizes of cans, are available from a limited number of suppliers.  Sucralose, which is used in many of our products including our low-calorie products, is purchased by us from a single manufacturer. While we believe that our 2009 sucralose volume allocation will be sufficient to meet the demand for our products that contain sucralose, we may need to reformulate certain of those products that contain sucralose with alternative sweetener systems to avoid an interruption in supply of those products, should the need arise.

Our failure to accurately estimate demand for our products could adversely affect our business and financial results.

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, sucralose, 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 juice concentrates, supplements and sweeteners have been and could, from time to time in the future, be experienced.  Such shortages 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 generally do not use hedging agreements or alternative instruments to manage this risk.

The costs of packaging supplies are subject to price increases from time to time and we may be unable to pass all or some of such increased costs on to our customers.

Many of our packaging supplies contracts allow our suppliers to alter the costs they charge us for packaging supplies based on changes in the costs of the underlying commodities that are used to produce those packaging supplies, such as resin for PET bottles, aluminum for cans, pulp for cartons and/or trays.  These changes in the prices we pay for our packaging supplies occur at certain predetermined times that vary by product and supplier.  In some cases, we fix the prices of certain packaging supplies for a reasonable period. In other cases, we bear the risk of increases in the costs of these packaging supplies, including the underlying costs of the commodities that comprise these packaging supplies. We do not use derivative instruments to manage this risk.  If the costs of these packaging supplies increase, we may be unable to pass these costs along to our customers through corresponding adjustments to the prices we charge, which could have a material adverse effect on our results of operations.

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.

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 certain of our concentrates readily available to

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us and we may be unable to obtain these flavors or concentrates from alternative suppliers on short notice. Industry-wide shortages of certain juice concentrates, supplements and sweeteners have been, and could, from time to time in the future, be experienced.  Such shortages could interfere with and/or delay production of certain of our products.  If we have to replace a flavor supplier, we could experience temporary disruptions in our ability to deliver products to our customers which could have a material adverse effect on our results of operations.

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

We own numerous trademarks that are very important to our business.  We also own the copyright in and to a portion of the content on the packaging of our products.  We regard our trademarks, copyrights, and similar intellectual property as critical to our success and attempt to protect such property with registered and common law trademarks and copyrights, restrictions on disclosure and other actions to prevent infringement.  Product packages, mechanical designs and artwork are important to our success and we take action to protect against imitation of our packaging and trade dress and to protect our trademarks and copyrights as necessary.  However, there can be no assurance that other third parties will not infringe or misappropriate our trademarks and similar proprietary rights.  If we lose some or all of our intellectual property rights, our business may be materially adversely affected.

Significant changes in government regulation may hinder sales.

The production, distribution and sale in the United States of many of our products is subject to various federal and state regulations, including, but not limited to: the Federal Food, Drug and Cosmetic Act; the Dietary Supplement Health and Education Act of 1994; the Occupational Safety and Health Act; various environmental statutes; and various other federal, state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients of such products. New statutes and regulations may also be instituted in the future. 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 such products may have to be recalled and/or reformulated and/or packaging changed, thus adversely affecting our financial condition and operations. California law requires that a specific warning appear on any product that contains a component listed by the State of California as having been found to cause cancer or birth defects.  While none of our beverage products are required to display warnings under this law, we cannot predict whether an important component of any of our products might be added to the California list in the future.  We also are unable to predict whether or to what extent a warning under this law would have an impact on costs or sales of our products.

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

Our success depends on our ability to maintain and build brand image for our existing products, new products and brand extensions. We have no assurance that our advertising, marketing and promotional programs 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 if false or unfounded, could tarnish the image of the affected brands and may cause consumers to choose other products.  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.

While we have to date not experienced any credible product liability litigation, there is no assurance that we will not experience such litigation in the future.  In the event we were to experience product liability claims or a product recall, our financial condition and business operations could be materially adversely effected.

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If we do not maintain sufficient inventory levels or if we are unable to deliver our products to our customers in sufficient quantities, or if our retailers’ inventory levels are too high, our operating results will be adversely affected.

If we do not accurately anticipate the future demand for a particular product or the time it will take to obtain new inventory, our inventory levels will not be appropriate and our results of operations may be negatively impacted.  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. In order to be able to deliver our products on a timely basis, we need to maintain adequate inventory levels of the desired products.  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 unfavorably impact our future sales and adversely affect our operating results.

If we are not able to retain the full-time services of senior management there may be an adverse effect on our operations and/or our operating performance until we find suitable replacements.

Our business is dependent, to a large extent, upon the services of our senior management.  We do not maintain key person life insurance for any members of our senior management.  The loss of services of either Mr. Sacks, Chairman and Chief Executive Officer, Mr. Schlosberg, President and Chief Financial Officer, or any other key members of our senior management could adversely affect our business until suitable replacements can be found.  There may be a limited number of personnel with the requisite skills to serve in these positions and we may be unable to locate or employ such qualified personnel on acceptable terms.

Weather could adversely affect our supply chain and demand for our products.

With regard to fruit juice, fruit juice concentrates and natural flavors, the beverage industry is subject to variability of weather conditions, which may result in higher prices and/or the nonavailability of any of such items.  Sales of our products may also be influenced to some extent by weather conditions in the markets in which we operate, particularly in areas outside of California.  Weather conditions may influence consumer demand for certain of our beverages, which could have an adverse effect on our results of operations.

Potential changes in accounting practices and/or taxation may adversely affect our financial results.

We cannot predict the impact that future changes in accounting standards or practices may have on our financial results.  New accounting standards could be issued that could change the way we record revenues, expenses, assets and liabilities.  These changes in accounting standards could adversely affect our reported earnings.  Increases in direct and indirect income tax rates could affect after tax income.   Equally, increases in indirect taxes (including environmental taxes pertaining to the disposal of beverage containers) could affect our products’ affordability and reduce our sales.

Volatility of stock price may restrict sale opportunities.

Our stock price is affected by a number of factors, including stockholder expectations, financial results, the introduction of new products by us and our competitors, general economic and market conditions, estimates and projections by the investment community and public comments by other persons and many other factors, many of which are beyond our control.  We may be unable to achieve analysts’ earnings forecasts, which may be based on projected volumes and sales of many product types and/or new products, certain of which are more profitable than others.  There can be no assurance that the Company will achieve projected levels or mixes of product sales. As a result, our stock price is subject to significant volatility and stockholders may not be able to sell our stock at attractive prices. 

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During the fiscal year ended December 31, 2008, our stock price high was $45.63 and stock price low was $20.52.

Provisions in our organizational documents and control by insiders may prevent changes in control even if such changes would be beneficial to other stockholders.

Our organizational documents may limit changes in control.  Furthermore, as of February 6, 2009, Mr. Sacks and Mr. Schlosberg together may be deemed to control a maximum of 22.1% of our outstanding common stock.  Consequently, Mr. Sacks and Mr. Schlosberg could exercise significant control on matters submitted to a vote of our stockholders, including electing directors, amending organizational documents and disapproving extraordinary transactions such as a takeover attempt, even though such actions may be favorable to the other common stockholders.

Our cash flow may not be sufficient to fund our long term goals.

We may be unable to generate sufficient cash flow to support our capital expenditure plans and general operating activities.  In addition, the terms and/or availability of our credit facility and/or the activities of our creditors could affect the financing of our future growth.

Our investments in marketable securities are subject to risks which may cause losses and affect the liquidity of these investments.

At December 31, 2008, we had $256.8 million in cash and cash equivalents and $118.7 million in short- and long-term investments. We have historically invested these amounts in U.S. Treasury bills, government agencies and municipal securities (which may have an auction reset feature), corporate notes and bonds, commercial paper and money market funds meeting certain criteria. Certain of these investments are subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets and caused credit and liquidity issues. These market risks associated with our investment portfolio may have a negative adverse effect on our future results of operations, liquidity and financial condition.

Certain of our short-term investments and all of our long-term investments are comprised of municipal or educational related or other public body notes with an auction reset feature (“auction rate securities”). The majority of these notes carry an investment grade or better credit rating and are additionally backed by various federal agencies and/or monoline insurance companies. The applicable interest rate is reset at pre-determined intervals, usually every 7 to 35 days.  Liquidity for these auction rate securities was typically provided by an auction process which allowed holders to sell their notes at periodic auctions.  At December 31, 2008, we held auction rate securities with a face value of $112.5 million.  Subsequent to December 31, 2008, we redeemed $8.1 million of auction rate securities at par, which are included in short-term investments in our consolidated financial statements.  During the year ended December 31, 2008, a large portion of the auctions for these auction rate securities failed. We determined that there was an impairment of our auction rate securities of $14.9 million, resulting in a fair value of $89.6 million, which is included in long-term investments in our consolidated financial statements.  We determined that of the $14.9 million impairment of our auction rate securities, $14.4 million was deemed temporary.  This amount has been recorded, net of a tax benefit of $5.7 million, as a component of accumulated other comprehensive loss for the year ended December 31, 2008. In addition, we determined that $0.5 million of the impairment was other-than-temporary and recorded a charge to interest and other income, net in our consolidated financial statements for the year ended December 31, 2008.  There is no assurance that auctions on the remaining auction rate securities in our investment portfolio will succeed. The auction failures appear to have been attributable to inadequate buyers and/or buying demand and/or the lack of support from financial advisors and sponsors. In the event that there is a failed auction, the indenture governing the security in some cases requires the issuer to pay interest at a

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default rate that is above market rates for similar instruments. The securities for which auctions have failed will continue to accrue and/or pay interest at their predetermined default rates and be auctioned every 7 to 35 days until their respective auction succeeds, the issuer calls the securities, they mature or we are able to sell the securities to third parties. As a result, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited. Consequently, certain of these securities have been classified as long-term investments in our consolidated financial statements.  We anticipate that due to the higher interest rates now payable on certain of these securities and for other reasons, certain issuers are likely to take steps to refinance their notes to enable them to call and repay the securities and therefore avoid the higher interest rates now payable on such securities.

If the issuers of these auction rate securities are unable to refinance their debts and call the notes or successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record additional impairment charges on these investments. If uncertainties in the credit and capital markets continue or there are ratings downgrades on the auction rate securities held by us, we may be required to recognize additional impairments on these investments. We may be required to wait until market stability is restored for these instruments or until the final maturity of the underlying notes (up to 40 years) to realize our investments’ recorded value. (See “Part II, Item 7A — Qualitative And Quantitative Disclosures About Market Risks” and “Part II, Item 8, Note 3 — Investments” in our consolidated financial statements).

If we fail to maintain effective disclosure controls and procedures and internal control over financial reporting on a consolidated basis, our stock price and investor confidence in our Company could be materially and adversely affected.

We are required to maintain both disclosure controls and procedures and internal control over financial reporting that are effective for the purposes described in “Part II, Item 9A — Controls and Procedures.”  If we fail to do so, our business, results of operations, financial condition or the value of our stock could be materially harmed.

Litigation or legal proceedings could expose us to significant liabilities and thus negatively affect our financial results.

We are a party, from time to time, to various litigation claims and legal proceedings, including, but not limited to, intellectual property, fraud, unfair business practices and false advertising, breach of contract claims, securities actions and shareholder derivative actions.  Material legal proceedings are described more fully in “Part I, Item 3 — Legal Proceedings” and in Part II, Item 8, Note 11 to our consolidated financial statements contained in this Form 10-K.

Defending these proceedings will result in significant ongoing 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.  Our failure to successfully defend or settle any of these litigations or legal proceedings could result in liability that, to the extent not covered by our insurance, could have a material adverse effect on our financial conditions, revenue and profitability, and could cause the market value of our common stock to decline.

Operations outside the United States expose us to uncertain conditions and other risks in international markets.

Our gross sales to customers outside of the United States were approximately 8.2% of consolidated gross sales for the year ended December 31, 2008 and our growth strategy includes expanding our international business. We face and will continue to face substantial risks associated with having foreign operations, including: economic or political instability in our international markets; restrictions on or costs relating to the repatriation of foreign profits to the United States, including

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possible taxes or withholding obligations on any repatriations; and the imposition of tariffs or trade restrictions.  These risks could have a significant impact on our ability to sell our products on a competitive basis in international markets and could have a material adverse effect on our business, financial condition and results of operations.  Also, our operations outside of the United States are subject to risks relating to appropriate compliance with legal and regulatory requirements in local jurisdictions, potential difficulties in staffing and managing local operations, potentially higher incidence of fraud or corruption, credit risk of local customers and distributors and potentially adverse tax consequences.  We are also exposed to foreign currency exchange rate risk with respect to our sales, expenses, profits, assets and liabilities denominated in currencies other than the U.S. dollar. We have not used instruments to hedge certain foreign currency risks and are not protected against foreign currency fluctuations.  As a result, our reported earnings may be affected by changes in foreign currency exchange rates. Moreover, any favorable impacts to profit margins or financial results from fluctuations in foreign currency exchange rates are likely to be unsustainable over time.

We must successfully maintain and/or upgrade our information technology systems.

We rely on various information technology systems to manage our operations. During the fourth quarter of 2008, we resolved to commence the implementation of the SAP enterprise resource planning system to replace our legacy systems.  The implementation is scheduled to be completed in the first quarter of 2010. This implementation subjects us to take on inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of the internal control structure, substantial capital expenditures, demands on management time and other risks of delays or difficulties in transitioning to a new system.  The implementation of this system may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. Any information technology system disruptions, if not anticipated and appropriately mitigated, could have an adverse effect on our business and operations.

ITEM 1B.               UNRESOLVED STAFF COMMENTS

None.

ITEM 2.                  PROPERTIES

In September 2007, we relocated our corporate offices to newly leased offices in Corona, California. In October 2006, we also entered into a lease agreement pursuant to which we leased 346,495 square feet of warehouse and distribution space located in Corona, California.  This lease commitment provides for minimum rental payments for 120 months, commencing March 2007, excluding renewal options.  The monthly rental payments are $167,586 at the commencement of the lease and increase over the lease term by 7.5% at the end of each 30 month period. The new warehouse and distribution space replaced our previous warehouse and distribution space also located in Corona, California.

In October 2006, we entered into an agreement to acquire 1.8 acres of vacant land for a purchase price of $1.4 million, which is currently in escrow.  In August 2008, we completed the purchase of an additional 1.09 acres of adjacent land for a purchase price of $1.4 million.  These properties are located adjacent to the newly leased warehouse and distribution space.  We are reviewing the feasibility of constructing a new office building and parking lot on these combined parcels of land to replace our existing office space.

We have sublet a small portion of our previous office, warehouse and distribution space on a month to month basis.  In addition, we continue to utilize the remaining portion of this space as overflow for our main warehouse.  This lease expires in October 2010.

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We also rent additional warehouse space on a short-term basis from time to time in public warehouses situated throughout the United States and Canada.

ITEM 3.                  LEGAL PROCEEDINGS

In August 2006, HBC filed a lawsuit against National Beverage Company, Shasta Beverages, Inc., Newbevco Inc. and Freek’N Beverage Corp. (collectively “National”) seeking an injunction and damages for trademark infringement, trademark dilution, unfair competition and deceptive trade practices based on National’s unauthorized use of HBC’s valuable and distinctive Monster Energy® trade dress in connection with a line of energy drinks it launched under the “Freek” brand name.  In June 2007, the parties entered into a confidential settlement agreement resolving the parties’ disputes in the litigation.  National subsequently repudiated the settlement agreement and HBC responded by filing a motion in the United States District Court for the Central District of California to enforce the terms of the confidential settlement agreement.  On August 14, 2007, the United States District Court entered an Order enforcing the settlement agreement and permanently enjoining National from manufacturing, distributing, shipping, marketing, selling and offering to sell “Freek” energy drinks in containers using the original “Freek” trade dress that was subject to the District Court’s preliminary injunction.  National appealed the District Court’s decision to the Ninth Circuit Court of Appeals, which heard oral arguments on December 11, 2008.  No decision has been issued on the appeal.

In August 2006, HBC filed a civil action in the Federal Court of Australia, Victoria District Registry, against Bickford’s Australia (Pty) Limited and Meak (Pty) Ltd. (collectively “Bickfords”), in which HBC sought an injunction restraining Bickfords from selling or offering for sale or promoting in Australia any energy drink or beverage under the MONSTER ENERGY™ or MONSTER™ marks or any similar marks, and further sought damages and costs.  Bickfords cross-claimed seeking an order to restrain HBC from selling, offering for sale or promoting in Australia any drink product under the Monster Energy or Monster trademarks or any similar trademarks, and for costs.  In December 2008, the parties entered into a confidential settlement agreement resolving the parties’ disputes in the litigation.  Pursuant to the terms of the settlement agreement, Bickfords will cease all use of the Monster and Monster Energy marks in Australia (after depletion of its existing inventory) and will assign to HBC all trademark applications and registrations which consist of or include the MONSTER ENERGY™ and MONSTER™ marks it has lodged throughout the world, including those lodged in Australia, New Zealand, Singapore, Malaysia, Hong Kong and Indonesia.

In September 2006, Christopher Chavez purporting to act on behalf of himself and a class of consumers yet to be defined filed an action in the Superior Court, of the State of California, City and County of San Francisco, against the Company and its subsidiaries for unfair business practices, false advertising, violation of California Consumers Legal Remedies Act, fraud, deceit and/or misrepresentation alleging that the Company misleadingly labels its Blue Sky beverages as originating in and/or being canned under the authority of a company located in Santa Fe, New Mexico.  Defendants removed this Superior Court action to the United States Court for the Northern District of California under the Class Action Fairness Act, and filed motions for dismissal or transfer.  On June 11, 2007, the United States District Court, Northern District of California granted the Company’s motion to dismiss Chavez’s complaint with prejudice. On June 21, 2007, Chavez filed an appeal with the U.S. Court of Appeals for the Ninth Circuit, and the Court heard oral arguments on January 14, 2009.  No decision has been issued on the appeal.

In January 2007, the Company’s distributor for the Riverside County and San Bernardino County, California territories, Gate City Beverage Company (“Gate City”), notified the Company of its intention to sell its business and requested the Company consent to the assignment of the distribution agreement with the Company.  The Company declined its consent and exercised its contractual right to terminate the Gate City distribution agreement upon thirty days prior written notice.  Gate City threatened to take “appropriate action” against the Company and third parties for what it contended was

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an improper termination of the distribution agreement.  The Company denied Gate City’s assertion regarding improper termination of the applicable distribution agreement.  On February 6, 2008, Gate City filed a demand for arbitration with the American Arbitration Association to be held in Orange County, California, claiming damages in an amount exceeding $5.0 million, plus attorneys’ fees and costs.  The Company disputes liability and is defending the claim. The arbitration hearing has been set for May 2009.

On July 3, 2008, the Company filed a lawsuit in the Superior Court for the State of California for Los Angeles County against St. Paul Mercury Insurance Company (“St. Paul”) due to St. Paul’s failure to reimburse the Company for certain costs and expenses incurred and paid by the Company for and in connection with the investigation and defense of various proceedings relating to certain stock option grants made by the Company, including Special Committee investigation costs (the “St. Paul Complaint”).   The Company purchased from St. Paul a directors and officers insurance policy that the Company contends covered such expenses during the pertinent time period.   St. Paul has reimbursed the Company for certain of the costs and expenses associated with the Company’s successful defense against the subject proceedings, but has refused to pay the remainder of the limits of its policy.  The St. Paul Complaint alleges that St. Paul is liable to the Company for the difference.  The Company seeks damages arising from St. Paul’s breach of the policy, punitive damages, and reimbursement of the attorneys’ fees expended in the investigation and litigation.  On August 1, 2008, St. Paul removed the lawsuit to the United States District Court for the Central District of California.  On August 8, 2008, St. Paul answered the St. Paul Complaint and denied that it has any further responsibility to the Company beyond the amount for which it had previously reimbursed the Company.  Motions for summary judgment on certain major issues in the litigation have been filed by the parties.  The Court has scheduled a hearing on those motions for March 2009.  A trial has been preliminarily scheduled in this litigation for November 2009.

On July 11, 2008, the Company initiated an action against Citigroup Inc., Citigroup Global Markets, Inc. and Citi Smith Barney, in the United States District Court, Central District of California, for violations of federal securities laws and the Investment Advisors Act, arising out of the Company’s purchase of auction rate securities.  The Court granted defendants’ motion to compel arbitration before the Financial Industry Regulatory Authority (“FINRA”).  The matter is now proceeding before FINRA.

On August 28, 2008, the Company initiated an action against Oppenheimer Holdings Inc., Oppenheimer & Co. Inc., and Oppenheimer Asset Management Inc. in the United States District Court, Central District of California, for violations of federal securities laws and the Investment Advisors Act, arising out of the Company’s purchase of auction rate securities.  The defendants answered the complaint on October 14, 2008 denying the allegations set forth therein.  The Oppenheimer action was deemed a related case to the Company’s action against Citigroup Inc. (described above).  After the Court granted defendants’ motion to compel arbitration in the Citigroup Inc. case, the Company stipulated to arbitration before FINRA and the matter is now proceeding before FINRA.

Securities Litigation - On September 11, 2008, a federal securities class action complaint styled Cunha v. Hansen Natural Corp., et al. was filed in the United States District Court for the Central District of California (the “District Court”). On September 17, 2008, a second federal securities class action complaint styled Brown v. Hansen Natural Corp., et al. was also filed in the District Court.

Both actions, filed by single individual shareholders purportedly on behalf of a class of purchasers of the Company’s stock during the period May 23, 2007 through November 8, 2007 (the “Class Period”), name as defendants the Company, Rodney C. Sacks, and Hilton H. Schlosberg. The allegations of both complaints are substantially similar. Plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs allege, among other things, that during the Class Period, the defendants issued materially false and misleading statements that failed to disclose that: (i) the Company’s second quarter sales results were “materially impacted by inventory loading as customers were induced to purchase more product before the Company

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raised its prices in its Monster Energy® drink line and its Java Monster™ drink line”; (ii) the Company was “experiencing declining sales in its non-core drink lines”; (iii) the Company was “experiencing production shortfalls with its Java Monster drink line”; and (iv) as a result of the foregoing, defendants “lacked a reasonable basis for their positive statements about the Company and its prospects.” The complaints seek an unspecified amount of damages.

The New Jersey Carpenters Pension Fund and the Structural Ironworkers Local Union #1 Pension Fund filed motions on November 10, 2008 for consolidation of the actions and for appointment of Lead Plaintiff and Lead Counsel.  A hearing on the motions is expected in March 2009.  If a motion for consolidation is granted, defendants must respond within forty-five days from the date of service of any consolidated complaint or the designation of one complaint as the operative complaint in the consolidated class actions.  If a motion for consolidation is denied, then defendants must respond to the complaints within forty-five days from the date on which the denial of such motion is entered on the Court’s docket.

Derivative Litigation - On September 15, 2008, a derivative complaint was filed in the Superior Court of the State of California, County of Riverside, styled Stueve v. Sacks, et al.  On October 15, 2008, a second derivative complaint was filed in the United States District Court for the Central District of California, styled Merckel v. Sacks, et al. The derivative suits were each brought, purportedly on behalf of the Company, by a shareholder of the Company who made no prior demand on the Company’s Board of Directors.

Pursuant to a stipulation among the parties that was so ordered by the Court on November 2, 2008, the Stueve action was voluntarily dismissed in its entirety and without prejudice.

The Merckel complaint names as defendants certain current and former officers, directors, and employees of the Company and HBC, including Rodney C. Sacks, Hilton H. Schlosberg, Harold C. Taber, Jr., Benjamin M. Polk, Norman C. Epstein, Mark S. Vidergauz, Sydney Selati, Thomas J. Kelly, Mark J. Hall, and Kirk S. Blower, as well as the administrator of the Estate of Michael B. Schott and Hilrod Holdings, L.P.   The Company is named as a nominal defendant.  The factual allegations of the complaint are substantially similar to those set forth in the two securities class action complaints described above.  The complaint also alleges, among other things, that between May 2007 and the date of the filing of the complaint, the defendants directed the Company to issue a series of improper statements concerning its business prospects. The complaint further alleges that while the Company’s shares were purportedly artificially inflated because of those improper statements, certain defendants sold Company stock while in possession of material non-public information regarding the Company’s “true” business prospects. The complaint asserts various causes of action, including breach of fiduciary duty, aiding and abetting breach of fiduciary duty, violation of Cal. Corp. Code §§ 25402 and 25403 for insider selling, and unjust enrichment. The suit seeks an unspecified amount of damages to be paid to the Company, adoption of corporate governance reforms, and equitable and injunctive relief.

On December 4, 2008, Plaintiff in the Merckel action filed a motion to consolidate that action with another lawsuit involving similar allegations filed in the Central District of California, styled Dislevy v. Sacks, et al.  The Dislevy complaint, which names some but not all of the defendants in the Merckel action has not been served.  A hearing on the motion to consolidate is expected for March 2009.  If the motion to consolidate is granted, defendants must respond within 45 days after the filing and service of a consolidated amended complaint.  If the motion to consolidate is denied, defendants must respond to the Merckel complaint within 45 days from entry of the order denying the motion or from the filing of any amended complaint, whichever is later.

On February 17, 2009 Plaintiff in the Merckel action voluntarily dismissed The Estate of Michael B. Schott from the action without prejudice.

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Although the ultimate outcome of these matters cannot be determined with certainty, the Company believes that the complaints are without merit. The Company intends to vigorously defend against these lawsuits.

In addition to the above matters, the Company is subject to litigation from time to time in the normal course of business, including claims from terminated distributors.  Although it is not possible to predict the outcome of such litigation, based on the facts known to the Company and after consultation with counsel, management believes that such litigation in the aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.

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

None.

PART II

ITEM 5.                  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Principal Market

The Company’s common stock began trading in the over-the-counter market on November 8, 1990 and was subsequently quoted on the Nasdaq Capital Market under the symbol “HANS”.  On July 5, 2007, the Company’s common stock began trading on the Nasdaq Global Select Market under the same symbol, HANS.  As of February 6, 2009, there were 90,401,966 shares of the Company’s common stock outstanding held by approximately 391 holders of record.

Stock Price and Dividend Information

The following table sets forth high and low bid closing quotations of our common stock for the periods indicated:

The quotations for the common stock set forth above represent bid quotations between dealers, do not include retail markups, mark-downs or commissions and bid quotations may not necessarily represent actual transactions and “real time” sale prices.  The source of the bid information is the NASDAQ Stock Market, Inc.

We have not paid cash dividends to our stockholders since our inception and do not anticipate paying cash dividends in the foreseeable future.

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Our Board of Directors terminated the common stock repurchase program authorized in November 2005 under which we had purchased $27.7 million of the Company’s common stock. On April 25, 2008, our Board of Directors authorized the repurchase of up to $200.0 million of the Company’s common stock.  During the year ended December 31, 2008, we purchased 3.9 million shares of the Company’s common stock at an average purchase price of $26.77 per share, which the Company holds in treasury.

The following tabular summary reflects our repurchase activity during the quarter ended December 31, 2008.

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2008 with respect to shares of our common stock that may be issued under our equity compensation plans.

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Performance Graph

The following graph shows a five-year comparison of cumulative total returns: 1

1 Annual return assumes reinvestment of dividends.  Cumulative total return assumes an initial investment of $100 on December 31, 2003.  The Company’s new self-selected peer group is comprised of National Beverage Corporation, Clearly Canadian Beverage Company, Leading Brands, Inc., Jones Soda Company and Cott Corporation.

ITEM 6.                  SELECTED FINANCIAL DATA

The consolidated statements of operations data set forth below with respect to each of the years ended December 31, 2004 through 2008 and the balance sheet data as of December 31, for the years indicated, are derived from our audited consolidated financial statements and should be read in conjunction with those financial statements and notes thereto, and with the Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Part II, Item 7 of this Annual Report on Form 10-K.

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¹Includes $14.3 million, $1.9 million and $0.4 million for the years ended December 31, 2008, 2007 and 2006, respectively, related to the recognition of deferred revenue attributable to new and/or amended distribution agreements entered into with certain distributors.

²Includes $118.1 million, $15.3 million and $12.7 million for the years ended December 31, 2008, 2007 and 2006, respectively, related to expenditures attributable to the costs associated with terminating existing distributors.

³Includes ($0.2) million, $9.8 million and $3.8 million for the years ended December 31, 2008, 2007 and 2006, respectively, related to professional service fees, net of insurance proceeds, in connection with our special investigation of stock option grants and granting practices, related litigation and other related matters.

*Gross sales, although used internally by management as an indicator of operating performance, should not be considered as an alternative to net sales, which is determined in accordance with generally accepted accounting principals in the United States of America (“GAAP”), and should not be used alone as an indicator of operating performance in place of net sales.  Additionally, gross sales may not be comparable to similarly titled measures used by other companies as gross sales has been defined by our internal reporting requirements.  However, gross sales is used by management to monitor operating performance including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance.  The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. Management believes the presentation of gross sales allows a more comprehensive presentation of our operating performance.  Gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from customers (See “Part II, Item 7 — Results of Operations”).

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to — and should be read in conjunction with — our financial statements and the accompanying notes (“Notes”) included in Part II, Item 8 of  this Form 10-K.  This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements.

This overview provides our perspective on the individual sections of MD&A. MD&A includes the following sections:

·                  Our Business — a general description of our business; the value drivers of our business; and opportunities and risks facing our Company;

·                  Results of Operations — an analysis of our consolidated results of operations for the three years presented in our financial statements;

·                  Liquidity and Capital Resources — an analysis of our cash flows, sources and uses of cash and contractual obligations;

·                  Accounting Policies and Pronouncements — a discussion of accounting policies that require critical judgments and estimates including newly issued accounting pronouncements;

·                  Sales — details of our sales measured on a quarterly basis in both dollars and cases;

·                  Inflation — information about the impact that inflation may or may not have on our results;

·                  Forward Looking Statements — cautionary information about forward looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from the company’s historical results or our current expectations or projections; and

·                  Market Risks — Information about market risks and risk management.  (See “Forward Looking Statements” and “Part II, Item 7A — Qualitative and Quantitative Disclosures About Market Risks”).

Our Business

Overview

We develop, market, sell and distribute “alternative” beverage category natural sodas, fruit juices and juice drinks, energy drinks and energy sports drinks, fruit juice smoothies and “functional” drinks, non-carbonated ready-to-drink iced teas, children’s multi-vitamin juice drinks, Junior Juice® juices, Junior Juice Water and flavored sparkling beverages under the Hansen’s® brand name.  We also develop, market, sell and distribute energy drinks under the following brand names: Monster Energy®; Monster Hitman Energy Shooter™; Lost® Energy™ and Joker Mad Energy™ brand names as well as Rumba®, Samba and Tango brand energy juices.  We also market, sell and distribute the Java Monster™ line of non-carbonated dairy based coffee drinks. Additionally, we market, sell and distribute natural sodas, premium natural sodas with supplements, organic natural sodas, seltzer waters, sports drinks and energy drinks under the Blue Sky® brand name. In July 2008, we began to market, sell and distribute enhanced water beverages under the Vidration™ brand name.

We have two reportable segments, namely DSD, whose principal products comprise energy drinks, and Warehouse, whose principal products comprise juice based and soda beverages.  The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers.

Our Monster Energy® brand energy drinks include Monster Energy® drinks (introduced in April 2002), lo-carb Monster Energy® drinks (introduced in August 2003), Monster Energy® Assault® energy drinks (introduced in September 2004), Monster Energy® KhaosTM energy drinks (introduced in August 2005), Monster Energy® M-80TM energy drinks (introduced in March 2007, named “RIPPER” in certain countries), Monster Energy® Heavy Metal™ energy drinks (introduced in November 2007) and Monster Energy® MIXXD™ energy drinks (introduced in December 2007).

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A substantial portion of our gross sales are derived from our Monster Energy® brand energy drinks.  Any decrease in sales of our Monster Energy® brand energy drinks could significantly adversely affect our future revenues and net income. Our DSD segment represented 90.7%, 89.5% and 84.9% of our net sales for the years ended December 31, 2008, 2007 and 2006, respectively.  Competitive pressure in the “energy drink” category could adversely affect our operating results. (See “Part I, Item 1A — Risk Factors”).

Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness and trial through sampling both in stores and at events.  We use our branded vehicles and other promotional vehicles at events where we sample our products to consumers.  We utilize “push-pull” methods to achieve maximum shelf and display space exposure in sales outlets and maximum demand from consumers for our products, including advertising, in-store promotions and in-store placement of point-of-sale materials and racks, prize promotions, price promotions, competitions, endorsements from selected public and extreme sports figures, coupons, sampling and sponsorship of selected causes such as cancer research.  Our extreme sports team endorsements include teams such as the Pro Circuit — Kawasaki Motocross and Supercross teams, Kawasaki Factory Motocross and Supercross teams, Robby Gordon Racing Team, Ken Block Rally Racing Team and the Tech 3 Moto GP Team (new for 2009).  Our individual athlete and/or personality endorsements include extreme sports figures and athletes such as NASCAR Camping World Truck Series racer Ricky Carmichael, Moto GP motorcycle racer Valentino Rossi (new for 2009), television personalities such as Rob Dyrdek as well as many athletes that compete in other sports related activities, particularly, the Winter and Summer X-Games, supercross, motocross, freestyle motocross, surfing, skateboarding, wakeboarding, skiing, snowboarding, BMX, mountain biking, snowmobile freestyle, snowmobile racing, etc.  Our event endorsements include a wide range of events such as the Monster Energy® Supercross Series, the AMA Pro Motocross Championship Series and the Vans Warped Tour. In-store posters, outdoor posters, print, radio and television advertising, together with price promotions and coupons, may also be used to promote our brands.

We believe that one of the keys to success in the beverage industry is differentiation, such as making Hansen’s® products visually distinctive from other beverages on the shelves of retailers.  We review our products and packaging on an ongoing basis and, where practical, endeavor to make them different, better and unique.  The labels and graphics for many of our products are redesigned from time to time to maximize their visibility and identification, wherever they may be placed in stores, and we will continue to reevaluate the same from time to time.

During 2008, we continued to expand our existing product lines and further develop our markets.  In particular, we continued to focus on developing and marketing beverages that fall within the category generally described as the “alternative” beverage category, with particular emphasis on energy type drinks.

During the second quarter of 2006, we entered into the Off-Premise Agreements with AB.  Under the Off-Premise Agreements, select AB Distributors distribute and sell, in markets designated by HBC, HBC’s Monster Energy® and Lost® EnergyTM brands non-alcoholic energy drinks and Rumba®, Samba and Tango brand energy juice, as well as additional products that may be agreed between the parties.

During the fourth quarter of 2008, we entered into the Monster Energy Distribution Coordination Agreement (the “TCCC North American Coordination Agreement”) with The Coca-Cola Company (“TCCC”).  Pursuant to the TCCC North American Coordination Agreement, we have designated, and in

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the future may designate, territories in which bottlers from TCCC’s network of partially owned and independent bottlers, including Coca-Cola Enterprises, Inc. (“CCE”), Coca-Cola Bottling Company (“CCBC”), CCBCC Operations, LLC (“Consolidated”), United Bottling Contracts Company, LLC (“United”), and other TCCC independent bottlers (collectively, the “TCCC North American Bottlers”) will distribute and sell primarily our Monster Energy® beverages (the “Products”) in the United States and Canada.

During the fourth quarter of 2008, we entered into the Monster Energy Distribution Agreement with CCE pursuant to which CCE was appointed to distribute, directly and through certain sub-distributors, the Products in portions of twenty-four U.S. states (the “U.S. Territories”). We may designate additional territories within reasonable proximity to the U.S. Territories and CCE will use reasonable good faith efforts to add the additional territories.  During the fourth quarter of 2008, we entered into the Monster Energy Canadian Distribution Agreement with CCBC, pursuant to which CCBC has been appointed to distribute, directly and through certain sub-distributors, the Products in Canada, with performance commencing on January 1, 2009.  In addition, during the fourth quarter of 2008, we entered into distribution agreements with Consolidated, United and other TCCC North American Bottlers for the distribution of Products in various territories within the United States.

During the fourth quarter of 2008, we entered into the Monster Energy International Coordination Agreement (the “TCCC International Coordination Agreement”) with TCCC.  Pursuant to the TCCC International Coordination Agreement, we have designated, and in the future may designate, countries in which we wish to appoint TCCC distributors to distribute and sell the Products.

During the fourth quarter of 2008, we entered into the Monster Energy International Distribution Agreement and the Monster Energy Belgium Distribution Agreement with CCE pursuant to which CCE has been appointed to distribute directly and through certain sub-distributors the Products in Great Britain, France, Belgium, the Netherlands, Luxembourg and Monaco.

Pursuant to the new and/or amended distribution agreements entered into with certain distributors as discussed above, net amounts of $113.0 million and $21.0 million from such distributors, relating to the cost of terminating certain of our prior distributors, were recorded for the years ended December 31, 2008 and 2007, respectively. Such amounts have been accounted for as deferred revenue and will be recognized as revenue ratably over the anticipated life of the respective distribution agreements, generally 20 years. Distributor receivables related to these new and/or amended distribution agreements totaled $90.7 million and $5.4 million as of December 31, 2008 and 2007, respectively. Revenue recognized was $14.3 million, $1.9 million and $0.4 million for the years ended December 31, 2008, 2007 and 2006, respectively.  Included in the $14.3 million of revenue recognized for the year ended December 31, 2008, is $11.6 million related to the acceleration of deferred revenue balances associated with certain of our prior distributors who were terminated in the fourth quarter of 2008.

We incurred termination costs to certain of our prior distributors amounting to $118.1 million, $15.3 million and $12.7 million in aggregate for the years ended December 31, 2008, 2007 and 2006, respectively. Such termination costs have been expensed in full and are included in operating expenses for the years ended December 31, 2008, 2007 and 2006. Accrued distributor terminations in the accompanying consolidated balance sheets as of December 31, 2008 and 2007 (representing termination costs not paid to our prior distributors prior to the end of the fiscal year) were $102.3 million and $4.3 million, respectively.  In addition, inventory returned to us by certain of our prior terminated distributors resulted in a reduction of gross sales of approximately $9.7 million for the year ended December 31, 2008.

As discussed under Review of Historic Stock Option Granting Practices in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Form 10-K for the fiscal year ended December 31, 2006, and Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Form 10-Q for the quarter

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ended March 31, 2007, a special committee of our Board of Directors concluded its review of our stock option grants and granting practices.  In connection with this review, and with respect to related litigation and other related matters, we incurred professional service fees, net of insurance proceeds, of ($0.2) million, $9.8 million and $3.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.

The following table summarizes the selected items discussed above for the years ended December 31, 2008, 2007 and 2006:

We again achieved record gross sales of $1,182.9 million for the year ended December 31, 2008.  The increase in gross sales in 2008 was primarily attributable to increased sales of certain of our existing products, particularly our Monster Energy® brand energy drinks and to increased sales by volume of our Java MonsterTM line of non-carbonated dairy based coffee drinks. Gross sales for the year ended December 31, 2008 were impacted by a price increase announced during the fourth quarter of 2007 for all of our Monster Energy® brand energy drinks in 16-ounce cans and our Java Monster™ line of non-carbonated dairy based coffee drinks, effective January 1, 2008.  We estimate that gross sales for the year ended December 31, 2008 were reduced by approximately 2% as a result of purchases made by our customers in advance of such price increases.  We did not limit the amount of purchases our customers could execute at our existing 2007 fourth quarter prices.

Our percentage increase in gross sales was 15.3%, 47.3% and 67.6% for the years ended December 31, 2008, 2007 and 2006, respectively.  We believe our growth rate decline was attributable to the decline of the overall growth rates in the markets in which we operate, and more recently, to general economic conditions.  Consumer spending habits, including spending for the merchandise that we sell, are affected by, among other things, prevailing economic conditions, inflation, levels of employment, salaries and wage rates, prevailing interest rates, housing costs, energy and gas costs, income tax rates and policies, consumer confidence and consumer perception of economic conditions.  In addition, consumer purchasing patterns may be influenced by consumers’ disposable income, credit availability and debt levels. A continued or incremental slowdown in the U.S. economy, an uncertain economic

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outlook or an expanded credit crisis could continue to adversely affect consumer spending habits resulting in lower net sales and profits than expected on a quarterly or annual basis.  During 2008, there was significant deterioration in the global financial markets and economic environment, which we believe negatively impacted consumer spending at many retailers for our products. In response to this, we have taken steps to increase opportunities to profitably drive sales and to operate our business more efficiently. If these adverse economic trends worsen, or if our efforts to counteract the impacts of these trends are not sufficiently effective, there could be a negative impact on our financial performance and position in future fiscal periods. For further discussion of the risks to us regarding general economic conditions (See “Part I, Item 1A — Risk Factors”).

Gross sales shipped outside of California represented 77%, 73% and 69% of our gross sales, for the years ended December 31, 2008, 2007 and 2006, respectively. Gross sales to customers outside the United States amounted to $96.3 million, $55.7 million and $24.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. Such sales were approximately 8.2%, 5.4% and 3.5% of gross sales for the years ended December 31, 2008, 2007 and 2006, respectively.  The reclassification of certain military customers from gross sales to customers within the United States to gross sales to customers outside the United States, resulted in an increase in gross sales outside the United States of $14.8 million and $5.5 million for the years ended December 31, 2007 and 2006, respectively, over amounts previously reported.

Our customers are primarily retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, full service beverage distributors, health food distributors and food service customers. Gross sales to our various customer types for 2008, 2007 and 2006 are reflected below.  The allocations below reflect changes made by the Company to the categories historically reported.

Our customers include CCE, CCBC, Consolidated, United and other TCCC North American Bottlers, Wal-Mart, Inc. (including Sam’s Club), AB Distributors, Kalil Bottling Group, Trader Joe’s, John Lenore & Company, Pepsi Canada (terminated by us effective December 31, 2008), Swire Coca-Cola, Costco, The Kroger Co., Safeway Inc. and Albertsons.  A decision by any large customer to decrease amounts purchased from the Company or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations.  Dr. Pepper Snapple Group, Inc., a former customer of the DSD division, accounted for approximately 13%, 16% and 19% of our net sales for the years ended December 31, 2008, 2007 and 2006, respectively.  Our distribution agreement with the Dr. Pepper Snapple Group, Inc. was terminated by us effective November 9, 2008.  The related terminated distributor territories are now serviced by a combination of TCCC North American Bottlers and AB Distributors.  Wal-Mart, Inc. (including Sam’s Club), a customer of both the DSD and Warehouse divisions, accounted for approximately 11%, 12% and 12% of our net sales for the years ended December 31, 2008, 2007 and 2006, respectively.

We continue to incur expenditures in connection with the development and introduction of new products and flavors.

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Value Drivers of our Business

We believe that the key value drivers of our business include the following:

·                  Profitable Growth — We believe “functional”, “better for you” brands properly supported by marketing and innovation, targeted to a broad consumer base, drive profitable growth.  We continue to broaden our family of brands.  In particular, we are expanding our specialty beverages and energy drinks to provide more alternatives to consumers.  We are focused on maintaining profit margins. We believe that tailored branding, packaging, pricing and channeling strategies help achieve profitable growth.  We are implementing these strategies with a view to accelerating profitable growth.

·                  Cost Management — The principal focus of cost management will continue to be on supplies and cost reduction.  One key area of focus is to decrease raw material costs, co-packing fees and general and administrative costs as a percentage of net operating revenues.  Another key area of focus is the reduction of inventory days on hand.

·                  Efficient Capital Structure — Our capital structure is intended to optimize our cost of capital.  We believe our strong capital position, our ability to raise funds if necessary at low effective cost and low overall costs of borrowing provide a competitive advantage.

We believe that, subject to increases in the costs of certain raw materials being contained, these value drivers, when properly implemented, will result in: (1) maintaining our gross profit margin; (2) providing additional leverage over time through reduced expenses as a percentage of net operating revenues; and (3) optimizing our cost of capital.  The ultimate measure of success is and will be reflected in our current and future results of operations.

Gross and net sales, gross profits, operating income, and net income and net income per share represent key measurements of the above value drivers.  These measurements will continue to be a key management focus in 2009 and beyond.   (See “Part II, Item 7 — Results of Operations for the Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007”).

As of December 31, 2008, the Company had working capital of $374.0 million compared to $187.3 million as of December 31, 2007.  The overall increase in working capital was primarily attributable to the transfer of our investments from long-term instruments to short-term instruments (See “Part II, Item 8, Note 3 — Investments” in our consolidated financial statements).  For the year ended December 31, 2008, our net cash provided by operating activities was approximately $199.5 million as compared to $135.5 million for the year ended December 31, 2007.  Principal uses of cash flows are repurchases of our common stock, purchases of inventory, increases in accounts receivable and other assets, acquisition of property and equipment and acquisition of trademarks.  Payment of accrued distributor terminations, purchases of our common stock, accounts payable and income taxes payable are expected to be and remain our principal recurring use of cash and working capital funds. (See “Part II, Item 7 — Liquidity and Capital Resources”).

Opportunities, Challenges and Risks

Looking forward, our management has identified certain challenges and risks that demand the attention of the beverage industry and our Company.  Uncertainty and volatility in domestic and international economic markets could negatively affect both the stability of our industry and our Company.  Decreased consumer discretionary spending represents a challenge to the successful marketing and purchase of our products.  Increases in consumer and regulatory awareness of the health problems arising from obesity and inactive lifestyles continues to represent a challenge.  We recognize

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that obesity is a complex and serious public health problem.  Our commitment to consumers begins with our broad product line and a wide selection of diet, light and lo-carb beverages, juices and juice drinks, sports drinks and waters and energy drinks.  We continuously strive to meet changing consumer needs through beverage innovation, choice and variety.

Our historical success is attributable, in part, to our introduction of different and innovative beverages.  Our future success will depend, in part, upon our continued ability to develop and introduce different and innovative beverages, although there can be no assurance of our ability to do so.  In order to retain and expand our market share, we must continue to develop and introduce different and innovative beverages and be competitive in the areas of quality, health, method of distribution, brand image and intellectual property protection. The beverage industry is subject to changing consumer preferences and shifts in consumer preferences that may adversely affect us if we misjudge such preferences.

In addition, other key challenges and risks that could impact our Company’s future financial results include, but are not limited to:

·                  the impact of the slowing economy in the United States and other countries in which we operate;

·                  maintenance of our brand image and product quality;

·                  profitable expansion and growth of our family of brands in the competitive market place (See “Part I, Item 1 —  Business - Competition and Sales and Marketing”);

·                  restrictions on imports and sources of supply; duties or tariffs; changes in government regulations;

·                  protection of our existing intellectual property portfolio of trademarks and the continuous pursuit to develop and protect new and innovative trademarks for our expanding product lines;

·                  limitations on available quantities of certain package containers such as the 24-ounce cap can, the 32-ounce can, and copacking availability;

·                  the imposition of additional restrictions.

(See “Part I, Item 1A — Risk Factors”) for additional information about risks and uncertainties facing our Company.

We believe that the following opportunities exist for us:

·                  growth potential for the “alternative” beverage category including energy drinks, sparkling beverages, carbonated soft drinks and teas, juices and juice drinks and enhanced waters;

·                  new product introductions intended to contribute to higher profitability;

·                  premium packages intended to generate strong revenue growth;

·                  significant package, pricing and channel opportunities to maximize profitable growth;

·                 proper positioning to capture industry growth; and

·                 broadening distribution/expansion opportunities in both domestic and international markets.

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Results of Operations

¹Includes $14.3 million, $1.9 million and $0.4 million for the years ended December 31, 2008, 2007 and 2006, respectively, related to the recognition of deferred revenue attributable to new and/or amended distribution agreements entered into with certain distributors.

²Includes $118.1 million, $15.3 million and $12.7 million for the years ended December 31, 2008, 2007 and 2006, respectively, related to expenditures attributable to the costs associated with terminating existing distributors.

³Includes ($0.2) million, $9.8 million and $3.8 million for the years ended December 31, 2008, 2007 and 2006, respectively, related to professional service fees, net of insurance proceeds in connection with our special investigation of stock option grants and granting practices, related litigation and other related matters.

* Gross sales, although used internally by management as an indicator of operating performance, should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales.  Additionally, gross sales may not be

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comparable to similarly titled measures used by other companies as gross sales has been defined by our internal reporting requirements.  However, gross sales is used by management to monitor operating performance including sales performance of particular products, salesperson performance, product growth or declines and our overall performance.  The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. Management believes the presentation of gross sales allows a more comprehensive presentation of our operating performance.  Gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from customers.  (See”Part II, Item 6 — Selected Financial Data”).

** 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 and other allowances may not be comparable to similar items presented by other companies.  The presentation of promotional and other allowances facilitates an evaluation of the impact thereof on the determination of net sales and illustrates the spending levels incurred to secure such sales. Promotional and other allowances constitute a material portion of our marketing activities.

Results of Operations for the Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Gross Sales.* Gross sales were $1,182.9 million for the year ended December 31, 2008, an increase of approximately $157.1 million, or 15.3% higher than gross sales of $1,025.8 million for the year ended December 31, 2007.  The increase in gross sales was primarily attributable to increased sales by volume and increased sales price per case for certain of our Monster Energy® brand energy drinks and our Java Monster™ line of non-carbonated dairy based coffee drinks (introduced in April 2007), as well as sales of certain new products such as Monster Hitman Energy Shooter™ (introduced in September 2008), Monster Energy® MIXXD™ energy drinks (introduced in December 2007) and Monster Energy® Heavy Metal™ energy drinks (introduced in November 2007).  To a lesser extent, the increase in gross sales was attributable to increased sales by volume of apple juice, aseptic juices and sales of Vidration® vitamin enhanced water (introduced in July 2008).  In addition, the increase in gross sales was partially attributable to the recognition of $11.6 million of revenue related to the acceleration of the deferred revenue balance associated with certain of our prior distributors terminated in the fourth quarter of 2008. The increase in gross sales was partially offset by inventory returned to us by certain of our terminated distributors of approximately $9.7 million in the fourth quarter of 2008, decreased sales by volume of juice blends, Lost Energy® brand energy drinks (introduced in January 2004), iced teas, Unbound Energy® brand energy drinks (introduced in October 2006), Rumba® brand energy juice (introduced in December 2004), Hansen’s® energy drinks and smoothies in cans. Gross sales for the year ended December 31, 2008 were impacted by a price increase announced during the fourth quarter of 2007 for all of our Monster Energy® brand energy drinks in 16-ounce cans and our Java Monster™ line of non-carbonated dairy based coffee drinks, effective January 1, 2008.  We estimate that gross sales for the year ended December 31, 2008 were reduced by approximately 2% as a result of purchases made by our customers in advance of such price increases. Promotional and other allowances were $149.1 million for the year ended December 31, 2008, an increase of $27.8 million, or 22.9% higher than promotional and other allowances of $121.3 million for the year ended December 31, 2007. Promotional and other allowances as a percentage of gross sales increased to 12.6% from 11.8% for the years ended December 31, 2008 and 2007, respectively.  As a result, the percentage increase in gross sales for the year ended December 31, 2008 was higher than the percentage increase in net sales.

*Gross sales — see definition above.

Net Sales. Net sales were $1,033.8 million for the year ended December 31, 2008, an increase of approximately $129.3 million, or 14.3% higher than net sales of $904.5 million for the year ended December 31, 2007.  The increase in net sales was primarily attributable to increased sales by volume and increased sales price per case for certain of our Monster Energy® brand energy drinks and our Java Monster™ line of non-carbonated dairy based coffee drinks, as well as sales of certain new products such as Monster Hitman Energy Shooter™, Monster Energy® MIXXD™ energy drinks and Monster Energy® Heavy Metal™ energy drinks.  To a lesser extent, the increase in

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net sales was attributable to increased sales by volume of apple juice, aseptic juices and sales of Vidration® vitamin enhanced water. In addition, the increase in net sales was partially attributable to the recognition of $11.6 million of revenue related to the acceleration of the deferred revenue balance associated with certain of our prior distributors terminated in the fourth quarter of 2008. The increase in net sales was partially offset by decreased sales by volume of Lost Energy® brand energy drinks, juice blends, iced teas, Unbound Energy® brand energy drinks, Hansen’s® energy drinks and Rumba® brand energy juice.  Net sales for the year ended December 31, 2008 were impacted by a price increase announced during the fourth quarter of 2007 for our Monster Energy® brand energy drinks in 16-ounce cans and our Java Monster™ line of non-carbonated dairy based coffee drinks, effective January 1, 2008.  We estimate that net sales for the year ended December 31, 2008 were reduced by approximately 2% as a result of purchases made by our customers in advance of such price increases.

Case sales, in 192-ounce case equivalents, were 102.7 million cases for the year ended December 31, 2008, an increase of 4.2 million cases or 4.3% higher than case sales of 98.5 million cases for the year ended December 31, 2007. The overall average net sales price per case increased to $10.07 for the year ended December 31, 2008 or 9.6% higher than the average net sales price per case of $9.19 for the year ended December 31, 2007.  The increase in the average net sales prices per case was attributable to an increase in the proportion of case sales derived from higher priced products as well as the price increases for our Monster Energy® brand energy drinks in 16-ounce cans effective January 1, 2008, price increases for our Monster Energy® brand energy drinks in 24-ounce cans effective July 1, 2007 and price increases in our Java Monster™ line of non-carbonated dairy based coffee drinks, effective January 1, 2008. In addition, the increase in the average net sales price per case was partially attributable to the recognition of $11.6 million of revenue related to the acceleration of the deferred revenue balance associated with certain of our prior distributors who were terminated in the fourth quarter of 2008.

Net sales for the DSD segment were $937.9 million for the year ended December 31, 2008, an increase of approximately $128.1 million, or 15.8% higher than net sales of $809.8 million for the year ended December 31, 2007.  The increase in net sales was primarily attributable to increased sales by volume and increased sales price per case for certain of our Monster Energy® brand energy drinks and our Java Monster™ line of non-carbonated dairy based coffee drinks, as well as sales of certain new products such as Monster Hitman Energy Shooter™, Monster Energy® MIXXD™ energy drinks, Monster Energy® Heavy Metal™ energy drinks and Vidration® vitamin enhanced water.  In addition, the increase in net sales for the DSD segment was partially attributable to the recognition of $11.6 million of revenue related to the acceleration of the deferred revenue balance associated with certain of our prior distributors terminated in the fourth quarter of 2008.  The increase in net sales was partially offset by decreased sales by volume of Lost Energy® brand energy drinks, Unbound Energy® brand energy drinks and Rumba® brand energy juice.

Net sales for the Warehouse segment were $95.9 million for the year ended December 31, 2008, an increase of approximately $1.2 million, or 1.3% higher than net sales of $94.7 million for the year ended December 31, 2007. The increase in net sales was primarily attributable to increased sales by volume of apple juice and aseptic juices.  The increase in net sales was partially offset by decreased sales by volume of juice blends, iced teas and Hansen’s® energy drinks.  Changes in pricing within the Warehouse segment did not have a material impact on net sales for the year ended December 31, 2008.

Gross Profit.*** Gross profit was $538.8 million for the year ended December 31, 2008, an increase of approximately $70.8 million, or 15.1% higher than the gross profit of $468.0 million for the year ended December 31, 2007.  Gross profit as a percentage of net sales increased slightly to 52.1% for the year ended December 31, 2008 from 51.7% for the year ended December 31, 2007.  The increase in net sales contributed to the increase in gross profit dollars.  The increase in gross profit as a percentage of net sales was partially attributable to the recognition of $11.6 million of revenue related to the acceleration of the deferred revenue balance associated with certain of our prior distributors terminated

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in the fourth quarter of 2008. The increase in gross profit as a percentage of net sales was also attributable to increased sales of DSD segment products which have higher gross profit margins than those in the Warehouse segment. Such increase in gross profit as a percentage of net sales was partially offset by an increase in the percentage of sales within the DSD segment of the Java Monster™ line of non-carbonated dairy based coffee drinks that have lower gross profit margins than our Monster Energy® brand energy drinks and to an increase in the cost of certain raw materials including certain sweeteners, certain containers and packaging materials and certain juice concentrates, particularly apple juice concentrate as well as increased trade marketing agreement costs.

***Gross profit may not be comparable to that of other entities since some entities include all costs associated with their distribution process in cost of sales, whereas others exclude certain costs and instead include such costs within another line item such as operating expenses.

Operating Expenses.   Total operating expenses were $375.2 million for the year ended December 31, 2008, an increase of approximately $138.2 million, or 58.3% higher than total operating expenses of $237.0 million for the year ended December 31, 2007. Total operating expenses as a percentage of net sales was 36.3% for the year ended December 31, 2008, compared to 26.2% for year ended December 31, 2007.  The increase in operating expenses in dollars was primarily due to increased expenditures of $102.9 million relating to the costs associated with terminating existing distributors. To a lesser extent, the increase in operating expenses was attributable to increased out-bound freight and warehouse costs of $5.9 million primarily due to increased volume of shipments and increased freight rates, increased expenditures of $17.9 million for sponsorships and endorsements, increased expenditures of $4.1 million for sampling programs, increased expenditures of $3.1 million for commissions and royalties, increased expenditures of $1.5 million for in-store demos and increased payroll expenses of $7.3 million (including a $3.7 million increase in stock-based compensation).  The increase in operating expenses in dollars was partially offset by decreased expenditures of $6.3 million for professional services costs, including legal and accounting fees and decreased expenditures of $3.8 million for merchandise displays. The individual increases above include costs of $10.7 million, or 1.0% of net sales, relating to the launch of the Monster Energy® brand in Europe for the year ended December 31, 2008.  Included in legal and accounting fees are professional service fees, net of insurance proceeds, of ($0.2) million and $9.8 million, for the years ended December 31, 2008 and 2007, respectively, in connection with our special investigation of stock option grants and granting practices, related litigation and other related matters. Total operating expenses, exclusive of expenditures of: (i) $118.1 million and $15.3 million for the years ended December 31, 2008 and 2007, respectively, attributable to the costs associated with terminating existing distributors; and (ii) exclusive of professional service fees, net of insurance proceeds, of ($0.2) million and $9.8 million, for the years ended December 31, 2008 and 2007, respectively in connection with our special investigation of stock option grants and granting practices, related litigation and other related matters, as a percentage of net sales, were 24.9% and 23.4% for the years ended December 31, 2008 and 2007, respectively.

Contribution Margin.  Contribution margin for the DSD segment was $216.1 million for the year ended December 31, 2008, a decrease of approximately $65.5 million, or 23.3% lower than contribution margin of $281.6 million for the year ended December 31, 2007.  The decrease in the contribution margin for the DSD segment was primarily due to increased expenditures of $102.9 million relating to the costs associated with terminating existing distributors. The decrease in the contribution margin for the DSD segment was offset by increased sales of our Java Monster™ line of non-carbonated dairy based coffee drinks, the increase in net sales of Monster Energy® brand energy drinks as well as sales of certain new products such as the Monster Hitman Energy Shooter™, Monster MIXXD™ energy drinks and Monster Heavy Metal™ energy drinks.  Contribution margin for the Warehouse segment was $0.5 million for the year ended December 31, 2008, approximately $3.4 million lower than contribution margin of $3.9 million for the year ended December 31, 2007.  The decrease in the contribution margin for the Warehouse segment was primarily attributable to a reduction in gross margin as a result of increases in the costs of certain raw materials, particularly apple juice concentrate, as well as a change

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from high fructose corn syrup to higher priced sugar, which additionally increased in price, for our soda lines.  The decrease in the contribution margin for the Warehouse segment was partially offset by a reduction in sales rebates within our juice product line as a result of the termination of our exclusive contracts with the State of California Department of Health Services, Women, Infant and Children (“WIC”) Supplemental Nutrition Branch in April 2008.  The WIC program continues on a non-exclusive basis in which we participate with our apple, grape, white grape and pineapple 64-ounce juice products.  Juice blends are not eligible under the new program.

Operating Income.  Operating income was $163.6 million for the year ended December 31, 2008, a decrease of approximately $67.4 million, or 29.2% lower than operating income of $231.0 million for the year ended December 31, 2007.  Operating income as a percentage of net sales decreased to 15.8% for the year ended December 31, 2008 from 25.5% for the year ended December 31, 2007.  The decrease in operating income and operating income as a percentage of net sales was primarily due to an increase in operating expenses of $138.2 million.  Operating income exclusive of: (i) recognition of deferred revenue of $14.3 million and $1.9 million for the years ended December 31, 2008 and 2007, respectively, attributable to new and/or amended distribution agreements entered into with certain distributors; (ii) exclusive of expenditures of $118.1 million and $15.3 million for the years ended December 31, 2008 and 2007, respectively, attributable to the costs associated with terminating existing distributors; and (iii) exclusive of professional service fees, net of insurance proceeds, in connection with our special investigation of stock option grants and granting practices, related litigation and other related matters, of ($0.2) million and $9.8 million, for the years ended December 31, 2008 and 2007, respectively, as a percentage of net sales, was 25.8% and 28.1% for the years ended December 31, 2008 and 2007, respectively.

Interest and Other Income, net.  Net interest and other income was $9.9 million for the year ended December 31, 2008, an increase of $1.1 million from $8.8 million for the year ended December 31, 2007.  This increase was primarily attributable to increased interest revenue earned on our cash balances and short- and long-term investments, which have increased significantly over the prior year. This increase was partially offset by foreign currency transaction losses.

Provision for Income Taxes.  Provision for income taxes for the year ended December 31, 2008 was $65.4 million, as compared to $90.3 million for the year ended December 31, 2007.  The effective combined federal and state tax rate was 37.7% for both the years ended December 31, 2008 and 2007.

Net Income.  Net income was $108.0 million for the year ended December 31, 2008, a decrease of $41.4 million or 27.7% lower than net income of $149.4 million for the year ended December 31, 2007.  The decrease in net income was primarily attributable to an increase in operating expenses of $138.2 million due to the items identified above. This was partially offset by an increase in gross profit of $70.8 million and a decrease in provision for income taxes of $24.9 million.

Results of Operations for the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

Gross Sales.* Gross sales were $1,025.8 million for the year ended December 31, 2007, an increase of approximately $329.5 million or 47.3% higher than gross sales of $696.3 million for the year ended December 31, 2006.  The increase in gross sales was primarily attributable to increased sales by volume of our Monster Energy® brand energy drinks, which include Monster Energy® drinks (introduced in April 2002), lo-carb Monster Energy® drinks (introduced in August 2003), Monster Energy® Assault® energy drinks (introduced in September 2004) and Monster Energy® KhaosTM energy drinks (introduced in August 2005), as well as sales of certain new products such as the Java Monster™ line of non-carbonated dairy based coffee drinks (introduced in April 2007), Monster Energy® M-80TM energy drinks (introduced in March 2007), Monster Energy® MIXXD™ energy drinks (introduced in December 2007) and Monster Energy® Heavy Metal™ energy drinks (introduced in  November 2007).

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To a lesser extent, the increase in gross sales was attributable to increased sales by volume of apple juice and juice blends, aseptic juices, Unbound Energy® energy drinks (introduced in October 2006) and Junior Juice® aseptic juices. The increase in gross sales was partially offset by decreased sales by volume of Lost Energy® drinks (introduced in January 2004), iced teas, Joker Mad Energy™ drinks (introduced in January 2005) and Hansen’s® fruit juice smoothies.  Changes in pricing did not have a material impact on the increase in gross sales for the year ended December 31, 2007.  However, during the fourth quarter of 2007, we announced a price increase for our Monster Energy® brand energy drinks and our Java Monster™ line of non-carbonated dairy based coffee drinks, effective January 1, 2008.  We estimate that approximately 7% to 8% of our gross sales for the fourth quarter of 2007 were attributable to purchases made by our customers in advance of such price increases. Promotional and other allowances were $121.3 million for 2007, an increase of $30.8 million or 34.0% higher than promotional and other allowances of $90.5 million for 2006. Promotional and other allowances as a percentage of gross sales decreased to 11.8% in 2007 from 13.0% in 2006.  As a result, the percentage increase in gross sales in 2007 was lower than the percentage increase in net sales.

*Gross sales — see definition above.

Net Sales. Net sales were $904.5 million for the year ended December 31, 2007, an increase of approximately $298.7 million or 49.3% higher than net sales of $605.8 million for the year ended December 31, 2006.  The increase in net sales was primarily attributable to increased sales by volume of our Monster Energy® brand energy drinks, which include Monster Energy® drinks, lo-carb Monster Energy® drinks, Monster Energy® Assault® energy drinks and Monster Energy® KhaosTM energy drinks, as well as sales of certain new products such as the Java Monster™ line of non-carbonated dairy based coffee drinks, Monster Energy® M-80TM energy drinks, Monster Energy® MIXXD™ energy drinks and Monster Energy® Heavy Metal™ energy drinks.  To a lesser extent, the increase in net sales was attributable to increased sales by volume of apple juice and juice blends, aseptic juices, sodas and Junior Juice® aseptic juices. The increase in net sales was partially offset by decreased sales by volume of Lost Energy® drinks, iced teas, Joker Mad Energy™ drinks, smoothies in cans and Hansen’s® energy drinks. Changes in pricing did not have a material impact on the increase in net sales for the year ended December 31, 2007.  However, during the fourth quarter of 2007, we announced a price increase to our Monster Energy® brand energy drinks and our Java Monster™ line of non-carbonated dairy based coffee drinks, effective January 1, 2008.  We estimate that approximately 7% to 8% of our net sales for the fourth quarter of 2007 were attributable to purchases made by our customers in advance of such price increases.

Case sales, in 192-ounce case equivalents, were 98.5 million cases for the year ended December 31, 2007, an increase of 25.7 million cases or 35.3% higher than case sales of 72.7 million cases for the year ended December 31, 2006. The overall average net sales price per case increased to $9.19 for 2007 or 10.3% higher than the average net sales price per case of $8.33 for 2006.  The increase in the average net sales prices per case was attributable to an increase in the proportion of case sales derived from higher priced products.

Net sales for the DSD segment were $809.8 million for year ended December 31, 2007, an increase of approximately $295.5 million or 57.5% higher than net sales of $514.3 million for the year ended December 31, 2006.  The increase in net sales was primarily attributable to increased sales by volume of our Monster Energy® brand energy drinks, which include Monster Energy® drinks, lo-carb Monster Energy® drinks, Monster Energy® Assault® energy drinks and Monster Energy® KhaosTM energy drinks, as well as sales of certain new products such as the Java Monster™ line of non-carbonated dairy based coffee drinks and Monster Energy® M-80TM energy drinks. The increase in net sales was partially offset by decreased sales by volume of Lost Energy® drinks and Joker Mad Energy™ drinks.  Changes in pricing within the DSD segment did not have a material impact on the increase in net sales for the year ended December 31, 2007.  However, during the fourth quarter of 2007, we announced a price increase to our Monster Energy® brand energy drinks and our Java Monster™ line of non-carbonated dairy based coffee drinks, effective January 1, 2008.  We estimate that approximately 7% to

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8% of our net sales for the fourth quarter of 2007 were attributable to purchases made by our customers in advance of such price increases.

Net sales for the Warehouse segment were $94.7 million for the year ended December 31, 2007, an increase of approximately $3.2 million or 3.5% higher than net sales of $91.5 million for the year ended December 31, 2006. The increase in net sales was primarily attributable to increased sales by volume of apple juice and juice blends, aseptic juices, sodas and Junior Juice® aseptic juices. The increase in net sales was partially offset by decreased sales by volume primarily of iced teas, smoothies in cans and Hansen’s® energy drinks.  Changes in pricing within the Warehouse segment did not have a material impact on the increase in net sales for the year ended December 31, 2007.

Gross Profit.*** Gross profit was $468.0 million for the year ended December 31, 2007, an increase of approximately $151.4 million or 47.8% higher than the gross profit of $316.6 million for the year ended December 31, 2006.  Gross profit as a percentage of net sales was 51.7% for 2007 as compared to 52.3% for 2006.  Increases in sales volumes contributed to the increase in gross profit dollars.  The decrease in gross profit as a percentage of net sales was primarily due to an increase in the percentage of sales within the DSD segment of certain packages that have lower gross profit margins.  To a lesser extent, the decrease in gross profit as a percentage of net sales was also attributable to an increase in the cost of certain raw materials including certain sweeteners, certain containers and packaging materials and certain juice concentrates and increased reserves for slow moving and obsolete inventory. Such decrease in gross profit as a percentage of net sales was partially offset by increased sales of DSD segment products which have higher gross profit margins than those in the Warehouse segment, a decrease in promotional and other allowances as a percentage of gross sales.

***Gross profit may not be comparable to that of other entities since some entities include all costs associated with their distribution process in cost of sales, whereas others exclude certain costs and instead include such costs within another line item such as operating expenses.

Operating Expenses. Total operating expenses were $237.0 million for the year ended December 31, 2007, an increase of approximately $79.0 million or 50.0% higher than total operating expenses of $158.0 million for the year ended December 31, 2006. Total operating expenses as a percentage of net sales was 26.2% for 2007, slightly higher than 26.1% for 2006.  The increase in operating expenses in dollars was partially attributable to increased out-bound freight and warehouse costs of $8.7 million primarily due to increased volume of shipments, increased expenditures of $18.4 million for sponsorships and endorsements, increased expenditures of $10.3 million for commissions and royalties, increased expenditures of $4.9 million for sampling programs, increased payroll expenses of $12.1 million, increased expenditures of $8.6 million for professional services costs, including legal and accounting fees, and increased expenditures of $2.5 million relating to the costs associated with terminating existing distributors. Included in legal and accounting fees are costs of $9.8 million (net of $2.5 million insurance reimbursements) in connection with our special investigation of stock option grants and granting practices, related litigation and other related matters. Total operating expenses, exclusive of expenditures of $15.3 million and $12.7 million for 2007 and 2006, respectively, attributable to the costs associated with terminating existing distributors and exclusive of expenditures of $9.8 million (net of $2.5 million in insurance reimbursements) and $3.8 million for 2007 and 2006, respectively in connection with our special investigation of stock option grants and granting practices, related litigation and other related matters, as a percentage of net sales, were 23.4% for both 2007 and 2006.

Contribution Margin.  Contribution margin for the DSD segment was $281.6 million for the year ended December 31, 2007, an increase of approximately $93.8 million or 49.9% higher than contribution margin of $187.9 million for the year ended December 31, 2006.  The increase in contribution margin for the DSD segment was primarily attributable to the increase in net sales of Monster Energy® brand energy drinks as well as sales of certain new products such as the Java Monster™ line of non-carbonated

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dairy based coffee drinks and Monster M-80TM energy drinks.  Contribution margin for the Warehouse segment was $3.9 million for the year ended December 31, 2007, a decrease of approximately $2.2 million or 36.3% lower than contribution margin of $6.1 million for year ended December 31, 2006.  The decrease in the contribution margin for the Warehouse segment was primarily attributable to a reduction in gross margin as a result of increased costs of raw materials and production.

Operating Income.  Operating income was $231.0 million for the year ended December 31, 2007, an increase of approximately $72.4 million or 45.7% higher than operating income of $158.6 million for the year ended December 31, 2006.  Operating income as a percentage of net sales decreased to 25.5% for 2007 from 26.2% for 2006.  The increase in operating income was primarily due to an increase in gross profit of $151.4 million.  The decrease in operating income as a percentage of net sales was primarily attributable to increased cost of sales as a percentage of net sales.  Operating income, exclusive of recognition of deferred revenue of $1.9 million and $0.4 million for 2007 and 2006, respectively, attributable to the AB Distribution agreements entered into with newly appointed AB Distributors, exclusive of expenditures of $15.3 million and $12.7 million for 2007 and 2006, respectively, attributable to the costs associated with terminating existing distributors and exclusive of expenditures of $9.8 million (net of $2.5 million insurance reimbursements) and $3.8 for 2007 and 2006, respectively, in connection with our special investigation of stock option grants and granting practices, related litigation and other related matters, as a percentage of net sales, was 28.2% for 2007 as compared to 28.9% for 2006.

Interest and Other Income, net.  Net interest and other income was $8.8 million for the year ended December 31, 2007, an increase of $5.1 million from net interest and other income of $3.7 million for the year ended December 31, 2006.  The increase in net interest and other income was primarily attributable to increased interest revenue earned on our cash balances and short- and long-term investments, which have increased significantly over the prior year.

Provision for Income Taxes.  Provision for income taxes for the year ended December 31, 2007 was $90.3 million, as compared to provision for income taxes of $64.3 million for the year ended December 31, 2006.  The effective combined federal and state tax rate for 2007 was 37.7%, which was lower than the effective tax rate of 39.6% for 2006.  The decrease in the effective tax rate was primarily attributable to certain interest income earned on securities that is exempt from federal income taxes and a reduction in federal taxes attributable to the domestic production tax deduction.  This decrease was partially offset by stock-based compensation relating to incentive stock options that is not deducted for federal or state income tax purposes.

Net Income.  Net income was $149.4 million for the year ended December 31, 2007, an increase of $51.5 million or 52.5% higher than net income of $97.9 million for the year ended December 31, 2006.  The increase in net income was primarily attributable to an increase in gross profit of $151.4 million and, to a lesser extent, an increase in net interest and other income of approximately $5.1 million. This was partially offset by an increase in operating expenses of $79.0 million and an increase in provision for income taxes of $26.1 million.

Liquidity and Capital Resources

Cash flows provided by operating activities — Net cash provided by operating activities was $199.5 million for the year ended December 31, 2008, as compared to $135.5 million in the comparable period in 2007.  For the year ended December 31, 2008, cash provided by operating activities was primarily attributable to net income earned of $108.0 million and adjustments for certain non-cash expenses consisting of $13.9 million of stock-based compensation and $3.4 million of depreciation and other amortization. For the year ended December 31, 2008, cash provided by operations also increased due to a $98.6 million increase in deferred revenue, a $98.1 million increase in accrued distributor terminations, a $30.6 million decrease in trade accounts receivable, a $7.5 million increase in accounts

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payable, a $3.3 million increase in accrued liabilities and a $1.0 million increase in accrued compensation. For the year ended December 31, 2008, cash provided by operating activities was reduced due to an $85.3 million increase in distributor receivables, a $19.7 million increase in inventories, a $4.7 million increase in prepaid expenses and other current assets and a $4.3 million increase in tax benefit from exercise of stock options. The increase in accounts payable is primarily due to increased inventory levels.

Cash flows provided by (used in) investing activities — Net cash provided by investing activities was $144.0 million for the year ended December 31, 2008, as compared to $194.7 million used in investing activities in the comparable period in 2007.  For the years ended December 31, 2008 and 2007, respectively, cash used in investing activities was primarily attributable to purchases of short- and long-term investments, particularly available-for-sale investments.  Cash provided by investing activities was primarily attributable to sales and maturities of available-for-sale investments. For both periods, cash used in investing activities included the acquisitions of fixed assets consisting of vans and promotional vehicles and other equipment to support our marketing and promotional activities, production equipment, computer and office furniture and equipment used for sales and administrative activities, as well as certain leasehold improvements.  Management expects that the Company will continue to use a portion of its cash in excess of its requirements for operations, for purchasing short- and long-term investments and for other corporate purposes. From time to time, management considers the acquisition of capital equipment, specifically items of production equipment required to produce certain of our products, storage racks, vans, trucks and promotional vehicles, coolers and other promotional equipment as well as the introduction of new product lines and businesses compatible with the image of our brands.

At December 31, 2008, we had $256.8 million in cash and cash equivalents and $118.7 million in short- and long-term investments. We have historically invested these amounts in U.S. Treasury bills, government agencies and municipal securities (which may have an auction reset feature), corporate notes and bonds, commercial paper and money market funds meeting certain criteria. Certain of these investments are subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets and caused credit and liquidity issues. These market risks associated with our investment portfolio may have a negative adverse effect on our future results of operations, liquidity and financial condition. (See Part I, Item IA – “Risk Factors – Our investments in marketable securities are subject to risks which may cause losses and affect the liquidity of these investments”).

Certain of our short-term investments and all of our long-term investments are comprised of auction rate securities. The majority of these notes carry an investment grade or better credit rating and are additionally backed by various federal agencies and/or monoline insurance companies. The applicable interest rate is reset at pre-determined intervals, usually every 7 to 35 days.  Liquidity for these auction rate securities was typically provided by an auction process which allowed holders to sell their notes at periodic auctions.  During the year ended December 31, 2008, a large portion of the auctions for these auction rate securities failed and there is no assurance that auctions on the remaining auction rate securities in our investment portfolio will succeed. The auction failures appear to have been attributable to inadequate buyers and/or buying demand and/or the lack of support from financial advisors and sponsors. In the event that there is a failed auction, the indenture governing the security in some cases requires the issuer to pay interest at a default rate that may be above market rates for similar instruments. The securities for which auctions have failed will continue to accrue and/or pay interest at their predetermined default rates and be auctioned every 7 to 35 days until their respective auction succeeds, the issuer calls the securities, they mature or we are able to sell the securities to third parties. As a result, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited. Consequently, certain of these securities have been classified as long-term investments in our consolidated financial statements.  We anticipate that due to the default interest rates now payable on certain of these securities and for other reasons, certain issuers are likely to take steps to refinance their

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notes to enable them to call and repay the securities and therefore avoid the default interest rates now payable on such securities.

At December 31, 2008, we held auction rate securities with a face value of $112.5 million.  Subsequent to December 31, 2008, $8.1 million of our auction rate securities were redeemed at par, which are included in short-term investments in our consolidated financial statements. A Level 3 valuation was performed on the remaining $104.5 million of our auction rate securities as of December 31, 2008, which indicated an impairment of $14.9 million, resulting in a fair value of $89.6 million which is included in long-term investments in our consolidated financial statements. This valuation utilized a mark to model approach which included estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums, and expected holding periods for the auction rate securities.  These assumptions are typically volatile and subject to change as the underlying data sources and market conditions evolve.

In addition to our Level 3 valuation performed as of December 31, 2008, we also reviewed various factors in determining whether to record a temporary or other than temporary impairment charge related to the decline in fair value on our available-for sale securities, including length of time and extent to which the investment’s fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer and any guarantors if applicable, any specific events which may influence the operations of the issuer, and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery of fair value.  Based on this analysis, we determined that of the $14.9 million impairment on our auction rate securities, $14.4 million was deemed temporary. This amount has been recorded, net of a tax benefit of $5.7 million, as a component of accumulated other comprehensive loss for the year ended December 31, 2008.  In addition, we determined that $0.5 million of impairment was other-than-temporary and recorded a charge to interest and other income, net, in our consolidated financial statements for the year ended December 31, 2008.

Based on our ability to access cash and other short-term investments and based on our expected operating cash flows, we do not anticipate that the current lack of liquidity of these investments will have a material effect on our liquidity or working capital.  If uncertainties in the credit and capital markets continue or there are ratings downgrades on the auction rate securities held by us, we may be required to recognize additional impairments on these investments.

Cash flows (used in) provided by financing activities — Net cash used in financing activities was $98.0 million for the year ended December 31, 2008, as compared to net cash provided by financing activities of $36.6 million for the comparable period in 2007.  For the year ended December 31, 2008 cash used in financing activities was primarily due to the purchase by us of $103.5 million of our common stock. For the year ended December 31, 2008, cash provided by financing activities was primarily attributable to a $4.3 million tax benefit in connection with the exercise of certain stock options and proceeds of $2.3 million received from the issuance of common stock in connection with the exercise of certain stock options.

Purchases of inventories, increases in accounts receivable and other assets, acquisition of property and equipment, acquisition of trademarks, payments of accounts payable, income taxes payable and purchases of our common stock are expected to remain our principal recurring use of cash.

On April 25, 2008, our Board of Directors authorized the repurchase of up to $200 million of our common stock. The Board of Directors also terminated the common stock repurchase program authorized in November 2005, under which we had purchased $27.7 million of common stock.  During the year ended December 31, 2008, we purchased 3.9 million shares of common stock at an average purchase price of $26.77 per share, which we hold in treasury.

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Debt and other obligations — We entered into a credit facility with Comerica Bank (“Comerica”) consisting of a revolving line of credit, which was amended in May 2007. In accordance with the amended provisions of the credit facility, we increased our available borrowings under the revolving line of credit to $10.0 million of non-collateralized debt.  The revolving line of credit is effective through June 1, 2010.  Interest on borrowings under the line of credit is based on Comerica’s base (prime) rate minus up to 1.5%, or varying London Interbank Offered Rates (“LIBOR”) up to 180 days, plus an additional percentage of up to 1.75%, depending upon certain financial ratios maintained by us. We had no outstanding borrowings on this line of credit at December 31, 2008. Letters of credit issued on our behalf totaling $0.3 million under this credit facility were outstanding as of December 31, 2008.

The terms of our line of credit contain certain financial covenants, including certain financial ratios, with which we were in compliance at December 31, 2008.

If any event of default shall occur for any reason, whether voluntary or involuntary, Comerica may declare all or any portion outstanding on the line of credit immediately due and payable, exercise rights and remedies available to them, including instituting legal proceedings.

We believe that cash available from operations, including cash resources and the revolving line of credit, will be sufficient for our working capital needs, including purchase commitments for raw materials and inventory, increases in accounts receivable, payments of tax liabilities, expansion and development needs, purchases of shares of our common stock, as well as any purchases of capital assets or equipment, through at least the next twelve months. Based on our current plans, at this time we estimate that capital expenditures are likely to be less than $20.0 million through December 2009.  However, future business opportunities may cause a change in this estimate.

The following represents a summary of the Company’s contractual obligations and related scheduled maturities as of December 31, 2008:

Noncancelable contractual obligations include our obligations related to sponsorships and other commitments.  (See “Part II, Item 8 — Note 11— Commitments & Contingencies”).

Purchase commitments include obligations made by us and our subsidiaries to various suppliers for raw materials used in the manufacturing and packaging of our products.  These obligations vary in terms.

In addition to the above obligations, pursuant to a can supply agreement between the Company and Rexam Beverage Can Company (“Rexam”), dated as of January 1, 2006, we have undertaken to purchase a minimum volume of 24-ounce resealable aluminum beverage cans over the four-year period commencing from January 1, 2006 through December 31, 2009.  Should we fail to purchase the minimum volume, we will be obligated to reimburse Rexam for certain capital reimbursements on a pro-

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rated basis.  Our maximum liability under this agreement as of December 31, 2008 is $4.0 million, subject to compliance by Rexam with a number of conditions under this agreement.

In the fourth quarter of 2008, we finalized licensing agreements with SAP America, Inc. for our global enterprise resource planning (“ERP”) software initiative which will replace existing legacy software.  Our decision to replace our legacy software solutions and move to SAP technologies was based upon our current domestic needs, global expansion, systems scalability, improved integration with trading partners and customers, improved reporting, and business process efficiency and productivity.  We estimate the cost for both licensing and implementation of the initiative to be approximately $5.5 million.  The project is scheduled to commence in the first quarter of 2009 with a targeted production live date in the first quarter of 2010.

In September 2007, we relocated our corporate offices to newly leased offices in Corona, California. In October 2006, we also entered into a lease agreement pursuant to which we leased 346,495 square feet of warehouse and distribution space located in Corona, California.  This lease commitment provides for minimum rental payments for 120 months, commencing March 2007, excluding renewal options.  The monthly rental payments are $167,586 at the commencement of the lease and increase over the lease term by 7.5% at the end of each 30 month period. The new warehouse and distribution space replaced our previous warehouse and distribution space also located in Corona, California.

In October 2006, we entered into an agreement to acquire 1.8 acres of vacant land for a purchase price of $1.4 million, which is currently in escrow.  In August 2008, we completed the purchase of an additional 1.09 acres of adjacent land for a purchase price of $1.4 million.  The properties are located adjacent to the newly leased warehouse and distribution space.  We are reviewing the feasibility of constructing a new office building and parking lot on these combined parcels of land to replace our existing office space.

We have sublet a small portion of our previous office, warehouse and distribution space on a month to month basis.  In addition, we continue to utilize the remaining portion of this space as overflow for our main warehouse.  This lease expires in October 2010.

Accounting Policies and Pronouncements

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP.  GAAP requires us to make estimates and assumptions that affect the reported amounts in our consolidated financial statements, including various allowances and reserves for accounts receivable and inventories, the estimated lives of long-lived assets and trademarks, as well as claims and contingencies arising out of litigation or other transactions that occur in the normal course of business.  The following summarizes our most significant accounting and reporting policies and practices:

Investments – Our investments in debt securities are classified in one of two categories, held-to-maturity or available-for-sale, in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). Held-to-maturity securities are those securities that the Company has the positive intent and ability to hold until maturity.  All other securities not included in the held-to-maturity category are classified as available-for-sale.  No securities are held for speculative or trading purposes.  Held-to-maturity securities are recorded at amortized cost which approximates fair market value. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded within accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. A decline in the market value of any investment security below cost that is deemed other-than-temporary, results in a reduction in its carrying amount to fair value.  The

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impairment is charged to earnings and a new cost basis for the security is established.  Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective-interest method.  We evaluate whether the decline in fair value of our investments is other-than temporary at each quarter-end. This evaluation consists of a review by management, and includes market pricing information and maturity dates for the securities held, market and economic trends in the industry and information on the investee company’s financial condition and information on the guarantors’ financial condition. Factors considered in determining whether a loss is temporary include length of time and extent to which the investment’s fair value has been less than its cost basis, the financial condition and near-term prospects of the issuer and guarantors, including any specific events which may influence the operations of the issuer and our intent and ability to retain the investment for a reasonable period of time sufficient to allow for any anticipated recovery of fair value.

Accounts Receivable – We evaluate the collectability of our trade accounts receivable based on a number of factors. In circumstances where we become aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount we believe will ultimately be collected.  In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our recent loss history and an overall assessment of past due trade accounts receivable outstanding.

Inventories – Inventories are stated at the lower of cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand, production availability and/or our ability to sell the product(s) concerned.  Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market and economic conditions or other factors that may result in cancellations of advance orders or reductions in the rate of reorders placed by customers and/or continued weakening of economic conditions.  Additionally, management’s estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.

Long-Lived Assets – Management regularly reviews property and equipment and other long-lived assets, including certain identifiable intangibles, for possible impairment.  This review occurs annually or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.  If there is indication of impairment of property and equipment or amortizable intangible assets, then management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition.  If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The fair value is estimated at the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks.  No impairments were identified as of December 31, 2008.

Management believes that the accounting estimate related to impairment of its long lived assets, including its trademarks, is a “critical accounting estimate” because: (1) the estimate is highly susceptible to change from period to period because it requires company management to make assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would have on the assets reported on our consolidated balance sheet, as well as net income, could be material.  Management’s assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and are expected to continue to do so.

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Intangibles – Intangibles are comprised primarily of trademarks that represent our exclusive ownership of the Hansen’s® trademark in connection with the manufacture, sale and distribution of beverages, water, non-beverage products and the Monster Energy® trademark in connection with the manufacture, sale and distribution of supplements and beverages.  We also own in our own right, a number of other trademarks in the United States, as well as in a number of countries around the world.  We also own the Blue Sky® trademark, which was acquired in September 2000, and the Junior Juice® trademark, which was acquired in May 2001. During 2002, we adopted Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Under the provisions on SFAS No. 142, we discontinued amortization on indefinite-lived trademarks while continuing to amortize remaining trademarks over one to 25 years.

In accordance with SFAS No. 142, we evaluate our trademarks annually for impairment or earlier if there is an indication of impairment.  If there is an indication of impairment of identified intangible assets not subject to amortization, management compares the estimated fair value with the carrying amount of the asset.  An impairment loss is recognized to write down the intangible asset to its fair value if it is less than the carrying amount.  The fair value is calculated using the income approach.  However, preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions.  Based on management’s impairment analysis performed for the year ended December 31, 2008, the estimated fair values of trademarks exceeded the carrying value.

In estimating future revenues, we use internal budgets.  Internal budgets are developed based on recent revenue data and future marketing plans for existing product lines and planned timing of future introductions of new products and their impact on our future cash flows.

Foreign Currency Translation and Transactions – The accounts of our foreign subsidiaries are translated in accordance with SFAS No. 52, “Foreign Currency Translation”.  Foreign currency transaction gains and losses are recognized in interest and other income, net, at the time they occur. Net foreign currency exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries whose functional currency is not the U.S. dollar are recorded as a part of accumulated other comprehensive income (loss) in stockholders’ equity. Unrealized foreign currency exchange gains and losses on certain intercompany transactions that are of a long-term-investment nature (i.e., settlement is not planned or anticipated in the foreseeable future) are also recorded in accumulated other comprehensive income (loss) in stockholders’ equity.

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.  Generally, ownership of and title to our products pass to customers upon delivery of the products to customers.  Certain of our distributors may also perform a separate function as a copacker on our behalf. In such cases, ownership of and title to our products that are copacked on our behalf by those copackers who are also distributors, passes to such distributors when we are notified by them that they have taken transfer or possession of the relevant portion of our finished goods. Net sales have been determined after deduction of promotional and other allowances in accordance with Emerging Issues Task Force Issue (“EITF”) No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”.

Management believes that adequate provision has been made for cash discounts, returns and spoilage based on our historical experience.

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Cost of Sales – Cost of sales consists of the costs of raw materials utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, as well as certain internal transfer costs, warehouse expenses incurred prior to the manufacture of our finished products and certain quality control costs.  Raw materials account for the largest portion of the cost of sales.  Raw materials include cans, bottles, other containers, ingredients and packaging materials.

Operating Expenses – Operating expenses include selling expenses such as distribution expenses to transport products to customers and warehousing expenses after manufacture, as well as expenses for advertising, commissions, sampling and in-store demonstration costs, costs for merchandise displays, point-of-sale materials and premium items, sponsorship expenses, other marketing expenses and design expenses.  Operating expenses also include payroll costs, travel costs, professional service fees including legal fees, termination payments made to certain of our prior distributors, entertainment, insurance, postage, depreciation and other general and administrative costs.

Stock-Based Compensation – We account for share-based compensation arrangements in accordance with the provisions of SFAS No. 123R, “Share-Based Payment” which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. We use the Black-Scholes-Merton option pricing formula to estimate the fair value of our stock options at the date of grant. The Black-Scholes-Merton option pricing formula was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Our employee stock options, however, have characteristics significantly different from those of traded options. For example, employee stock options are generally subject to vesting restrictions and are generally not transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility, the expected life of an option and the number of awards ultimately expected to vest. Changes in subjective input assumptions can materially affect the fair value estimates of an option. Furthermore, the estimated fair value of an option does not necessarily represent the value that will ultimately be realized by an employee. We use historical data to estimate the expected price volatility, the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. If actual results are not consistent with our assumptions and judgments used in estimating the key assumptions, we may be required to increase or decrease compensation expense or income tax expense, which could be material to our results of operations.

Income Taxes – Current income tax expense is the amount of income taxes expected to be payable for the current year.  A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. We consider future taxable income and ongoing, prudent and feasible tax planning strategies in assessing the value of our deferred tax assets.  If we determine that it is more likely than not that these assets will not be realized, we will reduce the value of these assets to their expected realizable value, thereby decreasing net income.  Evaluating the value of these assets is necessarily based on our judgment.  If we subsequently determine that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

Recently Issued Accounting Pronouncements

On January 1, 2008, we adopted SFAS No. 157 for our financial assets and liabilities. Our adoption of SFAS No. 157 did not have a material impact on our financial position, results of operations or liquidity.  In accordance with FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB

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Statement No. 157” (“FSP 157-2”), we elected to defer until January 1, 2009 the adoption of SFAS No. 157 for all nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of SFAS No. 157 for those assets and liabilities within the scope of FSP 157-2 is not expected to have a material impact on our financial position, results of operations or liquidity.

In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active” (“FSP 157-3”), that clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 is effective upon issuance, including prior periods for which the financial statements have not been issued.  The adoption of FSP 157-3 did not have a material impact on our financial position, results of operations or liquidity.

SFAS No. 157 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. SFAS No. 157 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that we use to measure fair value.

·                  Level 1: Quoted prices in active markets for identical assets or liabilities.

·                  Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

·                  Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

SFAS No. 157 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.

On January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. We already record marketable securities at fair value in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The adoption of SFAS No. 159 did not have an impact on our consolidated financial statements as management did not elect the fair value option for any other financial instruments.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for non-governmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s (“PCAOB”) amendments to Interim Auditing Standards Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect the adoption of SFAS No. 162 to have a material impact on of our consolidated financial statements.

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In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No.142, “Goodwill and Other Intangible Assets.” FSP 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. We do not expect the adoption of FSP 142-3 to have a material impact on our consolidated financial statements.

Sales

The table set forth below discloses selected quarterly data regarding sales for the past five years.  Data from any one or more quarters is not necessarily indicative of annual results or continuing trends.

Sales of beverages are expressed in unit case volume.  A “unit case” means a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings) or concentrate sold that will yield 192 U.S. fluid ounces of finished beverage.  The Company defines unit case volume as the number of unit cases (or unit case equivalents) of beverages directly or indirectly sold by us.  Sales of food bars, which have been discontinued and are not material, are expressed in actual cases.

Our quarterly results of operations reflect seasonal trends that are primarily the result of increased demand in the warmer months of the year.  It has been our experience that beverage sales tend to be lower during the first and fourth quarters of each fiscal year.  Because the primary historical market for our products is California, which has a year-long temperate climate, the effect of seasonal fluctuations on quarterly results may have been mitigated; however, such fluctuations may be more pronounced as the distribution of our products expands outside of California. Our experience with our energy drink products suggests they are less seasonal than traditional beverages.  As the percentage of our sales that are represented by such products continues to increase, seasonal fluctuations will be further mitigated.  Quarterly fluctuations may also be affected by other factors including the introduction of new products, the opening of new markets where temperature fluctuations are more pronounced, the addition of new bottlers and distributors, changes in the mix of the sales of its finished products and changes in and/or increased advertising and promotional expenses.  (See “Part I, Item 1 – Business – Seasonality”).

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