UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-QSB





(Mark
      One)


x
            QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT
                OF 1934





For
      the
      quarterly period ended September 30, 2007




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: 001-32501




**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, California. 90061


(Address
      of principal executive offices) (Zip Code)





(310)
      217-9400


(Registrant's
      telephone number, including area code)





(Former
      name, former address and former fiscal year, if changed since last
      report)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) Exchange Act during the past 12 months (or for such shorter period that
      the registrant was required to file such reports), and (2) has been subject
      to
      such filing requirements for the past 90 days. Yes x No o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No x




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 8,749,721 shares of the registrant's common stock outstanding as of 
November 13, 2007.





Transitional
      Small Business Disclosure Format (Check one)  Yes o No x







Part
      I -
      Financial Information


Item
      1.
      Financial Statements




**REED’S,
      INC.**


**CONDENSED
      BALANCE SHEETS**




September
                30,
              2007
            
            December
                31,
              2006(Unaudited)**ASSETS****CURRENT
                ASSETS**Cash
            
            $
            2,399,060
            
            $
            1,638,917Restricted
                cash
            
            
            -
            
            
            1,580,456Inventory
            
            
            3,292,720
            
            
            1,511,230Trade
                accounts receivable, net of allowance for doubtful accounts and returns
                and discounts of $188,000 as of September 30, 2007 and $173,253 as
                of
                December 31, 2006
            
            
            1,932,118
            
            
            1,183,763Note
                Receivable
            
            
            300,000
            
            
            -Other
                receivables
            
            
            145,172
            
            
            24,811Prepaid
                Expenses
            
            
            82,082
            
            
            164,462Total
                Current Assets
            
            
            8,151,152
            
            
            6,103,639Property
                and equipment, net of accumulated depreciation of $807,140 as of
                September
                30, 2007 and $663,251 as of December 31, 2006
            
            
            4,197,439
            
            
            1,795,163**OTHER
                ASSETS**Brand
                names
            
            
            800,201
            
            
            800,201Other
                intangibles, net of accumulated amortization of $5,026 as of September
                30,
                2007 and $4,467 as of December 31, 2006
            
            
            13,588
            
            
            14,146Total
                Other Assets
            
            
            813,789
            
            
            814,347**TOTAL
                ASSETS**
            
            **$**
            13,162,380
            
            $
            8,713,149**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****CURRENT
              LIABILITIES**Accounts
                payable
            
            $
            2,302,684
            
            $
            1,695,014Lines
                of credit
            
            
            -
            
            
            1,355,526Current
                portion of long term debt
            
            
            26,537
            
            
            71,860Accrued
                interest
            
            
            3,798
            
            
            27,998Accrued
                expenses
            
            
            216,180
            
            
            118,301Total
                Current Liabilities
            
            
            2,549,199
            
            
            3,268,699Long
                term debt, less current portion
            
            
            775,574
            
            
            821,362Total
                Liabilities
            
            
            3,324,773
            
            
            4,090,061**COMMITMENTS
                AND CONTINGENCIES****STOCKHOLDERS’
                EQUITY**Preferred
                stock, $10 par value, 500,000 shares authorized, 49,121 shares outstanding
                at September 30, 2007 and 58,940 shares at December 31,
                2006
            
            
            491,212
            
            
            589,402Common
                stock, $.0001 par value, 11,500,000 shares authorized,
                8,746,721 shares issued and outstanding at September 30, 2007 and
                7,143,185 at December 31, 2006
            
            
            874
            
            
            714Additional
                paid in capital
            
            
            17,582,385
            
            
            9,535,114Accumulated
                deficit
            
            
            (8,236,864
            )
            
            (5,502,142
            )Total
                stockholders’ equity
            
            
            9,837,607
            
            
            4,623,088**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            $
            13,162,380
            
            $
            8,713,149




See
      accompanying Notes to Condensed Financial
      Statements




-1-




**REED’S,
      INC.**


**CONDENSED
      STATEMENTS OF OPERATIONS**


**For
      the Three and Nine months Ended September 30, 2007 and 2006**


**(Unaudited)**




**Three
                months ended**
            
            **Nine
                months ended****September
                30,**
            
            **September
                30,**
            
            **September
                30,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****SALES**
            
            $
            3,881,328
            
            $
            2,775,955
            
            $
            10,366,378
            
            $
            7,913,045**COST
                OF SALES**
            
            
            3,083,055
            
            
            2,138,602
            
            
            8,348,055
            
            
            6,417,343**GROSS
                PROFIT**
            
            
            798,273
            
            
            637,353
            
            
            2,018,323
            
            
            1,495,702**OPERATING
                EXPENSES**Selling
            
            
            1,606,938
            
            
            407,074
            
            
            3,049,207
            
            
            1,007,693General
                and Administrative
            
            
            711,785
            
            
            519,045
            
            
            1,611,276
            
            
            1,535,255Total
                Operating Expenses
            
            
            2,318,723
            
            
            926,119
            
            
            4,660,483
            
            
            2,542,948**LOSS FROM
                OPERATIONS**
            
            
            (1,520,450
            )
            
            (288,766
            )
            
            (2,642,160
            )
            
            (1,047,246
            )**OTHER
                INCOME (EXPENSE)**Interest
                Income
            
            
            45,898
            
            
            —
            
            
            98,498
            
            
            —Interest
                Expense
            
            
            (51,407
            )
            
            (112,197
            )
            
            (163,290
            )
            
            (310,551
            )Total
                Other Income (Expense)
            
            
            (5,509
            )
            
            (112,197
            )
            
            (64,792
            )
            
            (310,551
            )**NET
                LOSS**
            
            
            (1,525,959
            )
            
            (400,963
            )
            
            (2,706,952
            )
            
            (1,357,797
            )Preferred
                stock dividend
            
            
            —
            
            
            —
            
            
            (27,770
            )
            
            (29,470
            )Net
                loss attributable to common shareholders
            
            $
            (1,525,959
            )
            $
            (400,963
            )
            $
            (2,734,722
            )
            $
            (1,387,267
            )**LOSS
                PER SHARE**-
                Available to Common StockholdersBasic and Diluted
            
            $
            (0.18
            )
            $
            (0.08
            )
            $
            (0.35
            )
            $
            (0.26
            )**WEIGHTED
                AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED**
            
            
            8,714,050
            
            
            5,335,482
            
            
            7,759,425
            
            
            5,269,878




See
      accompanying Notes to Condensed Financial
      Statements




-2-




**REED’S
      INC.**


**STATEMENT
      OF CHANGES IN STOCKHOLDERS’ EQUITY**


For
      the
      nine months ended September 30, 2007 (Unaudited)




Common
                Stock
            
            Additional
              Paid
                in
            
            Preferred
                Stock
            
            AccumulatedShares
            
            Amount
            
            Capital
            
            Shares
            
            Amount
            
            Deficit
            
            TotalBalance,
                January 1, 2007
            
            
            7,143,185
            
            $
            714
            
            $
            9,535,114
            
            
            58,940
            
            $
            589,402
            
            $
            (5,502,142
            )
            $
            4,623,088Fair
                Value of Common stock issued for services
            
            
            440
            
            
            -
            
            
            3,783
            
            
            —
            
            
            —
            
            
            —
            
            
            3,783Preferred
                Stock Dividend
            
            
            3,820
            
            
            1
            
            
            27,769
            
            
            -
            
            
            —
            
            
            (27,770
            )
            
            —Preferred
                stock conversion
            
            
            39,276
            
            
            3
            
            
            98,187
            
            
            (9,819
            )
            
            (98,190
            )
            
            —
            
            
            —Exercise
                of Warrants
            
            
            60,000
            
            
            6
            
            
            164,994
            
            
            —
            
            
            —
            
            
            —
            
            
            165,000Common
                stock issued for cash, net of offering costs
            
            
            1,500,000
            
            
            150
            
            
            7,626,392
            
            
            —
            
            
            —
            
            
            —
            
            
            7,626,392Public
                offering expenses
            
            
            —
            
            
            —
            
            
            (45,000
            )
            
            —
            
            
            —
            
            
            —
            
            
            (45,000
            )Fair
                value of vested options issued to employees
            
            
            —
            
            
            —
            
            
            171,296
            
            
            —
            
            
            —
            
            
            —
            
            
            171,296Net
                Loss for the nine months ended September 30, 2007
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,706,952
            )
            
            (2,706,952
            )Balance,
                September 30, 2007
            
            
            8,746,721
            
            $
            874
            
            $
            17,582,385
            
            
            49,121
            
            $
            491,212
            
            $
            (8,236,864
            )
            $
            9,837,607




See
      accompanying Notes to Condensed Financial
      Statements




-3-




**REED’S
      INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


For
      the
      nine months ended September 30, 2007 and 2006 (Unaudited)





Nine
                Months EndedSeptember
                30,
              2007
            
            September
                30,
              2006**CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                Loss
            
            $
            (2,706,952
            )
            $
            (1,357,797
            )Adjustments
                to reconcile net loss to net cash used in operating activities:Compensation
                expense from stock issuance
            
            
            3,783
            
            
            —Fair
                value of stock options issued to employees
            
            
            171,296
            
            
            —Depreciation
                and amortization
            
            
            144,445
            
            
            102,252Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (748,355
            )
            
            (600,154
            )Inventory
            
            
            (1,781,490
            )
            
            (335,291
            )Prepaid
                Expenses
            
            
            82,380
            
            
            (420
            )Other
                receivables
            
            
            (120,361
            )
            
            5,331Accounts
                payable
            
            
            607,670
            
            
            989,310Accrued
                expenses
            
            
            97,879
            
            
            16,966Accrued
                interest
            
            
            (24,200
            )
            
            23,821Net
                cash used in operating activities
            
            
            (4,273,905
            )
            
            (1,155,982
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Increase
                in Note Receivable
            
            
            (300,000
            )
            
            —Purchase
                of property and equipment
            
            
            (2,546,165
            )
            
            (44,347
            )Decrease
                in restricted cash
            
            
            1,580,456
            
            
            —Net
                cash used in investing activities
            
            
            (1,265,709
            )
            
            (44,347
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                received from borrowings on long term debt
            
            
            163,276
            
            
            —Principal
                payments on debt
            
            
            (254,387
            )
            
            (87,486
            )Proceeds
                received on sale of common stock
            
            
            9,000,000
            
            
            1,002,779Proceeds
                received from the exercise of warrants
            
            
            165,000
            
            
            —Payments
                for stock offering costs
            
            
            (1,418,606
            )
            
            (237,287
            )Net
                (payment) borrowing  on lines of credit
            
            
            (1,355,526
            )
            
            571,883Net
                cash provided by financing activities
            
            
            6,299,757
            
            
            1,249,889**NET
                INCREASE****IN
                CASH**
            
            
            760,143
            
            
            49,560**CASH —
                Beginning of period**
            
            
            1,638,917
            
            
            27,744**CASH —
                End of period**
            
            $
            2,399,060
            
            $
            77,304




See
      accompanying Notes to Condensed Financial
      Statements




-4-




**REED’S
      INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


(Continued)





**For
      the nine months ended September 30, 2007 and 2006**


**(Unaudited)**




Nine
                Months EndedSeptember
                30,
              2007
            
            September
                30,
              2006**Supplemental
                Disclosures of Cash Flow Information**Cash
                paid during the period for:Interest
            
            $
            187,490
            
            $
            286,731Taxes
            
            $
            —
            
            $
            —**Noncash
                Investing and Financing Activities:**Common
                stock to be issued in settlement of preferred stock
                dividend
            
            $
            27,770
            
            $
            29,470Deferred
                stock offering costs charged to paid in capital
            
            $
            -
            
            $
            336,238Preferred
                Stock converted to Common Stock
            
            $
            98,190
            
            $
            --







See
      accompanying Notes to Condensed Financial
      Statements




-5-


**REED’S,
      INC.**




**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**


**Nine
      months Ended September 30, 2007 and 2006 (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, 2007 and the results of operations and
      cash
      flows for the nine months ended September 30, 2007 and 2006. The balance sheet
      as of December 31, 2006 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 16, 2007.





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 nine months ended September 30, 2007 are not
      necessarily indicative of the results of operations to be expected for the
      full
      fiscal year ending December 31, 2007.





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, 2007 and 2006, basic and diluted loss per share are the same
      because the inclusion of common share equivalents would be anti-dilutive. At
      September 30, 2007 and 2006, potentially dilutive securities consisted of
      convertible preferred stock, common stock options and warrants aggregating
      2,612,220 and 1,276,159 common shares, respectively.





Adoption
      of New Accounting Policy





Effective
      January 1, 2007, the Company adopted Financial Accounting Standards Board
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN
      48 ”) *—* an
      interpretation of FASB Statement No. 109, Accounting for Income
      Taxes *.”* The
      Interpretation addresses the determination of whether tax benefits claimed
      or
      expected to be claimed on a tax return should be recorded in the financial
      statements. Under FIN 48 ,
      we may
      recognize the tax benefit from an uncertain tax position only if it is more
      likely than not that the tax position will be sustained on examination by the
      taxing authorities, based on the technical merits of the position. The tax
      benefits recognized in the financial statements from such a position should
      be
      measured based on the largest benefit that has a greater than fifty percent
      likelihood of being realized upon ultimate settlement. FIN
      48 also
      provides guidance on derecognition, classification, interest and penalties
      on
      income taxes, accounting in interim periods and requires increased disclosures.
      At the date of adoption, and as of September 30, 2007, the Company does not
      have
      a liability for unrecognized tax benefits.




-6-




The
      Company files income tax returns in the U.S. federal jurisdiction and various
      states. The Company is subject to U.S. federal or state income tax examinations
      by tax authorities for five years after 2002. During the periods open to
      examination, the Company has net operating loss and tax credit carry
      forwards for U.S. federal and state tax purposes that have attributes from
      closed periods. Since these NOLs and tax credit carry forwards may
      be utilized in future periods, they remain subject to
      examination.




The
      Company’s policy is to record interest and penalties on uncertain tax provisions
      as income tax expense. As of September 30, 2007, the Company has no accrued
      interest or penalties related to uncertain tax positions.





Recent
      Accounting Pronouncements





In
      September 2006, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standard (SFAS) No. 157, "Fair Value Measurements,"
      which provides enhanced guidance for using fair value to measure assets and
      liabilities. SFAS No. 157 provides a common definition of fair value and
      establishes a framework to make the measurement of fair value in generally
      accepted accounting principles more consistent and comparable. SFAS No. 157
      also
      requires expanded disclosures to provide information about the extent to which
      fair value is used to measure assets and liabilities, the methods and
      assumptions used to measure fair value, and the effect of fair value measures
      on
      earnings. SFAS No. 157 is effective for financial statements issued in fiscal
      years beginning after November 15, 2007 and to interim periods within those
      fiscal years. The adoption of this SFAS has not had a material change on the
      Company’s results of operations, financial position, or cash flows.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities-Including an Amendment of FASB No.
      115”. This statement permits entities to choose to measure many financial
      instruments and certain other items at fair value. This statement is effective
      for years beginning after November 15, 2007. Management believes the adoption
      will not have a material impact on the Company’s results of operations,
      financial position or cash flow.





Concentrations





The
      Company’s cash balances on deposit with banks are guaranteed by the Federal
      Deposit Insurance Corporation up to $100,000. The Company may be exposed to
      risk
      for the amounts of funds held in one bank in excess of the insurance limit.
      In
      assessing the risk, the Company’s policy is to maintain cash balances with high
      quality financial institutions. The Company had cash balances in excess of
      the
      $100,000 guarantee during the nine months ended September 30, 2007.





During
      the three months ended September 30, 2007 and 2006, the Company had two
      customers, which accounted for approximately 40% and 29% and 42% and 21% of
      sales, respectively. No other customers accounted for more than 10% of sales
      in
      either year.





During
      the nine months ended September 30, 2007 and 2006, the Company had two
      customers, which accounted for approximately 38% and 15% and 45% and 19% of
      sales, respectively. No other customers accounted for more than 10% of sales
      in
      either year. As of September 30, 2007, the Company had approximately $682,000
      and $339,000, respectively, of accounts receivable from these
      customers.




-7-


2.  Inventory




Inventory
      consists of the following at:





September
                30,
              2007
            
            December
                31,
              2006Raw
                Materials
            
            $
            1,289,813
            
            $
            593,458Finished
                Goods
            
            
            2,002,907
            
            
            917,772$
            3,292,720
            
            $
            1,511,230




3.      Long term debt





In
      February 2007, the Company originated a note payable with a bank in the amount
      of $130,000. The note matures in February 2008. The note requires 11 principal
      payments of $2,167 and one final payment in February 2008 of $106,674. The
      note
      carries a 5.50% interest rate and is secured by a certificate of deposit with
      the bank in the amount of $130,000. The bank may offset the certificate of
      deposit against the loan balance and the monies cannot be withdrawn until the
      loan is repaid in full. As of September 30, 2007, this loan had been paid in
      full and the certificate of deposit had been released of any
      restrictions.





In
      January and February 2007, the Company originated two car loans for $33,276.
      The
      loans have interest rates ranging from 8.85% to 9.4%. The loans have monthly
      payments of approximately $298 and $352 and mature in 2012 and 2013,
      respectively. As of September 30, 2007, these loans had been paid in
      full.





4.           Stockholders’
Equity





From
      May
      25, 2007 through June 15, 2007, the Company 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 the Company. The
      Company 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.




From
      April 1, 2007 through June 30, 2007, the following additional activity occurred
      with respect to our stockholders’ equity: 40,000 shares of common stock were
      issued from the exercise of 40,000 warrants and the Company received $105,000
      upon their conversion; 3,400 shares of preferred stock were converted into
      13,600 shares of common stock in accordance with the conversion privileges
      of
      certain preferred stockholders; 440 shares of common stock were issued to
      employees as a bonus; and 3,820 shares of common stock were issued in payment
      of
      the $27,770 preferred stock dividend payable June 30, 2007.





From
      July
      1, 2007 through September 30, 2007, the following additional activity occurred
      with respect to our stockholders’ equity: 20,000 shares of common stock were
      issued from the exercise of 20,000 warrants and the Company received $60,000
      upon their conversion; and 6,419 shares of preferred stock were converted into
      25,676 shares of common stock in accordance with the conversion privileges
      of
      certain preferred stockholders.




-8-


5.      Stock Based Compensation





The
      impact on our results of operations of recording stock-based compensation for
      the three-month period ended September 30, 2007 and 2006 was to increase selling
      expenses by $103,376 and $0, respectively, and increase general and
      administrative expenses by $19,500 and $0, respectively.




The
      impact on our results of operations of recording stock-based compensation for
      the nine-month period ended September 30, 2007 and 2006 was to increase selling
      expenses by $145,296 and $0, respectively, and increase general and
      administrative expenses by $26,000 and $0, respectively. As of September 30,
      2007, the Company has unvested options of 469,000, which will be reflected
      as
      compensation cost of approximately $1,902,826 over the remaining vesting period
      of five years.




We
      calculated the fair value of each option award on the date of grant using the
      Black-Scholes option pricing model. The following weighted average assumptions
      were used for the nine months ended September 30, 2007:





Risk-free
                interest rate
            
            
            4.49
            %Expected
                lives (in years)
            
            
            5.00Dividend
                yield
            
            
            0
            %Expected
                volatilty
            
            
            70
            %





Expected
      volatility is based on the volatilities of public entities which are in the
      same
      industry as the Company. For purposes of determining the expected life of the
      option, the full contract life of the option is used. The risk-free rate for
      periods within the contractual life of the options is based on the U. S.
      Treasury yield in effect at the time of the grant.




The
      following table summarizes stock option activity for the nine months ended
      September 30, 2007:




Shares
            
            Weighted
                Average Exercise Price
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
                (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at January 1, 2007
            
            
            363,500
            
            $
            3.84
            
            
            -
            
            
            -Granted
            
            
            424,000
            
            $
            7.52
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            (40,000
            )
            $
            3.50Outstanding
                at September 30, 2007
            
            
            747,500
            
            $
            5.95
            
            
            3.94
            
            $
            1,208,725Exercisable
                at September 30, 2007
            
            
            278,500
            
            $
            3.79
            
            
            2.76
            
            $
            906,925





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. The weighted average exercise price of stock
      options granted during the period was $7.52 per share and the related
      weighted average grant date fair value was $4.62 per share.




-9-





The
      Company calculated the fair value of each warrant award on the date of grant
      using the Black-Scholes option pricing model. The following weighted average
      assumptions were used for the nine months ended September 30, 2007:





Risk-free
                interest rate
            
            
            5.10
            %Expected
                lives (in years)
            
            
            5Dividend
                yield
            
            
            0
            %Expected
                volatilty
            
            
            70
            %





Expected
      volatility is based on the volatilities of public entities which are in the
      same
      industry as the Company. For purposes of determining the expected life of the
      warrant, the full contract life of the warrant is used. The risk-free rate
      for
      periods within the contractual life of the options is based on the U. S.
      Treasury yield in effect at the time of the grant.




The
      following table summarizes warrant activity for the nine months ended September
      30, 2007 :





Shares
            
            Weighted
                Average Exercise Price
            
            Weighted-Average
              Remaining
                Contractual
              Term
                (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at January 1, 2007
            
            
            813,241
            
            $
            3.74
            
            
            -
            
            
            -Issued
            
            
            914,995
            
            $
            7.34
            
            
            -
            
            
            -Exercised
            
            
            (60,000
            )
            $
            2.75
            
            
            -
            
            
            -Outstanding
                at September 30, 2007
            
            
            1,668,236
            
            $
            5.75
            
            
            3.59
            
            $
            2,508,902Exercisable
                at September 30, 2007
            
            
            1,468,236
            
            $
            5.63
            
            
            3.51
            
            $
            2,418,902




The
      warrants granted in 2007 were granted in connection with our private placement,
      see note 4, and were fully vested at issuance on June 15, 2007 and expire in
      June 2012. The weighted average exercise price of the warrants was $7.34. The
      weighted average issue date fair value was $4.26 per warrant, resulting in
      an aggregate fair value of $3,091,779. The accounting affect of this is to
      both
      include and deduct the amount from additional paid in capital. All of the
      warrants issued to the investors, 749,995 warrants, include a call provision
      which the Company may exercise and will require the warrant holder, within
      20
      days written notice of the call provision being exercised by the Company, to
      exercise the warrants or have them expire. The Company may exercise its call
      provision anytime the Company’s common stock closes at or above $10.00 per share
      for a period of 10 consecutive trading days.




5.      Subsequent Event





In
      October 2007, pursuant to conversion of 500 shares of Series A Preferred stock,
      the Company issued 2,000 shares and paid a consultant 1,000 shares of its common
      stock for services rendered valued at $73,000. In October 2007, options to
      purchase 50,000 shares of common stock were issued to an employee at an exercise
      price of $7.30 per share.




-10-


Item
      2.
      Management’s Discussion and Analysis or Plan of Operation





*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our financial statements and
      the
      related notes appearing elsewhere in this report. This discussion and analysis
      may contain forward-looking statements based on assumptions about our future
      business. Our actual results could differ materially from those anticipated
      in
      these forward-looking statements as a result of certain factors, including
      but
      not limited to those set forth under “Risk Factors included in our Annual Report
      on Form 10-KSB for the year ended December 31, 2006.*





**Overview**





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





·
            Reed’s
                Ginger Brews,


·
            Virgil’s
                Root Beer and Cream Sodas,


·
            China
                Colas,


·
            Reed’s
                Ginger Juice Brews,


·
            Reed’s
                Ginger Candies, and


·
            Reed’s
                Ginger Ice Creams




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




The
      following table shows a breakdown of net sales with respect to our distribution
      channels for the fiscal years set forth in the table:




Direct
                sales to large retailer accounts
            
            
            %
                of total sales
            
            
            Local
                direct distribution
            
            
            %
                of total sales
            
            
            Natural,
                gourmet and mainstream distributors
            
            
            %
                of total
            
            
            Total
                sales2006
            
            $
            1,853,439
            
            
            18
            
            $
            1,039,966
            
            
            10
            
            $
            7,590,948
            
            
            72
            
            $
            10,484,3532005
            
            
            1,536,896
            
            
            16
            
            
            751,999
            
            
            8
            
            
            7,181,390
            
            
            76
            
            
            9,470,2852004
            
            
            1,983,598
            
            
            22
            
            
            395,601
            
            
            4
            
            
            6,599,166
            
            
            74
            
            
            8,978,365




Historically,
      we have focused our marketing efforts on natural and gourmet food stores. More
      recently, we have expanded our marketing efforts to include more mainstream
      markets. These efforts included selling our products directly to:





·
            large
                retail accounts, such as Costco, BJ Wholesale, and Cost Plus World
                Markets, and


·
            the
                natural food section of mainstream national supermarket chains, such
                as
                Safeway, Kroger’s, Ralph’s and
                Albertsons.




-11-




In
      addition, we have introduced new products that include specialty beverage
      packaging options not typically available in the marketplace that have
      contributed to our growth in sales. These products include Virgil’s Cream Soda
      in a 12 ounce bottle, 5-liter “party keg” version of our Virgil’s Root Beer and
      Virgil’s Cream Soda and 750 ml. size bottles of our Reed’s Original Ginger Brew,
      Extra Ginger Brew and Spiced Apple Brew. In addition, in 2007, we launched
      Virgil’s Black Cherry Cream Soda and diet versions of Virgil’s Root Beer, Cream
      Soda and Black Cherry Cream Soda.




We
      gauge
      the financial success of our company using a number of different parameters.
      Because our industry typically values companies on a top-line basis, one of
      our
      main company goals is to increase net sales. Our net sales have increased each
      year during the period from 2002 to 2006, as follows:





2002
            
            2003
            
            2004
            
            2005
            
            2006Net
                sales
            
            $
            6,400,000
            
            $
            6,800,000
            
            $
            9,000,000
            
            $
            9,500,000
            
            $
            10,500,000




For
      the
      nine months ended September 30, 2007, our sales increased approximately
      $2,453,000 over the comparable period of the prior year, from approximately
      $7,913,000 to approximately $10,366,000.




We
      believe that the increase in net sales over this period comes from two
      factors:





·
            increases
                in our core of national distribution to natural and gourmet food
                stores
                and mainstream supermarket chains, and increases in the mainstream
                distribution of our products. These include new distribution relationships
                in the following areas: Washington state, Oregon, New York, Massachusetts,
                New Hampshire, Connecticut, Pennsylvania, Ohio, Michigan, Minnesota
                and
                Colorado. We also are starting up a co branded marketing plan with
                these
                new distributors in these areas of the country. We hope to establish
                a
                sales force to cultivate and generate sales for these new distributorship
                relationships and other key geographic areas, as we identify them,
                by the
                end of 2008, and


·
            increases
                in our direct sales to large
                retailers.





Almost
      as
      important as increasing our net sales, is increasing our gross margin. We
      continue to work to reduce costs related to production of our products. However,
      while gross margins have increased, we have encountered difficulties in
      increasing our gross margins  due
      to
      certain factors, including:





·
            inefficiencies
                relating to the operation of the Brewery, our West Coast production
                facility, and


·
            higher
                freight, glass and production expenses due to the increase in the
                cost of
                fuel and increases in the price of ingredients in our
                products.




In
      2002,
      we purchased and outfitted the Brewery, in part to help reduce both production
      costs and freight costs associated with our west coast sales. Gross margins
      decreased from 24.8% in 2002 to 19.5% in 2003 as a principal result of the
      start-up of the Brewery. Gross margins increased to 20.9% in 2004 as a principal
      result of attaining greater functionality and efficiencies in our operation
      of
      the Brewery by our own personnel and being able to produce and ship products
      in
      the western half of the United States from a west coast facility. However,
      in
      2005, gross margins decreased to 18.2% as a principal result of increases in
      fuel prices, which put downward pressure on our margins due to increased freight
      expenses and increased glass and production costs, both of which are sensitive
      to fuel costs. In February 2006, we decided to raise our prices on the Ginger
      Brew line for the first time in 16 years. In 2006, gross margins recovered
      to
      19.6% partially as a result of a price increase on our core Reed’s Ginger Brew
      line and offset by increased pressure from more expensive production,
      ingredients and packaging expenses due to fuel related price increases. For
      the
      nine months ended September 30, 2007, our gross margins were 19.5% as compared
      to 18.9% for the nine months ended September 30, 2006.




-12-





Production
      costs are a significant portion of our “cost of goods” and a major factor in
      determining our gross margins. Greater production volumes increase our ability
      to negotiate more favorable production costs. We are attempting to negotiate
      production arrangements with third parties that may result in production costs
      savings, which, if successful, would improve our gross margins. In addition,
      our
      west coast Brewery facility is running at 50% of capacity. We have had
      difficulties with the flavor of our Ginger Brew products produced at the
      Brewery. As a result, we continue to supply our Ginger Brew products at the
      Brewery from our east coast co-packing facility, thereby causing us to incur
      increased freight and warehousing expenses on our products. Management is
      committed to selling a high quality, great tasting product and has elected
      to
      continue to sell certain of our Ginger Brew products produced from our east
      coast facility on the west coast, even though it negatively impacts our gross
      margins. We believe that increased production of our Virgil’s product line
      (non-Ginger Brew) has increased utilization of operating capacity at the
      Brewery. As we are able to more fully utilize the Brewery, we believe that
      we
      will experience improvements in gross margins due to freight and production
      savings. We are continuing to improve the Brewery’s operations and to work on
      the issue of our Ginger Brew product flavoring. In the nine months ended
      September 30, 2007, we expended approximately $195,000 for a conveyor system
      and
      pasteurizer to improve our packaging line and 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 agreed to issue, 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 the Company. The Company
      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.





Trends,
      Risks, Challenges, Opportunities That May or Are Currently Affecting Our
      Business





Our
      main
      challenges, trends, risks and opportunities that could affect or are affecting
      our financial results include but are not limited to:




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





**Low
      Carbohydrate Diets and Obesity** -
      Our
      products are not geared for the low carbohydrate market. Consumer trends have
      reflected higher demand for lower carbohydrate products. Despite this trend,
      we
      achieved an increase in our sales growth in 2006. We monitor these trends
      closely and have recently launched diet versions of our Virgil’s Root Beer,
      Cream Soda and Black Cherry Cream Soda.




-13-





**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.





**Consumer
      Demanding More Natural Foods** - The
      rapid growth of the natural foods industry has been fueled by the growing
      consumer awareness of the potential health problems due to the consumption
      of
      chemicals in the diet. Consumers are reading ingredient labels and choosing
      products based on them. We design products with these consumer concerns in
      mind.
      We feel this trend toward more natural products is one of the main trends behind
      our growth. Recently, this trend in drinks has not only shifted to products
      using natural ingredients, but also to products with added ingredients
      possessing a perceived positive function like vitamins, herbs and other
      nutrients. Our ginger-based products are designed with this consumer demand
      in
      mind.





**Supermarket
      and Natural Food Stores** - More
      and more supermarkets, in order to compete with the growing natural food
      industry, have started including natural food sections. As a result of this
      trend, our products are now available in mainstream supermarkets throughout
      the
      United States in natural food sections. Supermarkets can require that we spend
      more advertising money and they sometimes require slotting fees. We continue
      to
      work to keep these fees reasonable. Slotting fees in the natural food section
      of
      the supermarket are generally not as expensive as in other areas of the
      store.





**Beverage
      Packaging Changes** -
      Beverage packaging has continued to innovate, particularly for premium products.
      There is an increase in the sophistication with respect to beverage packaging
      design. While we feel that our current core brands still compete on the level
      of
      packaging, we continue to experiment with new and novel packaging designs such
      as the 5-liter party keg and 750 ml. champagne style bottles. We have further
      plans for other innovative packaging designs.





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




**Cash
      Flow Requirements** - Our
      growth will depend on the availability of additional capital infusions. We
      have
      a financial history of losses and are dependent on non-banking sources of
      capital, which tend to be more expensive and charge higher interest rates.
      In
      addition, our initial public offering, subsequent private placement and our
      outstanding options and warrants, while providing capital, also dilute the
      ownership of common stockholders. 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. Our use of lines of credit have been reduced with the capital raised
      from our initial public offering and subsequent private placement of common
      stock.




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.




-14-





*Trademark
      License and Trademarks* .
      Trademark license and trademarks primarily represent the costs we pay for
      exclusive ownership of the Reed’s® registered trademark in connection with the
      manufacture, sale and distribution of beverages and water and non-beverage
      products. We also own the China Cola® and Virgil’s® registered trademarks. 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, 2007 or 2006.





*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, 2007
      or
      2006.





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 estimated impact on
      our
      future cash flows.




-15-





*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.




-16-


*Results
      of Operations*





*Three
      Months Ended September 30, 2007 Compared to Three Months Ended September 30,
      2006*




Net
      sales
      increased by $1,105,373 or 39.8%, from $2,775,955 in the three months ended
      September 30, 2006 to $3,881,328 in the three months ended September 30, 2007.
      The increase in sales was primarily due to an increase in sales of our Virgil’s
      product line of Root Beer and Cream Soda and our Reed’s Ginger Brew and Candy
      product lines.





Sales
      of
      our Virgil’s product line increased by $809,000, or 82.3%, from approximately
      $983,000 to $1,792,000. We realized a 68.3% increase in sales for Virgil’s Root
      Beer and a 119.7% increase in our Virgil’s Cream Soda products. We released a
      line of our Virgil’s diet sodas in 2007, resulting in approximately $76,000 of
      sales in the three months ended September 30, 2007. Virgil’s diet Root Beer soda
      comprised approximately $43,000 of the sales of our diet Virgil’s products. Of
      the increase in Virgil’s products, sales of five liter kegs represented an
      increase of approximately $120,000, or 107.1%, from $112,000 in the three months
      ended September 30, 2006 to $232,000 in the three months ended September 30,
      2007.





Sales
      of
      our Reed’s Ginger Brew product line increased by 14.9%, or $226,000, from
      $1,513,000 in the three months ended September 30, 2006 to $1,739,000 in the
      three months ended September 30, 2007. We realized an increase in sales of
      our
      Reed’s Ginger Brew and Spiced Apple products, including an increase of 10.4%
      increase in sales of our Original Ginger Brew, a 10.8% increase in sales of
      our
      Extra Ginger Brew and a 9.8% increase in sales of our Premium Ginger Brew.
      Our
      Reed’s Cherry Ginger Brew, Raspberry Ginger Brew and Spiced Apple soda
      collectively realized a 28.1% increase of sales.





Candy
      sales increased by $69,000, or 43.1%, from $160,000 in the three months ended
      September 30, 2006 to $229,000 in the three months ended September 30, 2007.
      Ice
      cream sales in the three months ended September 30, 2007 were $39,000, and
      remained relatively constant from the same period in 2006, but represent less
      than 1% of our total sales.





The
      product mix for our two most significant product lines, Reed’s Ginger Brews and
      Virgil’s sodas, for the three months ended September 30, 2007 was 45% and 46%,
      respectively, of total sales. The product mix for our Reed’s Ginger Brews and
      Virgil’s sodas for the three months ended September 30, 2006 was 54% and 35%,
      respectively, of total sales.




Cost
      of
      sales increased by $944,453, or 44.2%, from $2,138,602 in the three months
      ended
      September 30, 2006 to $3,083,055 in the three months ended September 30, 2007.
      As a percentage of net sales, cost of sales increased from 77.0% in the three
      months ended September 30, 2006 to 79.4% in the three months ended September
      30,
      2007.




Gross
      profit increased by $160,920, or 25.2%, from $637,353 in the three months ended
      September 30, 2006 to $798,273 in the three months ended September 30, 2007.
      As
      a percentage of net sales, gross profit decreased from 23.0% in the three months
      ended September 30, 2006 to 20.6% in the three months ended September 30, 2007.
      Our product mix and reduced freight costs resulted in the improvement in
      margins. However, in July 2007, some of the favorable results to gross margin
      were partially offset by our main co-pack production facility’s increase in
      prices. We are looking at alternative co-pack production plants to reduce
      production costs, our largest expense, and hope to reach arrangements with
      alternative co-pack facilities by the end of the first quarter of
      2008.




Operating
      expenses increased by $1,392,604, or 150.4%, from $926,119, in the three months
      ended September 30, 2006 to $2,318,723 in the three months ended September
      30,
      2007. Operating expenses increased as a percentage of net sales from 33.4%
      in
      the three months ended September 30, 2006 to 59.7% in the three months ended
      September 30, 2007. The increase was primarily due to an increase in selling
      costs and general and administrative costs. Selling costs increased $1,199,864,
      or 294.8%, from $407,074 for three months ended September 30, 2006 to $1,606,938
      for the three months ended September 30, 2007. Our focus on increasing revenues
      and diversifying our customer base from a high concentration of natural food
      marketplace to more mainstream and mass-merchants has increased our selling
      costs. Sales salaries and commissions for the three months ended September
      30,
      2007 was $911,000, compared to $238,000 for the three months ended September
      30,
      2006, or an increase of $673,000, or 282.7%. This increase resulted from
      increases in salaries and benefits for new sales and sales support staff and
      the
      related non-recurring costs of their recruitment and non-cash costs of employee
      stock options. Promotion expenses increased $292,000, or 297.9%, from $98,000
      in
      the three months ended September 30, 2006 to $390,000 for the three months
      ended
      September 30, 2007. The increase was mainly due to a tour to demonstrate and
      sell our products with various Costco stores during the summer months in 2007
      in
      an effort to promote our brand and products to a wider audience of consumers.
      Selling expenses increased to $306,000 in the three months ended September
      30,
      2007, or by $232,000, 315%, from $74,000 in the three months ended September
      30,
      2006. This increase was mainly due to increased travel related costs to
      cultivate relationships with new and recently signed distributors and retailers
      in support of the strategy to expand our brand and channels. General and
      administrative costs increased $192,740, or 37.1%, from $519,045 in the three
      months ended September 30, 2006 to $711,785 for the three months ended September
      30, 2007. The increase was due to increased legal and accounting expenses
      associated with being a public company and costs of additional support in the
      form of personnel and computer systems to support the new sales and production
      efforts. These increased costs also included non-cash costs of employee stock
      options. The increase would have been higher but for the one-time charge in
      2006
      of $291,000 related to a rescission offer in connection with our recent initial
      public offering.




-17-




Interest
      expense decreased by $60,790, or 54.2%, from $112,197 in the three months ended
      September 30, 2006 to $51,407 in the three months ended September 30, 2007.
      Interest income increased from $0 in the three months ended September 30, 2006
      to $45,898 in the three months ended September 30, 2007. The decrease in
      interest expense was principally due to the reduction of certain outstanding
      loans in the fourth quarter of 2006. The increase in interest income and other
      income was due to interest earned from a higher cash balance in 2007 compared
      to
      the same period in 2006.




As
      a
      result of the foregoing, we experienced a net loss of $1,525,959 in the three
      months ended September 30, 2007 compared to a net loss of $400,963 in the three
      months ended September 30, 2006. Our net loss attributable to common
      stockholders was $(0.18) per share for the three months ended September 30,
      2007
      and $(0.08) per share for the three months ended September 30, 2006.





*Nine
      months Ended September 30, 2007 Compared to nine months Ended September 30,
      2006*




Net
      sales
      increased by $2,453,333 or 31.0%, from $7,913,045 in the nine months ended
      September 30, 2006 to $10,366,378 in the nine months ended September 30, 2007.
      The increase in sales was primarily due to an increase in sales of our Virgil’s
      product line of Root Beer and Cream Soda and our Reed’s Ginger Brew and Candy
      product lines.





Sales
      of
      our Virgil’s product line increased by 66.1% from $2,710,000 to $4,499,000. We
      realized a 62.4% increase in sales for Virgil’s Root Beer and a 72.9% increase
      in our Virgil’s Cream Soda products. We released a line of our Virgil’s diet
      sodas in 2007, resulting in approximately $220,000 of sales for the nine months
      ending September 30, 2007. Virgil’s diet Root Beer soda comprised approximately
      $77,000 of the sales of our diet Virgil’s products. Of the increase in Virgil’s
      products, sales of five liter kegs represented an increase of approximately
      $418,000, or 198.3%, from $211,000 in the nine months ended September 30, 2006
      to $629,000 in the nine months ended September 30, 2007.





Sales
      of
      our Reed’s Ginger Brew product line increased by 12.1% from $4,301,000 in the
      nine months ended September 30, 2006 to $4,820,000 in the nine months ended
      September 30, 2007. We realized an increase in sales of our Reed’s Ginger Brew
      and Spiced Apple products, including an increase of 7.4% increase in sales
      of
      our Original Ginger Brew, a 11.8% increase in sales of our Extra Ginger Brew
      and
      a 7.9% increase in sales of our Premium Ginger Brew. Our Reed’s Cherry Ginger
      Brew, Raspberry Ginger Brew and Spiced Apple soda collectively realized a 24.0%
      increase of sales.





-18-





Candy
      sales increased by $100,000, or 17.8%, from $563,000 in the nine months ended
      September 30, 2006 to $663,000 in the nine months ended September 30, 2007.
      Ice
      cream sales in the nine months ended September 30, 2007 were $105,000, and
      remained relatively constant from the same period in 2006, but represent less
      than 1% of our total sales.




The
      product mix for our two most significant product lines, Reed’s Ginger Brews and
      Virgil’s sodas, for the nine months ended September 30, 2007 was 46% and 43%,
      respectively, of total sales. The product mix for our Reed’s Ginger Brews and
      Virgil’s sodas for the three months ended September 30, 2006 was 54% and 34%,
      respectively, of total sales.





Cost
      of
      sales increased by $1,930,712, or 30.1%, from $6,417,343 in the nine months
      ended September 30, 2006 to $8,348,055 in the nine months ended September 30,
      2007. As a percentage of net sales, cost of sales decreased from 81.1% in the
      nine months ended September 30, 2006 to 80.5% in the nine months ended September
      30, 2007.




Gross
      profit increased by $522,621 or 34.9% from $1,495,702 in the nine months ended
      September 30, 2006 to $2,018,323 in the nine months ended September 30, 2007.
      As
      a percentage of net sales, gross profit increased from 18.9% in the nine months
      ended September 30, 2006 to 19.5% in the nine months ended September 30, 2007.
      Our product mix and reduced freight costs resulted in the improvement in
      margins. However, in July 2007, some of the favorable results to gross margin
      were partially offset by our main co-pack production facility’s increase in
      prices. We are looking at alternative co-pack production plants to reduce
      production costs, our largest expense and hope to reach arrangements with
      alternative co-pack facilities by the end of the first quarter of
      2008.




Operating
      expenses increased by $2,117,535 or 83.3% from $2,542,948, in the nine months
      ended September 30, 2006 to $4,660,483 in the nine months ended September 30,
      2007. Operating expenses increased as a percentage of net sales from 32.1%
      in
      the nine months ended September 30, 2006 to 45.0% in the nine months ended
      September 30, 2007. The increase was primarily due to an increase in selling
      costs and general and administrative costs. Selling costs increased $2,041,514,
      or 202.6% from $1,007,693 for the nine months ended September 30, 2006 to
      $3,049,207 for the nine months ended September 30, 2007. Our focus on increasing
      revenues and diversifying our customer base to more mainstream and mass
      merchants has increased our selling costs. Sales salaries and commissions for
      the nine months ended September 30, 2007 were $1,751,000 compared to $640,000
      for the nine months ended September 30, 2006, or an increase of $1,111,000
      or
      173.6%. This increase resulted from an increase in salaries and benefits for
      new
      sales and sales support staff and the non-recurring costs of their recruitment
      and non-cash costs of their employee stock options granted. Promotion expenses
      increased $552,000, or 303.3%, from $182,000 in the nine months ended September
      30, 2006 to $734,000 for the nine months ended September 30, 2007. The increase
      was mainly due to a tour to demonstrate and sell our products with various
      Costco stores during the summer months in 2007 in an effort to promote our
      brand
      and products to a wider audience of consumers. Selling expenses increased to
      $480,000 in the nine months ended September 30, 2007 or by $292,000 or 155.3%
      from $188,000 in the nine months ended September 30, 2006. This increase was
      mainly due to increased travel related costs to cultivate relationships with
      new
      and recently signed distributors and retailers in support of the strategy to
      expand our brand and channels. General and administrative costs increased
      $76,021, or 5.0%, from $1,535,255 in the nine months ended September 30, 2006
      to
      $1,611,276 for the nine months ended September 30, 2007. The increase was due
      to
      increased professional fees such as legal and accounting expenses associated
      with being a public company, additional support in the form of personnel and
      computer systems to support the new sales and production efforts. These costs
      also included the non-cash cost of employee stock options. The increase would
      have been higher but for the one-time charge in 2006 of $660,000 related to
      a
      rescission offer in connection with our recent initial public
      offering.




Interest
      expense decreased by $147,261, or 47.4%, from $310,551 in the nine months ended
      September 30, 2006 to $163,290 in the nine months ended September 30, 2007.
      Interest income increased from $0 in the nine months ended September 30, 2006
      to
      $98,498 in the nine months ended September 30, 2007. The decrease in interest
      expense was due principally due to the reduction of certain outstanding loans
      in
      the fourth quarter of 2006. The increase in interest income and other income
      was
      due to interest earned from a higher cash balance in 2007 compared to the same
      period in 2006.




-19-




As
      a
      result of the foregoing, we experienced a net loss of $2,706,952 in the nine
      months ended September 30, 2007 compared to a net loss of $1,357,797 in the
      nine
      months ended September 30, 2006. Our net loss attributable to common
      stockholders was $(0.35) per share for the nine months ended September 30,
      2007
      and $(0.26) per share for the nine months ended September 30, 2006, inclusive
      of
      the value of our preferred stock dividend.





*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, 2007, we had an accumulated deficit of $8,236,864 and we had
      working capital of $5,601,953, compared to an accumulated deficit of $5,502,142
      and working capital of $2,834,940 as of December 31, 2006. Cash and cash
      equivalents were $2,399,060 as of September 30, 2007, as compared to $1,638,917
      as of December 31, 2006. This increase in our working capital and cash position
      was primarily attributable to the completion of our private
      placement ** in
      the
      second quarter of 2007. In addition to our cash position, we have availability
      under our lines of credit of approximately $751,000.





Net
      cash
      used in operating activities during the nine months ended September 30, 2007
      was
      $4,237,905 which was due primarily to our net loss of $2,706,952, net increases
      in our accounts receivable, inventory and other receivables, net of a decrease
      in accounts payable.




In
      the
      nine months ended September 30, 2007, we used $1,265,709 of cash in investing
      activities, which was due primarily to the purchase of a building and various
      equipment to support business growth, net of the release of restricted cash
      used
      as collateral for a line of credit that we paid in full and an unsecured loan
      of
      $300,000 to an unrelated third party.




-20-




Net
      cash
      provided by financing activities during the nine months ended September 30,
      2007
      was $6,299,757. The primary components of that were: the proceeds of our
      private placement of $9,000,000 and proceeds from the exercise of common
      stock purchase warrants of $165,000, which were partially offset by related
      expenses directly associated with the private placement, and payments of our
      lines of credit.




As
      of
      September 30, 2007, we had no outstanding borrowings under our lines of credit
      agreements:





·
            We
                have an unsecured $50,000 line of credit with US Bank which expires
                in
                December 2009. Interest is payable monthly at the prime rate, as
                published
                in the Wall Street Journal, plus 12% per annum. Our outstanding balance
                was $-0- at September 30, 2007 and there was $50,000 available under
                the
                line of credit. The interest rate in effect at September 30, 2007
                was
                20.25%.




·
            We
                have a line of credit with Merrill Lynch. Robert T. Reed, Jr., our
                Vice
                President and National Sales Manager - Mainstream and a brother of
                our
                Chief Executive Officer, Christopher J. Reed, has pledged certain
                securities (which do not include any of our securities which are
                owned by
                Mr. Reed) in his personal securities account on deposit with Merrill
                Lynch
                as collateral for repayment of the line of credit. The amount of
                the line
                of credit is based on a percentage value of such securities. At September
                30, 2007, the outstanding balance on the line of credit was $-0-,
                and
                there was approximately $701,000 available under the line of credit.
                The
                line of credit bears interest at a rate of 3.785% per annum plus
                LIBOR
                (9.06% as of September 30, 2007). In consideration for Mr. Reed’s pledging
                his stock account at Merrill Lynch as collateral, we have agreed
                to pay
                Mr. Reed 5% per annum of the amount we borrow from Merrill Lynch,
                as a
                loan fee. In addition, Christopher J. Reed has pledged all of his
                shares
                of common stock to Robert T. Reed, Jr. as collateral for the shares
                pledged by Robert T. Reed, Jr.




In
      the
      nine months ended September 30, 2007, we expended approximately $195,000 for
      a
      conveyor system and pasteurizer to improve our packaging line and operations,
      but do not consider these improvements to have been a material capital
      expenditure for the purpose of improving plant capacity at the Brewery. In
      August 2007, we purchased the adjacent land and building to our Los Angeles
      location for approximately $1,730,000 in cash. We use the facility to store
      some
      of our finished goods inventory. No major renovations were needed to be made
      to
      the property in order for us to attain the intended use of the
      property.




Management
      recognizes that operating losses negatively impact liquidity and is working
      on
      decreasing operating losses, while focusing on increasing net sales. Management
      believes that our current cash position and lines of credit will be sufficient
      to enable us to meet our cash needs through at least the second quarter of
      2008.




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.




-21-




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,


·
            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





In
      September 2006, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standard (SFAS) No. 157, "Fair Value Measurements,"
      which provides enhanced guidance for using fair value to measure assets and
      liabilities. SFAS No. 157 provides a common definition of fair value and
      establishes a framework to make the measurement of fair value in generally
      accepted accounting principles more consistent and comparable. SFAS No. 157
      also
      requires expanded disclosures to provide information about the extent to which
      fair value is used to measure assets and liabilities, the methods and
      assumptions used to measure fair value, and the effect of fair value measures
      on
      earnings. SFAS No. 157 is effective for financial statements issued in fiscal
      years beginning after November 15, 2007 and to interim periods within those
      fiscal years. The adoption of this SFAS has not had a material change on our
      results of operations, financial position, or cash flows.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities-Including an Amendment of FASB No.
      115”. This statement permits entities to choose to measure many financial
      instruments and certain other items at fair value. This statement is effective
      for years beginning after November 15, 2007. Management believes the adoption
      will not have a material impact on our results of operations, financial position
      or cash flow.





**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.
      Controls and Procedures




(a)
      Evaluation of Disclosure Controls and Procedures.





As
      of
      September 30, 2007, we carried out an evaluation, under the supervision and
      with
      the participation of our principal executive officer and principal financial
      officer, of the effectiveness of the design and effectiveness of our disclosure
      controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as amended).




-22-





Based
      on our evaluation, our chief executive officer and chief financial officer
      concluded that our disclosure controls and procedures are designed at a
      reasonable assurance level and are effective to provide reasonable assurance
      that information we are required to disclose in reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in Securities and Exchange Commission rules and
      forms, and that such information is accumulated and communicated to our
      management, including our chief executive officer and chief financial officer,
      as appropriate, to allow timely decisions regarding required
      disclosure.





(b)
      Changes in Internal Controls.





There
      were no changes in our internal controls over financial reporting during the
      quarter ended September 30, 2007 that materially affected, or are reasonably
      likely to materially affect, our internal controls over financial reporting.




-23-


**Part
      II OTHER INFORMATION**





Item
      1.
      Legal Proceedings





Reference
      is made to Item 3, part I, ***Legal
      Proceedings*** ,
      in our
      Annual Report on Form 10-KSB for the year ended December 31, 2006 for
      descriptions of our legal proceedings.





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
      2.
      Unregistered Sales of Equity Securities and Use of Proceeds





**Recent
      Sale of Unregistered Equity Securities**





In
      August
      2007, we issued 20,000 shares of common stock upon the exercise of outstanding
      warrants at an exercise price of $3.00, resulting in gross proceeds to us of
      $60,000. In September 2007, 4,619 shares of Series A preferred stock were
      converted into 25,676 shares of common stock. In October 2007, 500 shares of
      Series A preferred stock were converted into 2,000 shares of common stock.
      In
      October 2007, we issued 1,000 shares to a consultant for services rendered valued
      at
      $73,000 .





In
      the
      three months ended September 30, 2007, we issued 285,000 options to purchase
      shares of common stock to our employees, including 110,000 options under the
      2001 Stock Option Plan with an exercise price range of $7.80 to $10.01 per
      share, and 175,000 options outside of the 2001 Stock Option Plan with an
      exercise price of $8.50 per share. In October 2007, we issued 50,000 options
      to
      purchase shares of common stock to an employee with an exercise price of $7.30
      per share outside of the 2001 Stock Option Plan.





The
      securities were issued in reliance on exemptions from registration pursuant
      to
      Section 4(2) and Regulation D under the Securities Act.




-24-





Item
      3.
      Defaults Upon Senior Securities





Not
      applicable





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
            
            Certification
                by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200231.2
            
            Certification
                by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232
            
            Officer's
                Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002




-25-


**SIGNATURES**




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 J. ReedChristopher
                J. Reed
              Chief
                Executive Officer and PresidentNovember
                13, 2007




By 
              /s/ David M. KaneDavid
                M. Kane
              Chief
                Financial Officer
              
              
              November
                13, 2007




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