UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 
 FORM
        10-Q
  (Mark
        One)
 
 þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF
        1934
 
 For
        the
        quarterly period ended June 30, 2008
  o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
  For the transition period from       
     to
 Commission
        file number
 Commission
        file number: 000-32501
 
 REED'S
        INC.
 (Exact
        name of registrant as specified in its charter)
  Delaware
              35-2177773(State
                  of incorporation)
              (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)
  N/A
 (Former
        name, former address and former fiscal year, if changed since last
        report)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports
        required to be filed by Section 13 or 15(d) Exchange Act of 1934 during
        the preceding 12 months (or for such shorter period that the registrant was
        required to file such reports), and (2) has been subject to such filing
        requirements for the past 90 days.
 Yes þ No o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        the definitions of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act (Check one):
  Large
                  Accelerated Filero
              
              Accelerated
                  FileroNon-accelerated
                  filero
              
              Smaller
                  reporting companyþ
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).   Yes o   No þ
  APPLICABLE
        ONLY TO CORPORATE ISSUERS
  State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date:
  There
        were 8,928,591 shares of the registrant's common stock, $0.0001 par
        value, outstanding as of  August 19, 2008.
 
 Transitional
        Small Business Disclosure Format (Check one)      Yes o No þ
  
  **SPECIAL
        NOTE REGARDING FORWARD-LOOKING STATEMENTS**
 
 This
        report contains forward-looking statements. All forward-looking statements
        are
        inherently uncertain as they are based on current expectations and assumptions
        concerning future events or future performance of the Company. Readers are
        cautioned not to place undue reliance on these forward-looking statements,
        which
        are only predictions and speak only as of the date hereof. Forward-looking
        statements usually contain the words “estimate,” “anticipate,” “believe,”
“expect,” or similar expressions, and are subject to numerous known and unknown
        risks and uncertainties. In evaluating such statements, prospective investors
        should carefully review various risks and uncertainties identified in this
        Report, including the matters set forth under the captions “Trends, Risks,
        Challenges, Opportunities That May or Are Currently Affecting Our Business” and
        in the Company’s other SEC filings. These risks and uncertainties could cause
        the Company’s actual results to differ materially from those indicated in the
        forward-looking statements. The Company undertakes no obligation to update
        or
        publicly announce revisions to any forward-looking statements to reflect
        future
        events or developments.
  Although
        forward-looking statements in this Quarterly Report on Form 10-Q reflect
        the
        good faith judgment of our management, such statements can only be based
        on
        facts and factors currently known by us. Consequently, forward-looking
        statements are inherently subject to risks and uncertainties, and actual
        results
        and outcomes may differ materially from the results and outcomes discussed
        in or
        anticipated by the forward-looking statements. Factors that could cause or
        contribute to such differences in results and outcomes include, without
        limitation, those specifically addressed under the heading “Trends, Risks,
        Challenges, Opportunities That May or Are Currently Affecting Our Business”
below, as well as those discussed elsewhere in this Quarterly Report. Readers
        are urged not to place undue reliance on these forward-looking statements,
        which
        speak only as of the date of this Quarterly Report. We file reports with
        the
        SEC. You can read and copy any materials we file with the SEC at the SEC’s
        Public Reference Room, 100 F. Street, NE, Washington, D.C. 20549 on official
        business days during the hours of 10 a.m. to 3 p.m. You can obtain additional
        information about the operation of the Public Reference Room by calling the
        SEC
        at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov)
        that contains reports, proxy and information statements, and other information
        regarding issuers that file electronically with the SEC, including the
        Company.
  *We
        undertake no obligation to revise or update any forward-looking statements
        in
        order to reflect any event or circumstance that may arise after the date
        of this
        Quarterly Report. Readers are urged to carefully review and consider the
        various
        disclosures made throughout the entirety of this annual report, which attempt
        to
        advise interested parties of the risks and factors that may affect our business,
        financial condition, results of operations and prospects.*
  2
 
 **Part
        I – FINANCIAL INFORMATION**
 
 **Item
        1. Financial Statements**
  **REED’S,
        INC**
 **CONDENSED
        BALANCE SHEETS**
 
 June 30, 2008
                (Unaudited)
              
              December 31, 2007**ASSETS****CURRENT ASSETS**Cash
              
              $
              39,963
              
              $
              742,719Inventory
              
              
              3,739,678
              
              
              3,028,450Trade
                  accounts receivable, net of allowance for doubtful accounts and
                  returns
                  and discounts of $150,000 as of June 30, 2008 and $407,480 as of
                  December
                  31, 2007
              
              
              1,543,839
              
              
              1,160,940Other
                  receivables
              
              
              250
              
              
              16,288Prepaid
                  Expenses
              
              
              135,634
              
              
              76,604Total
                  Current Assets
              
              
              5,459,364
              
              
              5,025,001Property
                  and equipment, net of accumulated depreciation of $1,019,087 as
                  of June
                  30, 2008 and $867,769 as of December 31, 20074,255,365
              
              
              4,248,702**OTHER
                  ASSETS**Brand
                  names
              
              
              800,201
              
              
              800,201Other
                  intangibles, net of accumulated amortization of $295 as of June
                  30, 2008
                  and $5,212 as of December 31, 2007
              
              
              35,105
              
              
              13,402Total
                  Other Assets
              
              
              835,306
              
              
              813,603**TOTAL
                  ASSETS**
              
              **$**
              10,550,035
              
              $
              10,087,306**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****CURRENT
                  LIABILITIES**Accounts
                  payable
              
              $
              2,770,797
              
              
              1,996,849Lines
                  of credit
              
              
              879,205
              
              
              —Current
                  portion of long term debt
              
              
              10,738
              
              
              27,331Accrued
                  interest
              
              
              20,267
              
              
              3,548Accrued
                  expenses
              
              
              76,151
              
              
              54,364Total
                  Current Liabilities
              
              
              3,757,158
              
              
              2,082,092Long
                  term debt, less current portion
              
              
              1,760,197
              
              
              765,753Total
                  Liabilities
              
              
              5,517,355
              
              
              2,847,845**COMMITMENTS
                  AND CONTINGENCIES****STOCKHOLDERS’
                  EQUITY**Preferred
                  stock, $10 par value, 500,000 shares authorized, 47,121 shares
                  outstanding
                  at June 30, 2008 and 48,121 shares at December 31, 2007
              
              
              471,212
              
              
              481,212Common
                  stock, $.0001 par value, 19,500,000 shares authorized,
                  8,928,591 shares issued and outstanding at June 30, 2008 and
                  8,751,721 at December 31, 2007
              
              
              892
              
              
              874Additional
                  paid in capital
              
              
              18,146,466
              
              
              17,838,516Accumulated
                  deficit
              
              
              (13,585,890
              )
              
              (11,081,141
              )Total
                  stockholders’ equity
              
              
              5,032,680
              
              
              7,239,461**TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY**
              
              $
              10,550,035
              
              $
              10,087,306
  See
        accompanying Notes to Condensed Financial Statements
  3
  **REED’S,
        INC.**
 **CONDENSED
        STATEMENTS OF OPERATIONS**
 **For
        the Three and Six Months Ended June 30, 2008 and 2007**
 **(Unaudited)**
 
 **Three months ended**
              
              **Six months ended****June 30,**
              
              **June 30,**
              
              **June 30,**
              
              **June 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****SALES**
              
              $
              4,570,816
              
              $
              3,472,360
              
              $
              8,134,916
              
              $
              6,485,050**COST
                  OF SALES**
              
              
              3,301,486
              
              
              2,791,932
              
              
              6,345,773
              
              
              5,265,000**GROSS
                  PROFIT**
              
              
              1,269,330
              
              
              680,428
              
              
              1,789,143
              
              
              1,220,050**OPERATING
                  EXPENSES**Selling
              
              
              1,051,008
              
              
              888,104
              
              
              2,175,136
              
              
              1,442,269General
                  and Administrative
              
              
              659,596
              
              
              450,148
              
              
              1,989,742
              
              
              899,,491Total
                  Operating Expenses
              
              
              1,710,604
              
              
              1,338,252
              
              
              4,164,878
              
              
              2,341,760**LOSS FROM
                  OPERATIONS**
              
              
              (441,274
              )
              
              (657,824
              )
              
              (2,375,735
              )
              
              (1,121,710
              )**OTHER
                  INCOME (EXPENSE)**Interest
                  Income
              
              
              145
              
              
              29,109
              
              
              975
              
              
              52,600Interest
                  Expense
              
              
              (49,990
              )
              
              (64,330
              )
              
              (106,428
              )
              
              (111,883
              )Total
                  Other Income (Expense)
              
              
              (49,845
              )
              
              (35,221
              )
              
              (105,453
              )
              
              59,283**NET
                  LOSS**
              
              
              (491,119
              )
              
              (693,045
              )
              
              (2,481,188
              )
              
              (1,180,993
              )Preferred
                  stock dividend
              
              
              (23,561
              )
              
              (27,770
              )
              
              (23,561
              )
              
              (27,770
              )Net
                  loss attributable to common stockholders
              
              $
              (514,680
              )
              $
              (720,815
              )
              $
              (2,504,749
              )
              $$
              (1,208,763
              )**LOSS
                PER
                SHARE**-Available
                  to Common Stockholders****Basic and Diluted
              
              $
              (0.06
              )
              $
              (0.10
              )
              $
              (0.28
              )
              $
              (0.17
              )**WEIGHTED
                  AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED**
              
              
              8,911,327
              
              
              7,403,777
              
              
              8,837,956
              
              
              7,274,201
  See
        accompanying Notes to Condensed Financial Statements
  4
  **REED’S
        INC.**
 **STATEMENT
        OF CHANGES IN STOCKHOLDERS’ EQUITY**
 For
        the
        six months ended June 30, 2008 (Unaudited)
 
 Common
              
              Stock
              
              Additional
                  Paid in
              
              Preferred
              
              Stock
              
              AccumulatedShares
              
              Amount
              
              Capital
              
              Shares
              
              Amount
              
              Deficit
              
              TotalBalance, January 1, 2008
              
              
              8,751,721
              
              $
              874
              
              $
              17,838,516
              
              
              48,121
              
              $
              481,212
              
              $
              (11,081,141
              )
              $
              7,239,461Fair
                  Value of Common stock issued for services
              
              
              161,960
              
              
              16
              
              
              335,439
              
              
              -
              
              
              
              
              
              -
              
              
              335,455Preferred
                  Stock Dividend
              
              
              10,910
              
              
              1
              
              
              23,560
              
              
              -
              
              
              -
              
              
              (23,561
              )
              
              -Preferred
                  stock conversion
              
              
              4,000
              
              
              1
              
              
              9,999
              
              
              (1,000
              )
              
              (10,000
              )
              
              -
              
              
              -Fair
                  value of options issued to employees
              
              
              **-**
              
              
              -
              
              
              (61,048
              )
              
              -
              
              
              -
              
              
              -
              
              
              (61,048
              )Net
                  Loss for the six months ended June 30, 2008
              
              
              **-**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,481,188
              )
              
              (2,481,188
              )Balance,
                  June 30, 2008
              
              
              8,928,591
              
              $
              892
              
              $
              18,146,466
              
              
              47,121
              
              $
              471,212
              
              $
              (13,585,890
              )
              $
              5,032,680
  See
        accompanying Notes to Condensed Financial Statements
  5
  **REED’S
        INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**For
      the six months ended June 30, 2008 and 2007**


**(Unaudited)**


**Six Months Ended****June 30,**
                **2008**
              
              **June 30,**
                **2007****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  Loss
              
              $
              (2,481,188
              )
              $
              (1,180,993
              )Adjustments
                  to reconcile net loss to net cash used in operating activities:Fair
                  Value of Common Stock Issued for Services
              
              
              335,455
              
              
              3,783Fair
                  value of stock options issued to employees
              
              
              (61,048
              )
              
              48,420Depreciation
                  and amortization
              
              
              165,465
              
              
              81,907Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (382,899
              )
              
              (181,796
              )Inventory
              
              
              (711,228
              )
              
              (459,727
              )Prepaid
                  Expenses
              
              
              (59,030
              )
              
              31,163Other
                  receivables
              
              
              16,038
              
              
              (118,576
              )Other
                  intangibles
              
              
              (35,400
              )Accounts
                  payable
              
              
              773,948
              
              
              (273,792
              )Accrued
                  expenses
              
              
              21,787
              
              
              (41,547
              )Accrued
                  interest
              
              
              16,719
              
              
              (19,296
              )Net
                  cash used in operating activities
              
              
              (2,401,381
              )
              
              (2,110,454
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchase
                  of property and equipment
              
              
              (158,431
              )
              
              (410,631
              )Increase
                  in restricted cash
              
              
              -
              
              
              (10,473
              )Net
                  cash used in investing activities
              
              
              (158,431
              )
              
              (421,104
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                  received from warrants exercised
              
              
              -
              
              
              105,000Proceeds
                  received from borrowings on long term debt
              
              
              1,770,000
              
              
              163,276Principal
                  payments on debt
              
              
              (792,149
              )
              
              (182,356
              )Proceeds
                  received on sale of common stock
              
              
              -
              
              
              9,000,000Payments
                  for stock offering costs
              
              
              -
              
              
              (1,182,777)
              )Net
                  borrowing  on lines of credit
              
              
              879,205
              
              
              167,911Net
                  cash provided by financing activities
              
              
              1,857,056
              
              
              8,071,054**NET(DECREASE)
                  INCREASE****IN
                  CASH**
              
              
              (702,756
              )
              
              5,539,496**CASH —
                  Beginning of period**
              
              
              742,719
              
              
              1,638,917**CASH —
                  End of period**
              
              $
              39,963
              
              $
              7,178,413**Supplemental
                  Disclosures of Cash Flow Information**Cash
                  paid during the period for:Interest
              
              $
              89,709
              
              $
              131,176Taxes
              
              $
              —
              
              $
              —Noncash
                  Investing and Financing Activities:Preferred
                  Stock converted to Common Stock
              
              $
              10,000
              
              $
              34,000Common
                  stock issued in settlement of preferred stock dividend
              
              $
              23,561
              
              $
              27,770


6




**REED’S,
      INC.**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**


**Six
      Months Ended June 30, 2008 and 2007**




1.
            BASIS
                OF PRESENTATION





The
      accompanying interim condensed financial statements are unaudited, but in the
      opinion of management of Reeds, Inc. (the Company), contain all adjustments,
      which include normal recurring adjustments necessary to present fairly the
      financial position at June 30, 2008 and the results of operations and cash
      flows
      for the six months ended June 30, 2008 and 2007. The balance sheet as of
      December 31, 2007 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 Annual Report, Form 10-KSB, as filed with the Securities and
      Exchange Commission on April 15, 2008.





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 six months ended June 30, 2008 are not necessarily
      indicative of the results of operations to be expected for the full fiscal
      year
      ending December 31, 2008.





Income
      (Loss) per Common Share





Basic
      income (loss) per share is calculated by dividing net income (loss) available
      to
      common stockholders by the weighted average number of common shares outstanding
      during the year. Diluted income 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 three and six month periods ended
      June 30, 2008 and 2007, basic and diluted loss per share are the same because
      the inclusion of common share equivalents would be anti-dilutive. At June 30,
      2008 and 2007, potentially dilutive securities consisted of convertible
      preferred stock, common stock options and warrants aggregating 2,709,220 and
      2,412,896 common shares, respectively.





Fair
      Value of Financial Instruments





The
      carrying amount of financial instruments, including cash, accounts and other
      receivables, accounts payable and accrued liabilities, approximate fair value
      because of their short maturity. The carrying amounts of notes payable
      approximate fair value because the related effective interest rates on these
      instruments approximate the rates currently available to the
      Company.





Effective
      January 1, 2008, the Company adopted Statement of Financial Accounting Standards
      (SFAS) No. 157, "Fair Value Measurements." This Statement defines fair value
      for
      certain financial and nonfinancial assets and liabilities that are recorded
      at
      fair value, establishes a framework for measuring fair value, and expands
      disclosures about fair value measurements. This guidance applies to other
      accounting pronouncements that require or permit fair value measurements. On
      February 12, 2008, the FASB finalized FASB Staff Position (FSP) No.157-2,
      Effective Date of FASB Statement No. 157. This Staff Position delays the
      effective date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal
      years beginning after November 15, 2008 and interim periods within those fiscal
      years, except for those items that are recognized or disclosed at fair value
      in
      the financial statements on a recurring basis (at least annually). The adoption
      of SFAS No. 157 had no effect on the Company’s financial position or results of
      operations.





Recent
      Accounting Pronouncements





References
      to the “FASB”, “SFAS” and “SAB” herein refer to the “Financial Accounting
      Standards Board”, “Statement of Financial Accounting Standards”, and the “SEC
      Staff Accounting Bulletin”, respectively.




7




In
      December 2007, the FASB issued FASB Statement No. 141 (R), “Business
      Combinations” (FAS 141(R)), which establishes accounting principles and
      disclosure requirements for all transactions in which a company obtains control
      over another business. Statement 141(R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. Earlier
      adoption is prohibited.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
      establishes accounting and reporting standards that require that the ownership
      interests in subsidiaries held by parties other than the parent be clearly
      identified, labeled, and presented in the consolidated statement of financial
      position within equity, but separate from the parent’s equity; the amount of
      consolidated net income attributable to the parent and to the noncontrolling
      interest be clearly identified and presented on the face of the consolidated
      statement of income; and changes in a parent’s ownership interest while the
      parent retains its controlling financial interest in its subsidiary be accounted
      for consistently. SFAS No. 160 also requires that any retained noncontrolling
      equity investment in the former subsidiary be initially measured at fair value
      when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
      requirements to identify and distinguish between the interests of the parent
      and
      the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
      that prepare consolidated financial statements, except not-for-profit
      organizations, but will affect only those entities that have an outstanding
      noncontrolling interest in one or more subsidiaries or that deconsolidate a
      subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
      within those fiscal years, beginning on or after December 15, 2008. Earlier
      adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
      beginning of the fiscal year in which it is initially applied, except for the
      presentation and disclosure requirements. The presentation and disclosure
      requirements are applied retrospectively for all periods presented.





In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS No.
      161”).  SFAS No. 161 amends and expands the disclosure requirements of SFAS
      No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS
      No. 133”). The objective of SFAS No. 161 is to provide users of financial
      statements with an enhanced understanding of how and why an entity uses
      derivative instruments, how derivative instruments and related hedged items
      are
      accounted for under SFAS No. 133 and its related interpretations, and how
      derivative instruments and related hedged items affect an entity’s financial
      position, financial performance, and cash flows.  SFAS No. 161 requires
      qualitative disclosures about objectives and strategies for using derivatives,
      quantitative disclosures about fair value amounts of and gains and losses on
      derivative instruments, and disclosures about credit-risk-related contingent
      features in derivative agreements.  SFAS No. 161 applies to all derivative
      financial instruments, including bifurcated derivative instruments (and
      nonderivative instruments that are designed and qualify as hedging instruments
      pursuant to paragraphs 37 and 42 of SFAS No. 133) and related hedged items
      accounted for under SFAS No. 133 and its related interpretations.  SFAS No.
      161 also amends certain provisions of SFAS No. 131. SFAS No. 161 is effective
      for financial statements issued for fiscal years and interim periods beginning
      after November 15, 2008, with early application encouraged.  SFAS No. 161
      encourages, but does not require, comparative disclosures for earlier periods
      at
      initial adoption.





The
      Company does not believe the adoption of the above recent pronouncements, will
      have a material effect on the Company’s results of operations, financial
      position, or cash flows.





Concentrations





The
      Company’s cash balances on deposit with banks are guaranteed by the Federal
      Deposit Insurance Corporation up to $100,000. The Company may be exposed to
      risk
      for the amounts of funds held in one bank in excess of the insurance limit.
      In
      assessing the risk, the Company’s policy is to maintain cash balances with high
      quality financial institutions. The Company had cash balances in excess of
      the
      $100,000 guarantee during the six months ended June 30, 2008.





During
      the three months ended June 30, 2008 and 2007, the Company had two customers,
      which accounted for approximately 13% and 29% and 14% and 34% of sales,
      respectively. No other customers accounted for more than 10% of sales in either
      year.





During
      the six months ended June 30, 2008 and 2007, the Company had two customers,
      which accounted for approximately 13% and 30% and 15% and 36% of sales,
      respectively. No other customers accounted for more than 10% of sales in either
      year. As of June 30, 2008, the Company had approximately $97,000 and $305,000,
      respectively, of accounts receivable from these customers.





2.
                Inventory




Inventory
      consists of the following at:





June 30, 2008
            
            December 31, 2007Raw
                Materials
            
            $
            1,008,881
            
            $
            1,175,580Finished
                Goods
            
            $
            2,730,797
            
            $
            1,848,870$
            3,739,678
            
            $
            3,028,450




8




3.
                Long
                    term debt





In
      March
      2008, the Company originated a note payable with a bank in the amount of
      $1,770,000. The note matures in February 2038. The note carries an 8.41% per
      annum interest rate, requires a monthly payment of principal and interest of
      $13,651, and is secured by all of the land and buildings owned by the Company.
      The previous debt of $650,483 for the land and building and a building
      improvement loan of $136,525 that were secured by land and building were paid
      off in March 2008 as a condition of obtaining this loan.





4.
                Line
                    of Credit





In
      May
      2008 the Company entered into a Credit and Security Agreement under which the
      Company was provided with a $2 million revolving credit facility. In July 2008,
      the line of credit was increased to $3 million. The amount available to borrow
      is based on a calculation of eligible accounts receivable and inventory. At
      June
      30, 2008, aggregate amounts outstanding under the line of credit was $879,206
      and the Company had approximately $164,000 of availability on this line of
      credit . Interest accrues on outstanding loans under the credit facility at
      a
      rate equal to 5.75% per annum plus the greater of 2% or the LIBOR rate.
      Borrowings under the credit facility are secured by all of the Company's
      assets.  The agreement terminates May 2010, and the Company
      is subject to an early termination fee if the loan is terminated before such
      date.





The
      Company is required to comply with a number of affirmative, negative and
      financial covenants. Among other things, these covenants require the Company
      to
      achieve minimum quarterly net income as set forth in
      the
      Credit Agreement, require the Company to maintain a minimum Debt Service
      Coverage Ratio (as defined in the Credit Agreement), require the Company to
      maintain minimum levels of tangible net worth. As of June 30, 2008, the Company
      was not in compliance with all such covenants. The Company is in the process
      of
      obtaining a waiver.





5.
            Stockholders’
                Equity





For
      the
      six months ended June 30, 2008, the following stock transactions
      occurred:





The
      Company issued 161,960 shares of common stock in exchange for consulting
      services. The value of the stock was based on the closing price of the stock
      on
      the issuance date. The total value of $335,455 was charged to consulting
      expenses.





The
      Company issued 10,910 shares of common stock valued at $23,561 to its preferred
      stockholders, in accordance with the dividend provision of the preferred stock
      agreement.





The
      Company issued 4,000 of common stock, resulting from the conversion of 1,000
      shares of preferred stock





6.
                Stock
                    Based Compensation





The
      impact on our results of operations of recording stock-based compensation for
      the three-month period ended June 30, 2008 was to reduce selling expenses by
      $52,565, and increase general and administrative expenses by $19,500. The
      impact on our results of operations of recording stock-based compensation for
      the three-month period ended June 30, 2007 was to increase selling expenses
      by
      $16,793, and increase general and administrative expenses by $6,500.





The
      impact on our results of operations of recording stock-based compensation for
      the six-month period ended June 30, 2008 was to decrease selling expenses by
      $100,048 and increase general and administrative expenses by $39,000. The impact
      on our results of operations of recording stock-based compensation for the
      six-month period ended June 30, 2007 was to increase selling expenses by $41,920
      and increase general and administrative expenses by $6,500.





The
      reduction in compensation expense resulted from a change in estimated
      forfeitures of our total expected stock option compensation expense. In
      accordance with FAS 123R, the company recalculated its expected compensation
      for
      all options outstanding at June 30, 2008 and compared it to previously recorded
      compensation expense for options in that option pool. The change in forfeiture
      assumption resulted from a significant forfeiture of stock options due to many
      of the option holders leaving the employ of the company before they became
      vested in those options.





The
      amount of the cumulative adjustment to reflect the effect of the forfeited
      options is approximately $238,000. The amount of compensation expense which
      would have been recognized if the cumulative adjustment was not made would
      have
      been approximately $177,000.





As
      of
      June 30, 2008, the Company has unvested options of 423,333, which will be
      reflected as compensation cost of approximately $860,054 over the remaining
      vesting period of three years. .




9




We
      calculated the fair value of each option award on the date of grant using the
      Black-Scholes option pricing model. The weighted average grant date fair value
      of options granted during the six months ended June 30, 2008 was $1.59. The
      following weighted average assumptions were used for the six months ended June
      30, 2008:





Risk-free
                interest rate
            
            
            3.76
            %Expected
                lives (in years)
            
            
            5.00Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            109.81
            %





Expected
      volatility is based on the actual volatility based on the closing price of
      the
      Company’s stock. For purposes of determining the expected life of the option,
      the full contract life of the option is used. The risk-free rate for periods
      within the contractual life of the options is based on the U. S. Treasury yield
      in effect at the time of the grant.




The
      following table summarizes stock option activity for the six months ended June
      30, 2008:


Shares
              
              Weighted
                Average
                Exercise Price
              
              Weighted-
                Average
                Remaining
                Contractual
                Term (Years)
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at January 1, 2008
              
              
              749,000
              
              $
              6.02
              
              
              -
              
              
              -Granted
              
              
              275,000
              
              $
              1.99
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              (371,500
              )
              $
              6.83
              
              
              -
              
              
              -Outstanding
                  at June 30, 2008
              
              
              652,500
              
              $
              3.85
              
              
              3.75
              
              $
              90,250Exercisable
                  at June 30, 2008
              
              
              229,167
              
              $
              4.01
              
              
              2.17
              
              $
              10,500




Stock
      options granted under our equity incentive plans vest over two and three years
      from the date of grant, 1⁄2 and 1/3 per year, respectively, and generally expire
      five years from the date of grant.





We
      calculated the fair value of each warrant award on the date of grant using
      the
      Black-Scholes option pricing model.




The
      following table summarizes warrant activity for the six months ended June 30,
      2008:





Shares
            
            Weighted
              Average
              Exercise Price
            
            Weighted-Average
              Remaining
              Contractual
              Term (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at January 1, 2008
            
            
            1,688,236
            
            $
            5.75
            
            
            -
            
            
            -Granted
            
            
            200,000
            
            $
            2.54
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                at June 30, 2008
            
            
            1,868,236
            
            $
            5.41
            
            
            3.10
            
            $
            29,365Exercisable
                at June 30, 2008
            
            
            1,668,236
            
            $
            5.75
            
            
            2.89
            
            $
            29,365





10





The
      200,000 warrants granted during the six months ended June 30, 2008, were granted
      in connection with a distribution agreement between the Company and a company
      which is owned by two brothers of Christopher Reed, President and Chief
      Financial Officer of the Company. The warrants are issuable only upon the
      attainment of certain international product sales. No warrants vested during
      the
      six months ended June 30, 2008. Accordingly, no expense was recorded for these
      warrants. The warrants will be valued and a corresponding expense will be
      recorded upon the attainment of the sales goals identified when the warrants
      were granted.





7.
                Related
                    Party Activity





As
      of
      December 31, 2007, the Company had a $300,000 note receivable from an entity
      that is partly owned by an advisor to the board of directors. The note is
      secured by all the entity’s assets and intellectual property. The note is
      payable on March 25, 2008 and bears interest at 7.50% per annum with quarterly
      interest payments. As of June 30, 2008, the Company has determined that the
      note
      is deemed uncollectible and the collateral worthless, and has written off the
      entire balance and associated accrued interest.





For
      the
      three months ended March 31, 2008 the Company employed one family member of
      the
      majority shareholder, Chief Executive Officer and Chief Financial Officer of
      the
      Company in a sales role. He was paid approximately $56,250. No stock options
      were granted to him during the three months ended March 31, 2008 and $112,500
      for the six months ended June 30, 2008.





During
      the six months ended June 30, 2008, the Company entered into an agreement for
      the distribution of its products internationally. The agreement is between
      the
      Company and a company controlled by two brothers of Christopher Reed, President
      and Chief Financial Officer of the Company. The agreement remains in effect
      until terminated by either party and requires the Company to pay the greater
      of
      $10,000 per month or 10% of the defined sales of the previous month. During
      the
      six months ended June 30, 2008, the Company paid $10,000 for these services.
      200,000 warrants were granted during the six months ended June 30, 2008, in
      connection with this distribution agreement. The warrants are issuable only
      upon
      the attainment of certain international product sales. No warrants vested during
      the six months ended June 30, 2008. Accordingly, no expense was recorded for
      these warrants. The warrants will be valued and a corresponding expense will
      be
      recorded upon the attainment of the sales goals identified when the warrants
      were granted.




11


Item
      2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations





FORWARD
      LOOKING STATEMENTS





*Certain
      statements in this Quarterly Report on Form 10-Q, or the Report, are
“forward-looking statements.” These forward-looking statements include, but are
      not limited to, statements about the plans, objectives, expectations and
      intentions of Reed’s, Inc., a Delaware corporation (referred to in this Report
      as “we,” “us,” or “our””) and other statements contained in this Report that are
      not historical facts. Forward-looking statements in this Report or hereafter
      included in other publicly available documents filed with the Securities and
      Exchange Commission, or the Commission, reports to our stockholders and other
      publicly available statements issued or released by us involve known and unknown
      risks, uncertainties and other factors which could cause our actual results,
      performance (financial or operating) or achievements to differ from the future
      results, performance (financial or operating) or achievements expressed or
      implied by such forward-looking statements. Such future results are based upon
      management's best estimates based upon current conditions and the most recent
      results of operations. When used in this Report, the words “expect,”
“anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar
      expressions are generally intended to identify forward-looking statements,
      because these forward-looking statements involve risks and uncertainties. There
      are important factors that could cause actual results to differ materially
      from
      those expressed or implied by these forward-looking statements, including our
      plans, objectives, expectations and intentions and other factors that are
      discussed under the section entitled “Risk Factors,” in our Annual Report on
      Form 10-KSB for the year ended December 31, 2007.*





*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our unaudited condensed financial
      statements and the related notes appearing elsewhere in this Form
      10-Q.*




**Overview**




We
      develop, manufacture, market, and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
      includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
      sports drinks, and water. 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, and





·
            Reed’s
                Ginger Ice Creams





We
      sell
      most of our products in specialty gourmet and natural food stores, supermarket
      chains, retail stores and restaurants in the United States and, to a lesser
      degree, in Canada. We primarily sell our products through a network of natural,
      gourmet and independent distributors. We also maintain an organization of
      in-house sales managers who work mainly in the stores serviced by our natural,
      gourmet and mainstream distributors and with our distributors. We also work
      with
      regional, independent sales representatives who maintain store and distributor
      relationships in a specified territory. In Southern California, we have our
      own
      direct distribution system.




**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 increase, our packaging, production and
      ingredient costs will continue to rise. We have attempted to offset the rising
      freight costs from fuel price increases by creatively negotiating rates and
      managing freight. We will continue to pursue alternative production, packaging
      and ingredient suppliers and options to help offset the affect of rising fuel
      prices on these expenses.




Low
      Carbohydrate Diets and Obesity - Our products are not geared for the low
      carbohydrate market. Consumer trends have reflected higher demand for lower
      carbohydrate products. We monitor these trends closely and have started
      developing low-carbohydrate versions of some of our beverages, although we
      do
      not have any currently marketable low-carbohydrate products.




Distribution
      Consolidation - There has been a recent trend towards continued consolidation
      of
      the beverage distribution industry through mergers and acquisitions. This
      consolidation results in a smaller number of distributors to market our products
      and potentially leaves us subject to the potential of our products either being
      dropped by these distributors or being marketed less aggressively by these
      distributors. As a result, we have initiated our own direct distribution to
      mainstream supermarkets and natural and gourmet foods stores in Southern
      California and to large national retailers. Consolidation among natural foods
      industry distributors has not had an adverse affect on our
      sales.


12





Consumers
      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 ginger-based products 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 mainstream
      supermarkets throughout the United States in natural food sections. 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, particularly
      for premium products. 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.




Packaging
      or Raw Material Price Increases - An increase in packaging or raw materials
      has
      caused our margins to suffer and has negatively impacted our cash flow and
      profitability. We continue to search for packaging and production alternatives
      to reduce our cost of goods.




Cash
      Flow
      Requirements - Our growth will depend on the availability of additional capital
      infusions. 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.




Interest
      Rates - We use lines of credit as a source of capital and are negatively
      impacted as interest rates rise.




**Critical
      Accounting Policies**




Our
      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 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:




Revenue
      Recognition. Revenue is recognized on the sale of a product when the product
      is
      shipped, which is when the risk of loss transfers to our customers, and
      collection of the receivable is reasonably assured. A product is not shipped
      without an order from the customer and credit acceptance procedures performed.
      The allowance for returns is regularly reviewed and adjusted by management
      based
      on historical trends of returned items. Amounts paid by customers for shipping
      and handling costs are included in sales.




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 these 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 three months ended March 31, 2008 or March 31, 2007.




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 three months ended March
      31, 2008 or 2007.


13





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
      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.





**Results
      of Operations**





*Three
      Months Ended June 30, 2007 Compared to Three Months Ended June 30,
      2008*





Net
      sales
      increased by $1,098,456, or 31.6%, from $3,472,360 in the three months ended
      June 30, 2007 to $4,570,816in the three months ended June 30, 2008. The increase
      in net sales was primarily due to an increase in our Virgil’s product line and
      our Reed’s Ginger Brews line. The increase in sales was also primarily due to an
      increase in net sales due to newly introduced mainstream distributors and an
      increase in our existing distribution channels of natural food distributors
      and
      retailers.





The
      Virgil’s brand, which includes Root Beer, Real Cola, Cream Soda and Black Cherry
      Cream soda, Diet Root Beer, Diet Real Cola, Diet Cream Soda and Diet Black
      Cherry Cream Soda, realized an increase in net sales of $788,000, or 54% to
      $2,246,000 in the three months ended June 30, 2008 from $1,458,000 in the three
      months ended June 30, 2007. The increase was the result of increased sales
      in 12
      ounce Root Beer of $225,000 or 32% from $714,000 in the three months ended
      June
      30, 2007 to $939,000 in the three months ended June 30, 2008, increased sales
      in
      Cream Soda of $109,000 or 62% from $175,000 in the three months ended June
      30,
      2007 to $284,000 in the three months ended June 30, 2008, and increased sales
      in
      Black Cherry Cream Soda of $31,000 or 31% from $101,000 in the three months
      ended June 30, 2007 to $132,000 in the three months ended June 30, 2008. Also,
      the Virgil’s Root Beer five-liter party kegs increased $321,000 or 106%, from
      $304,000 in the three months ended June 30, 2007 to $625,000 in the three months
      ended June 30, 2008. In addition, the increase in sales in the Virgil’s Brand
      was the result of launch of Virgil’s Real Cola in 2008 which realized net sales
      of $95,000 in the three months ended June 30, 2008.





The
      Reeds
      Ginger Brew Line increased $312,000 or 20 % to $1,837,000 in the three months
      ended June 30, 2008 from $1,525,000 in the three months ended June 30,
      2007.


14





Net
      sales
      of candy increased $48,000, or 27% to $229,000 in the three months ended June
      30, 2008 from $181,000 in the three months ended June 30, 2007.





The
      product mix for our two most significant product lines, Reed’s Ginger Brews and
      Virgil’s sodas was 51.1% and 41.8%, respectively of net sales in the three
      months ended June 30, 2008 and was 46.4% and 44.4%, respectively of net sales
      in
      the three months ended June 30, 2007.





Cost
      of
      sales increased by $509,554, or 18.3%, to $3,301,486 in the three months ended
      June 30, 2008 from $2,791,932 in the three months ended June 30, 2007. As a
      percentage of net sales, cost of sales decreased to 72.2% in the three months
      ended June 30, 2008 from 80.4% in the three months ended June 30, 2007. Cost
      of
      sales as a percentage of net sales decreased by 7.6%, primarily as a result
      of
      the price increase on April 1, 2008 for the Reed’s Ginger Brew line of beverages
      offset by fuel and commodity price increases which have caused an increase
      in
      our costs of production from our co-packer. Fuel price increases have also
      increased our costs of delivery. In addition, we had increased costs of
      packaging. If fuel and commodity prices continue to increase, we will have
      more
      pressure on our margins.




Gross
      profit increased $588,902 or 86.5% to $1,269,330 in the three months ended
      June
      30, 2008 from $680, 428 in the three months ended June 30, 2007. As a percentage
      of net sales, gross profit increased to 27.8% in the first three months of
      2008
      from 19.6% in the first three months of 2007.





To
      improve gross margins in 2008, we have raised prices on the Reed’s Ginger Brew
      line by 20% bringing it more in line with our competitors in the natural soda
      category. In addition, we are implementing systems to track and manage the
      approval and use of promotions and discounting to maintain a higher net gross
      margin. Finally, we are performing a competitive bidding process for our third
      party co-packing production. We expect to select a co-packer by the third
      quarter 2008. We expect to lower our costs of production, thus further improving
      our gross margin while maintaining our product quality.





Operating
      expenses increased by $372,352, or 27.8%, to $1,710,604 in the three months
      ended June 30, 2008 from $1,338,252 in the three months ended June 30, 2007
      and
      decreased as a percentage of net sales to 37.4% in the three months ended June
      30, 2008 from 38.5% in the three months ended June 30, 2007. The increase was
      primary the result of increased selling and general and administrative expenses.
      In March of 2008, we reduced our staff by 17 employees, mostly from the sales
      staff.  During
      the first quarter of 2008, we implemented a cost reduction strategy to reduce
      unnecessary expenses and revised our budget for 2008. We reduced selling
      expenses by reducing our work force by 17 employees. We expect to save
      approximately $2,000,000 in annual expense with this reduction. We experienced
      a
      $743,640 reduction in operating expenses over the first quarter of 2008 in
      the
      three months ending March 31, 2008 expenses were $2,454,274.




Selling
      expensed increased by $162,904 or 18.3%, to $1,051,008 in the three months
      ended
      June 30, 2008 from $888,104 in the three months ended June 30, 2007. The
      increase in selling expenses is due to increased promotional and advertising
      expenses, public relations expenses, trade show expenses, travel expenses,
      and
      increased usage of brokerage firms for sales offset by lower option expenses
      and
      contract services expenses. Promotional and advertising expenses increased
      $100,938 or 108.2% to $194,204 in the three months ended June 30, 2008 from
      $93,266 in the three months ended June 30, 2007. This increase was due to the
      increased use of advertising and promotions with our supermarket customers
      as we
      move into more mainstream accounts. Public relations expenses increased $31,280
      or 299.3% to $41,730 in the three months ended June 30, 2008 from $10,450 in
      the
      three months ended June 30, 2007. The increase in public relations expenses
      was
      due to the increased use. Trade show expenses increased $20,795 or 134.2%,
      to
      $36,292 in the three months ended June 30, 2008 from $15,497 in the three months
      ended June 30, 2007. The increase in trade show expenses was due to an increase
      in trade shows as we start marketing to new channels of trade such as the drug
      store channel. Travel expenses increased $50,969 or 356.6%, to $65,263 in the
      three months ended June 30, 2008 from $14,294 in the three months ended June
      30,
      2007. The increase in travel expenses was due to increased air travel as our
      sales force focus is redirected to visiting supermarket headquarters and key
      retailer around the country. Brokerage commission expenses increased $86,478
      or
      103.2%, to $170,312 in the three months ended June 30, 2008 from $83,834 in
      the
      three months ended June 30, 2007. The increase in brokerage commission expenses
      was due to increased use of outside food brokers to represent us to the
      supermarket trade. Non-cash stock option compensation expense decreased $69,357
      or 413% to ($52,565) in the three months ended June 30, 2008 from $16,792
      in the three months ended June 30, 2007. This decrease is due to options which
      were forfeited as we reduced our sales force in the first quarter of 2008.
      Contract services expense decreased $18,735 or 43.7% to $24,108 in the
      three months ended June 30, 2008 from $42,843 in the three months ended June
      30,
      2007. This decrease is due to the reduction of use of contract services. In
      March 2008, we announced our new strategic direction in sales, whereby our
      focus
      is to strengthen our product placements in our estimated 10,500 supermarkets
      nationwide. This strategy replaces our strategy in the three months ended June
      30, 2007 that focused on both the supermarkets and a direct store delivery
      (DSD)
      effort. Since March 2008, our sales organization has been reduced by 16 compared
      to the level we had at December 31, 2007. We have found that the most effective
      sales efforts are to grocery stores. We have our products in more than 10,500
      supermarket stores across the country and our new direction for 2008 is to
      remain focused on these accounts while opening new business with other grocery
      stores leveraging our brand equity. We feel that the trend in grocery stores
      to
      offer their customers natural products can be served with our products. Our
      sales personnel are leveraging our success at natural food grocery stores to
      establish new relationships with mainstream grocery stores.





General
      and administrative expenses increased by $209,448 or 46.5% to $659,596 in the
      three months ended June 30, 2008 from $450,148 in the first three months of
      2007. The increase in general and administrative expenses is due to increased
      legal, accounting and investor relations expenses and officer salaries. Legal,
      accounting and investor relations expenses increased $152,651 or 571.6% to
      $179,357 in the three months ended June 30, 2008 from $26,706 in the three
      months ended June 30, 2007. The increase in legal, accounting and investor
      relation expenses was due to increased legal and accounting costs mostly related
      to the increased costs of reporting and compliance with the Securities and
      Exchange Commission and NASDAQ. Officer salaries increased by $33,806 or 90.1%
      to $71,306 in the three months ended June 30, 2008 from $37,500 in the three
      months ended June 30, 2007. The increase was due to the hiring of a Chief
      Operating Officer in May 2007.


15





Interest
      expense was $49,990 in the three months ended June 30, 2008, compared to
      interest expense of $64,330 in the three months ended June 30, 2007. Interest
      income dropped to $145 in the three months ended June 30, 2008, compared to
      interest income of $29,109 in the three months ended June 30, 2007.




Interest
      income decreased because of our overall decrease in cash and corresponding
      decrease in interest bearing cash accounts. Interest expenses will probably
      increase due to the increased reliance of the Company to finance operations
      with
      its $3,000,000 inventory and accounts receivable line of credit with First
      Capital LLC.





*Six
      Months Ended June 30, 2007 Compared to Six Months Ended June 30,
      2008*





Net
      sales
      increased by $1,649,866, or 25.4%, from $6,485,050 in the first six months
      ended
      June 30, 2007 to $8,134,916 in the first six months ended June 30, 2008. The
      increase in net sales was primarily due to an increase in our Virgil’s product
      line and our Reed’s Ginger Brews line. The increase in sales was also primarily
      due to an increase in net sales due to newly introduced mainstream distributors
      and an increase in our existing distribution channels of natural food
      distributors and retailers.





The
      Virgil’s brand, which includes Root Beer, Real Cola, Cream Soda and Black Cherry
      Cream soda, Diet Root Beer, Diet Real Cola, Diet Cream Soda and Diet Black
      Cherry Cream Soda, realized an increase in net sales of $1,364,000, or 57%
      to
      $3,742,000 in first six months ended June 30, 2008 from $2,378,000 in first
      six
      months ended June 30, 2007. The increase was the result of increased sales
      in 12
      ounce Root Beer of $449,000 or 35% from $1,296,000 in first six months ended
      June 30, 2007 to $1,745,000 in first six months ended June 30, 2008, increased
      sales in Cream Soda of $157,000 or 51% from $306,000 in the first six months
      of
      2007 to $463,000 in the first six months of 2008, and increased sales in Black
      Cherry Cream Soda of $72,000 or 44% from $164,000 in the first six months of
      2007 to $236,000 in the first six months of 2008. Also, the Virgil’s Root Beer
      five-liter party kegs increased $531,000 or 135%, from $392,000 in first six
      months ended June 30, 2007 to $923,000 in first six months ended June 30, 2008.
      In addition, the increase in sales in the Virgil’s Brand was the result of
      launch of Virgil’s Real Cola in 2008 which realized net sales of $100,000 in the
      first six months ended June 30, 2008.





The
      Reeds
      Ginger Brew Line increased $773,000 or 26% to $3,779,000 in first six months
      ended June 30, 2008 from $3,006,000 in first six months ended June 30,
      2007.





Net
      sales
      of candy increased $44,000, or 10% to $482,000 in first six months ended June
      30, 2008 from $438,000 in first six months ended June 30, 2007.





The
      product mix for our two most significant product lines, Reed’s Ginger Brews and
      Virgil’s sodas was 46.2% and 45.7%, respectively of net sales in first six
      months ended June 30, 2008 and was 49.7% and 39.4%, respectively of net sales
      in
      first six months ended June 30, 2007.




Cost
      of sales increased by $1,080,773, or 20.5%, to $6,345,773 in first six months
      ended June 30, 2008 from $5,265,000 in first six months ended June 30, 2007.
      As
      a percentage of net sales, cost of sales decreased to 78.0% in first six months
      ended June 30, 2008 from 81.2% in first six months ended June 30, 2007. Cost
      of
      sales as a percentage of net sales decreased by 3.2%, primarily
      as a result of the price increase on April 1, 2008 for the Reed’s Ginger Brew
      line of beverages offset by fuel and commodity price increases which have caused
      an increase in our costs of production from our co-packer. Fuel price increases
      have also increased our costs of delivery. In addition, we had increased costs
      of packaging. If fuel and commodity prices continue to increase, we will have
      more pressure on our margins.




Gross
      profit increased $569,093 or 46.6% to
      $1,789,143 in first six months ended June 30, 2008 from $1,220,050 in first
      six
      months ended June 30, 2007. As a percentage of net sales, gross profit increased
      to 22.0% in the first six months of 2008 from 18.8% in the first six months
      of
      2007.





To
      improve gross margins in 2008, we have raised prices on the Reed’s Ginger Brew
      line by 20% on April 1, 2008 bringing it more in line with our competitors
      in
      the natural soda category. In addition, we are implementing systems to track
      and
      manage the approval and use of promotions and discounting to maintain a higher
      net gross margin. Finally, we are performing a competitive bidding process
      for
      our third party co-packing production. We expect to select a co-packer by the
      third quarter 2008. We expect to lower our costs of production, thus further
      improving our gross margin while maintaining our product quality. Our current
      co-packer producing the bulk of our products is charging us considerably over
      the market.





Operating
      expenses increased by $1,832,118 or 77.8%, to $4,164,878 in first six months
      ended June 30, 2008 from $2,341,760 in first six months ended June 30, 2007
      and
      increased as a percentage of net sales to
      51.2% in first six months ended June 30, 2008 from 36.1% in first
      six months ended June 30, 2007. The increase was primary the result of increased
      selling and general and administrative expenses. In March of 2008, we reduced
      our staff by 17 employees, mostly from the sales staff. During the first quarter
      of 2008, we implemented a cost reduction strategy to reduce unnecessary expenses
      and revised its budget for 2008. We reduced selling expenses by reducing our
      work force by 17 employees. We expect to save approximately $2,000,000 in annual
      expense with this reduction. We believe our operating expenses will decrease
      approximately $300,000 per month beginning in April 2008.




16




Selling
      expensed increased by $732,867 or 50.8%, to $2,175,136 in first six months
      ended
      June 30, 2008 from $1,442,269 in first six months ended June 30, 2007. The
      increase in selling expenses is due to increased salaries of sales personnel,
      brokerage expenses, promotional and advertising costs, trade show expenses,
      and
      travel expenses offset by lower non-cash stock option expense, lower demo
      expenses, lower contract services and lower auto expenses. Salaries of sales
      personnel increased $714,045 or 132.1% to $1,254,562 in first six months ended
      June 30, 2008 from $540,517 in first six months ended June 30, 2007. This
      increase was due to increased personnel to support the initiative to increase
      sales of our product to the mainstream consumer through mainstream stores and
      distributors that support mainstream retailers. Brokerage expenses increased
      $122,809 or 111.1% to $233,396 in first six months ended June 30, 2008 from
      $110,587 in first six months ended June 30, 2007. The increase in brokerage
      commission expenses was due to increased use of outside food brokers to
      represent us to the supermarket trade. Promotional and advertising expenses
      increased $105,025 or 88.0%, to $224,360 in first six months ended June 30,
      2008
      from $119,335 in first six months ended June 30, 2007. This increase was due
      to
      the increased use of advertising and promotions with our supermarket customers
      as we move into more mainstream accounts. Trade show expenses increased $40,599
      or 90.6%, to $85,406 in first six months ended June 30, 2008 from $44,807 in
      first six months ended June 30, 2007. The increase in trade show expenses was
      due to an increase in trade shows as we start marketing to new channels of
      trade
      such as the drug store channel. Travel expenses increased $170,169 or 289.8%,
      to
      $228,890in first six months ended June 30, 2008 from $58,721 in first six months
      ended June 30, 2007. The increase in travel expenses was due to the build up
      of
      the sales force at the end of 2007 and their increased activities. These
      increases were offset by reductions in the following expenses. Non-cash stock
      option compensation expense decreased $2,919 or 7.0% to $39,000 in first six
      months ended June 30, 2008 from $41,919 in first six months ended June 30,
      2007.
      This decrease is due to options which were forfeited. Contract services expense
      decreased $49,636 or 59.6% to $33,677 in first six months ended June 30, 2008
      from $83,313 in first six months ended June 30, 2007. This decrease is due
      to
      reduced use of outside services. Auto expenses decreased $168,516 or 61.2%
      to
      $43,392 in first six months ended June 30, 2008 from $111,908 in first six
      months ended June 30, 2007. This decrease is due to a reduction of our delivery
      systems in Southern California in 2008. In March 2008, we announced our new
      strategic direction in sales, whereby our focus is to strengthen our product
      placements in our estimated 10,500 supermarkets nationwide. This strategy
      replaces our strategy in first six months ended June 30, 2007 that focused
      on
      both the supermarkets and a direct store delivery (DSD) effort. Since March
      2008, our sales organization has been reduced by 16 compared to the level we
      had
      at December 31, 2007. We have found that the most effective sales efforts are
      to
      grocery stores. We have our products in more than 10,500 supermarket stores
      across the country and our new direction for 2008 is to remain focused on these
      accounts while opening new business with other grocery stores leveraging our
      brand equity. We feel that the trend in grocery stores to offer their customers
      natural products can be served with our products. Our sales personnel are
      leveraging our success at natural food grocery stores to establish new
      relationships with mainstream grocery stores





General
      and administrative expenses increased by $1,090,251 or 121.2% to $1,989,742
      in
      first six months ended June 30, 2008 from $899,491 in the first six months
      of
      2007. The increase in general and administrative expenses is due to increased
      legal, accounting and investor relations expenses, officer salaries, general
      liability insurance, outside services, and office supplies. Legal, accounting
      and investor relations expenses increased $326,492 or 266.4% to $449,036 in
      first six months ended June 30, 2008 from $122,544 in first six months ended
      June 30, 2007. The increase in legal, accounting and investor relation expenses
      was due to increased legal and accounting costs mostly related to the increased
      costs of reporting and compliance with the Securities and Exchange Commission
      and NASDAQ. Salaries increased by $243,914 or 219.6% to $354,981 in first six
      months ended June 30, 2008 from $111,067 in first six months ended June 30,
      2007. Officer salaries increased by $116,848 or 155.8% to $191,848 in the three
      months ended June 30, 2008 from $75,000 in the three months ended June 30,
      2007.
      The increase was due to the hiring of a Chief Operating Officer in May 2007
      and
      a Chief Financial Officer in October 2007. Liability insurance expenses
      increased $62,451 or 155.0% to $70,262 in first six months ended June 30, 2008
      from $29,752 in first six months ended June 30, 2007. This increase was mainly
      due to increased sales and coverage. Outside services expenses increased $40,512
      or 136.2% to $70,262 in first six months ended June 30, 2008 from $29,752 in
      first six months ended June 30, 2007. This increase was due increased use of
      outside services. Office supplies expenses increased $14,419 or 80.6% to $32,304
      in first six months ended June 30, 2008 from $17,885 in first six months ended
      June 30, 2007. This increase was due to increased staff in general. In addition,
      we had a one-time non cash expense of $320,762 for consulting services, for
      which we issued stock.





Interest
      expense was $106,428 in the six months ended June 30, 2008, compared to interest
      expense of $111,883 in the six months ended June 30, 2007. Interest income
      dropped to $975 in the six months ended June 30, 2008, compared to interest
      income of $52,600 in the six months ended June 30, 2007.




Interest
      income decreased because of our overall decrease in cash and corresponding
      decrease in interest bearing cash accounts. Interest expenses will probably
      increase due to the increased reliance of the company to finance operations
      with
      its $3,000,000 inventory accounts receivable line of credit with First Capital
      LLC.




17




*Liquidity
      and Capital Resources*




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. On December 12, 2006, we
      completed the sale of 2,000,000 shares of our common stock at an offering price
      of $4.00 per share in our initial public offering. The public offering resulted
      in gross proceeds of $8,000,000 to us. In connection with the public offering,
      we paid aggregate commissions, concessions and non-accountable expenses to
      the
      underwriters of $800,000, resulting in net proceeds of $7,200,000, excluding
      other expenses of the public offering. In addition, we issued, to the
      underwriters, warrants to purchase up to approximately an additional 200,000
      shares of common stock at an exercise price of $6.60 per share (165% of the
      public offering price per share), at a purchase price of $0.001 per warrant.
      The
      underwriters’ warrants are exercisable for a period of five years commencing on
      the final closing date of the public offering. From August 3, 2005 through
      April
      7, 2006, we had issued 333,156 shares of our common stock in connection with
      the
      public offering. We sold the balance of the 2,000,000 shares in connection
      with
      the public offering (1,666,844 shares) following October 11, 2006.





From
      May
      25, 2007 through June 15, 2007, we completed a private placement to accredited
      investors only, on subscriptions for the sale of 1,500,000 shares of common
      stock and warrants to purchase up to 749,995 shares of common stock, resulting
      in an aggregate of $9,000,000 of gross proceeds to us. We sold the shares at
      a
      purchase price of $6.00 per share. The warrants issued in the private placement
      have a five-year term and an exercise price of $7.50 per share. We paid cash
      commissions of $900,000 to the placement agent for the private placement and
      issued warrants to the placement agent to purchase up to 150,000 shares of
      common stock with an exercise price of $6.60 per share. We also issued
      additional warrants to purchase up to 15,000 shares of common stock with an
      exercise price of $6.60 per share and paid an additional $60,000 in cash to
      the
      placement agent as an investment banking fee. Total proceeds received, net
      of
      underwriting commissions and the investment banking fee and excluding other
      expenses of the private placement, was $8,040,000.





As
      of
      June 30, 2008, we had an accumulated deficit of $13,585,890 and we had working
      capital of $1,702,206, compared to an
      accumulated deficit of $11,081,141 and working
      capital of $2,942,909 as of December 31, 2007. Cash and cash equivalents
      were $39,963 as of June 30, 2008, as compared to $742,719 as of December 31,
      2007. This decrease in our working capital and cash position was primarily
      attributable to our net
      loss for the six months ended June 30, 2008 offset by an increase in our
      inventory at June 30, 2008 .
      In
      addition to our cash position on June 30,2008, we had availability under our
      lines of credit of approximately $164,000.





Net
      cash
      used in operating activities during the six months ended June 30, 2008 was
      $2,401,381 which was due primarily to our net loss of $2,481,188. In the six
      months ended June 30, 2008, we used $158,431 of cash in investing activities,
      which was due primarily to the purchase of various equipment to support business
      growth.




Net
      cash
      provided by financing activities during the six months ended June 30, 2008
      was
      $1,857,056. The primary components of that were the net proceeds from the
      refinanincing of our land and buildings and our obtaining of a line of credit.




As
      of
      June 30, 2008, we had outstanding borrowings of $879,205under our line of credit
      agreement:




We
      recognize that operating losses negatively impact liquidity and we are working
      on decreasing operating losses, while focusing on increasing net sales. We
      are
      currently borrowing near the maximum on our line of credit. We have
      approximately $500,000 to $1,000,000 in excess inventory over our normal
      inventory levels. We believe the operations of the company are running at
      approximately breakeven, after adjusting for non-cash expenses . Between the
      reduction of our inventory to more normal levels and our current breakeven
      operating status, we believe that our current cash position and lines of credit
      will be sufficient to enable us to meet our cash needs through at least the
      end
      of 2008. We’re planning on registering a S-3 shelf offering in the next 2-3
      months. We believe that if the need arises we can raise money through the equity
      markets.




We
      may
      not generate sufficient revenues from product sales in the future to achieve
      profitable operations. If we are not able to achieve profitable operations
      at
      some point in the future, we eventually may have insufficient working capital
      to
      maintain our operations as we presently intend to conduct them or to fund our
      expansion and marketing and product development plans. In addition, our losses
      may increase in the future as we expand our manufacturing capabilities and
      fund
      our marketing plans and product development. These losses, among other things,
      have had and will continue to have an adverse effect on our working capital,
      total assets and stockholders’ equity. If we are unable to achieve
      profitability, the market value of our common stock will decline and there
      would
      be a material adverse effect on our financial condition.





If
      we
      continue to suffer losses from operations, the proceeds from our public offering
      and private placement may be insufficient to support our ability to expand
      our
      business operations as rapidly as we would deem necessary at any time, unless
      we
      are able to obtain additional financing. There can be no assurance that we
      will
      be able to obtain such financing on acceptable terms, or at all. If adequate
      funds are not available or are not available on acceptable terms, we may not
      be
      able to pursue our business objectives and would be required to reduce our
      level
      of operations, including reducing infrastructure, promotions, personnel and
      other operating expenses. These events could adversely affect our business,
      results of operations and financial condition.





In
      addition, some or all of the elements of our expansion plan may have to be
      curtailed or delayed unless we are able to find alternative external sources
      of
      working capital. We would need to raise additional funds to respond to business
      contingencies, which may include the need to:





·
            fund
                more rapid expansion,




·
            fund
                additional marketing expenditures,




18




·
            enhance
                our operating infrastructure,




·
            respond
                to competitive pressures, and




·
            acquire
                other businesses.




We
      cannot
      assure you that additional financing will be available on terms favorable to
      us,
      or at all. If adequate funds are not available or if they are not available
      on
      acceptable terms, our ability to fund the growth of our operations, take
      advantage of opportunities, develop products or services or otherwise respond
      to
      competitive pressures, could be significantly limited.




Recent
      Accounting Pronouncements





References
      to the “FASB”, “SFAS” and “SAB” herein refer to the “Financial Accounting
      Standards Board”, “Statement of Financial Accounting Standards”, and the “SEC
      Staff Accounting Bulletin”, respectively.





In
      December 2007, the FASB issued FASB Statement No. 141 (R), “Business
      Combinations” (FAS 141(R)), which establishes accounting principles and
      disclosure requirements for all transactions in which a company obtains control
      over another business. Statement 141(R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. Earlier
      adoption is prohibited.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
      establishes accounting and reporting standards that require that the ownership
      interests in subsidiaries held by parties other than the parent be clearly
      identified, labeled, and presented in the consolidated statement of financial
      position within equity, but separate from the parent’s equity; the amount of
      consolidated net income attributable to the parent and to the noncontrolling
      interest be clearly identified and presented on the face of the consolidated
      statement of income; and changes in a parent’s ownership interest while the
      parent retains its controlling financial interest in its subsidiary be accounted
      for consistently. SFAS No. 160 also requires that any retained noncontrolling
      equity investment in the former subsidiary be initially measured at fair value
      when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
      requirements to identify and distinguish between the interests of the parent
      and
      the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
      that prepare consolidated financial statements, except not-for-profit
      organizations, but will affect only those entities that have an outstanding
      noncontrolling interest in one or more subsidiaries or that deconsolidate a
      subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
      within those fiscal years, beginning on or after December 15, 2008. Earlier
      adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
      beginning of the fiscal year in which it is initially applied, except for the
      presentation and disclosure requirements. The presentation and disclosure
      requirements are applied retrospectively for all periods presented.





In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS No.
      161”).  SFAS No. 161 amends and expands the disclosure requirements of SFAS
      No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS
      No. 133”). The objective of SFAS No. 161 is to provide users of financial
      statements with an enhanced understanding of how and why an entity uses
      derivative instruments, how derivative instruments and related hedged items
      are
      accounted for under SFAS No. 133 and its related interpretations, and how
      derivative instruments and related hedged items affect an entity’s financial
      position, financial performance, and cash flows.  SFAS No. 161 requires
      qualitative disclosures about objectives and strategies for using derivatives,
      quantitative disclosures about fair value amounts of and gains and losses on
      derivative instruments, and disclosures about credit-risk-related contingent
      features in derivative agreements.  SFAS No. 161 applies to all derivative
      financial instruments, including bifurcated derivative instruments (and
      nonderivative instruments that are designed and qualify as hedging instruments
      pursuant to paragraphs 37 and 42 of SFAS No. 133) and related hedged items
      accounted for under SFAS No. 133 and its related interpretations.  SFAS No.
      161 also amends certain provisions of SFAS No. 131. SFAS No. 161 is effective
      for financial statements issued for fiscal years and interim periods beginning
      after November 15, 2008, with early application encouraged.  SFAS No. 161
      encourages, but does not require, comparative disclosures for earlier periods
      at
      initial adoption.





The
      Company does not believe the adoption of the above recent pronouncements, will
      have a material effect on the Company’s results of operations, financial
      position, or cash flows





**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




Not
      applicable.




19




Item
      4.
      CONTROLS AND PROCEDURES




(a)  
      Management's Evaluation of Disclosure Controls and Procedures.




As
      of
      June 30, 2008, we carried out an evaluation, under the supervision and with
      the
      participation of our management, including our Chief Executive Officer and
      Chief
      Financial Officer, of the effectiveness of the design and operation of our
      “disclosure controls and procedures,” as such term is defined under Exchange Act
      Rules 13a-15(e) and 15d-15(e).




Our
      Chief
      Executive Officer and Chief Financial Officer concluded that, as of June 30,
      2008, our disclosure controls and procedures were effective to ensure that
      information required to be disclosed by us in the reports we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in the rules and forms of the SEC, and accumulated
      and communicated to our management, including our Chief Executive Officer and
      Chief Financial Officer, as appropriate to allow timely decisions regarding
      required disclosure.





(b)
      Changes in Internal Controls.





There
      were no changes in our internal controls over financial reporting during the
      quarter ended June 30, 2008 that materially affected, or are reasonably likely
      to materially affect, our internal controls over financial
      reporting.




20




**Part
      II**




Item
      1.
      Legal Proceedings




There
      has
      been no change to our disclosure regarding legal proceeding as set forth in
      our
      Annual Report on Form 10-KSB for the year ended December 31, 2007.





Except
      as
      set forth in such disclosure, we believe that there are no material litigation
      matters at the current time. Although the results of such litigation matters
      and
      claims cannot be predicted with certainty, we believe that the final outcome
      of
      such claims and proceedings will not have a material adverse impact on our
      financial position, liquidity, or results of operations.




Item
      1A. RISK FACTORS





Not
      applicable




Item
      2.
      Unregistered Sales of Equity Securities and Use of Proceeds





Not
      applicable





Item
      3.
      Defaults Upon Senior Securities





As
      of
      June 30, 2008, the Company was in default of a financial covenant of its line
      of
      credit. The Company is in the process of obtaining a waiver for this covenant
      violation.





Item
      4.
      Submission of Matters to a Vote of Security Holders





Not
      applicable




Item
      5.
      Other Information





Not
      applicable




Item
      6.
      Exhibits




Exhibit
              Number
            
            Description of Document31
            
            Officer's
                Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
                200232
            
            Officer's
                Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002


21





**SIGNATURE**




In
      accordance with requirements of the Exchange Act, the Registrant caused this
      report to be signed on its behalf by the undersigned thereunto duly
      authorized.




Reeds,
                Inc.By:
            /s/
                Christopher ReedChief
                Executive Officer, President
              and
                Chief Financial OfficerAugust
                19, 2008




22