SECURITIES
            AND EXCHANGE COMMISSION
 
 Washington,
            D.C. 20549
 
 FORM
            10-QSB
 
 x QUARTERLY
            REPORT
            PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
 ACT
            OF
            1934
 
 For
            the
            quarterly period ended June 30, 2005
 
 Commission
            file number: 333-120451
  ----------
 
 REED'S
            INC.
 --------------------------------------------
 (Exact
            name of registrant as specified in its charter)
 
 
 Delaware
 --------
 (State
            of
            incorporation)
 
 
 95-4348325
 ----------
 (I.R.S.
            Employer
 Identification
            No.)
 
 
 13000
            South Spring St.
 Los
            Angeles, Ca. 90061
 ---------------------------
 (Address
            of principal executive offices) (Zip Code)
 
 
 (310)
            217-9400
 ---------------------------------------------
 (Registrant's
            telephone number, including area code)
 
 
 -------------------------------------------------------
 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 o
 
 There
            were 4,726,091 shares of the registrant's common stock outstanding as
            of June
            30,
            2005.
 
  **REED’S,
        INC**
  **CONDENSED
        BALANCE SHEET**
 **ASSETS****June
                  30,**
              ****
              **December
                  31,**
              ********
              ****
              **2005**
              ****
              **2004**
              ********
              ****
              **(Unaudited)**
              ******CURRENT
                  ASSETS**Cash
              
              $
              230,404
              
              $
              42,488Inventory
              
              
              1,197,601
              
              
              1,301,025Trade
                  accounts receivable, net of allowance for doubtful accounts and
                  returns
                  and discounts of $79,431 as of June 30, 2005 and $74,974 as of
                  December
                  31, 2004
              
              
              864,919
              
              
              797,614Other
                  receivables
              
              
              8,794
              
              
              3,163Prepaid
                  expenses
              
              
              36,541
              
              
              5,652
  Total
                    Current Assets
                
                
                2,338,259
                
                
                2,241,139Property
                    and equipment, net of accumulated depreciation of $434,227 as
                    of June 30,
                    2005 and $390,363 as of December 31, 2004
                
                
                1,809,364
                
                
                1,821,473**OTHER
                    ASSETS**Brand
                    names
                
                
                800,201
                
                
                800,201Other
                    intangibles, net of accumulated amortization of $3,350 as of
                    June 30, 2005
                    and $2,978 as of December 31, 2004
                
                
                15,263
                
                
                15,635Deferred
                    stock offering costs
                
                
                354,435
                
                
                219,955Due
                    from director
                
                
                116,210
                
                
                91,197Total
                    Other Assets
                
                
                1,286,109
                
                
                1,035,791**TOTAL
                    ASSETS**
                
                $
                5,433,732
                
                $
                5,098,403**LIABILITIES
                    AND STOCKHOLDER’S EQUITY****CURRENT
                    LIABILITIES**Accounts
                    payable
                
                $
                1,664,156
                
                
                1,412,124Lines
                    of credit
                
                
                1,556,490
                
                
                1,128,222Current
                    portion of long term debt
                
                
                83,064
                
                
                106,113Note
                    payable-related party
                
                
                --
                
                
                21,000Accrued
                    interest
                
                
                114,263
                
                
                115,581Accrued
                    expenses
                
                
                44,865
                
                
                51,549Total
                    Current Liabilities
                
                
                3,462,838
                
                
                2,834,589Loans
                    payable, related party
                
                
                252,358
                
                
                252,358Long
                    term debt, less current portion
                
                
                1,038,788
                
                
                1,041,756Total
                    Liabilities
                
                
                4,753,984
                
                
                4,128,703**COMMITMENTS
                    AND CONTINGENCIES****STOCKHOLDERS’
                    EQUITY**Preferred
                    stock, $10.00 par value, 500,000 shares authorized, 58,940
                    outstanding
                
                
                589,402
                
                
                589,402Common
                    stock, $.0001 par value, 11,500,000 shares authorized,
                    4,726,091 shares issued and outstanding
                
                
                472
                
                
                472Common
                    stock to be issued (269,867 shares)
                
                
                34,720
                
                
                -Additional
                    paid in capital
                
                
                2,753,994
                
                
                2,783,464Accumulated
                    deficit
                
                
                (2,698,840
                )
                
                (2,403,638
                )Total
                    stockholders’ equity
                
                
                679,748
                
                
                969,700**TOTAL
                    LIABILITIES AND STOCKHOLDERS’ EQUITY**
                
                $
                5,433,732
                
                $
                5,098,403
 See
        accompanying Notes to Condensed Financial Statements
   F-1
 **REED’S,
        INC.**
  **CONDENSED
        STATEMENTS OF OPERATIONS**
 **For
        the Three and Six Months Ended June 30, 2005 and 2004**
 **(Unaudited)**
 **Three
                  months ended**
              
              **Six
                  months ended****(Unaudited)**
              
              **(Unaudited)****June
                  30,**
              
              **June
                  30,**
              
              **June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****SALES**
              
              $
              2,582,273
              
              $
              2,782,004
              
              $
              4,399,608
              
              $
              4,495,344**COST
                  OF SALES**
              
              
              2,069,274
              
              
              2,321,097
              
              
              3,555,561
              
              
              3,623,767**GROSS
                  PROFIT**
              
              
              512,999
              
              
              460,907
              
              
              844,047
              
              
              871,577**OPERATING
                  EXPENSES**Selling
              
              
              236,218
              
              
              198,033
              
              
              521,116
              
              
              336,278General &
                  Administrative
              
              
              244,502
              
              
              227,634
              
              
              456,599
              
              
              461,575480,720
              
              
              425,667
              
              
              977,715
              
              
              797,853**INCOME
                  (LOSS) FROM OPERATIONS**
              
              
              32,279
              
              
              35,240
              
              
              (133,668
              )
              
              73,724**OTHER
                  EXPENSES**Interest
                  Expense
              
              
              (90,327
              )
              
              (54,074
              )
              
              (161,534
              )
              
              (114,013
              )**NET
                  LOSS**
              
              $
              (58,048
              )
              $
              (18,834
              )
              $
              (295,202
              )
              $
              (40,289
              )**PREFERRED
                  STOCK DIVIDEND**
              
              
              (29,470
              )
              
              -
              
              
              (29,470
              )
              
              -**NET
                  LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS**
              
              $
              (87,518
              )
              $
              -
              
              $
              (324,672
              )
              $
              -**LOSS
                  PER SHARE**—
                  Basic and Diluted
              
              $
              (.02
              )
              $
              (.01
              )
              $
              (.07
              )
              $
              (.01
              )**WEIGHTED
                  AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED**
              
              
              4,812,710
              
              
              4,726,091
              
              
              4,769,640
              
              
              4,726,091
 See
        accompanying Notes to Condensed Financial Statements
  F-2
  **REED’S,
                      INC.****STATEMENT
                      OF CHANGES IN STOCKHOLDERS’ EQUITY****For
                      the Six Months Ended June 30, 2005
                      (Unaudited)**
  **Common
                      Stock**
                  
                  
                  
                  
                  
                  
                  
                  
                  **Preferred
                      Stock****Shares**
                  
                  
                  **Amount**
                  
                  
                  **Common**Stock
                      To**Be
                      issued******
                  
                  
                  **Additional
                      Paid**
                      **In
                        Capital**
                  
                  
                  **Shares**
                  
                  
                  **Amount**
                  
                  
                  **Accumulated**
                      **Deficit**
                  
                  
                  **Total**Balance,
                      December 31, 2004
                  
                  
                  4,726,091
                  
                  $
                  472
                  
                  $
                  —
                  
                  $
                  2,783,464
                  
                  
                  58,940
                  
                  $
                  589,402
                  
                  $
                  (2,403,638
                  )
                  $
                  969,700Exercise
                      of Warrants (Unaudited)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,250
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,250Preferred
                      Stock Dividend (unaudited)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  29,470
                  
                  
                  (29,470
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Net
                      loss for the six months ended June 30, 2005 (Unaudited)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (295,202
                  )
                  
                  (295,202Balance
                      June 30, 2005 (Unaudited)
                  
                  
                  4,726,091
                  
                  $
                  472
                  
                  $
                  34,720
                  
                  $
                  2,753,994
                  
                  
                  58,940
                  
                  $
                  589,402
                  
                  $
                  (2,698,840
                  )
                  $
                  679,748
  See
              Accompanying Notes to Condensed Financial Statements
 F-3
 **REED’S
        INC.**
  **CONDENSED
        STATEMENTS OF CASH FLOWS**
 **For
        the six months ended June 30, 2005 and 2004**
 **(Unaudited)**
 **Six
                  Months Ended****(Unaudited)****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  Loss
              
              $
              (295,202
              )
              $
              (40,289
              )Adjustments
                  to reconcile net loss to net cash used in operating activities:Depreciation
                  and amortization
              
              
              46,610
              
              
              51,959Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (67,305
              )
              
              (763,672
              )Inventory
              
              
              103,424
              
              
              (110,425
              )Prepaid
                  Expenses
              
              
              (33,264
              )
              
              (35,710
              )Other
                  receivables
              
              
              (5,631
              )
              
              (245
              )Accounts
                  payable
              
              
              252,032
              
              
              587,123Accrued
                  expenses
              
              
              (6,684
              )
              
              (34,504
              )Accrued
                  interest
              
              
              3,932
              
              
              23,468Net
                  cash used in operating activities
              
              
              (24,708
              )
              
              (253,287
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchase
                  of property and equipment
              
              
              (31,754
              )
              
              (51,354
              )Due
                  from director
              
              
              (25,013
              )
              
              --Net
                  cash used in investing activities
              
              
              (56,767
              )
              
              (51,354
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Repayment
                  of previous line of credit
              
              
              (759,387
              )
              
              --Borrowings
                  on new  line of credit
              
              
              1,109,543
              
              
              --Borrowings
                  on debt
              
              
              190,000
              
              
              --Principal
                  payments on debt
              
              
              (216,016
              )
              
              (65,255
              )Proceeds
                  received prior to issuance of preferred stock
              
              
              --
              
              
              310,900Net
                  borrowing on lines of credit
              
              
              78,112
              
              
              226,813Payments
                  on debt to related parties
              
              
              (21,000
              )Payments
                  for deferred stock offering costs
              
              
              (134,481
              )
              
              (7,672
              )Net
                  cash provided by financing activities
              
              
              246,771
              
              
              464,786**NET
                  INCREASE (DECREASE) IN CASH**
              
              
              187,916
              
              
              (160,145
              )**CASH —
                  Beginning of period**
              
              
              42,488
              
              
              12,930**CASH —
                  End of period**
              
              $
              230,404
              
              $
              173,075**Supplemental
                  Disclosures of Cash Flow Information**Cash
                  paid during the period for:Interest
              
              $
              157,602
              
              $
              90,545Taxes
              
              $
              0
              
              $
              0**Noncash
                Investing and Financing Activities**Common
                  stock to be issued
                  in settlement of accrued interest
              
              $
              5,250
              
              $
              --Common
                  stock to be issued in settlement of preferred stock
                  dividend
              
              $
              29,470
              
              $
              29,470
  See
        accompanying Notes to Condensed Financial Statements
   F-4
 **REED’S,
        INC.**
  **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 **Six
        Months Ended June 30, 2005**
 **(UNAUDITED)**
  1.
              BASIS
                  OF PRESENTATION
  The
        accompanying interim condensed financial statements are unaudited, but in
        the
        opinion of management of Reeds, Inc. (the Company), contains all adjustments,
        which include normal recurring adjustments necessary to present fairly the
        financial position at June 30, 2005, the results of operations, and cash
        flows
        for the three months ended June 30, 2005 and 2004. The balance sheet as of
        December 31, 2004 is derived from the Company’s audited financial
        statements.
  Certain
        information and footnote disclosures normally included in financial statements
        that have been prepared in accordance with generally accepted accounting
        principles have been condensed or omitted pursuant to the rules and regulations
        of the Securities and Exchange Commission, although management of the Company
        believes that the disclosures contained in these financial statements are
        adequate to make the information presented herein not misleading. For further
        information, refer to the financial statements and the notes thereto included
        in
        the Company’s Registration Statement, Form SB-2 as filed with the Securities and
        Exchange Commission on May 13, 2005.
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities, disclosures of contingent
        assets and liabilities at the date of the financial statements, and the reported
        amounts of revenues and expense during the reporting period. Actual results
        could differ from those estimates.
  The
        results of operations for the three and six months ended June 30, 2005 are
        not
        necessarily indicative of the results of operations to be expected for the
        full
        fiscal year ending December 31, 2005.
  Loss
        per
        Common Share
  Basic
        loss per share is calculated by dividing net loss available to common
        stockholders by the weighted average number of common shares outstanding
        during
        the year. Diluted loss per share is calculated assuming the issuance of common
        shares, if dilutive, resulting from the exercise of stock options and warrants.
        As the Company had a loss in the six month period ended June 30, 2005 and
        2004,
        basic and diluted loss per share are the same.
  The
        weighted average shares outstanding at June 30, 2005 includes the shares
        to be
        issued resulting from the exchange of warrants, which occurred on June 30,
        2005
        for 262,500 shares of common stock, and the preferred stock dividend payable
        for
        7,367 shares of common stock . These shares are expected to be issued in
        the
        third quarter of 2005 (see Notes 5 and 6).
  Recent
          Accounting Pronouncements
 
 In
          November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
          ARB No. 43, Chapter 4.” The amendments made by Statement 151 clarify that
          abnormal amounts of idle facility expense, freight, handling costs, and
          wasted
          materials (spoilage) should be recognized as current period charges and
          require
          the allocation of fixed production overheads to inventory based on the
          normal
          capacity of the production facilities. The guidance is effective for inventory
          costs incurred during fiscal years beginning after June 15, 2005. Earlier
          application is permitted for inventory costs incurred during fiscal years
          beginning after November 23, 2004. The Company has evaluated the impact
          of the
          adoption of SFAS 151, and does not believe the impact will be significant
          to the
          Company's overall results of operations or financial position.
  In
          December 2004, the FASB issued SFAS No.153, “Exchanges of Non-monetary Assets,
          an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions.”
          The amendments made by Statement 153 are based on the principle that exchanges
          of non-monetary assets should be measured based on the fair value of the
          assets
          exchanged. Further, the amendments eliminate the narrow exception for
          non-monetary exchanges of similar productive assets and replace it with
          a
          broader exception for exchanges of non-monetary assets that do not have
          commercial substance. Previously, Opinion 29 required that the accounting
          for an
          exchange of a productive asset for a similar productive asset or an equivalent
          interest in the same or similar productive asset should be based on the
          recorded
          amount of the asset relinquished. Opinion 29 provided an exception to its
          basic
          measurement principle (fair value) for exchanges of similar productive
          assets.
          The Board believes that exception required that some non-monetary exchanges,
          although commercially substantive, be recorded on a carryover basis. By
          focusing
          the exception on exchanges that lack commercial substance, the Board believes
          this Statement produces financial reporting that more faithfully represents
          the
          economics of the transactions. The Statement is effective for non-monetary
          asset
          exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
          application is permitted for non-monetary asset exchanges occurring in
          fiscal
          periods beginning after the date of issuance. The provisions of this Statement
          shall be applied prospectively. The Company has evaluated the impact of
          the
          adoption of SFAS 152, and does not believe the impact will be significant
          to the
          Company's overall results of operations or financial position.
  In
          December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
          Payment.” Statement 123(R) will provide investors and other users of financial
          statements with more complete and neutral financial information by requiring
          that the compensation cost relating to share-based payment transactions
          be
          recognized in financial statements. That cost will be measured based on
          the fair
          value of the equity or liability instruments issued. Statement 123(R) covers
          a
          wide range of share-based compensation arrangements including share options,
          restricted share plans, performance-based awards, share appreciation rights,
          and
          employee share purchase plans. Statement 123(R) replaces FASB Statement
          No. 123,
          "Accounting for Stock-Based Compensation," and supersedes APB Opinion No.
          25,
          "Accounting for Stock Issued to Employees." Statement 123, as originally
          issued
          in 1995, established as preferable a fair-value-based method of accounting
          for
          share-based payment transactions with employees. However, that Statement
          permitted entities the option of continuing to apply the guidance in Opinion
          25,
          as long as the footnotes to financial statements disclosed what net income
          would
          have been had the preferable fair-value-based method been used. Public
          entities
          (other than those filing as small business issuers) will be required to
          apply
          Statement 123(R) as of the first interim or annual reporting period of
          the first
          fiscal year that begins after June 15, 2005 and the first fiscal year that
          begins after December 15, 2005 for small business issuers. The Company
          has
          evaluated the impact of the adoption of SFAS 123(R), and does not believe
          the
          impact will be significant to the Company's overall results of operations
          or
          financial position.
 
 We
          do not
          believe that the adoption of the above recent pronouncements will have
          a
          material effect on our consolidated financial position or results of operations.
  2.
              Lines
                  of credit
  In
        June
        2005, the Company was successful in replacing the lender of its line of credit
        facilities. The new lender has extended a line of credit secured by accounts
        receivable and inventory in the maximum amounts of $1,910,000. The borrowing
        base on the accounts receivable are 80% of all eligible receivables, which
        are
        primarily accounts receivables under 90 days. The inventory borrowing base
        is
        50% of eligible inventory. As of June 30, 2005, the amounts borrowed on this
        line of credit were $ 1,109,543. The interest rate on this new loan is Prime
        plus 2.75%. The aggregate amounts borrowed under other lines of credit and
        payable at June 30, 2005 was $446,947 (see Note 4).
  3.
              Long
                  term debt
  In
        June
        2005, the Company was successful in replacing the lender of certain long-term
        debt secured by equipment. The Company replaced 2 loans which had a combined
        principle balance at December 31, 2004 of $169,248 and had interest rates
        ranging from Prime plus 10% to Prime plus 12% to one loan at June 30, 2005
        with
        a principal balance of $190,000 and an interest rate of Prime plus 2.75%.
        The
        monthly payment on this loan requires principal payments of $3,167, plus
        interest. This loan matures in June 2010.
  4.
              Equipment
                  line of credit
  In
        June
        2005, the Company obtained an equipment line of credit from the same lender
        mentioned in footnotes 2 and 3. The maximum amount of this line of credit
        is
        $150,000 and can be used for eligible equipment purchases. The interest rate
        for
        this line of credit is Prime plus 2.75%. As of June 30, 2005, no advances
        were
        made on this line of credit.
  5.
              Related
                  Party Transactions
  In
        June
        2005, 262,500 warrants held by Robert Reed were exercised at $.02 per warrant
        resulting in 262,500 shares to be issued. In lieu of receiving $5,250, interest
        payable to Robert Reed was reduced by the same amount. As of June 30,
        2005, the shares had not been issued.
  6.
                Dividend
                    Distributable
 Dividend
        distributable represents the preferred stock dividend payable to
        be paid with the issuance of common stock. The 7,367 shares of common
        stock had not been issued as of June 30, 2005.
 7.
                Inventory
  Inventory
          consists of the following at June 30, 2005
 
 Raw
                  Materials
                
                $
                546,189Finished
                  Goods
                
                
                651,412$
                1,197,601
  F-5


**Overview**
 
 We develop, manufacture, market, and sell “alternative” or “New Age” beverages
        and assorted foods. We currently manufacture, market and sell six unique
        product
        lines:
 ·
                  Reed’s
                      Ginger Brews
 ·
                  Virgil’s Root Beer and Cream
                    Sodas
 ·
                  China Colas
 ·
                  Reed’s Ginger Juice Brews
 ·
                  Reed’s Ginger Candies
 ·
                  Reed’s Ginger Ice Creams
  We currently distribute and sell our products through a network of natural,
        gourmet, and independent distributors, as well as through our growing in-house
        direct sales and distribution team, throughout the United States and, to
        a
        lesser extent, in Canada.
 
 **Trends,
        Risks, Challenges, Opportunities That May or Are Currently Affecting Our
        Business**
 
 Our
        main
        challenges, trends, risks, and opportunities that could affect or are affecting
        our financial results include but are not limited to:
  Fuel
        Prices - As oil
        prices continue to rise, our freight rates, which run at approximately 8%
        of net
        sales, have been increasing. We currently see freight rates increasing by
        an
        additional 5% to 10% in the near term. On the other hand, we expect that
        our
        Brewery operations in Los Angeles, CA will allow us to reduce certain freight
        costs by eliminating the need to ship from our contract manufacturer in
        Pennsylvania to our customers in the Western part of the United States.
 
 Low
        Carbohydrate Diets and Obesity -
        Consumers have been demanding lower carbohydrate products. This trend did
        not
        seem to affect our sales growth in 2004. We are watching this trend closely
        and
        have started developing low-carbohydrate versions of some of our beverages.
 
 Distribution
        Consolidation - The
        trend towards continued consolidation of the beverage distribution industry
        through mergers and acquisitions has inspired us to start our own direct
        distribution locally in southern California and to go to large national
        retailers. Consolidation among natural foods industry distributors has not
        had
        an affect on our sales. However, this consolidation may limit the distributor
        options outside natural foods to service mass-market food accounts.
 
 
 Consumer
        Demanding More Natural Foods - The
        rapid growth of the natural foods industry has been fueled by the growing
        consumer awareness of the potential health problems due to the consumption
        of
        chemicals in the diet. Consumers are reading ingredient labels and choosing
        products based on them. We design products with these consumer concerns in
        mind.
        We feel this trend toward more natural products is one of the main trends
        behind
        our growth. Recently, this trend in drinks has not only shifted to products
        using natural ingredients, but also to products with added ingredients
        possessing a perceived positive function like vitamins, herbs and other
        nutrients. Our products also are designed with this consumer demand in
        mind.
 
 Supermarket
        and Natural Food Stores - More
        and more supermarkets, in order to compete with the growing natural food
        industry, have started including natural food sections. As a result of this
        trend, our products are now available in supermarkets throughout the United
        States. Supermarkets can require that we spend more advertising money and
        they
        sometimes require slotting fees. We continue to work to keep these fees
        reasonable. Slotting fees in the natural food section of the supermarket
        are
        generally not as expensive as in other areas of the store.
 
 Beverage
        Packaging Changes -
        Beverage packaging has continued to innovate. There is an increase in the
        sophistication with respect to beverage packaging design. While we feel that
        our
        current core brands still compete on the level of packaging, we continue
        to
        experiment with new and novel packaging designs such as the 5-liter party
        keg
        and 750 ml champagne style bottles. We have further plans for other innovative
        packaging designs.
 
 Cash
        Flow Requirements - Growth
        of our company will depend on the availability of additional capital infusions
        to finance. We have a financial history of losses and are dependent on
        non-banking sources of capital, which tend to be more expensive and charge
        higher interest rates. Any increase in costs of goods will further increase
        losses and will further tighten cash reserves. We feel that we could raise
        prices to offset this problem if it occurs. We haven’t increased our prices
        since inception and we feel that the market has been increasing in terms
        of
        beverage prices in the last ten years.
 Packaging
        or Raw Material Price Increases - An
        increase in packaging or raw materials could be adverse to our cash flow
        and
        income. We have not had a significant increase in any of these costs for
        many
        years but the effect of the US dollar dropping in value with respect to other
        major world currencies and rising fuel prices could possibly increase costs
        of
        the raw materials and packaging making up the cost of goods manufactured.
        We
        continue to search for packaging and production alternatives to reduce our
        cost
        of goods.
 
 Initial
        Public Offering - We
        anticipate that during the 2005 calendar year we will complete our
        regulatory filings with state and federal securities commissions and commence
        our public offering. Our public offering is a best efforts offering of up
        to 2
        million shares of stock at $4.00 per share. While we do not require this
        funding
        to continue our operations, in the event less than the maximum amount of
        this
        offering is raised, our future business plans may be adversely effected.
  **Critical
          Accounting Policies**
 
 Our
          consolidated financial statements are prepared in accordance with accounting
          principles generally accepted in the United States of America, or 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 and trademark licenses, as well as claims
          and
          contingencies arising out of litigation or other transactions that occur
          in the
          normal course of business. The following summarize our most significant
          accounting and reporting policies and practices:
 
  *Trademark
          License and Trademarks.* Trademark
          license and trademarks primarily represent the costs we pay for exclusive
          ownership of the Reed’s® trademark in connection with the manufacture, sale and
          distribution of beverages and water and non-beverage products. We also
          own the
          Virgil’s® trademark and the China Cola® trademark. In addition, we own a number
          of other trademarks in the United States as well as in a number of countries
          around the world. We account for theses items in accordance with SFAS No.
          142, Goodwill, and Other Intangible Assets. Under the provisions of
          SFAS No. 142, we do not amortize indefinite-lived trademark licenses
          and
          trademarks.
  
  In
          accordance with SFAS No. 142, we evaluate our non-amortizing trademark
          license and trademarks quarterly for impairment. We measure impairment
          by the
          amount that the carrying value exceeds the estimated fair value of the
          trademark
          license and trademarks. The fair value is calculated by reviewing net sales
          of
          the various beverages and applying industry multiples. Based on our quarterly
          impairment analysis the estimated fair values of trademark license and
          trademarks exceeded the carrying value and no impairments were identified
          during
          the years ended December 31, 2004 or 2003.
  
  *Long-Lived
          Assets.* Our
          management regularly reviews property, equipment and other long-lived assets,
          including identifiable amortizing intangibles, for possible impairment.
          This
          review occurs quarterly 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. Quarterly, or earlier, if there is 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. Preparation of estimated
          expected future cash flows is inherently subjective and is based on management’s
          best estimate of assumptions concerning expected future conditions. No
          impairments were identified during the years ended December 31, 2004 or
          2003.
  
  Management
          believes that the accounting estimate related to impairment of our long
          lived
          assets, including our trademark license and trademarks, is a “critical
          accounting estimate” because: (1) it is highly susceptible to change from
          period to period because it requires management to estimate fair value,
          which is
          based on 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 we
          expect they will continue to do so.
  
 In
          estimating future revenues, we use internal budgets. Internal budgets are
          developed based on recent revenue data for existing product lines and planned
          timing of future introductions of new products and their impact on our
          future
          cash flows.
 
  *Advertising.* We
          account for advertising production costs by expensing such production costs
          the
          first time the related advertising is run.
  
 *Accounts
          Receivable.* We
          evaluate the collectibility 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 our management believes will ultimately be collected.
          In
          addition to specific customer identification of potential bad debts, bad
          debt
          charges are recorded based on our historical losses 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 and/or
          our
          ability to sell the product(s) concerned and production requirements. Demand
          for
          our products can fluctuate significantly. Factors that could affect demand
          for
          our products include unanticipated changes in consumer preferences, general
          market conditions or other factors, which may result in cancellations of
          advance
          orders or a reduction in the rate of reorders placed by customers. Additionally,
          our 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.
   *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 our management determines 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 management’s
          judgment. If our management subsequently determined 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.
  
 
 **Recent
        Accounting Pronouncements**
 
 In
        November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
        ARB No. 43, Chapter 4.” The amendments made by Statement 151 clarify that
        abnormal amounts of idle facility expense, freight, handling costs, and wasted
        materials (spoilage) should be recognized as current period charges and require
        the allocation of fixed production overheads to inventory based on the normal
        capacity of the production facilities. The guidance is effective for inventory
        costs incurred during fiscal years beginning after June 15, 2005. Earlier
        application is permitted for inventory costs incurred during fiscal years
        beginning after November 23, 2004. The Company has evaluated the impact of
        the
        adoption of SFAS 151, and does not believe the impact will be significant
        to the
        Company's overall results of operations or financial position.
  In
        December 2004, the FASB issued SFAS No.153, “Exchanges of Non-monetary Assets,
        an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions.”
        The amendments made by Statement 153 are based on the principle that exchanges
        of non-monetary assets should be measured based on the fair value of the
        assets
        exchanged. Further, the amendments eliminate the narrow exception for
        non-monetary exchanges of similar productive assets and replace it with a
        broader exception for exchanges of non-monetary assets that do not have
        commercial substance. Previously, Opinion 29 required that the accounting
        for an
        exchange of a productive asset for a similar productive asset or an equivalent
        interest in the same or similar productive asset should be based on the recorded
        amount of the asset relinquished. Opinion 29 provided an exception to its
        basic
        measurement principle (fair value) for exchanges of similar productive assets.
        The Board believes that exception required that some non-monetary exchanges,
        although commercially substantive, be recorded on a carryover basis. By focusing
        the exception on exchanges that lack commercial substance, the Board believes
        this Statement produces financial reporting that more faithfully represents
        the
        economics of the transactions. The Statement is effective for non-monetary
        asset
        exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
        application is permitted for non-monetary asset exchanges occurring in fiscal
        periods beginning after the date of issuance. The provisions of this Statement
        shall be applied prospectively. The Company has evaluated the impact of the
        adoption of SFAS 152, and does not believe the impact will be significant
        to the
        Company's overall results of operations or financial position.
 
 In
          December 2004, the FASB issued SFAS No.123 (revised 2004),
“Share-Based Payment.” Statement 123(R) will provide investors and other users
          of financial statements with more complete and neutral financial information
          by
          requiring that the compensation cost relating to share-based payment
          transactions be recognized in financial statements. That cost will be measured
          based on the fair value of the equity or liability instruments issued.
          Statement
          123(R) covers a wide range of share-based compensation arrangements including
          share options, restricted share plans, performance-based awards, share
          appreciation rights, and employee share purchase plans. Statement 123(R)
          replaces FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
          and
          supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
          Statement 123, as originally issued in 1995, established as preferable
          a
          fair-value-based method of accounting for share-based payment transactions
          with
          employees. However, that Statement permitted entities the option of continuing
          to apply the guidance in Opinion 25, as long as the footnotes to financial
          statements disclosed what net income would have been had the preferable
          fair-value-based method been used. Public entities (other than those filing
          as
          small business issuers) will be required to apply Statement 123(R) as of
          the
          first interim or annual reporting period of the first fiscal year that
          begins
          after June 15, 2005 and the first fiscal year that begins after December
          15,
          2005 for small business issuers. The Company has evaluated the impact of
          the
          adoption of SFAS 123(R), and does not believe the impact will be significant
          to
          the Company's overall results of operations or financial
          position.
 
 We do not believe that the adoption of the above recent pronouncements will
        have
        a material effect on our consolidated financial position or results of
        operations.
 
 **Results
        of Operations**
 
 ***Three
        Months Ended June 30, 2005 Compared to Three Months Ended June 30,
        2004***
 
 Net
        Sales. Net sales decreased by $199,731, or 7.2%, to $2,582,273 in the three
        months ending June 30, 2005 from $2,782,004 in the three months ending June
        30,
        2004. The net sales decrease was primarily the result of a one time sale
        of
        product in the three months ending June 30, 2004 of $348,000. Comparing
        the three months ended June 30, 2005 to thethree
        months ended June 30, 2004 overall sales decreased. However, the2004
        period includes salesofapproximately
        $348,000 to one customer who placed a one time order.Given
        that our sales decreased by$199,731
        in the 2005 period as compared to 2004period,our
        sales
        to our recurring customers actually increased approximately$148,000.
        This trend is consistent with management's plans toincrease
        sales to its existing customer base as well as search for newcustomers,
        thereby increasing its customerbase.Sales
        growth was from existing products. This growth came from the Virgil’s Root Beer
        line that includes the new 5 liter kegs and cream soda (2.6%) and from the
        core
        Reed’s Ginger Brew products (3.0%) consisting of Reed’s Original, Reed’s Extra
        and Reed’s Premium Ginger Brew. While we keep limited data on the following, we
        believe these existing product sales increases were due to increased sales
        in
        existing outlets and the expansion of the number of outlets carrying these
        products.
 
 Gross
        Profit. Gross profit was $512,999 for the three months ending June 30, 2005,
        an
        increase of $52,092 or 11.3% higher than the gross profit for the three months
        ending June 30, 2004 of $460,907. As a percentage of net sales, gross profit
        increased to 19.9% in the three months ending June 30, 2005 from 16.6% in
        the
        three months ending June 30, 2004. This increase was due to decreased warehouse
        expenses (1.1%) due to decreased use of outside warehousing and decreased
        freight expenses (2.2%) due to decreased use of cross country freight as
        the
        west coast facility gears up.
 
 
 Selling
        Expenses. Selling expenses increased by $38,185 or 19.3% to $236,218 in the
        three months ending June 30, 2005 from $198,033 in the three months ending
        June
        30, 2004 and increased as a percentage of net sales to 9.1% in the three
        months
        ending June 30, 2005 from 7.1% in the three months ending June 30, 2004.
        The
        increase in selling expenses was primarily due to increased sales wages due
        to a
        larger sales force (a 25.0% increase), increased selling expenses due to
        the
        larger sales force (4.7%) and increased promotional expenses in the form
        of
        demos (7.3%). These increased expenses were offset by lower promotional expenses
        (-3.1%) and lower commissions to outside brokers (-14.6%)
  General
        and Administrative. General and administrative expenses increased by $16,868
        or
        7.4%, to $244,502 in the three months ending June 30, 2005 from $227,634
        in the
        three months ending June 30, 2004 and increased as a percentage of net sales
        to
        9.5% in the three months ending June 30, 2005 from 8.2% in the three months
        ending June 30, 2004. The increase in general and administrative expenses
        was
        primarily due to an increase in insurance expenses (9.5%) and utility expenses
        (3.1%) offset by a reclassification of lease expenses in the three months
        ending
        June 30, 2005 to cost of goods sold (-5.2%).
  Interest
        expense was $90,327 in the three months ending June 30, 2005, compared to
        interest expense of $54,074 in the three months ending June 30, 2004. We
        had
        higher interest expense in 2005 due to increased borrowing and an increase
        in
        the prime lending rate on our receivable line of credit with our
        lender.
 
 ***Six
        Months Ended June 30, 2005 Compared to Six Months Ended June 30,
        2004***
  Net
        Sales. Net sales decreased by $95,736, or 2.1%, to $4,399,608 in the six
        months
        ending June 30, 2005 from $4,495,344 in the six months ending June 30, 2004.
        2004 sales figures include a one time sale of $348,000. Comparing
        the six months ended June 30, 2005 to thesix
        months ended June 30, 2004 overall sales decreased. However, the2004
        period includes salesofapproximately
        $348,000 to one customer who placed a one time order.Given
        that our sales decreased by$95,736
        in the 2005 period as compared to 2004period,our
        sales
        to our recurring customers actually increased approximately$252,000.
        This trend is consistent with management's plans to increase
        sales to its existing customer base as well as search for new customers,
        thereby increasing its customer base. This net sales increase was primarily
        the
        result of sales growth of existing products. Existing product growth came
        from
        the Virgil’s Root Beer line including the new 5 liter part kegs and the cream
        soda (2.8%) and from the core Reed’s Ginger Brew products (0.9%) consisting of
        Reed’s Original, Reed’s Extra and Reed’s Premium Ginger Brew. While we keep
        limited data on the following, we believe these existing product sales increases
        were due to increased sales in existing outlets and the expansion of the
        number
        of outlets carrying these products.
 
 
 Gross
        Profit. Gross profit was $844,047 for the six months ending June 30, 2005,
        a
        decrease of $27,530 or 3.2% lower than the gross profit for the six months
        ending June 30, 2004 of $871,577. As a percentage of net sales, gross profit
        decreased to 19.2% in the six months ending June 30, 2005 from 19.4% in the
        six
        months ending June 30, 2004. The decrease in gross margin percentage is due
        to
        increased customs expenses (-0.3%) due to increased importations of products
        and
        packaging material, increased depreciation as a percentage of sales (-0.1%)
        and
        lease expenses being relocated from general and administrative expenses (-0.4%),
        offset by reduced freight expenses (0.4%) due to the increased use of the
        west
        coast facility and reduced labor expenses at the new facility (0.2%) as
        efficiencies increase at the new west coast facility.
 
 Selling
        Expenses. Selling expenses increased by $184,838 or 55.0% to $521,116 in
        the six
        months ending June 30, 2005 from $336,278 in the six months ending June 30,
        2004
        and increased as a percentage of net sales to 11.8% in the six months ending
        June 30, 2005 from 7.5% in the six months ending June 30, 2004. The increase
        in
        selling expenses was primarily due to increased sales wages due to a larger
        sales force (31.7%), increased selling expenses due to the larger sales force
        (9.0%) and increased promotional expenses in the form of demos (24.2%). This
        was
        offset by reduced promotional expenses (-4.0%) and reduced commissions expenses
        to outside brokers (-5.9%). Selling expenses increased as we prepared for
        more
        aggressive growth with the expected public offering in the third quarter
        of this
        year. The rate of increase of our annualized selling expenses is not expected
        to
        continue. We will monitor our selling expenses in relation to our future
        realized sales and will make adjustments as management deems
        necessary.
 
 General
        and Administrative. General and administrative expenses decreased by $4,976
        or
        1.1%, to $456,599 in the six months ending June 30, 2005 from $461,575 in
        the
        six months ending June 30, 2004 and increased as a percentage of net sales
        to
        10.4% in the six months ending June 30, 2005 from 10.3% in the six months
        ending
        June 30, 2004. General and administrative expenses saw an increase in utility
        expenses (1.5%), an increase in bank processing expenses (0.4%) and an increase
        in insurance expenses (3.0%) offset by a reclassification of lease expenses
        to
        cost of goods sold (-5.0%).
  Interest
        expense was $161,534 in the six months ending June 30, 2005, compared to
        interest expense of $114,013 in the six months ending June 30, 2004. We had
        higher interest expense in 2005 due to increased borrowing and an increase
        in
        the prime lending rate on our receivable line of credit with our
        lender.
 
 
 
 **Liquidity
        and Capital Resources**
 
 Robert
          T.
          Reed Sr. had options to purchase 262,500 shares at $0.02 for his work in
          1991
          helping the start up of our company. The expiration date of these options
          was
          June 1, 2005. The original term of the options was until December 31, 1997.
          We
          affected extension of these options twice, once to December 31, 2000 and
          again
          to June 1, 2005. These extensions were granted in consideration of extensions
          Mr. Reed, Sr. granted us on the repayment of his various loans made to
          us. These
          options were exercised on May 31, 2005.
  Historically, we have financed our operations primarily through private sales
        of
        common stock, preferred stock, convertible debt, a line of credit from a
        financial institution, and cash generated from operations.
  As
          of
          June 30, 2005, we had a working capital deficit of $1,124,579 compared
          to a
          working capital deficit of $593,450 as of December 31, 2004. This increase
          in
          our working capital deficit was primarily attributable to losses from
          operations, increased borrowing under our credit facilities, and costs
          incurred
          related to our deferred stock offering.
 
 As of June 30, 2005, cash was $230,404, compared to $42,488 as of
        December 31, 2004. This amount arose from cash collections on accounts
        receivable not yet applied to our line of credit as of June 30, 2005. Net
        cash
        used by operating activities was approximately $24,708 for the six months
        ended
        June 30, 2005.
 
 We
        used
        $56,767 in investing activities for the six months ended June 30, 2005,
        primarily for the purchase of equipment for our West Coast Brewery and advances
        on a loan to a director.
 
 Cash
        flow
        provided from financing activities was $246,771 for the six months ended
        June
        30, 2005. The increase came primarily from borrowings from our new lender
        and
        was reduced by the pay-off of loans from our previous lender, the pay-off
        of
        non-related party loans and an increase in our deferred offering expenses.
 
 We do not have any current material commitments for capital expenditures.
 
 On June 25, 2005, we changed our primary lender. As a result we have
        increased our revolving line of credit availability from $1,100,00 to
        $1,910,000. In addition, long term debt financing with our previous lender
        has
        been refinanced with our new lender. We were successful in securing these
        credit
        facilities at an interest rate of Prime plus 2.75% as opposed to interest
        rates
        with our previous lender which ranged from Prime plus 9% to Prime plus
        12%.
 
 This revolving line of credit is secured by all of our assets, including
        real
        estate, accounts receivable, inventory, trademarks and other intellectual
        property and equipment. The credit facility does not impose any financial
        covenants on us.
 
 We have recently been advised by the Securities Exchange Commission that
          our
          best efforts $9.2 million SB-2 offering has been declared effective under
          the
          federal securities laws. Management believes that we are in the final stages
          of
          obtaining approval of our offering before the coordinated state review,
          which
          will allow us to offer our shares in 31 states.
 
 During
        the next six months, we expect to reduce our raw materials inventory by
        approximately $150,000. We built up this inventory by purchasing beverage
        bottles in a foreclosure proceeding of an unrelated party.
  Management
          believes its sources of cash are adequate for
          the next twelve months of operations.
  **Inflation**
   Although
        management expects that our operations will be influenced by general economic
        conditions, we do not believe that inflation has a material effect on our
        results of operations.
 
 Item
        3. Quantitative and Qualitative Disclosures About Market Risk
 
 We
        are
        exposed to the impact of interest rate changes as most of our borrowings
        are
        based on the prime rate. As the prime rate increases, our borrowing costs
        will
        increase and we may not be able to pass along the increase in our borrowing
        costs to our customers.
  We
        are
        exposed to the impact of foreign currency fluctuations. Our sales are not
        materially impacted by foreign currency fluctuations, as a minimal amount
        of our
        revenues are currently generated outside the United States. We use certain
        suppliers in Germany for product packing materials, and we settle these
        transactions in Euro’s. We do not use any foreign currency hedging activities or
        other techniques to mitigate our risk to currency fluctuations. Consequently,
        our product cost may suffer from a weak dollar and we may not be able to
        pass
        along foreign currency fluctuations to our customers.
 
 Policies
        and Procedures -- The Company does not invest in instruments designed to
        provide
        hedging against interest rate fluctuations.
 
 Interest
        Rate Risk
 We
        currently have one credit line which we use in our operations with a maximum
        loan amount of $1,910,000. Our interest rate is variable and based on the
        prime
        rate. Our actual interest rate will change with each change of the prime
        rate.
        In addition, we have term loans with rates based on the prime rate. Since
        our
        borrowings have been in excess of $1,000,000, changes in the prime rate will
        impact our operations.
 
 Foreign
        Currency Risk
 We
        are
        exposed to the impact of foreign currency fluctuations. Our sales are not
        materially impacted by foreign currency fluctuations, as a minimal amount
        of our
        revenues are currently generated outside the United States. We use certain
        suppliers in Germany for product packing materials, and we settle these
        transactions in Euro’s. We do not use any foreign currency hedging activities or
        other techniques to mitigate our risk to currency fluctuations. Consequently,
        our product cost may suffer from a weak dollar and we may not be able to
        pass
        along foreign currency fluctuations to our customers.
  
 
 Overall
        Market Risk
 With
        regard to overall market risk, we attempt to mitigate our exposure to such
        risks by assessing the relative proportion of our investments in cash and cash
        equivalents and the relatively stable and risk-minimized returns available on
        such
        investments. At June 30, 2005, our cash was primarily invested in non-interest
        bearing checking accounts.





CONTROLS
        AND PROCEDURES
 
 (a)
        Evaluation of Disclosure Controls and Procedures.
 
 Our
        management, with the participation of our principal executive officer and principal
        financial officer, has evaluated the effectiveness of the design and effectiveness
        of our disclosure controls and procedures (as defined in Rules 13a-15(e)
        and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as
        of the
        end of the period covered by this quarterly report. Based on this evaluation,
        our principal executive officer and principal financial officer concluded,
        as of the end of such period, that these disclosure controls and procedures
        are effective and designed to ensure that the information required to be
        disclosed in our reports filed or submitted under the Securities Exchange
        Act of
        1934
        is recorded, processed, summarized and reported within the requisite time
        periods.
 
 (b)
        Changes in Internal Controls.
 
 There
        was
        no change in our internal control over financial reporting (as defined in
        Rules
        13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)
        identified in connection with the evaluation of our internal control performed
        during our last fiscal quarter that has materially affected, or is reasonably
        likely to materially affect, our internal control over financial reporting.