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 September 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 outstanding as
        of November 4, 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.*
  
  **TABLE
          OF CONTENTS**
 
 **FORM
          10-Q**
 
 **QUARTER
          ENDED SEPTEMBER 30, 2008**
 
 **PART
          I**
 
 **FINANCIAL
          INFORMATION**
  **Item
                    1. Financial Statements (Unaudited)**
                **Page**Condensed
                    Balance Sheets as of September 30, 2008 and December 31,
                    2007
                1Condensed
                    Statements of Operations for the three and nine months ended
                    September 30,
                    2008 and 2007
                2Condensed
                    Statement of Changes in Stockholders’ Equity for the nine months ended
                    September 30, 2008
                3Condensed
                    Statements of Cash Flows for the nine months ended September
                    30, 2008 and
                    2007
                4Selected
                    notes to condensed financial statements for the nine months ended
                    September 30, 2008 and 2007
                5**Item
                    2. Management's Discussion and Analysis of Financial Condition
                    and Results
                    of Operations**
                11**Item
                    3. Quantitative and Qualitative Disclosures About Market
                    Risk**
                23**Item
                    4. Controls and Procedures**
                23
   **PART
          II**
 
 **OTHER
          INFORMATION REQUIRED**
 
 **Item
                    1. Legal Proceedings**
                23**Item
                    1A. Risk Factors**
                23**Item
                    2. Unregistered Sales of Equity Securities and Use of
                    Proceeds**
                23**Item
                    3. Defaults Upon Senior Securities**
                24**Item
                    4. Submission of Matters of a Vote of Security Holders**
                24**Item
                    5. Other Information**
                24**Item
                    6. Exhibits**
                24




**Part
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**




**REED’S,
      INC**




**CONDENSED
      BALANCE SHEETS**




**ASSETS**
                
                September
                    30, 2008
                  (Unaudited)
                
                December
                    31, 2007**CURRENT
                    ASSETS**Cash
                
                $
                83,091
                
                $
                742,719Inventory
                
                
                2,994,507
                
                
                3,028,450Trade
                    accounts receivable, net of allowance for doubtful accounts and
                    returns
                    and discounts of $165,000 as of September 30, 2008 and $407,480
                    as of
                    December 31, 2007
                
                
                1,281,662
                
                
                1,160,940Other
                    Receivable
                
                
                4,255
                
                
                16,288Prepaid
                    Expenses
                
                
                62,857
                
                
                76,604Total
                    Current Assets
                
                
                4,426,372
                
                
                5,025,001Property
                    and equipment, net of accumulated depreciation of $1,075,342
                    as of
                    September 30, 2008 and $867,769 as of December 31, 2007
                
                
                4,207,441
                
                
                4,248,702**OTHER
                    ASSETS**Brand
                    names
                
                
                800,201
                
                
                800,201Other
                    intangibles, net of accumulated amortization of $ 15,984 as of
                    September
                    30, 2008 and $5,212 as of December 31, 2007
                
                
                72,166
                
                
                13,402Total
                    Other Assets
                
                
                872,367
                
                
                813,603**TOTAL
                    ASSETS**
                
                **$**
                9,506,180
                
                $
                10,087,306**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY****CURRENT
                    LIABILITIES**Accounts
                    payable
                
                $
                1,328,774
                
                $
                1,996,849Lines
                    of credit
                
                
                1,290,082
                
                
                -Current
                    portion of long term debt
                
                
                9,421
                
                
                27,331Accrued
                    interest
                
                
                24,691
                
                
                3,548Accrued
                    expenses
                
                
                117,308
                
                
                54,364Total
                    Current Liabilities
                
                
                2,770,276
                
                
                2,082,092Long
                    term debt, less current portion
                
                
                1,757,681
                
                
                765,753Total
                    Liabilities
                
                
                4,527,957
                
                
                2,847,845**COMMITMENTS
                    AND CONTINGENCIES****STOCKHOLDERS’
                    EQUITY**Preferred
                    stock, $10 par value, 500,000 shares authorized, 47,121 shares
                    outstanding
                    at September 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 September 30, 2008 and
                    8,751,721 at December 31, 2007
                
                
                892
                
                
                874Additional
                    paid in capital
                
                
                18,266,167
                
                
                17,838,516Accumulated
                    deficit
                
                
                (13,760,048
                )
                
                (11,081,141
                )Total
                    stockholders’ equity
                
                
                4,978,223
                
                
                7,239,461**TOTAL
                    LIABILITIES AND STOCKHOLDERS’ EQUITY**
                
                $
                9,506,180
                
                $
                10,087,306


See
      accompanying Notes to Condensed Financial Statements




1




**REED’S,
      INC.**




**CONDENSED
      STATEMENTS OF OPERATIONS**


**For
      the Three and Nine months Ended September 30, 2008 and
      2007**


**(Unaudited)**




**Three
                months ended**
            
            **Nine
                months ended****September
                30,**
            
            **September
                30,**
            
            **September
                30,**
            
            **September
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****SALES**
            
            $
            4,233,186
            
            $
            3,881,328
            
            $
            12,368,102
            
            $
            10,366,378**COST
                OF SALES**
            
            
            2,937,687
            
            
            3,083,055
            
            
            9,283,460
            
            
            8,348,055**GROSS
                PROFIT**
            
            
            1,295,499
            
            
            798,273
            
            
            3,084,642
            
            
            2,018,323**OPERATING
                EXPENSES**Selling
            
            
            819,362
            
            
            1,606,938
            
            
            2,994,498
            
            
            3,049,207General
                and Administrative
            
            
            558,094
            
            
            711,785
            
            
            2,547,836
            
            
            1,611,276Total
                Operating Expenses
            
            
            1,377,456
            
            
            2,318,723
            
            
            5,542,334
            
            
            4,660,483**LOSS FROM
                OPERATIONS**
            
            
            (81,957
            )
            
            (1,520,450
            )
            
            (2,457,692
            )
            
            (2,642,160
            )**OTHER
                INCOME (EXPENSE)**Interest
                Income
            
            
            -
            
            
            45,898
            
            
            975
            
            
            98,498Interest
                Expense
            
            
            (92,201
            )
            
            (51,407
            )
            
            (198,629
            )
            
            (163,290
            )Total
                Other Income (Expense)
            
            
            (92,201
            )
            
            (5,509
            )
            
            (197,654
            )
            
            (64,792
            )**NET
                LOSS**
            
            
            (174,158
            )
            
            (1,525,959
            )
            
            (2,655,346
            )
            
            (2,706,952
            )Preferred
                stock dividend
            
            
            -
            
            
            --
            
            
            (23,561
            )
            
            (27,770
            )**NET
                  LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS**
            
            $
            (174,158
            )
            $
            (1,525,959
            )
            $
            (2,678,907
            )
            $
            (2,734,722
            )**LOSS
                PER SHARE**-
                Available to Common Stockholders
              ****Basic and Diluted
            
            $
            (0.02
            )
            $
            (0.18
            )
            $
            (0.30
            )
            $
            (0.35
            )**WEIGHTED
                AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED**
            
            
            8,928,591
            
            
            8,714,050
            
            
            8,868,381
            
            
            7,759,425




See
      accompanying Notes to Condensed Financial Statements




2




**REED’S
      INC.**




**CONDENSED
      STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**


For
      the
      nine months ended September 30, 2008 (Unaudited)




Common
            
            Stock
            
            
            
            Preferred
            
            StockShares
            
            Amount
            
            Additional
                Paid in Capital
            
            Shares
            
            Amount
            
            Accumulated
                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
            
            
            **-**
            
            
            -
            
            
            58,653
            
            
            -
            
            
            -
            
            
            -
            
            
            58,653Net
                Loss for the nine months ended
              September
                30, 2008
            
            
            **--**
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (2,655,346
            )
            
            (2,655,346
            )Balance,
                September 30, 2008
            
            
            8,928,591
            
            $
            892
            
            $
            18,266,167
            
            
            47,121
            
            $
            471,212
            
            $
            (13,760,048
            )
            $
            4,978,223






See
      accompanying Notes to Condensed Financial Statements




3






**REED’S
      INC.**




**CONDENSED
      STATEMENTS OF CASH FLOWS**


**For
      the nine months ended September 30, 2008 and 2007**


**(Unaudited)**




**Nine
                  months Ended****September
                  30,**
              
              **September
                  30,****2008**
              
              **2007****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  Loss
              
              $
              (2,655,346
              )
              $
              (2,706,952
              )Adjustments
                  to reconcile net loss to net cash used in operating activities:Compensation
                  expense from stock issuance
              
              
              335,455
              
              
              3,783Fair
                  value of stock options issued to employees
              
              
              58,653
              
              
              171,296Depreciation
                  and amortization
              
              
              256,959
              
              
              144,445Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (120,722
              )
              
              (748,335
              )Inventory
              
              
              33,943
              
              
              (1,781,490
              )Prepaid
                  Expenses
              
              
              13,747
              
              
              82,380Other
                  receivables
              
              
              12,033
              
              
              (120,361
              )Other
                  Intangibles
              
              
              (88,149
              )
              
              -Accounts
                  payable
              
              
              (668,075
              )
              
              607,670Accrued
                  expenses
              
              
              62,944
              
              
              97,879Accrued
                  interest
              
              
              21,143
              
              
              (24,200
              )Net
                  cash used in operating activities
              
              
              (2,737,415
              )
              
              (4,273,905
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Increase
                  in note receivable
              
              
              -
              
              
              (300,000
              )Purchase
                  of property and equipment
              
              
              (186,313
              )
              
              (2,546,165
              )Increase
                  in restricted cash
              
              
              -
              
              
              1,580,456Net
                  cash used in investing activities
              
              
              (186,313
              )
              
              (1,265,709
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                  received from warrants exercised
              
              
              -
              
              
              165,000Proceeds
                  received from borrowings on long term debt
              
              
              1,770,000
              
              
              163,276Principal
                  payments on debt
              
              
              (795,982
              )
              
              (254,387
              )Proceeds
                  received on sale of common stock
              
              
              -
              
              
              9,000,000Payments
                  for stock offering costs
              
              
              -
              
              
              (1,418,606
              )Net
                  borrowing (payment) on lines of credit
              
              
              1,290,082
              
              
              (1,355,526
              )Net
                  cash provided by financing activities
              
              
              2,264,100
              
              
              6,299,757**NET
                  (DECREASE) INCREASE****IN
                  CASH**
              
              
              (659,628
              )
              
              760,143**CASH —
                  Beginning of period**
              
              
              742,719
              
              
              1,638,917**CASH —
                  End of period**
              
              $
              83,091
              
              $
              2,399,060**Supplemental
                  Disclosures of Cash Flow Information**Cash
                  paid during the period for:Interest
              
              $
              177,486
              
              $
              187,490Taxes
              
              $
              -
              
              $
              -Noncash
                  Investing and Financing Activities:Common
                  stock to be issued in settlement of preferred stock
                  dividend
              
              $
              -
              
              $
              27,770Preferred
                  Stock converted to Common Stock
              
              $
              10,000
              
              $
              98,190Common
                  stock issued in settlement of preferred stock dividend
              
              $
              23,561
              
              $
              -






See
      accompanying Notes to Condensed Financial Statements




4




**REED’S,
      INC.**




**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**


**Nine
      months Ended September 30, 2008 and 2007 (UNAUDITED)**




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 September 30, 2008 and the results of operations and
      cash
      flows for the three and nine months ended September 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 three and nine months ended September 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 nine month periods ended
      September 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
      September 30, 2008 and 2007, potentially dilutive securities consisted of
      convertible preferred stock, common stock options and warrants aggregating
      2,709,220 and 2,612,220 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.




5




Recent
      Accounting Pronouncements




References
        to the “FASB” and “SFAS” herein refer to the “Financial Accounting Standards
        Board”, and “Statement of Financial Accounting Standards”,
        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.




6





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 $250,000. 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
      $250,000 guarantee during the nine months ended September 30, 2008.





During
      the three months ended September 30, 2008 and 2007, the Company had two
      customers, which accounted for approximately 36% and 14% and 40% and 29% of
      sales, respectively. No other customers accounted for more than 10% of sales
      in
      either year.





During
      the nine months ended September 30, 2008 and 2007, the Company had two
      customers, which accounted for approximately 32% and 13% and 38% and 15% of
      sales, respectively . No other customers accounted for more than 10% of sales
      in
      either year. As of September 30, 2008, the Company had approximately $310,100
      and $175,000, respectively, of accounts receivable from these customers.




2.
              Inventory




Inventory
      consists of the following at:





September
                30,
              2008
            
            December
                31,
              2007Raw
                Materials
            
            $
            1,152,136
            
            $
            1,179,580Finished
                Goods
            
            
            1,842,371
            
            
            1,848,870$
            2,994,507
            
            $
            3,028,450




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. As
      of
      September 30, 2008, $1,767,102 was due under this debt obligation, of which
      $9,421 has been reflected as current.





7




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
      September 30, 2008, aggregate amounts outstanding under the line of credit
      was
      $1,290,082 and the Company had approximately $273,000 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,
      required the Company to maintain a minimum Debt Service Coverage Ratio (as
      defined in the Credit Agreement), and require the Company to maintain minimum
      levels of tangible net worth. The Company was in compliance with these covenants
      as of September 30, 2008 .





5.
              Stockholders’
                  Equity





For
      the
      nine months ended September 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




Stock
      options




The
      following table summarizes stock option activity for
      the nine months ended September 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 September 30, 2008
            
            
            652,500
            
            $
            3.85
            
            
            3.70
            
            $
            62,250Exercisable
                at September 30, 2008
            
            
            266,667
            
            $
            4.64
            
            
            2.68
            
            $
            7,500




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.




During
      the nine months ended September 30, 2008, the Company recognized $56,978 of
      compensation cost relating to the vesting of options.




8




As
        of September 30, 2008, the Company has unvested
        options of 385,833, which will be reflected as compensation cost of
        approximately $751,000 over the remaining vesting period of three
        years.




The
        impact on our results of operations of recording stock-based compensation
        for
        the three-month period ended September 30, 2008 was to increase selling expenses
        by $98,526, 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 September 30, 2007 was to increase selling expenses
        by $103,376 and increase general and administrative expenses by $19,500.
 
 The
        impact on our results of operations of recording stock-based compensation
        for
        the nine-month period ended September 30, 2008 was to decrease selling expenses
        by $1,522 and increase general and administrative expenses by $58,500. The
        impact on our results of operations of recording stock-based compensation
        for
        the nine-month period ended September 30, 2007 was to increase selling expenses
        by $145,296 and increase general and administrative expenses by $26,000.
 
 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 September 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 $295,000.




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 nine months ended September 30, 2008 was $1.59.
      The following weighted average assumptions were used for the nine months
      ended September 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.




9




Stock
      Warrants




The
      following table summarizes warrant activity for the nine months ended
      September 30, 2008:





Shares
            
            Weighted
                AverageExercise
                Price
            
            Weighted-Average
              Remaining
                Contractual
              Term
                (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at January 1, 2008
            
            
            1,668,236
            
            $
            5.75
            
            
            -
            
            
            -Granted
            
            
            200,000
            
            $
            2.54
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                at September 30, 2008
            
            
            1,868,236
            
            $
            5.41
            
            
            2.85
            
            $
            20,975Exercisable
                at September 30, 2008
            
            
            1,668,236
            
            $
            5.75
            
            
            2.64
            
            $
            20,975




The
      200,000 warrants granted during the nine months ended September 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
      nine months ended September 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





For
      the
      nine months ended September 30, 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 $112,500 during
      the
      nine months ended September 30, 2008. No stock options were granted to
      him during the nine months ended September 30, 2008. The family member was
      not
      employed by the Company during the three months ended September 30,
      2008.





During
      the nine months ended September 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 nine months ended September 30, 2008, the Company paid $30,000 for
      these services. 200,000 warrants were granted during the nine months ended
      September 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 nine months ended September 30, 2008. 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.




10
 
 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, Real Cola, and Cream Sodas in regularly sweetened
                    and diet
                    versions,
 
 ·
                China
                    Colas,
 
 ·
                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.
  11
 **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:
  Slowing
          Economy- The recent economic crisis could cause consumers to pull back
          from high
          end natural food products. So far the natural food industry has seen a
          slow down
          of growth but according to a recent news article by SPINS, the industry
          scan
          data providers, sales are up 10% over the same period last year for 4 week
          of
          October 2008. Never the less a more accelerated slow down would potentially
          impact our core customers, the natural food consumer.
 
 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 - Most of 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 developing
          low-carbohydrate versions of some of our beverages namely the whole Virgil’s
          line.
  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.
 
 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.
  12
 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 nine months ended September
          30, 2008 or September
          30, 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 nine months ended
September
          30, 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.
 
 14
 **Results
          of Operations**
 
 *Three
          Months Ended September 30, 2007 Compared to Three Months Ended September
          30,
          2008*
 
 Gross
          sales increased by $573,168, or 13.5%, from $4,236,429 in the three months
          ended
          September 30, 2007 to $4,809,597 in the three months ended September 30,
          2008. The three months ended September 30, 2007 included $251,401 in Costco
          Roadshows which are promotional sales that we decided against in 2008.
          In
          calculating our core business growth, we would exclude these sales.
  Product
          discounting increased by $222,651, or 62.6%, from $355,491 in the three
          months
          ended September 30, 2007 to $578,142 in the three months ended September
          30,
          2008. As a percentage of gross sales the product discounting increased
          from 8.4%
          in the first three months ended September 30, 2007 to 12.0% in the first
          three
          months ended September 30, 2008.The increase was due to greater promotional
          activity of the brands in the marketplace.
 
 Net
          sales
          increased by $351,858, or 9.0%, from $3,881,328 in the three months ended
          September 30, 2007 to $4,233,186 in the three months ended September 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 $151,000, or 8%
          to
          $1,983,000 in the three months ended September 30, 2008 from $1,832,000
          in the
          three months ended September 30, 2007. The increase was the result of increased
          sales in 12 ounce Root Beer of $86,000 or 9% from $1,003,000 in the three
          months
          ended September 30, 2007 to $1,089,000 in the three months ended September
          30,
          2008, increased sales in Cream Soda of $49,000 or 18% from $271,000 in
          the three
          months ended September 30, 2007 to $320,000 in the three months ended September
          30, 2008, and decreased sales in Black Cherry Cream Soda of $20,000 or
          12% from
          $163,000 in the three months ended September 30, 2007 to $143,000 in the
          three
          months ended September 30, 2008. Also, the Virgil’s Root Beer five-liter party
          kegs decreased $150,000 or 66%, from $228,000 in the three months ended
          September 30, 2007 to $78,000 in the three months ended September 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 $127,000 in the three
          months ended September 30, 2008. Virgil’s diet sodas, the new stevia sweetened
          versions, sales increased $47,000 or 61% from $77,000 in the three months
          ended
          September 30, 2007 to $124,000 in the three months ended September 30,
          2008.
 
 The
          Reeds
          Ginger Brew Line increased $433,000 or 24% to $2,223,000 in the three months
          ended September 30, 2008 from $1,790,000 in the three months ended September
          30,
          2007.
 
 Net
          sales
          of candy increased $25,000, or 11% to $261,000 in the three months ended
          September 30, 2008 from $236,000 in the three months ended September 30,
          2007.
 
 The
          product mix for our two most significant product lines, Reed’s Ginger Brews and
          Virgil’s sodas was 48.6% and 43.3%, respectively of net sales in the three
          months ended September 30, 2008 and was 45.1% and 46.2%, respectively of
          net
          sales in the three months ended September 30, 2007.
 
 Cost
          of
          sales decreased by $145,368, or 4.7%, to $2,937,687 in the three months
          ended
          September 30, 2008 from $3,083,055 in the three months ended September
          30, 2007.
          As a percentage of net sales, cost of sales decreased to 69.3% in the three
          months ended September 30, 2008 from 79.4% in the three months ended September
          30, 2007. Cost of sales as a percentage of net sales decreased by 10.1%,
          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.
  15
 Gross
          profit increased $497,226 or 62.3% to $1,295,499 in the three months ended
          September 30, 2008 from $798,273 in the three months ended September 30,
          2007.
          As a percentage of net sales, gross profit increased to 30.7% in the first
          three
          months of 2008 from 20.6% 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 have renegotiated our production costs from our largest
          co-packer and expect an increase in gross margins between 5-6% as we move
          through our current inventory. The contract is effective November 1,
          2008.
 
 Operating
          expenses decreased by $941,267, or 40.7%, to $1,377,456 in the three months
          ended September 30, 2008 from $2,318,723 in the three months ended September
          30,
          2007 and decreased as a percentage of net sales to 32.5% in the three months
          ended September 30, 2008 from 59.8% in the three months ended September
          30,
          2007. The decrease was primary the result of decreased 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 sales force reduction.
          Operating expenses decreased by $743,640 or 30.3%, to $1,710,634 in the
          three
          months ended June 30, 2008 from $2,454,274 in the three months ended March
          31,
          2008. Operating expenses decreased by $333,178 or 19.5%, to $1,377,456
          in the
          three months ended September 30, 2008 from $1,710,634 in the three months
          ended
          June 30, 2008. We expect to stabilize at this level of operating expense
          for the
          next few quarters and increase in 2009 in later quarters due to increased
          gross
          profits expected in 2009.
  Selling
          expenses decreased by $787,576 or 49.0%, to $819,362 in the three months
          ended
          September 30, 2008 from $1,606,938 in the three months ended September
          30, 2007.
          The decrease in selling expenses is due to our decreased sales force size
          and
          reduced promotions at Costco which caused sales salaries, sales contractors,
          hiring expenses, road show, demos and travel expenses to reduce partially
          offset
          by increased commissions to outside sales organizations as we outsourced
          some of
          our sales efforts. Sales salaries expenses decreased $238,398 or 44.5%
          to
          $297,490 in the three months ended September 30, 2008 from $535,888 in
          the three
          months ended September 30, 2007. This decrease was due to the reduction
          of the
          sales force. Contract and Hiring expenses decreased $124,986 or 96.8% to
          $4,172
          in the three months ended September 30, 2008 from $129,158 in the three
          months
          ended September 30, 2007. The decrease in contract and hiring expenses
          was due
          to the reduction of sales staff. Road show expenses decreased $153,592
          or
          100.0%, to $0 in the three months ended September 30, 2008 from $153,592
          in the
          three months ended September 30, 2007. We did not run any road shows in
          the
          three months ended September 30, 2008 . Travel expenses decreased $148,343
          or
          73.6%, to $53,198 in the three months ended September 30, 2008 from $201,541
          in
          the three months ended September 30, 2007. The decrease in travel expenses
          was
          due to decreased sales force. Brokerage commission expenses increased $57,354
          or
          75.8%, to $133,000 in the three months ended September 30, 2008 from $75,646
          in
          the three months ended September 30, 2007. The increase in brokerage commission
          expenses was due to increased use of outside food brokers to represent
          us to the
          supermarket trade. Demo expenses decreased $224,636 or 113.8% to ($27,218)
          in the three months ended September 30, 2008 from $197,418 in the three
          months
          ended September 30, 2007. This decrease is due to the reduction of use
          of demos
          and a credit due to prior over charging by a demo company. 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
          September 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.
 
 16
 General
          and administrative expenses decreased by $153,691 or 21.6% to $558,094
          in the
          three months ended September 30, 2008 from $711,785 in the first three
          months
          ended September 30, 2007. The decrease in general and administrative expenses
          is
          due to decreased legal, accounting and investor relations expenses, officer
          salaries, and travel expenses. Legal, accounting and investor relations
          expenses decreased $114,866 or 54.7% to $95,030 in the three months ended
          September 30, 2008 from $209,896 in the three months ended September 30,
          2007.
          The decrease in legal, accounting and investor relation expenses was due
          to
          decreased legal and accounting costs mostly related to the decreased costs
          of
          reporting and compliance with the Securities and Exchange Commission and
          NASDAQ
          as we changed firms and renegotiated fees. Officer salaries decreased by
          $26,251
          or 27.3% to $69,982 in the three months ended September 30, 2008 from $96,233
          in
          the three months ended September 30, 2007. The decrease was due to the
          leaving
          of a Chief Operating Officer in April 2008. Travel expenses decreased by
          $21,513
          or 100% to $0 in the three months ended September 30, 2008 from $21,513
          in the
          three months ended September 30, 2007. The decrease was due to non traveling
          of
          office personnel during the three months ended September 30, 2008.
 
 Interest
          expense was $92,201 in the three months ended September 30, 2008, compared
          to
          interest expense of $51,407 in the three months ended September 30, 2007.
          Interest income dropped to $-0- in the three months ended September 30,
          2008,
          compared to interest income of $45,898 in the three months ended September
          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.
 
 *Nine
          Months Ended September 30, 2007 Compared to Nine Months Ended September
          30,
          2008*
 
 Gross
          sales increased by $2,261,779, or 19.9%, from $11,359,958 in the three
          months
          ended September 30, 2007 to $13,621,737 in the three months ended September
          30,
          2008.
 
 Product
          discounting increased by $260,056, or 26.2%, from $993,579 in the three
          months
          ended September 30, 2007 to $1,253,635 in the three months ended September
          30,
          2008. As a percentage of gross sales the product discounting increased
          from 8.7%
          in the first nine months ended September 30, 2007 to 9.2% in the first
          nine
          months ended September 30, 2008. The increase was due to greater promotional
          activity of the brands in the marketplace.
 
 Net
          sales
          increased by $2,001,724, or 19.3%, from $10,366,378 in the first nine months
          ended September 30, 2007 to $12,368,102 in the first nine months ended
          September
          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 $1231,000, or 27%
          to
          $5,791,000 in first nine months ended September 30, 2008 from $4,560,000
          in
          first nine months ended September 30, 2007. The increase was the result
          of
          increased sales in 12 ounce Root Beer of $305,000 or 12% from $2,570,000
          in
          first nine months ended September 30, 2007 to $2,875,000 in first nine
          months
          ended September 30, 2008, increased sales in Cream Soda of $176,000 or
          28% from
          $625,000 in the first nine months of 2007 to $801,000 in the first nine
          months
          of 2008, and increased sales in Black Cherry Cream Soda of $25,000 or 7%
          from
          $359,000 in the first nine months of 2007 to $384,000 in the first nine
          months
          of 2008. Also, the Virgil’s Root Beer five-liter party kegs increased $381,000
          or 61%, from $620,000 in first nine months ended September 30, 2007 to
          $1,001,000 in first nine months ended September 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 $228,000 in the first nine
          months
          ended September 30, 2008. Virgil’s diet sodas, the new stevia sweetened
          versions, sales increased $103,000 or 60.6% from $170,000 in the nine
          months ended September 30, 2007 to $273,000 in the nine months ended September
          30, 2008.
 
 17
 
 The
          Reeds
          Ginger Brew Line increased $1,173,000 or 24% to $6,110,000 in first nine
          months
          ended September 30, 2008 from $4,937,000 in first nine months ended September
          30, 2007.
 
 Net
          sales
          of candy increased $69,000, or 10% to $746,000 in first nine months ended
          September 30, 2008 from $677,000 in first nine months ended September 30,
          2007.
 
 The
          product mix for our two most significant product lines, Reed’s Ginger Brews and
          Virgil’s sodas was 47.2% and 44.7%, respectively of net sales in first nine
          months ended September 30, 2008 and was 49.6% and 43.3%, respectively of
          net
          sales in first nine months ended September 30, 2007.
  Cost
          of
          sales increased by $935,405, or 11.2%, to $9,283,460 in first nine months
          ended
          September 30, 2008 from $8,348,055 in first nine months ended September
          30,
          2007. As a percentage of net sales, cost of sales decreased to 75.1% in
          first
          nine months ended September 30, 2008 from 80.5% in first nine months ended
          September 30, 2007. Cost of sales as a percentage of net sales decreased
          by
          5.4%,  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 $1,066,319 or 52.8% to $3,084,642 in first nine months
          ended
          September 30, 2008 from $2,018,323 in first nine months ended September
          30,
          2007. As a percentage of net sales, gross profit increased to 24.9% in
          the first
          nine months of 2008 from 19.5% in the first nine 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 have renegotiated our production costs from
          our
          largest co-packer and expect an increase in gross margins between 5-6%
          as we
          move through our current inventory. The contract is effective November
          1,
          2008.
 
 Operating
          expenses increased by $881,851 or 18.9%, to $5,542,334 in first nine months
          ended September 30, 2008 from $4,660,483 in first nine months ended September
          30, 2007 and decreased as a percentage of net sales  to
          44.8%
          in first nine months ended September 30, 2008 from 44.9% in first nine
          months
          ended September 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. During the last nine months ending September
          30,
          2008 we had an average monthly operating expense of $615,650. During the
          three
          months ended September 30, 2008 we had an average monthly operating expense
          of
          $459,044. We believe we are reaching operating expense levels that allow
          for
          good growth while maintaining a lean environment.
  18
  Selling
          expenses decreased by $54,709 or 1.8%, to $2,994,498 in first nine months
          ended
          September 30, 2008 from $3,049,207 in first nine months ended September
          30,
          2007. The decrease in selling expenses is due to decreased road show, demo,
          stock option, contract services, and auto expenses offset by increased
          salary, promotion, trade show, travel, broker commission and telephone
          expenses.
          Road show expenses decreased $134,473 or 97.1% to $4,308 in first nine
          months
          ended September 30, 2008 from $138,781 in first nine months ended September
          30,
          2007. This decrease was due to not running as many Costco road shows in
          2008.
          Demo expenses decreased $196,821 or 71.8% to $76,767 in first nine months
          ended
          September 30, 2008 from $273,588 in first nine months ended September 30,
          2007.
          The decrease in demo expenses was due to decreased use of demoing in our
          marketing in 2008. Stock option expenses decreased $146,817 or 101.0%,
          to
          ($1,522) in first nine months ended September 30, 2008 from $145,295 in
          first
          nine months ended September 30, 2007. This decrease was due to the stock
          options
          that were forfeited. Contract services expenses decreased $112,131 or 75.2%,
          to
          $37,727 in first nine months ended September 30, 2008 from $149,858 in
          first
          nine months ended September 30, 2007. The decrease in contract services
          expenses
          was due to reduced useage of contract services. Hiring expenses decreased
          $61,788 or 98.7%, to $825 in first nine months ended September 30, 2008
          from
          $62,613 in first nine months ended September 30, 2007. The decrease in
          hiring
          expenses was due to inactivity in hiring for sales in 2008. Auto expenses
          decreased $105,527 or 44.5%, to $131,459 in first nine months ended September
          30, 2008 from $236,986 in first nine months ended September 30, 2007. The
          decrease in auto expenses was due the reduction in the sales force in March
          of
          2008. These decreases were offset by increases in the following expenses.
          Salary
          expense increased $229,927 or 22.8% to $1,234,667 in first nine months
          ended
          September 30, 2008 from $1,004,740 in first nine months ended September
          30,
          2007. This decrease is due to the build up of sales employees in late 2007.
          Promotional expense increased $186,518 or 432.5% to $229,952 in first nine
          months ended September 30, 2008 from $43,434 in first nine months ended
          September 30, 2007. This increase is due to increased promotionally spending
          with supermarkets as we implement increased marketing programs with our
          supermarket partners. Trade show expenses increased $43,896 or 68.8% to
          $107,718
          in first nine months ended September 30, 2008 from $63,822 in first nine
          months
          ended September 30, 2007. This increase is due to a increase in the number
          of
          trade shows we are attending including first time showings at the drug
          store
          chain national trade show in 2008. Travel expenses increased $21,826 or
          8.2% to
          $282,089 in first nine months ended September 30, 2008 from $260,263 in
          first
          nine months ended September 30, 2007. This increase is due to a increase
          in the
          sales force in the earlier part of 2008. Brokerage commission expenses
          increased
          $180,163 or 96.7% to $366,396 in first nine months ended September 30,
          2008 from
          $186,233 in first nine months ended September 30, 2007. This increase is
          due to
          a increase use of brokerage firms to help penetrate and manage our supermarket
          busines in 2008. Telephone and postage expenses increased $29,554 or 69.1%
          to
          $72,314 in first nine months ended September 30, 2008 from $42,760 in first
          nine
          months ended September 30, 2007. This increase is due to a increase in
          the
          number of sales people toward the end of 2007 and also the increase in
          samples
          and mailing due to aggressive telemarketing. 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 nine months ended September 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 $936,560 or 58.0% to $2,547,836
          in
          first nine months ended September 30, 2008 from $1,611,276 in the first
          nine
          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, stock options, and one time expenses of our
          First
          Capital line of credit set up expense. Legal, accounting and investor relations
          expenses increased $623,027 or 168.2% to $993,338 in first nine months
          ended
          September 30, 2008 from $370,311 in first nine months ended September 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,
          in addition, we had a one-time non cash expense of $320,762 for consulting
          services, for which we issued stock. Officer salaries increased by $168,236
          or
          86.6% to $362,412 in first nine months ended September 30, 2008 from $194,176
          in
          first nine months ended September 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 $84,539 or 209.9% to $124,820
          in
          first nine months ended September 30, 2008 from $40,281 in first nine months
          ended September 30, 2007. This increase was mainly due to increased sales
          and
          coverage. Stock option expenses increased $32,500 or 125.0% to $58,500
          in first
          nine months ended September 30, 2008 from $26,000 in first nine months
          ended
          September 30, 2007. This increase was due to the hiring of a Chief Operating
          Officer in May 2007 and a Chief Financial Officer in October 2007. We had
          one
          time expenses with the new line of credit with First Capital in first nine
          months ended September 30, 2008 of $30,122.
 
 19
 Interest
          expense was $198,629 in the nine months ended September 30, 2008, compared
          to
          interest expense of $163,290 in the nine months ended September 30, 2007.
          Interest income dropped to $975 in the nine months ended September 30,
          2008,
          compared to interest income of $98,498 in the nine months ended September
          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.
  *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
          September 30, 2008, we had an accumulated deficit of $13,760,048 and we
          had
          working capital of $1,656,096, 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 $83,091 as of September 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 nine months ended September
          30,
          2008. In addition to our cash position on September 30,2008, we had availability
          under our line of credit of approximately $273,000.
 
 20
 Net
          cash
          used in operating activities during the nine months ended September 30,
          2008 was
          $2,737,415 which was due primarily to our net loss of $2,655,346. In the
          nine
          months ended September 30, 2008, we used $186,313 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 nine months ended September
          30, 2008
          was $2,264,100. The primary components of that were the net proceeds from
          the
          refinancing of our land and buildings and our obtaining of a line of credit.
  As
          of
          September 30, 2008, we had outstanding borrowings of $1,290,082 under our
          line
          of credit agreement. Our line of credit lender is a privately held, Senior
          Secured Commercial Lender. Our lender has communicated to us that they
          are not a
          bank and are not subject to banking regulations. They have also communicated
          to
          us that they have over $1billion dollars in assets and has approximately
          20% of
          equity capital. They communicated that they have adequate lines of credits
          in
          place with banks to achieve their business goals. They communicated that
          there
          are no requirements in place for them to repurchase any of their outstanding
          stock. Based on these communications, we believe that our lending source
          will be
          able to fund the full extent of our line of credit, should we meet the
          requirements for such funding.
  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
          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,
  21
 
 ·
                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”, and “SFAS” herein refer to the “Financial Accounting Standards
          Board”, and “Statement of Financial Accounting Standards”,
          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.
 
 22
 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
 
 As
            a
            smaller reporting company, the Company is not required to provide disclosure
            under this Part I, Item 3.
 
 Item
            4.
            CONTROLS AND PROCEDURES
  (a)
            Management's Evaluation of Disclosure Controls and Procedures.
  As
            of
            September 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 September
            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 Control Over Financial Reporting.
 
 There
            were no changes in our internal control over financial reporting during
            the
            quarter ended September 30, 2008 that materially affected, or are reasonably
            likely to materially affect, our internal control over financial
            reporting.
  **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
 
 As
            a
            smaller reporting company, the Company is not required to provide disclosure
            under this Item 1A.
  Item
            2.
            Unregistered Sales of Equity Securities and Use of Proceeds
  For
              the
              nine months ended September 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.
 The
            issuance of these securities was exempt from registration under Section
            4(2) of
            the Securities Act. The purchasers were either (a) “accredited investors” within
            the meaning of Rule 501 of Regulation D promulgated under the Securities
            Act or
            (c) had a pre-existing or personal relationship with the Company. There
            was
            no advertising or public solicitation in connection with these transactions
            bythe Company or anyone acting on the Company’s behalf.]
  23
 
 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 with
            First Capital Western Region LLC (“First Capital”). The Company entered
            into an agreement with First Capital amending the agreement so that the
            Company
            would no longer be in breach of the financial covenants onSeptember 3,
            2008.
  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 Document31.1
                  
                  Officer's
                      Certification pursuant to Section 302 of the Sarbanes-Oxley
                      Act of
                      200232.1
                  
                  Officer's
                      Certification pursuant to Section 906 of the Sarbanes-Oxley
                      Act of
                      2002
 
 
 **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 OfficerNovember
                      11, 2008
  24