**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-QSB**





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT
                OF 1934




For
      the
      quarterly period ended June 30, 2006





Commission
      file number: 333-120451






**REED'S
      INC.**


(Exact
      name of registrant as specified in its charter)





Delaware


(State
      of
      incorporation)





95-4348325


(I.R.S.
      Employer Identification
      No.)





13000
      South Spring St.


Los
      Angeles, Ca. 90061


(Address
      of principal executive offices) (Zip Code)





(310)
      217-9400


(Registrant's
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yes 
      x No o





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





There
      were 5,335,482 shares of the registrant's common stock outstanding as of 
June 30, 2006.









**Part
      I - Financial Information**





**Item
      1. Financial Statements**




**REED’S,
      INC**




**CONDENSED
      BALANCE SHEETS**


**ASSETS**June
                30,2006
              (Unaudited)
            
            December
                31,
              2005**CURRENT
                ASSETS**Cash
            
            $
            54,768
            
            $
            27,744Inventory
            
            
            1,275,819
            
            
            1,208,019Trade
                accounts receivable, net of allowance for doubtful accounts and returns
                and discounts of $101,000 as of June 30, 2006 and $70,000 as of December
                31, 2005
            
            
            982,484
            
            
            534,906Other
                receivables
            
            
            6,267
            
            
            10,563Prepaid
                expenses
            
            
            106,311
            
            
            74,279


Total
                Current Assets
            
            
            2,425,649
            
            
            1,855,511Property
                and equipment, net of accumulated depreciation of $566,449 as of
                June 30,
                2006 and $508,136 as of December 31, 2005
            
            
            1,864,011
            
            
            1,885,354**OTHER
                ASSETS**Brand
                names
            
            
            800,201
            
            
            800,201Other
                intangibles, net of accumulated amortization of $4,095 as of June
                30, 2006
                and $3,723 as of December 31, 2005
            
            
            14,519
            
            
            14,891Deferred
                stock offering costs
            
            
            20,000
            
            
            356,238Total
                Other Assets
            
            
            834,720
            
            
            1,171,330**TOTAL
                ASSETS**
            
            **$**
            5,124,380
            
            $
            4,912,195**LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIENCY)****CURRENT
                LIABILITIES**Accounts
                payable
            
            $
            2,381,103
            
            $
            1,644,491Lines
                of credit
            
            
            1,463,461
            
            
            1,445,953Current
                portion of long term debt
            
            
            191,516
            
            
            169,381Accrued
                interest
            
            
            154,191
            
            
            136,240Accrued
                expenses
            
            
            75,769
            
            
            54,204Total
                Current Liabilities
            
            
            4,266,040
            
            
            3,450,269Loans
                payable, related party
            
            
            252,358
            
            
            252,358Long
                term debt, less current portion
            
            
            984,568
            
            
            1,060,573Total
                Liabilities
            
            
            5,502,966
            
            
            4,763,200**COMMITMENTS
                AND CONTINGENCIES****STOCKHOLDERS’
                EQUITY (DEFICIENCY)**Preferred
                stock, $10.00 par value, 500,000 shares authorized, 58,940
                outstanding
            
            
            589,402
            
            
            589,402Common
                stock, $.0001 par value, 11,500,000 shares authorized,
                5,335,482 shares issued and outstanding at June 30, 2006 and
                5,042,197 at December 31, 2005
            
            
            533
            
            
            503Common
                stock to be issued
            
            
            —
            
            
            29,470Additional
                paid in capital
            
            
            3,276,847
            
            
            2,788,683Accumulated
                deficit
            
            
            (4,245,368
            )
            
            (3,259,063
            )Total
                stockholders’ equity (deficiency)
            
            
            (378,586
            )
            
            148,995**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)**
            
            $
            5,124,380
            
            $
            4,912,195


See
      accompanying Notes to Condensed Financial Statements


-2-




**REED’S,
      INC.**




**CONDENSED
      STATEMENTS OF OPERATIONS**


**For
      the Three and Six Months Ended June 30, 2006 and 2005**


**(Unaudited)**


**Three
                months ended (Unaudited)**
            
            **Six
                months ended (Unaudited)****June
                30,**
            
            **June
                30,**
            
            **June
                30,**
            
            **June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****SALES**
            
            $
            3,157,818
            
            $
            2,582,273
            
            $
            5,137,089
            
            $
            4,399,608**COST
                OF SALES**
            
            
            2,589,864
            
            
            2,069,274
            
            
            4,278,741
            
            
            3,555,561**GROSS
                PROFIT**
            
            
            567,954
            
            
            512,999
            
            
            858,348
            
            
            844,047**OPERATING
                EXPENSES**Selling
            
            
            313,462
            
            
            236,218
            
            
            600,619
            
            
            521,116General &
                Administrative
            
            
            386,995
            
            
            244,502
            
            
            649,656
            
            
            456,599Expenses
                associated with rescission offer on prior sales of common
                stock
            
            
            351,757
            
            
            —
            
            
            351,757
            
            
            —Legal
                fees
            
            
            5,230
            
            
            —
            
            
            14,797
            
            
            —Total
                Operating Expenses
            
            
            1,057,444
            
            
            480,720
            
            
            1,616,829
            
            
            977,715**INCOME
                (LOSS) FROM OPERATIONS**
            
            
            (489,490
            )
            
            32,279
            
            
            (758,481
            )
            
            (133,668
            )**OTHER
                EXPENSES**Interest
                Expense
            
            
            (97,748
            )
            
            (90,327
            )
            
            (198,354
            )
            
            (161,534
            )**NET
                LOSS**
            
            
            (587,238
            )
            
            (58,048
            )
            
            (956,835
            )
            
            (295,202
            )Preferred
                stock dividend
            
            
            (29,470
            )
            
            (29,470
            )
            
            (29,470
            )
            
            (29,470
            )Net
                loss attributable to common shareholders
            
            $
            (616,708
            )
            $
            (87,518
            )
            $
            (986,305
            )
            $
            (324,672
            )**LOSS
                PER SHARE**—
                Basic and Diluted
            
            $
            (.12
            )
            $
            (.02
            )
            $
            (.19
            )
            $
            (.07
            )**WEIGHTED
                AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED**
            
            
            5,322,755
            
            
            4,812,710
            
            
            5,239,913
            
            
            4,769,640


See
      accompanying Notes to Condensed Financial Statements


-3-




**REED’S
      INC.**




**STATEMENT
      OF CHANGES IN STOCKHOLDERS’ EQUITY**  **(DEFICICENCY)**


For
      the
      six months ended June 30, 2006 (Unaudited)


Common
                Stock
            
            Common
              Stock
                to be
            
            Additional
                Paid in
            
            Preferred
                Stock
            
            AccumulatedShares
            
            Amount
            
            Issued
            
            Capital
            
            Shares
            
            Amount
            
            Deficit
            
            TotalBalance,
                January 1, 2006
            
            
            5,042,197
            
            $
            503
            
            
            29,470
            
            $
            2,788,683
            
            
            58,940
            
            $
            589,402
            
            $
            (3,259,063
            )
            $
            148,995Preferred
                Stock Dividend
            
            
            7,373
            
            
            1
            
            
            —
            
            
            29,469
            
            
            —
            
            
            —
            
            
            (29,470
            )
            
            —Common
                stock issued in connection with the June 30, 2005 preferred stock
                dividend
            
            
            7,362
            
            
            1
            
            
            (29,470
            )
            
            29,469
            
            
            —
            
            
            —
            
            
            —
            
            
            —Common
                stock issued for cash, net of offering costs
            
            
            278,550
            
            
            28
            
            
            —
            
            
            429,226
            
            
            —
            
            
            —
            
            
            —
            
            
            429,254Net
                Loss for the six months ended June 30, 2006
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (956,835
            )
            
            (956,835
            )Balance,
                June 30, 2006
            
            
            5,335,482
            
            $
            533
            
            $
            —
            
            $
            3,276,847
            
            
            58,940
            
            $
            589,402
            
            $
            (4,245,368
            )
            $
            (378,586
            )


See
      accompanying Notes to Condensed Financial Statements


-4-




**REED’S
      INC.**




**CONDENSED
      STATEMENTS OF CASH FLOWS**


**For
      the six months ended June 30, 2006 and 2005**


**(Unaudited)**


**Six
                  Months Ended**
                **(Unaudited)****June
                  30,**
                **2006**
              
              **June
                  30,**
                **2005****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  Loss
              
              $
              (956,835
              )
              $
              (295,202
              )Adjustments
                  to reconcile net loss to net cash used in operating activities:Depreciation
                  and amortization
              
              
              58,684
              
              
              46,610Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (447,578
              )
              
              (67,305
              )Inventory
              
              
              (67,800
              )
              
              103,424Prepaid
                  Expenses
              
              
              (32,032
              )
              
              (33,264
              )Other
                  receivables
              
              
              4,296
              
              
              (5,631
              )Accounts
                  payable
              
              
              736,612
              
              
              252,032Accrued
                  expenses
              
              
              21,565
              
              
              (6,684
              )Accrued
                  interest
              
              
              17,951
              
              
              3,932Net
                  cash used in operating activities
              
              
              (665,137
              )
              
              (2,088
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchase
                  of property and equipment
              
              
              (36,969
              )
              
              (31,754
              )Due
                  from director
              
              
              —
              
              
              (25,013
              )Net
                  cash used in investing activities
              
              
              (36,969
              )
              
              (56,767
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Repayment
                  of previous line of credit
              
              
              —
              
              
              (759,387
              )Borrowings
                  on new line of credit
              
              
              —
              
              
              1,109,543Borrowings
                  on debt
              
              
              —
              
              
              190,000Principal
                  payments on debt
              
              
              (53,870
              )
              
              (216,016
              )Proceeds
                  received on sale of common stock
              
              
              1,002,779
              
              
              —Payments
                  for stock offering costs
              
              
              (237,287
              )
              
              (134,481
              )Net
                  borrowing  on lines of credit
              
              
              17,508
              
              
              78,112Payments
                  of debt to related parties
              
              
              —
              
              
              (21,000
              )Net
                  cash provided by financing activities
              
              
              729,130
              
              
              246,771**NET
                  INCREASE****IN
                  CASH**
              
              
              27,024
              
              
              187,916**CASH —
                  Beginning of period**
              
              
              27,744
              
              
              42,488**CASH —
                  End of period**
              
              $
              54,768
              
              $
              230,404
  **Supplemental
                    Disclosures of Cash Flow Information**Cash
                    paid during the period for:Interest
                
                $
                180,403
                
                $
                157,602Taxes
                
                $
                —
                
                $
                —Noncash
                    Investing and Financing ActivitiesCommon
                    stock to be issued in settlement of accrued interest
                
                $
                —
                
                $
                5,250Common
                    stock to be issued in settlement of preferred stock
                    dividend
                
                $
                29,470
                
                $
                29,470Common
                    stock issued in settlement of preferred stock dividend
                
                $
                29,470
                
                $
                —Deferred
                    stock offering costs charged to paid in capital
                
                $
                356,238
                
                $
                —


See
      accompanying Notes to Condensed Financial Statements


-5-




**REED’S,
      INC.**




**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**


**June
      30, 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 June 30, 2006 and the results of operations and cash
      flows
      for the six months ended June 30, 2006 and 2005. The balance sheet as of
      December 31, 2005 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/A, as filed with the Securities and
      Exchange Commission on July 27, 2006.




The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities, disclosures of contingent
      assets and liabilities at the date of the financial statements, and the reported
      amounts of revenues and expense during the reporting period. Actual results
      could differ from those estimates.




The
      results of operations for the six months ended June 30, 2006 are not necessarily
      indicative of the results of operations to be expected for the full fiscal
      year
      ending December 31, 2006.




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 six month period ended June 30,
      2006
      and 2005, basic and diluted loss per share are the same because the inclusion
      of
      common share equivalents would be anti-dilutive .




Going
      Concern




The
      accompanying condensed financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate continuation of the Company as a going concern. However,
      the
      Company had a net loss of $956,835 and utilized cash of $665,137 in operating
      activities during the six months ended June 30, 2006, and had a working capital
      deficiency of $1,840,391and stockholders’ deficiency of $378,586 at June 30,
      2006. In addition, the Company may have committed a violation of securities
      law
      which may require the rescission of common stock issued in 2005 and 2006 in
      the
      aggregate of approximately $1,324,624, see Note 6. These factors raise
      substantial doubt about the Company's ability to continue as a going concern.
      The financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts, or amounts and
      classification of liabilities that might result from this uncertainty. The
      Company is conducting an initial public offering of its stock. The maximum
      amount of common stock to be sold is 2,000,000 shares at $4.00, of which 333,156
      has been sold as of April 7, 2006. Management has received enough interest
      in
      the offering which leads it to believe the maximum amount of the offering will
      be sold, however no assurance can be made that any additional shares will be
      sold as a result of the offering. See Note 5 for information related to the
      common stock offering.


-6-





Recent
      Accounting Pronouncements


In
      June 2005, the FASB issued SFAS 154, “Accounting Changes and Error
      Corrections,” a replacement of existing accounting pronouncements. SFAS 154
      modifies accounting and reporting requirements when a company voluntarily
      chooses to change an accounting principle or correct an accounting error. SFAS
      154 requires retroactive restatement of prior period financial statements unless
      it is impractical. Previous accounting guidelines allowed recognition by
      cumulative effect in the period of the accounting change. SFAS 154 is effective
      for accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005.




In
      February 2006, the FASB issued SFAS 155,“Accounting for Certain Hybrid Financial
      Instruments”, an amendment of SFAS 133 and 140. These SFAS’s deal with
      derivative and hedging activities, accounting for transfers and servicing of
      financial instruments and extinguishment of liabilities. SFAS 155 is effective
      for all financial instruments acquired or issued in an entity’s first fiscal
      year beginning after September 15, 2006. The Company does not engage in the
      activities described in these SFAS’s and does not have any intention of engaging
      in those activities when SFAS 155 becomes effective. The Company has evaluated
      the impact of the adoption of SFAS 155, and does not believe the impact will
      be
      significant to the Company's overall results of operations or financial
      position.





2.
            Concentrations





The
      Company’s cash balances on deposit with banks are guaranteed by the Federal
      Deposit Insurance Corporation up to $100,000. The Company may be exposed to
      risk
      for the amounts of funds held in one bank in excess of the insurance limit.
      In
      assessing the risk, the Company’s policy is to maintain cash balances with high
      quality financial institutions. The Company had cash balances in excess of
      the
      $100,000 guarantee during the six months ended June 30, 2006.




During
      the six months ended June 30, 2006 and 2005 the Company had two customers,
      which
      accounted for approximately 18% and 46 % and 15% and 46 % of sales, respectively
      . No other customers accounted for more than 10% of sales in either year. As
      of
      June 30, 2006, the Company had $101,562 and $328,636 , respectively of accounts
      receivable from these customers.


3.
              Inventory


Inventory
        consists of the following at June 30, 2006


Raw
                Materials
            
            $
            649,873Finished
                Goods
            
            
            625,946$
            1,275,819




4.
                Lines
                    of credit




In
      June
      2006, one of the Company’s lines of credit expired. The Company renewed this
      line of credit with its current lender. The renewal line of credit is secured
      by
      accounts receivable and inventory in the maximum amounts of $1,400,000. The
      borrowing base on the accounts receivable are 80% of all eligible receivables,
      which are primarily accounts receivables under 90 days. The inventory borrowing
      base is 50% of eligible inventory. The interest rate to be charged on these
      borrowings is Prime plus 4.00%. As of June 30, 2006, the amounts borrowed on
      this line of credit was $751,861. The amount available to borrow was $385,901.
      No changes were made to other lines of credit agreements appearing in the
      Company’s Annual Report, Form 10-KSB/A filed with the Securities and Exchange
      Commission on July 27, 2006.




5.
                Long
                    term debt




In
      June
      2006, the Company, in connection with its line of credit renewal described
      in
      Note 4, consolidated its equipment line of credit and its equipment installment
      loan with its lender. The interest rate on this consolidated loan is Prime
      plus
      4.00% and is secured by certain equipment and property of the Company. The
      loan
      requires payments of principal of $7,500 per month, plus interest, until paid
      in
      full. No changes were made to other long


-7-





term
      debt
      agreements appearing in the Company’s Annual Report, Form 10-KSB/A filed with
      the Securities and Exchange Commission on July 27, 2006.




6.
            Common
                Stock Offering




From
      August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
      stock in connection with our initial public offering pursuant to a Registration
      Statement on Form SB-2. Management has determined that the shares may have
      been
      issued in violation of securities laws. Management has made a rescission offer
      to purchase up to all of the shares sold to date in the offering, however,
      it is
      our intention that if any of the shares are tendered for rescission, the shares
      will be purchased by others and not from our funds. The amount to be paid
      pursuant to the rescission offer, if accepted by any shareholders, would be
      $4.00 per share, plus accrued interest at the applicable statutory rate. The
      rescission offer commenced in August 2006.




During
      the six months ended June 30, 2006, the Company sold 278,550 of common stock
      for
      proceeds of $1,002,779, net of commisions. During the six months ended June
      30,
      2006, previously deferred stock offering costs of $356,238 and additional stock
      offering costs incurred during the period of $217,287 were charged to additional
      paid in capital.





7.
            Preferred
                stock dividend




During
      the six months ended June 30, 2006, the Company issued 14,735 shares of common
      stock in accordance with the terms of the preferred stock agreement. 7,373
      shares were associated with the $29, 469 dividend payable as of June 30, 2006
      and 7,362 shares were associated with the $29,469 dividend payable as of June
      30, 2005.




8.
              Legal
                  Proceedings and Litigation
                  Fees




During
      2005 and 2006, the Company incurred litigation fees associated with a law suit
      which the Company has won. The Plaintiff has lost its appeal. The judgment
      in
      favor of the Company is to have the Plaintiff reimburse the Company for its
      legal defense costs. The Company is in the processing of perfecting its judgment
      and will record income from the judgment when the monies are collected.




On
      January 20  ,
      2006,
      Consac Industries, Inc. (dba Long Life Teas and Long Life Beverages) filed
      a
      lawsuit in the United States District Court for the Central District of
      California against Reed’s Inc. and Christopher Reed, Case No. CV06-0376. The
      complaint asserts claims for negligence, breach of contract, breach of warranty,
      and breach of express indemnity relating to Reed’s, Inc.’s manufacture of
      approximately 13,000 cases of “Prism Green Tea Soda” for Consac. Consac contends
      that we negligently manufactured the soda resulting in at least one personal
      injury. Consac seeks $2.6 million in damages, plus interest and attorneys fees.
      We contend that Consac was responsible for the soda’s condition by providing a
      defective formula which had not been adequately tested. In May 2006 both parties
      agreed to a mediation proceeding which is expected to commence in the third
      quarter of 2006. We believe that we will successfully defend Consac’s claims.
      While there is no assurance, we believe that the Consac litigation will have
      no
      material adverse effect upon our operations.


-8-




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





**FORWARD
      LOOKING STATEMENTS**





This
      report contains statements that involve expectations, plans or intentions (such
      as those relating to future business or financial results, new features or
      services, or management strategies). These statements are forward-looking and
      are subject to risks and uncertainties, so actual results may vary materially.
      You can identify these forward-looking statements by words such as “may,” 
“should,”  “expect,”  “anticipate,”  “believe,”  
“estimate,”  “intend,”  “plan” and other similar expressions. You
      should consider our forward-looking statements in light of the risks discussed
      under the heading “Risk Factors That May Affect Results of Operations and
      Financial Condition” below, as well as our financial statements, related notes,
      and the other financial information appearing elsewhere in this report and
      our
      other filings with the Securities and Exchange Commission. We assume no
      obligation to update any forward-looking statements.





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




**Overview**




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




·
            Reed’s
                Ginger Brews,




·
            Virgil’s
                Root Beer and Cream Sodas,




·
            China
                Colas,




·
            Reed’s
                Ginger Juice Brews,




·
            Reed’s
                Ginger Candies, and




·
            Reed’s
                Ginger Ice Creams




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




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




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




***Fuel
      Prices*** ** -Our
      freight rates were approximately 9.7% of net sales during 2005. We expect
      freight rates to increase by an additional 5% to 10% in 2006 as a result of
      the
      continuing increase in fuel prices. However, as we increase production at the
      Brewery for delivery of products in the western half of the United States,
      we
      expect to offset this trend, at least in part, by reducing our need for
      cross-country freight services from our eastern co-packing
      facility.




***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 the first six months of 2006. We
      monitor these trends closely and have started developing low-carbohydrate
      versions of some of our beverages, although we do not have any currently
      marketable low-carbohydrate products.




***Distribution
      Consolidation*** ** -
      There
      has been a recent trend towards continued consolidation of the beverage
      distribution industry through mergers and acquisitions. This consolidation
      results in a smaller number of distributors to market our products and
      potentially leaves us subject to the potential of our products either being
      dropped by these distributors or being marketed less aggressively by these
      distributors. As a result, we have initiated our own direct distribution to
      mainstream supermarkets and natural and gourmet foods stores in Southern
      California and to large national retailers. Consolidation among natural foods
      industry distributors has not had an adverse affect on our sales.  -9-




***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 and raw materials has caused our margins to suffer and
      has
      negatively impacted our cash flow and profitability. We continue to search
      for
      packaging and production alternatives to reduce our cost of goods.




***Cash
      Flow Requirements*** - Our
      growth will depend on the availability of additional capital infusions. We
      have
      a financial history of losses and are dependent on non-banking sources of
      capital, which tend to be more expensive and charge higher interest rates.
      Any
      increase in costs of goods will further increase losses and will further tighten
      cash reserves. We intend to use the proceeds from our future stock offering
      to
      increase our liquidity to be able to make cash expenditures, as
      needed.




***Interest
      Rates -*** We
      use
      lines of credit as a source of capital and are negatively impacted as interest
      rates rise. Management believes our future offering will provide capital
      sufficient for us to reduce our debt level and allow us to lower our incremental
      borrowing costs.




**Critical
      Accounting Policies**




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




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




*Trademark
      License and Trademarks.* Trademark license and trademarks primarily represent the costs we pay for
      exclusive ownership of the Reed’s® trademark in connection with the manufacture,
      sale and distribution of beverages and water and non-beverage products. We
      also
      own the Virgil’s® trademark and the China Cola® trademark. In addition, we own a
      number of other trademarks in the United States as well as in a number of
      countries around the world. We account for these items in accordance with
      SFAS No. 142, “Goodwill and Other Intangible Assets.” Under the provisions
      of SFAS No. 142, we do not amortize indefinite-lived trademark licenses and
      trademarks.




In
      accordance with SFAS No. 142, we evaluate our non-amortizing trademark
      license and trademarks quarterly for impairment. We measure impairment by the
      amount that the carrying value exceeds the estimated fair value of the trademark
      license and trademarks. The fair value is calculated by reviewing net sales
      of
      the various beverages and applying industry multiples. Based on our quarterly
      impairment analysis the estimated fair values of trademark license and
      trademarks exceeded the carrying value and no impairments were identified during
      the six months ended June 30, 2006 or June 30, 2005.




*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  -10-


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 six months ended June 30, 2006 or 2005.




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




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




*Advertising.* We
      account for advertising production costs by expensing such production costs
      the
      first time the related advertising is run.




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




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




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




**Results
      of Operations**




*Three
      Months Ended June 30, 2006 Compared to Three Months Ended June 30,
      2005*




Net
      sales
      increased by $575,545, or 22.3%, from $2,582,273 in the three months ended
      June
      30, 2005 to $3,157,818 in the three months ended June 30, 2006. Sales of
      our core Reed’s Ginger Brew items ** increased
      from $1,319,000 in the three months ended June 30, 2005 to $1,634,000 in the
      three months ended June 30, 2006. Sales of our Virgil’s Root Beer line increased
      from $934,000 in the three months ended June 30, 2005 to $1,075,000 in the
      three
      months ended June 30, 2006. The Virgil’s Root Beer and Cream Soda 12 ounce
      bottles increased from $507,000 and $119,000, respectively, in the three months
      ended June 30, 2005 to $704,000 and $174,000, respectively, in the three months
      ended June 30, 2006. The new Virgil’s Black Cherry Cream Soda launched at the
      end of May 2006 had sales for the three months ended June 30, 2006 of $107,000.
      Progressive Grocers, a top trade publication in the Grocer industry voted this
      product as the best new beverage product of 2006. We expect sales of this item
      to positively impact future sales. Sales of the Virgil’s 5 liter party kegs
      continued to decline from $180,000 in the three months ended June 30, 2005
      to
      $49,000 in the three months ended June 30, 2006. Candy sales decreased from
      $208,000 in the three months ended June 30, 2005 to $204,000 in the three months
      ended June 30, 2006. Ice cream sales decreased from $50,000 in the three months
      ended June 30, 2005 to $23,000 in the three months ended June 30, 2006. China
      Cola sales increased from $51,000 in the three months ended June 30, 2005 to
      $86,000 in the three months ended June 30, 2006. Canadian sales increased from
      $16,000 in the three months ended June 30, 2005 to $44,000 in the three months
      ended June 30, 2006. We have increased our focus on the Canadian market place
      in
      2006 and the China cola brisk sales increase comes as somewhat of a
      surprise.




Cost
      of
      sales increased by $520,590, or 25.2%, from $2,069,274 in the three months
      ended
      June 30, 2005 to $2,589,864 in the three months ended June 30, 2006. As a
      percentage of net sales, cost of sales increased from 80.1% in the three months
      ended June 30, 2005 to 82.0% in the three months ended June 30, 2006. Costs
      of
      sales increased primarily as a result of increased warehouse expenses due to
      increased inventory levels (0.6%) and increased production expenses (0.5%)
      and
      freight costs (0.8%) due to fuel related cost increases.




Gross
      profit increased from $512,999 in the three months ended June 30, 2005 to
      $567,954 in the three months ended June 30, 2006. As a percentage of net sales,
      gross profit decreased from 19.9% in the three months ended June 30, 2005 to
      18.0% in the three months ended  -11-


June
      30,
      2006. Effective February 1, 2006 we approved a price increase in a number of
      our
      product lines at an average of approximately 7% in order to attempt to increase
      our gross profit. The full implementation of the price increase is expected
      to
      be completed by the middle of the third quarter of 2006. We expect margins
      to
      increase by the end of 2006 due to this price increase.




Operating
      expenses increased by $576,724, or approximately 120%, from $480,720 in the
      three months ended June 30, 2005 to $1,057,444 in the three months ended June
      30, 2006 and increased as a percentage of net sales from 18.6% in the three
      months ended June 30, 2005 to 33.5% in the three months ended June 30, 2006.
      The
      primary increase in expenses was due to the rescission offer that the Company
      undertook to satisfy a possible securities law violation associated with its
      sales of common stock. The Company had no rescission related expenses for the
      three months ended June 30, 2005 and $351,757 of rescission related expenses
      for
      the three months ended June 30, 2006. Other changes were: increased salaries
      due
      to a larger sales force (9.5%), increased sales expenses from increased fuel
      costs and increased telephone charges (7.0%), increased recycling fees expenses
      (6.6%) and increased legal and accounting costs due to the costs associated
      with
      being a public reporting company (13.8%). We also had increased consulting
      fees
      due to the one time usage of a marketing group to evaluate our marketing
      strategies (6.3%). Also, increased commissions due to increased reliance on
      outside reps in some markets (6.1%), offset by a reduction in promotional
      expenses due to less club store demos (-2.9%), resulted in the increase in
      these
      expenses.




Interest
      expense increased by $7,421, or 8.2%, from $90,327 in the three months ended
      June 30, 2005 to $97,748 in the three months ended June 30, 2006. The increase
      in interest expense was due to increasing short term interest rates, increased
      borrowings on our available lines of credit and increasing our long term debt,
      which was used to purchase brewing equipment, vehicles and office equipment.




As
      a
      result of the foregoing, we experienced a net loss of $58,048 in the three
      months ended June 30, 2005 and $587,238 in the three months ended June 30,
      2006.
      Our net loss was $0 .02 per share in the three months ended June 30, 2005 and
      $0.12 per share in the three months ended June 30, 2006, which included the
      value of our preferred stock dividend.




*Six
      Months Ended June 30, 2006 Compared to Six Months Ended June 30,
      2005*




Net
      sales
      increased by $737,481, or 16.8%, from $4,399,608 in the first six months ended
      June 30, 2005 to $5,137,089 in the first six months ended June 30, 2006. Sales
      of our core Reed’s Ginger Brew items ** increased
      from $2,286,000 in the six months ended June 30, 2005 to $2,776,000 in the
      six
      months ended June 30, 2006. Sales of our Virgil’s Root Beer line increased from
      $1,665,000 in the six months ended June 30, 2005 to $1,772,000 in the six months
      ended June 30, 2006. The Virgil’s Root Beer and Cream Soda 12 ounce bottles
      increased from $1,018,000 and $224,000, respectively, in the six months ended
      June 30, 2005 to $1,185,000 and $281,000, respectively, in the six months ended
      June 30, 2006. The new Virgil’s Black Cherry Cream Soda launched at the end of
      May 2006 had sales for the six months ended June 30, 2006 of $107,000.
      Progressive Grocers, a top trade publication in the Grocer industry voted this
      product as the best new beverage product of 2006. We expect sales of this item
      to positively impact future sales. Sales of the Virgil’s 5 liter party kegs
      continued to decline from $275,000 in the six months ended June 30, 2005 to
      $100,000 in the six months ended June 30, 2006. Candy sales increased from
      $337,000 in the six months ended June 30, 2005 to $410,000 in the six months
      ended June 30, 2006. Ice cream sales decreased from $85,000 in the six months
      ended June 30, 2005 to $68,000 in the six months ended June 30, 2006. China
      Cola
      sales increased from $106,000 in the six months ended June 30, 2005 to $120,000
      in the six months ended June 30, 2006. Canadian sales increased from $32,000
      in
      the six months ended June 30, 2005 to $64,000 in the six months ended June
      30,
      2006. We have increased our focus on the Canadian market place in
      2006.




Cost
      of
      sales increased by $723,180, or 20.3%, from $3,555,561 in the first six months
      ended June 30, 2005 to $4,278,741 in the first six months ended June 30, 2006.
      As a percentage of net sales, cost of sales increased from 80.8% in the first
      six months ended June 30, 2005 to 83.3% in the first six months ended June
      30,
      2006. Costs of sales increased primarily as a result of increased warehouse
      expenses due to increased inventory levels (0.3%) and increased production
      expenses (1.9%) and freight costs (0.3%) due to fuel related cost
      increases.




Gross
      profit increased from $844,047 in the first six months ended June 30, 2005
      to
      $858,348 in the first six months ended June 30, 2006. As a percentage of net
      sales, gross profit decreased from 19.2% in the first six months ended June
      30,
      2005 to 16.7% in the first six months ended June 30, 2006. Effective February
      1,
      2006 we approved a price increase in a number of our product lines at an average
      of approximately 7% in order to attempt to increase our gross profit. The full
      implementation of the price increase is expected to be completed by the middle
      of the third quarter of 2006. We expect margins to increase by the end of 2006
      due to this price increase.




Operating
      expenses increased by $639,114, or 65.4%, from $977,715 in the first six months
      ended June 30, 2005 to $1,616,829 in the first six months ended June 30, 2006
      and increased as a percentage of net sales from 22.2% in the first six months
      ended June 30, 2005 to 31.5% in the first six months ended June 30, 2006. The
      primary increase in expenses was due to the rescission offer that the Company
      undertook to satisfy a possible securities law violation associated with its
      sales of common stock. The Company had no rescission related expenses for the
      six months ended June 30, 2005 and $351,757 of rescission related expenses
      for
      the six months ended June 30, 2006. Other changes were: increased salaries
      due
      to a larger sales force (6.4%), increased sales expenses from increased fuel
      costs and increased telephone charges (7.1%), increased recycling fees expenses
      (3.7%) and increased legal and accounting costs due to the costs associated
      with
      being a public reporting company (8.5%). We had increased consulting fees due
      to
      the one time usage of a marketing group to evaluate our marketing strategies
      (3.6%). Also, increased commissions due to increased reliance on outside reps
      in
      some markets (2.5%) offset by a reduction in promotional expenses due to less
      club store demos (-3.7%), resulted in the increase in these
      expenses.




Interest
      expense increased by $36,820, or 22.8%, from $161,534 in the first six months
      ended June 30, 2005 to $198,354 in the first six months ended June 30, 2006.
      The
      increase in interest expense was due to increasing short term interest rates,
      increased borrowings on our available lines of credit and increasing our long
      term debt, which was used to purchase brewing equipment, vehicles and office
      equipment.  -12-


As
      a
      result of the foregoing, we experienced a net loss of $295,202 in the first
      six
      months ended June 30, 2005 and $956,835 in the first six months ended June
      30,
      2006. Our net loss was $0.07 per share in the first six months ended June 30,
      2005 and $0.19 per share in the first six months ended June 30, 2006, which
      included 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. We have a "best efforts"
      commitment from an underwriter to assist us in continuing the process of raising
      capital through a public offering of our common stock, which we had commenced
      in
      2005. Management believes it will be successful in raising additional funds
      from
      the public offering, however it can not predict the exact amount which will
      be
      raised. We intend to recommence the offering upon completion of a rescission
      offer to persons who have purchased shares in the offering to date. Management
      expects the offering to commence during the summer of 2006. Until the
      commencement of the offering, we will continue to experience challenges with
      managing cash flow, but management believes it has enough liquidity to operate
      the business in the short term. The addition of cash from the public offering
      ,
      if successful, would provide us the ability to improve our liquidity position
      and provide capital to continue to expand the business. The remaining amount
      of
      common stock that we can sell in connection with the offering is 1,666,844
      shares at an anticipated offering price of $4.00 per share. If the remainder
      of
      the shares were sold, we would receive approximately $6,000,000, after
      underwriter commissions.




As
      of
      June 30, 2006, we had a working capital deficit of $1,840,391, compared to
      a
      working capital deficit of $1,594,758 as of December 31, 2005.




As
      of
      June 30, 2006, we had outstanding borrowings of $1,463,461 under our lines
      of
      credit agreements and we continue to approach maximum borrowing capacity based
      on the terms of the lines of credit.




From
      August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
      stock in connection with our initial public offering pursuant to a Registration
      Statement on Form SB-2. Management has determined that the shares may have
      been
      issued in violation of securities laws. Management intends to make a rescission
      offer to purchase up to all of the shares sold to date in the offering, however,
      it is our intention that if any of the shares are tendered for rescission,
      the
      shares will be purchased by others and not from our funds. The amount to be
      paid
      pursuant to the rescission offer, if accepted by any shareholder, would be
      $4.00
      per share, plus accrued interest at the applicable statutory rate. The
      rescission offer commenced in August 2006.




During
      the six months ended June 30, 2006, the Company sold 278,550 of their shares
      for
      $1,002,779, net of commisions.




During
      the six months ended June 30, 2006, previously deferred stock offering expenses
      of $356,238 and additional stock offering costs incurred during the period
      of
      $217,287 were charged to additional paid in capital.




The
      accompanying condensed financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate continuation of the Company as a going concern. However,
      the
      Company had a net loss of $956,835 and utilized cash of $665,137 in operating
      activities during the six months ended June 30, 2006, and had a working capital
      deficiency of $1,840,391and stockholders’ deficiency of $378,586 at June 30,
      2006. In addition, the Company may have committed a violation of securities
      law
      which may require the rescission of common stock issued in 2005 and 2006 in
      the
      aggregate of approximately $1,324,624. These factors raise substantial doubt
      about the Company's ability to continue as a going concern. The financial
      statements do not include any adjustments relating to the recoverability and
      classification of recorded asset amounts, or amounts and classification of
      liabilities that might result from this uncertainty. The Company is conducting
      an initial public offering of its stock. The maximum amount of common stock
      to
      be sold is 2,000,000 shares at $4.00, of which 333,156 has been sold as of
      April
      7, 2006. Management has received enough interest in the offering which leads
      it
      to believe the maximum amount of the offering will be sold, however no assurance
      can be made that any additional shares will be sold as a result of the
      offering




Recent
      Accounting Pronouncements





In
      June 2005, the FASB issued SFAS 154, “Accounting Changes and Error
      Corrections,” a replacement of existing accounting pronouncements. SFAS 154
      modifies accounting and reporting requirements when a company voluntarily
      chooses to change an accounting principle or correct an accounting error. SFAS
      154 requires retroactive restatement of prior period financial statements unless
      it is impractical. Previous accounting guidelines allowed recognition by
      cumulative effect in the period of the accounting change. SFAS 154 is effective
      for accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005.




In
      February 2006, the FASB issued SFAS 155,“Accounting for Certain Hybrid Financial
      Instruments”, an amendment of SFAS 133 and 140. These SFAS’s deal with
      derivative and hedging activities, accounting for  -13-




transfers
      and servicing of financial instruments and extinguishment of liabilities. SFAS
      155 is effective for all financial instruments acquired or issued in an entity’s
      first fiscal year beginning after September 15, 2006. The Company does not
      engage in the activities described in these SFAS’s and does not have any
      intention of engaging in those activities when SFAS 155 becomes effective.
      The
      Company has evaluated the impact of the adoption of SFAS 155, and does not
      believe the impact will be significant to the Company's overall results of
      operations or financial position.





**Item
      3. CONTROLS AND PROCEDURES**




(a)
            Evaluation
                of Disclosure Controls and Procedures.





As
      of
      June 30, 2006, 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) as of the end of the period covered
      by this quarterly report. Based on this evaluation, our principal executive
      officer and principal financial officer concluded, as of the end of such period,
      that these disclosure controls and procedures are effective and designed to
      ensure that the information required to be disclosed in our reports filed or
      submitted under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the requisite time periods.





(b)
            Changes
                in Internal Controls.





There
      was
      no change in our internal control over financial reporting (as defined in Rules
      13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)
      identified in connection with the evaluation of our internal control performed
      during our last fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial reporting.  -14-




**Part
      II**





**Item
      1. Legal Proceedings**





On
      January 20, 2006, Consac Industries, Inc. (dba Long Life Teas and Long Life
      Beverages) filed a lawsuit in the United States District Court for the Central
      District of California against Reed’s Inc. and Christopher Reed, Case No.
      CV06-0376. The complaint asserts claims for negligence, breach of contract,
      breach of warranty, and breach of express indemnity relating to Reed’s, Inc.’s
      manufacture of approximately 13,000 cases of “Prism Green Tea Soda” for Consac.
      Consac contends that we negligently manufactured the soda resulting in at least
      one personal injury. Consac seeks $2.6 million in damages, plus interest and
      attorneys fees. We contend that Consac was responsible for the soda’s condition
      by providing a defective formula which had not been adequately tested. We
      believe that we will successfully defend Consac’s claims. While there is no
      assurance, we believe that the Consac litigation will have no material adverse
      effect upon our operations. In May 2006 both parties agreed to a mediation
      proceeding which is expected to commence in the third quarter of
      2006.





From
      August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
      stock in connection with our initial public offering pursuant to a Registration
      Statement on Form SB-2. Management has determined that the shares may have
      been
      issued in violation of securities laws. Management intends to make a rescission
      offer to purchase up to all of the shares sold to date in the offering, however,
      it is our intention that if any of the shares are tendered for rescission,
      the
      shares will be purchased by others and not from our funds. The amount to be
      paid
      pursuant to the rescission offer, if accepted by any shareholders, would be
      $4.00 per share, plus accrued interest at the applicable statutory
      rate.


The
      rescission offer commenced in August 2006.





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




From
      August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
      stock in connection with our initial public offering pursuant to a Registration
      Statement on Form SB-2. Management has determined that the shares may have
      been
      issued in violation of securities laws. Management intends to make a rescission
      offer to purchase up to all of the shares sold to date in the offering. The
      amount to be paid pursuant to the rescission offer, if accepted by any
      shareholders, would be $4.00 per share, plus accrued interest at the applicable
      statutory rate.




We
      received net proceeds of approximately $1,200,000 from the sale of the 333,156
      shares, after underwriter commissions. The net proceeds were used to meet our
      liquidity needs primarily as working capital and costs relating to the offering.




**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
              Document  31
            Officer's
                Certification pursuant to Section 302 of the Sarbanes-OxleyAct
                of 2002





32
            Officer's
                Certification pursuant to Section 906 of the Sarbanes-OxleyAct
                of 2002





-15-




**SIGNATURE**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.




**REEDS,
              INC.**Date: August
              21, 2006
            By:
            /s/ CHRISTOPHER
              J. REEDName:  
                Christopher J. Reed
              Title:    
                Chief Executive Officer, President
              and Chief Financial Officer




-16-