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 September 30, 2005
 
 Commission
                  file number: 333-120451
  ----------
 
 REED'S
                  INC.
 --------------------------------------------
 (Exact
                  name of registrant as specified in its charter)
 
 
 Delaware
 --------
 (State
                  of
                  incorporation)
 
 
 95-4348325
 ----------
 (I.R.S.
                  Employer
 Identification
                  No.)
 
 
 13000
                  South Spring St.
 Los
                  Angeles, Ca. 90061
 ---------------------------
 (Address
                  of principal executive offices) (Zip Code)
 
 
 (310)
                  217-9400
 ---------------------------------------------
 (Registrant's
                  telephone number, including area code)
 
 
 -------------------------------------------------------
 Indicate
                  by check mark whether the registrant (1) has filed all reports required
                  to be filed by Section 13 or 15(d) of the Securities Exchange Act
                  of 1934
                  during the preceding 12 months (or for such shorter period that
                  the registrant
                  was required to file such reports), and (2) has been subject to
                  such filing
                  requirements for the past 90 days.
 
 Yes x
                  No o
 
 There
                  were 4,726,091 shares of the registrant's common stock outstanding
                  as
                  of September
                  30, 2005.
 **Part
            I - Financial Information**
  **Item
            1. Financial Statements**
 **REED’S,
              INC**
  **CONDENSED
              BALANCE SHEETS**  **ASSETS**
 **September
                            30,**
                          **2005**
                        
                        **December
                            31,**
                          **2004**(Unaudited)**CURRENT
                            ASSETS**Cash
                        
                        $
                        38,928
                        
                        $
                        42,488Inventory
                        
                        
                        1,361,843
                        
                        
                        1,301,025Trade
                            accounts receivable, net of allowance for doubtful accounts
                            and returns
                            and discounts of $79,431
                          as of September 30, 2005 and $74,974 as of December 31,
                            2004
                        
                        
                        653,222
                        
                        
                        797,614Other
                            receivables
                        
                        
                        7,683
                        
                        
                        3,163Prepaid
                            expenses
                        
                        
                        215,604
                        
                        
                        5,652
 Total
                          Current Assets
                      
                      
                      2,277,280
                      
                      
                      2,149,942Property
                          and equipment, net of accumulated depreciation of $462,294
                          as of September
                          30, 2005
                        and $390,363 as of December 31, 2004
                      
                      
                      1,834,361
                      
                      
                      1,821,473**OTHER
                          ASSETS**Brand
                          names
                      
                      
                      800,201
                      
                      
                      800,201Other
                          intangibles, net of accumulated amortization of $3,537
                          as
                          of September 30, 2005 and $2,978
                        as of December 31, 2004
                      
                      
                      15,077
                      
                      
                      15,635Deferred
                          stock offering costs
                      
                      
                      443,888
                      
                      
                      219,955Due
                          from director
                      
                      
                      120,210
                      
                      
                      91,197Total
                          Other Assets
                      
                      
                      1,379,376
                      
                      
                      1,126,988**TOTAL
                          ASSETS**
                      
                      **$**
                      5,491,017
                      
                      $
                      5,098,403**LIABILITIES
                          AND STOCKHOLDERS' EQUITY****CURRENT
                          LIABILITIES**Accounts
                          payable
                      
                      $
                      1,968,872
                      
                      $
                      1,412,124Lines
                          of credit
                      
                      
                      1,381,327
                      
                      
                      1,128,222Current
                          portion of long term debt
                      
                      
                      112,166
                      
                      
                      106,113Note
                          payable-related party
                      
                      
                      –
                      
                      
                      21,000Accrued
                          interest
                      
                      
                      118,563
                      
                      
                      115,581Accrued
                          expenses
                      
                      
                      65,900
                      
                      
                      51,549Total
                          Current Liabilities
                      
                      
                      3,646,828
                      
                      
                      2,834,589Loans
                          payable, related party
                      
                      
                      252,358
                      
                      
                      252,358Long
                          term debt, less current portion
                      
                      
                      1,092,427
                      
                      
                      1,041,756Total
                          Liabilities
                      
                      
                      4,991,613
                      
                      
                      4,128,703**COMMITMENTS
                          AND CONTINGENCIES****STOCKHOLDERS’
                          EQUITY**Preferred
                          stock, $10.00 par value, 500,000 shares authorized, 58,940
                          shares issued
                          and outstanding
                      
                      
                      589,402
                      
                      
                      589,402Common
                          stock, $.0001 par value, 11,500,000 shares
                          authorized,
                          4,726,091 shares issued and outstanding
                      
                      
                      472
                      
                      
                      472Common
                          stock to be issued (269,867 shares)
                      
                      
                      34,720Additional
                          paid in capital
                      
                      
                      2,753,994
                      
                      
                      2,783,464Accumulated
                          deficit
                      
                      
                      (2,879,184
                      )
                      
                      (2,403,638
                      )Total
                          stockholders’ equity
                      
                      
                      499,404
                      
                      
                      969,700**TOTAL
                          LIABILITIES AND STOCKHOLDERS’ EQUITY**
                      
                      $
                      5,491,017
                      
                      $
                      5,098,403
 See
              accompanying Notes to Condensed Financial Statements
  
  **REED’S,
              INC.**
  **CONDENSED
              STATEMENTS OF OPERATIONS**
 **For
              the Three and Nine Months Ended September 30, 2005 and
              2004**
 **(Unaudited)**
 **Three
                        months ended (Unaudited)**
                    
                    **Nine
                        months ended (Unaudited)****September
                        30,**
                    
                    **September
                        30,**
                    
                    September
                        30,
                    
                    **September
                        30,****2005**
                    
                    **2004**
                    
                    **2005**
                    
                    **2004****SALES**
                    
                    $
                    2,735,332
                    
                    $
                    2,209,696
                    
                    $
                    7,134,940
                    
                    $
                    6,705,040**COST
                        OF SALES**
                    
                    
                    2,266,327
                    
                    
                    1,759,630
                    
                    
                    5,821,887
                    
                    
                    5,383,397**GROSS
                        PROFIT**
                    
                    
                    469,005
                    
                    
                    450,066
                    
                    
                    1,313,053
                    
                    
                    1,321,643**OPERATING
                        EXPENSES**Selling
                    
                    
                    318,862
                    
                    
                    194,606
                    
                    
                    839,978
                    
                    
                    530,884General &
                        Administrative
                    
                    
                    232,938
                    
                    
                    308,414
                    
                    
                    687,413
                    
                    
                    769,989Legal
                        fees
                    
                    
                    24,040
                    
                    
                    74,539
                    
                    
                    26,166
                    
                    
                    74,539575,840
                    
                    
                    577,559
                    
                    
                    1,553,557
                    
                    
                    1,375,412**LOSS
                        FROM OPERATIONS**
                    
                    
                    (106,835
                    )
                    
                    (127,493
                    )
                    
                    (240,504
                    )
                    
                    (53,769
                    )**OTHER
                        EXPENSES**Interest
                        Expense
                    
                    
                    (73,508
                    )
                    
                    (64,466
                    )
                    
                    (235,042
                    )
                    
                    (178,479
                    )Loss
                      on Extinguishment of Debt
                    
                    
                    –
                    
                    
                    (153,000
                    )
                    
                    –
                    
                    
                    (153,000
                    )(73,508
                    )
                    
                    (217,466
                    )
                    
                    (235,042
                    )
                    
                    (331,479
                    )**NET
                        LOSS**
                    
                    
                    (180,343
                    )
                    
                    (344,959
                    )
                    
                    (475,546
                    )
                    
                    (385,248
                    )Preferred
                        Stock Dividend
                    
                    
                    –
                    
                    
                    –
                    
                    
                    (29,470
                    )
                    
                    –Net
                        Loss Attributable to Common Stockholders
                    
                    $
                    (180,343
                    )
                    $
                    (344,959
                    )
                    $
                    (505,016
                    )
                    $
                    (385,248
                    )**Net Loss Available to Common Stockholders —**
                      **Basic and Diluted**
                    
                    $
                    (.04
                    )
                    $
                    (.07
                    )
                    $
                    (.10
                    )
                    $
                    (0.08
                    )**WEIGHTED
                        AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED**
                    
                    
                    4,995,959
                    
                    
                    4,726,091
                    
                    
                    4,845,909
                    
                    
                    4,726,091
 See
              accompanying Notes to Condensed Financial Statements
   
  **REED’S
              INC.**
  **STATEMENT
              OF CHANGES IN STOCKHOLDERS’ EQUITY**
 For
              the
              nine months ended September 30, 2005 (Unaudited)
 **CommonStock**
                          ****
                          **Common
                              Stock to be**
                          ****
                          **Additional
                              Paid in**
                          ****
                          **PreferredStock**
                          ****
                          **Accumulated**
                          ****
                          
                          ********
                          ****
                          **Shares**
                          ****
                          **Amount**
                          ****
                          **Issued**
                          ****
                          **Capital**
                          ****
                          **Shares**
                          ****
                          **Amount**
                          ****
                          **Deficit**
                          ****
                          **Total**Balance,
                              January 1, 2005
                          
                          
                          4,726,091
                          
                          $
                          472
                          
                          $
                          –
                          
                          $
                          2,783,464
                          
                          
                          58,940
                          
                          $
                          589,402
                          
                          $
                          (2,403,638
                          )
                          $
                          969,700Exercise
                              of warrants
                          
                          
                          
                          
                          
                          
                          
                          
                          5,250
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          5,250Preferred
                              Stock Dividend
                          
                          
                          
                          
                          
                          
                          
                          
                          29,470
                          
                          
                          (29,470
                          )Net
                              Loss for the nine months ended
                            September 30, 2005
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (475,546
                          )
                          
                          (475,546
                          )Balance,
                              September 30, 2005
                            (unaudited)
                          
                          
                          4,726,091
                          
                          $
                          472
                          
                          $
                          34,720
                          
                          $
                          2,753,994
                          
                          
                          58,940
                          
                          $
                          589,402
                          
                          $
                          (2,879,184
                          )
                          $
                          499,404
 See
              accompanying Notes to Condensed Financial Statements
   
  **REED’S
              INC.**
  **CONDENSED
              STATEMENTS OF CASH FLOWS**
 **For
              the nine months ended September 30, 2005 and 2004**
 **(Unaudited)**
 **Nine
                            Months Ended (Unaudited)****September
                            30,**
                        
                        **September
                            30,****2005**
                        
                        **2004****CASH
                            FLOWS FROM OPERATING ACTIVITIES:**Net
                            Loss
                        
                        $
                        (475,546
                        )
                        $
                        (385,248
                        )Adjustments
                            to reconcile net loss to net cash provided by (used in)
                            operating
                            activities:Depreciation
                            and amortization
                        
                        
                        83,220
                        
                        
                        78,935Loss
                          on extinguishment of debt
                        
                        
                        –
                        
                        
                        153,000Changes
                            in operating assets and liabilities:Accounts
                            receivable
                        
                        
                        144,392
                        
                        
                        (46,308
                        )Inventory
                        
                        
                        (60,817
                        )
                        
                        (322,494
                        )Prepaid
                            Expenses
                        
                        
                        (220,683
                        )
                        
                        (110,004
                        )Other
                            receivables
                        
                        
                        (4,520
                        )
                        
                        855Accounts
                            payable
                        
                        
                        556,748
                        
                        
                        400,336Accrued
                            expenses
                        
                        
                        14,351
                        
                        
                        46,311Accrued
                            interest
                        
                        
                        8,232
                        
                        
                        37,452Net
                            cash provided by (used in) operating activities
                        
                        
                        45,377
                        
                        
                        (147,165
                        )**CASH
                            FLOWS FROM INVESTING ACTIVITIES:**Purchase
                            of property and equipment
                        
                        
                        (84,819
                        )
                        
                        (74,532
                        )Due
                            from director
                        
                        
                        (29,013
                        )
                        
                        (23,600
                        )Net
                            cash used in investing activities
                        
                        
                        (113,832
                        )
                        
                        (98,132
                        )**CASH
                            FLOWS FROM FINANCING ACTIVITIES:**Principal
                            borrowings on debt
                        
                        
                        340,000
                        
                        
                        184,132Principal payments on debt
                        
                        
                        (283,277
                        )
                        
                        (178,947
                        )Proceeds received prior to issuance of preferred stock
                        
                        
                        –
                        
                        
                        334,400Net
                            borrowing on lines of credit
                        
                        
                        253,106
                        
                        
                        89,717Payments
                            on debt to related parties
                        
                        
                        (21,000
                        )
                        
                        –Payments
                            for deferred stock offering costs
                        
                        
                        (223,934
                        )
                        
                        (105,662
                        )Net
                            cash provided by financing activities
                        
                        
                        64,895
                        
                        
                        323,640**NET
                            INCREASE (DECREASE) IN CASH**
                        
                        
                        (3,560
                        )
                        
                        78,343**CASH —
                            Beginning of period**
                        
                        
                        42,488
                        
                        
                        12,930**CASH —
                            End of period**
                        
                        $
                        38,928
                        
                        $
                        91,273**Supplemental
                            Disclosures of Cash Flow Information**Cash
                            paid during the period for:Interest
                        
                        $
                        226,810
                        
                        $
                        141,626Taxes
                        
                        $
                        –
                        
                        $
                        –**Noncash
                            Investing and Financing Activities**Common
                            stock to be issued in settlement of accrued interest
                            and exercise of
                            warrants
                        
                        $
                        5,250
                        
                        $
                        –Common
                            stock to be issued in settlement of preferred stock
                            dividend
                        
                        $
                        29,470
                        
                        $
                        –Beneficial
                          conversion feature
                        
                        $
                        –
                        
                        $
                        353,640
 See
              accompanying Notes to Condensed Financial Statements
   
  **REED’S,
              INC.**
  **NOTES
              TO CONDENSED FINANCIAL STATEMENTS**
 **SEPTEMBER 30,
              2005 (UNAUDITED)**
   1.
                    BASIS
                        OF PRESENTATION
  The
              accompanying interim condensed financial statements are unaudited,
              but in the
              opinion of management of Reeds, Inc. (the Company), contain all adjustments,
              which include normal recurring adjustments necessary to present fairly
              the
              financial position at September 30, 2005, and the results of operations
              and cash
              flows for the three and nine months ended September 30, 2005 and 2004.
              The
              balance sheet as of December 31, 2004 is derived from the Company’s audited
              financial statements.
  Certain
              information and footnote disclosures normally included in financial
              statements
              that have been prepared in accordance with generally accepted accounting
              principles have been condensed or omitted pursuant to the rules and
              regulations
              of the Securities and Exchange Commission, although management of the
              Company
              believes that the disclosures contained in these financial statements
              are
              adequate to make the information presented herein not misleading. For
              further
              information, refer to the financial statements and the notes thereto
              included in
              the Company’s Registration Statement, Form SB-2 as filed with the Securities and
              Exchange Commission on May 13, 2005.
  The
              preparation of financial statements in conformity with generally accepted
              accounting principles requires management to make estimates and assumptions
              that
              affect the reported amounts of assets and liabilities, disclosures
              of contingent
              assets and liabilities at the date of the financial statements, and
              the reported
              amounts of revenues and expense during the reporting period. Actual
              results
              could differ from those estimates.
  The
              results of operations for the nine months ended September 30, 2005
              are not
              necessarily indicative of the results of operations to be expected
              for the full
              fiscal year ending December 31, 2005.
  Loss
              per
              Common Share
  Basic
              loss per share is calculated by dividing net loss available to common
              stockholders by the weighted average number of common shares outstanding
              during
              the year. Diluted loss per share is calculated assuming the issuance
              of common
              shares, if dilutive, resulting from the exercise of stock options and
              warrants.
              As the Company had a loss in the three and nine month period
              ended September 30, 2005 and 2004, basic and diluted loss per
              share are the
              same.
  The
              weighted average shares outstanding
              at September 30, 2005 includes the shares to be issued resulting
              from the
              exchange of warrants, which occurred on June 30, 2005, for 262,500
              shares of
              common stock, and the preferred stock payable for 7,367 shares of commons
              stock
              . These shares are expected to be issued in the fourth quarter of 2005,
              (see
              Notes 5 and 6).
  Recent
                Accounting Pronouncements
  In
                November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
                ARB No. 43, Chapter 4.” The amendments made by Statement 151 clarify that
                abnormal amounts of idle facility expense, freight, handling costs,
                and wasted
                materials (spoilage) should be recognized as current period charges
                and require
                the allocation of fixed production overheads to inventory based on
                the normal
                capacity of the production facilities. The guidance is effective
                for inventory
                costs incurred during fiscal years beginning after June 15, 2005.
                Earlier
                application is permitted for inventory costs incurred during fiscal
                years
                beginning after November 23, 2004. The Company has evaluated the
                impact of the
                adoption of SFAS 151, and does not believe the impact will be significant
                to the
                Company's overall results of operations or financial position.
  In
                December 2004, the FASB issued SFAS No.153, “Exchanges of Non-monetary Assets,
                an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions.”
                The amendments made by Statement 153 are based on the principle that
                exchanges
                of non-monetary assets should be measured based on the fair value
                of the assets
                exchanged. Further, the amendments eliminate the narrow exception
                for
                non-monetary exchanges of similar productive assets and replace it
                with a
                broader exception for exchanges of non-monetary assets that do not
                have
                commercial substance. Previously, Opinion 29 required that the accounting
                for an
                exchange of a productive asset for a similar productive asset or
                an equivalent
                interest in the same or similar productive asset should be based
                on the recorded
                amount of the asset relinquished. Opinion 29 provided an exception
                to its basic
                measurement principle (fair value) for exchanges of similar productive
                assets.
                The Board believes that exception required that some non-monetary
                exchanges,
                although commercially substantive, be recorded on a carryover basis.
                By focusing
                the exception on exchanges that lack commercial substance, the Board
                believes
                this Statement produces financial reporting that more faithfully
                represents the
                economics of the transactions. The Statement is effective for non-monetary
                asset
                exchanges occurring in fiscal periods beginning after June 15, 2005.
                Earlier
                application is permitted for non-monetary asset exchanges occurring
                in fiscal
                periods beginning after the date of issuance. The provisions of this
                Statement
                shall be applied prospectively. The Company has evaluated the impact
                of the
                adoption of SFAS 152, and does not believe the impact will be significant
                to the
                Company's overall results of operations or financial position.
  In
                December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
                Payment.” Statement 123(R) will provide investors and other users of financial
                statements with more complete and neutral financial information by
                requiring
                that the compensation cost relating to share-based payment transactions
                be
                recognized in financial statements. That cost will be measured based
                on the fair
                value of the equity or liability instruments issued. Statement 123(R)
                covers a
                wide range of share-based compensation arrangements including share
                options,
                restricted share plans, performance-based awards, share appreciation
                rights, and
                employee share purchase plans. Statement 123(R) replaces FASB Statement
                No. 123,
                "Accounting for Stock-Based Compensation," and supersedes APB Opinion
                No. 25,
                "Accounting for Stock Issued to Employees." Statement 123, as originally
                issued
                in 1995, established as preferable a fair-value-based method of accounting
                for
                share-based payment transactions with employees. However, that Statement
                permitted entities the option of continuing to apply the guidance
                in Opinion 25,
                as long as the footnotes to financial statements disclosed what net
                income would
                have been had the preferable fair-value-based method been used. Public
                entities
                (other than those filing as small business issuers) will be required
                to apply
                Statement 123(R) as of the first interim or annual reporting period
                of the first
                fiscal year that begins after June 15, 2005 and the first fiscal
                year that
                begins after December 15, 2005 for small business issuers. The Company
                has
                evaluated the impact of the adoption of SFAS 123(R), and does not
                believe the
                impact will be significant to the Company's overall results of operations
                or
                financial position.
  We
                do not
                believe that the adoption of the above recent pronouncements will
                have a
                material effect on our consolidated financial position or results
                of operations.
  2.
                    Lines
                        of credit
  In
              June
              2005, the Company was successful in replacing the lender of its line
              of credit
              facilities. The new lender has extended a line of credit secured by
              accounts
              receivable and inventory in the maximum amounts of $1,910,000. The
              borrowing
              base on the accounts receivable are 80% of all eligible receivables,
              which are
              primarily accounts receivables under 90 days. The inventory borrowing
              base is
              50% of eligible inventory. As of September 30, 2005, the amounts borrowed
              on
              this line of credit were $ 928,335. The interest rate on this new loan
              is Prime
              plus 2.75%. The aggregate amounts borrowed under other lines of credit
              and
              payable at September 30, 2005 was $452,992.
   
  3.
                    Long
                        term debt
  In
              June
              2005, the Company was successful in replacing the lender of certain
              long-term
              debt secured by equipment. The Company replaced 2 loans which had a
              combined
              principle balance at December 31, 2004 of $169,248 and had interest
              rates
              ranging from Prime plus 10% to Prime plus 12% to one loan. At September
              30,
              2005, the new loan balance was $180,499. The interest rate on the loan
              is Prime
              plus 2.75%. The monthly payment on this loan requires principal payments
              of
              $3,167, plus interest. This loans matures in June 2010.
  4.
                    Equipment
                        line of credit
  In
              June
              2005, the Company obtained an equipment line of credit from the same
              lender
              mentioned in footnotes 2 and 3. The maximum amount of this line of
              credit is
              $150,000 and can be used for eligible equipment purchases. The interest
              rate for
              this line of credit is Prime plus 2.75%, but not less than 8.50%. As
              of
              September 30, 2005, net advances were $101,000. This line matures May
              2009 and
              requires ratable, monthly payments of principal, and applicable interest,
              until
              the line matures in May 2009.
  5.
                      Related
                          Party Transactions
  In
                June
                2005, 262,500 warrants held by Robert Reed were exercised at $.02
                per warrant
                resulting in 262,500 shares to be issued. In lieu of receiving $5,250,
                interest
                payable to Robert Reed was reduced by the same amount. As of September
                30,
                2005, the shares had not been issued.
  6.
                        Dividend
                            Distributable
 Dividend
                distributable represents the preferred stock dividend payable to
                be paid with the issuance of common stock. The 7,367 shares of common
                stock had not been issued as of September 30, 2005.
 7.
                        Inventory
  Inventory
                  consists of the following at September 30, 2005
 
 Raw
                          Materials
                        
                        $
                        565,531Finished
                          Goods
                        
                        
                        796,312$
                        1,361,843
 8.
                    Legal
                        Proceedings
  The
              Company currently and from time to time is involved in litigation incidental
              to
              the conduct of its business. The Company is not currently a party to
              any lawsuit
              or proceeding which, in the opinion of management, is likely to have
              a
              materially adverse effect on it.
  During
              2004 and 2005, the Company incurred legal fees associated with a law
              suit which
              the Company has won. The Plaintiff has appealed. The judgment in favor
              of the
              Company is to have the Plaintiff reimburse the Company for its legal
              defense
              costs. If the Company is successful in the appeals process, it will
              record
              income from the judgment if it collects the monies.
   F-6
 **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 consolidated 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.
 
 You
                should read the following Managemen’s Discussion and Analysis of Financial
                Condition and Results of Operations in conjunction with the condensed
                consolidated financial statements and the related notes that appear
                elsewhere in
                this document.
 **Overview**
 
 We
            develop, manufacture, market, and sell “alternative” or “New Age” beverages and
            assorted foods. We currently manufacture, market and sell six unique
            product
            lines:
  ·
                    Reed’s Ginger Brews
 ·
                    Virgil’s Root Beer and Cream Sodas
 ·
                    China Colas
 ·
                    Reed’s Ginger Juice Brews
 ·
                    Reed’s Ginger Candies
 ·
                    Reed’sGinger
                        Ice
                        Creams
  We
              currently distribute and sell our products through a network of natural,
              gourmet, and independent distributors, as well as through our growing
              in-house
              direct sales and distribution team, throughout the United States and,
              to a
              lesser extent, in Canada.
  **Trends,
            Risks, Challenges, Opportunities That May or Are Currently Affecting
            Our
            Business**
  Our
            main
            challenges, trends, risks, and opportunities that could affect or are
            affecting
            our financial results include but are not limited to:
  Fuel
            Prices - As oil prices continue to rise, our freight rates, which run at
            approximately 9% of net sales, have been increasing. As of September
            30, 2005,
            we believe oil prices have peaked and may start to decline for most of
            the next
            quarter. We therefore do not expect freight rates to continue to rise
            in the
            fourth quarter. We expect that our Brewery operations in Los Angeles,
            CA will
            allow us to reduce certain freight costs by eliminating the need to ship
            from
            our contract manufacturer in Pennsylvania to our customers in the Western
            part
            of the United States.
  Low
            Carbohydrate Diets and Obesity -
            Consumers have been demanding lower carbohydrate products. This trend
            did not
            seem to affect our sales growth in 2005. We are watching this trend closely
            and
            have started developing low-carbohydrate versions of some of our beverages.
 
 Distribution
            Consolidation - The
            trend towards continued consolidation of the beverage distribution industry
            through mergers and acquisitions has inspired us to start our own direct
            distribution locally in southern California and to go to large national
            retailers. Consolidation among natural foods industry distributors has
            not had
            an affect on our sales. However, this consolidation may limit the distributor
            options outside natural foods to service mass-market food accounts.
 
 
 C onsumer
            Demanding More Natural Foods - The rapid growth of the natural foods
            industry has been fueled by the growing consumer awareness of the potential
            health problems due to the consumption of chemicals in the diet. Consumers
            are
            reading ingredient labels and choosing products based on them. We design
            products with these consumer concerns in mind. We feel this trend toward
            more
            natural products is one of the main trends behind our growth. Recently,
            this
            trend in drinks has not only shifted to products using natural ingredients,
            but
            also to products with added ingredients possessing a perceived positive
            function
            like vitamins, herbs and other nutrients. Our products are designed with
            this
            consumer demand in mind.
 
 Supermarket
            and Natural Food Stores - More
            and more supermarkets, in order to compete with the growing natural food
            industry, have started including natural food sections. As a result of
            this
            trend, our products are now available in supermarkets throughout the
            United
            States. Supermarkets can require that we spend more advertising money
            and they
            sometimes require slotting fees. We continue to work to keep these fees
            reasonable. Slotting fees in the natural food section of the supermarket
            are
            generally not as expensive as in other areas of the store.
 
 Beverage
            Packaging Changes -
            Beverage packaging has continued to innovate. There is an increase in
            the
            sophistication with respect to beverage packaging design. While we feel
            that our
            current core brands still compete on the level of packaging, we continue
            to
            experiment with new and novel packaging designs such as the 5-liter party
            keg
            and 750 ml champagne style bottles. We have further plans for other innovative
            packaging designs.
 
 Cash
            Flow Requirements - Growth of our company will depend on the availability of
            additional capital infusions to finance. We have a financial history
            of losses
            and are dependent on non-banking sources of capital, which tend to be
            more
            expensive and charge higher interest rates. Any increase in costs of
            goods will
            further increase losses and will further tighten cash reserves. We feel
            that we
            could raise prices to offset this problem if it occurs. We haven’t increased our
            prices since inception and we feel that the market has been increasing
            in terms
            of beverage prices in the last ten years. We intend to increase our prices
            in
            2006. See our discussion of this in our discussion of Gross Margin
            below.
 
 Packaging
            or Raw Material Price Increases - An
            increase in packaging or raw materials could be adverse to our cash flow
            and
            income. Recently, glass prices have gone up considerably due to increased
            fuel
            prices and other market forces. Rising fuel prices could possibly increase
            costs
            of the raw materials and packaging making up the cost of goods manufactured.
            We
            continue to search for packaging and production alternatives to reduce
            our cost
            of goods.
 
 Initial
            Public Offering. We
            completed our regulatory filings with state and federal securities commissions
            and commenced our public offering in September 2005. Our public offering
            is a
            best efforts offering of up to 2 million shares of stock at $4.00 per
            share.
            While we do not require this funding to continue our operations, in the
            event
            less than the maximum amount of this offering is raised, our future business
            plans may be adversely effected.
  
  **Gross
            Margin Discussion**
 
 We
            recognize the long term need to improve the margins of the company. Currently,
            we spend about 11.6% on freight and warehousing supporting our national
            distribution with most of our production coming from our east coast contract
            manufacturer in Pennsylvania. Ultimately, we will have regional production
            and
            ship direct to our customers. This will result in savings, in both reduced
            production costs and local delivery direct to customers. We expect that
            reduced
            production costs and local delivery will result in a gross margin increase
            in
            the 10-15% range. We have always built our brands with the focus of increasing
            our sales volumes, which in turn increases the value of our company because
            we
            know the market place values sales volume. This focus has driven our
            sales
            growth and will continue to do so. However, we also recognize the need
            to
            improve our margins, thereby increasing our profitability. In the short
            term, a
            number of projects are in the works to improve margins. Those projects
            are
            summarized below.
 
 **Projects**
                  **Annual
                      Savings**
                    **per
                      shift**
                  **Approximate
                      Costs**Build
                      Manual Bulk glass depalletizer
                  $20,000
                  $5,000Improve
                      plant conveyors
                  $20,000
                  $5,000Automatic
                      soft drink batch machine
                  $10,000
                  $5,000Drop
                      packer installed
                  $40,000
                  $5,000Bringing
                      on a Swing shift
                  $40,000
                  $0
 
 
 The
            west
            coast brewery when fully operational will allow the company to reduce
            its
            freight expenses by avoiding expensive cross country shipping. Even though
            the
            brewery had been intended to accomplish this task, it has not been able
            to
            become fully operational. The plant can run in a single shift with a
            5 day week
            approximately 375,000 cases a year supporting approximately $5,000,000
            in annual
            sales. We ran in 2004 at approximately 30% of this capacity and this
            year we are
            running at about 50%. The main obstacle to full plant utilization is
            the
            inability of our west coast plant to consistently produce a product which
            meets
            our flavor standards. Since we do not release inferior product in the
            market
            place, our utilization has been impacted. We are working with flavor
            experts in
            seeking a solution to this production obstacle. It appears differences
            in
            equipment and water source at our west coast plant are causing
            the flavor
            of the brews to not consistently produce a product which meets our flavor
            standards. The goal with this plant is to get the plant supporting and
            producing
            all the product demand for west of the Mississippi. This would save about
            $225,000 on freight a year on our current volume of sales. Labor costs
            at this
            plant are also running higher than design. The number of people on the
            line is
            still high due to a number of pieces of equipment that need to be bought
            and
            installed to reduce labor. We project those six projects we currently
            are
            working on will save approximately $150,000 in labor annually. Recently,
            we
            acquired an automatic 5 liter party keg filler for $77,000. This machine
            has
            reduced labor costs from 50¢ per keg to 15¢ per keg. The savings that both full
            operating volume and proper staff on the line would result in approximately
            $375,000 per year or around 4 percent boost to gross margin.
 
 **Affect
            of Fuel Costs Increase on our Gross Margin**
 
 Hurricane
            Katrina’s effects on fuel prices have had a negative effect on our gross margin.
            Our products require us to utilize freight companies to move our products
            to
            market. The freight costs have been considerably higher as freight companies
            pass on the effect of higher fuel prices. Higher fuel prices have also
            caused a
            number of our suppliers to increase prices to us, most notably our main
            contract
            manufacturer in Pennsylvania. Citing cost increases for glass, they have
            increased our cost of production by 9%. This price increase will reduce
            our
            gross margin by an estimated 3%. This price increase became effective
            on October
            31, 2005. Our response to this price increase is that we will initiate
            a price
            increase on our products. In addition, we are actively pursuing other
            production
            facilities that could offer better pricing. We believe our growth, current
            volume and projected future volume will allow us to negotiate better
            pricing and
            at least partially negate the current cost increase. In the short term
            we will
            raise our prices. This price increase is our first in 15 years and should
            improve gross margins by about 7%. It will not go into effect until February
            1,
            2006. Therefore, we do not anticipate gross margin relief on this price
            increase
            until the first quarter of 2006.
 
 
 **Current
            Public Offering**
 
 On
            August
            3, 2005, the SEC declared our SB-2 Registration Statement effective.
            This
            offering has also been cleared in 35 States.  Brookstreet Securities
            is the
            underwriter for this offering. We are currently syndicating the offer
            to other
            NASD broker-dealers.
 
 **Results
            of Operations**
 
 ***Three
            Months Ended September 30, 2005 Compared to Three Months Ended September
            30,
            2004***
 
 Net
            Sales. Net sales increased by $525,636, or 23.8%, to $2,735,332 in the
            three
            months ended September 30, 2005 from $2,209,696 in the three months ended
            September 30, 2004. Sales growth was from existing products. This growth
            came
            from the Virgil’s Root Beer line (15.9%) that includes the new 5 liter kegs and
            cream soda and from the Reed’s Ginger Brew products line (8.0%). In addition,
            the candy line contributed (0.7%). While we keep limited data on the
            following,
            we believe these existing product sales increases were due to increased
            sales in
            existing outlets and the expansion of the number of outlets carrying
            these
            products.
 
 Gross
            Profit. Gross profit was $469,005 for the three months ended September
            30, 2005,
            an increase of $18,939 or 4.2% higher than the gross profit for the three
            months
            ended September 30, 2004 of $450,066. As a percentage of net sales, gross
            profit
            decreased to 17.1% in the three months ended September 30, 2005 from
            20.4% in
            the three months ended September 30, 2004. This decrease was due to increased
            fuel costs reflected in an increase in freight costs and increased packaging
            costs due to fuel related price increases.
 
 
 
 General
            and Administrative & Selling Expenses. These expenses increased by $48,780,
            1% to $551,800 in the three months ended September 30, 2005 from $503,020
            in the
            three months ended September 30, 2004 and decreased as a percentage of
            net sales
            to 20.2% in the three months ended September 30, 2005 from 22.8% in the
            three
            months ended September 30, 2004. We had an increase in commissions (5.8%)
            due to
            the increased reliance on outside brokers. Selling expenses also increased
            due
            to demos in new accounts to launch our products in those accounts (3.9%).
            We
            expect the commissions to remain higher as some of our sales growth relies
            on
            outside brokers and we expect to have the elevated demo expenses that
            we
            experienced this quarter on going as we use our in store kegerator demo
            program
            to launch our products into new accounts.
  Interest
            expense was $73,508 in the three months ended September 30, 2005, compared
            to
            interest expense of $64,466 in the three months ended September 30, 2004.
            We had
            higher interest expense in 2005 due to increased borrowing on our receivable
            line of credit with our lender, BACC.
 
 ***Nine
            Months Ended September 30, 2005 Compared to Nine Months Ended September
            30,
            2004***
 
 Net
            Sales. Net sales increased by $429,900, or 6.4%, to $7,134,940 in the
            nine
            months ended September 30, 2005 from $6,705,040 in the nine months ended
            September 30, 2004. 2004 sales figures include a one time sale of $348,000
            to
            one customer. Given that our overall sales increased $429,900, our sales
            increase to recurring customers approximated $778,000, for the nine months
            ending September 30, 2005. This trend is consistent with management’s plans to
            increase sales to its existing customer base as well as search for new
            customers, thereby increasing its customer base. This net sales increase
            was
            primarily the result of sales growth of existing products. Existing product
            growth came from the Virgil’s Root Beer line (7.5%) including the new 5 liter
            party kegs and the cream soda and from the Reed’s Ginger Brew products line
            (4.7%). While we keep limited data on the following, we believe these
            existing
            product sales increases were due to increased sales in existing outlets
            and the
            expansion of the number of outlets carrying these products.
 
 Gross
            Profit. Gross profit was $1,313,053 for the nine months ended September
            30,
            2005, a decrease of $8,590 or 0.6% lower than the gross profit for the
            nine
            months ended September 30, 2004 of $1,321,643. As a percentage of net
            sales,
            gross profit decreased to 18.4% in the nine months ended September 30,
            2005 from
            19.7% in the nine months ended September 30, 2004. This decrease was
            due to
            increased fuel costs reflected in an increase in freight costs and increased
            packaging costs due to fuel related price increases.
 
 General
            and Administrative & Selling Expenses. These expenses increased by $226,518
            or 17.4% to $1,527,391 in the three months ended September 30, 2005 from
            $1,300,873 in the three months ended September 30, 2004 and increased
            as a
            percentage of net sales to 21.4% in the three months ended September
            30, 2005
            from 19.4% in the three months ended September 30, 2004. General and
            administrative and selling expenses increased for the following reasons.
            We had
            an increase in commissions (2.1%) due to the increased reliance on outside
            brokers. Selling expenses also increased due to demos in new accounts
            to launch
            our products in those accounts (6.7%). Professional fees such as accounting
            fees
            increased (1.6%) due to the public reporting. Sales salaries increased
            due to
            the increase in sales force staff. We expect the new level of expenses
            to
            continue going forward but to not increase in the short term.
  Interest
              expense was $235,042 in the nine months ended September 30, 2005, compared
              to
              interest expense of $178,479 in the nine months ended September 30,
              2004. We had
              higher interest expense in 2005 due to increased borrowing and an increase
              in
              the prime lending rate on our receivable line of credit with our lender,
              BACC.
  **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.
 
 As
            of
            September 30, 2005, we had a working capital deficit of $1,369,548, compared
            to
            a working capital deficit of $684,647 as of December 31, 2004.
            This
            increase in our working capital deficit was primarily attributable to
            losses
            from operations, a decrease in accounts receivable, an increase in accounts
            payable and an increase in use of our line of credit.
 
 As
            of
            September 30, 2005, cash was $38,928, compared to $42,488 as of
            December 31, 2004. Net cash provided by operating activities was
            $45,377
            for the nine months ended September 30, 2005. This amount arose from
            a decrease
            in accounts receivable and an increase accounts payable and accrued expenses,
            offset with our loss from operations and increase in prepaid expenses.
 
 We
            used
            $113,832 in investing activities for the nine months ended September
            30, 2005,
            primarily for the purchase of equipment for our West Coast Brewery and
            a loan
            made to a director before we become public. The purchase of equipment
            was for
            the 5 liter party keg filler. This piece of equipment reduces the labor
            costs by
            over 75% in the manufacture of the party kegs.
 
 Cash
            flow
            provided in financing activities was $64,895 for the nine months ended
            September
            30, 2005 and was the result of increased borrowing on our line of credit,
            principal borrowing on debt offset by principal payment of debt and deferred
            offering expenses.
 **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
              consolidated financial statements including various allowances and
              reserves for
              accounts receivable and inventories, the estimated lives of long-lived
              assets
              and trademarks and trademark licenses, as well as claims and contingencies
              arising out of litigation or other transactions that occur in the normal
              course
              of business. The following summarize our most significant accounting
              and
              reporting policies and practices:
 
 *Trademark
              License and Trademarks.* Trademark
              license and trademarks primarily represent the costs we pay for exclusive
              ownership of the Reed’s® trademark in connection with the manufacture, sale and
              distribution of beverages and water and non-beverage products. We also
              own the
              Virgil’s® trademark and the China Cola® trademark. In addition, we own a number
              of other trademarks in the United States as well as in a number of
              countries
              around the world. We account for theses items in accordance with SFAS No.
              142, Goodwill, and Other Intangible Assets. Under the provisions of
              SFAS No. 142, we do not amortize indefinite-lived trademark
              licenses and
              trademarks.
 
 In
              accordance with SFAS No. 142, we evaluate our non-amortizing
              trademark
              license and trademarks quarterly for impairment. We measure impairment
              by the
              amount that the carrying value exceeds the estimated fair value of
              the trademark
              license and trademarks. The fair value is calculated by reviewing net
              sales of
              the various beverages and applying industry multiples. Based on our
              quarterly
              impairment analysis the estimated fair values of trademark license
              and
              trademarks exceeded the carrying value and no impairments were identified
              during
              the year ended December 31, 2004 or the nine months ended September
              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 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 year ended December 31, 2004
              or the nine
              months ended September 30, 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
              consolidated balance sheet, as well as net income, could be material.
              Management’s assumptions about cash flows and discount rates require significant
              judgment because actual revenues and expenses have fluctuated in the
              past and we
              expect they will continue to do so.
 
 In
              estimating future revenues, we use internal budgets. Internal budgets
              are
              developed based on recent revenue data for existing product lines and
              planned
              timing of future introductions of new products and their impact on
              our future
              cash flows.
 
 *Advertising.* We
              account for advertising production costs by expensing such production
              costs the
              first time the related advertising is run.
 
 *Accounts
              Receivable.* We
              evaluate the collectibility of our trade accounts receivable based
              on a number
              of factors. In circumstances where we become aware of a specific customer’s
              inability to meet its financial obligations to us, a specific reserve
              for bad
              debts is estimated and recorded which reduces the recognized receivable
              to the
              estimated amount our management believes will ultimately be collected.
              In
              addition to specific customer identification of potential bad debts,
              bad debt
              charges are recorded based on our historical losses and an overall
              assessment of
              past due trade accounts receivable outstanding.
 
 *Inventories.* Inventories
              are stated at the lower of cost to purchase and/or manufacture the
              inventory or
              the current estimated market value of the inventory. We regularly review
              our
              inventory quantities on hand and record a provision for excess and
              obsolete
              inventory based primarily on our estimated forecast of product demand
              and/or our
              ability to sell the product(s) concerned and production requirements.
              Demand for
              our products can fluctuate significantly. Factors that could affect
              demand for
              our products include unanticipated changes in consumer preferences,
              general
              market conditions or other factors, which may result in cancellations
              of advance
              orders or a reduction in the rate of reorders placed by customers.
              Additionally,
              our management’s estimates of future product demand may be inaccurate, which
              could result in an understated or overstated provision required for
              excess and
              obsolete inventory.
 
  
  *Income
              Taxes.* Current
              income tax expense is the amount of income taxes expected to be payable
              for the
              current year. A deferred income tax asset or liability is established
              for the
              expected future consequences of temporary differences in the financial
              reporting
              and tax bases of assets and liabilities. We consider future taxable
              income and
              ongoing, prudent, and feasible tax planning strategies, in assessing
              the value
              of our deferred tax assets. If our management determines that it is
              more likely
              than not that these assets will not be realized, we will reduce the
              value of
              these assets to their expected realizable value, thereby decreasing
              net income.
              Evaluating the value of these assets is necessarily based on our management’s
              judgment. If our management subsequently determined that the deferred
              tax
              assets, which had been written down, would be realized in the future,
              the value
              of the deferred tax assets would be increased, thereby increasing net
              income in
              the period when that determination was made.
  **Recent
              Accounting Pronouncements**
  In
              November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
              ARB No. 43, Chapter 4.” The amendments made by Statement 151 clarify that
              abnormal amounts of idle facility expense, freight, handling costs,
              and wasted
              materials (spoilage) should be recognized as current period charges
              and require
              the allocation of fixed production overheads to inventory based on
              the normal
              capacity of the production facilities. The guidance is effective for
              inventory
              costs incurred during fiscal years beginning after June 15, 2005. Earlier
              application is permitted for inventory costs incurred during fiscal
              years
              beginning after November 23, 2004. The Company has evaluated the impact
              of the
              adoption of SFAS 151, and does not believe the impact will be significant
              to the
              Company's overall results of operations or financial position.
  In
              December 2004, the FASB issued SFAS No.153, “Exchanges of Non-monetary Assets,
              an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions.”
              The amendments made by Statement 153 are based on the principle that
              exchanges
              of non-monetary assets should be measured based on the fair value of
              the assets
              exchanged. Further, the amendments eliminate the narrow exception for
              non-monetary exchanges of similar productive assets and replace it
              with a
              broader exception for exchanges of non-monetary assets that do not
              have
              commercial substance. Previously, Opinion 29 required that the accounting
              for an
              exchange of a productive asset for a similar productive asset or an
              equivalent
              interest in the same or similar productive asset should be based on
              the recorded
              amount of the asset relinquished. Opinion 29 provided an exception
              to its basic
              measurement principle (fair value) for exchanges of similar productive
              assets.
              The Board believes that exception required that some non-monetary exchanges,
              although commercially substantive, be recorded on a carryover basis.
              By focusing
              the exception on exchanges that lack commercial substance, the Board
              believes
              this Statement produces financial reporting that more faithfully represents
              the
              economics of the transactions. The Statement is effective for non-monetary
              asset
              exchanges occurring in fiscal periods beginning after June 15, 2005.
              Earlier
              application is permitted for non-monetary asset exchanges occurring
              in fiscal
              periods beginning after the date of issuance. The provisions of this
              Statement
              shall be applied prospectively. The Company has evaluated the impact
              of the
              adoption of SFAS 152, and does not believe the impact will be significant
              to the
              Company's overall results of operations or financial position.
  In
              December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
              Payment.” Statement 123(R) will provide investors and other users of financial
              statements with more complete and neutral financial information by
              requiring
              that the compensation cost relating to share-based payment transactions
              be
              recognized in financial statements. That cost will be measured based
              on the fair
              value of the equity or liability instruments issued. Statement 123(R)
              covers a
              wide range of share-based compensation arrangements including share
              options,
              restricted share plans, performance-based awards, share appreciation
              rights, and
              employee share purchase plans. Statement 123(R) replaces FASB Statement
              No. 123,
              Accounting for Stock-Based Compensation, and supersedes APB Opinion
              No. 25,
              Accounting for Stock Issued to Employees. Statement 123, as originally
              issued in
              1995, established as preferable a fair-value-based method of accounting
              for
              share-based payment transactions with employees. However, that Statement
              permitted entities the option of continuing to apply the guidance in
              Opinion 25,
              as long as the footnotes to financial statements disclosed what net
              income would
              have been had the preferable fair-value-based method been used. Public
              entities
              (other than those filing as small business issuers) will be required
              to apply
              Statement 123(R) as of the first interim or annual reporting period
              that begins
              after June 15, 2005. The Company has evaluated the impact of the adoption
              of
              SFAS 123(R), and does not believe the impact will be significant to
              the
              Company's overall results of operations or financial position.
  We
                do not
                believe that the adoption of the above recent pronouncements will
                have a
                material effect on our consolidated financial position or results
                of operations.
 
 We
            do not
            have any current material commitments for capital expenditures.
 
 On
            June 25, 2005, we changed our primary lender. As a result we have
            increased
            our revolving line of credit availability from $1,100,000 to $1,910,000.
            In
            addition, long term debt financing with our previous lender has been
            refinanced
            with our new lender. We were successful in securing these credit facilities
            at
            an interest rate of Prime plus 2.75% as opposed to interest rates with
            our
            previous lender which ranged from Prime plus 9% to Prime plus 12%. The
            better
            interest rate was influenced by the improved collateral of the company.
            Our
            building, which we bought for $850,000 in 2000 is now appraised at $1,600,000.
 
 This
            revolving line of credit is secured by all of our assets, including real
            estate,
            accounts receivable, inventory, trademarks and other intellectual property
            and
            equipment. The credit facility does not impose any financial covenants
            on us.
 
 The
            status of the current public offering is handled in a section prior to
            the
            discussion of results of operations.
 
 Proceeds
            of the IPO will be used to expand the sales and marketing efforts, improve
            the
            quality of our management team, and improve the infrastructure of our
            reporting
            systems and aid in the improvement to our West Coast plant.
 
 During
            the next six months, we expect to reduce our raw materials inventory
            by
            approximately $150,000. We built up this inventory by purchasing beverage
            bottles in a foreclosure proceeding of an unrelated party.
  **Inflation**
 
 Although
            management expects that our operations will be influenced by general
            economic
            conditions, we do not believe that inflation has a material effect on
            our
            results of operations.
 
 Item
            3. Quantitative and Qualitative Disclosures About Market Risk
 
 We
            are
            exposed to the impact of interest rate changes as most of our borrowings
            are
            based on the prime rate. As the prime rate increases, our borrowing costs
            will
            increase and we may not be able to pass along the increase in our borrowing
            costs to our customers.
 
 We
            are
            exposed to the impact of foreign currency fluctuations. Our sales are
            not
            materially impacted by foreign currency fluctuations, as a minimal amount
            of our
            revenues are currently generated outside the United States. We use certain
            suppliers in Germany for product packing materials, and we settle these
            transactions in Euro’s. We do not use any foreign currency hedging activities or
            other techniques to mitigate our risk to currency fluctuations. Consequently,
            our product cost may suffer from a weak dollar and we may not be able
            to pass
            along foreign currency fluctuations to our customers.
 
 
 Policies
            and Procedures -- The Company does not invest in instruments designed
            to provide
            hedging against interest rate fluctuations.
 
 Interest
            Rate Risk
 We
            currently have one credit line which we use in our operations with a
            maximum
            loan amount of $1,910,000. Our interest rate is variable and based on
            the prime
            rate. Our actual interest rate will change with each change of the prime
            rate.
            In addition, we have term loans with rates based on the prime rate. Since
            our
            borrowings have been in excess of $1,000,000, changes in the prime rate
            will
            impact our operations.
 
 Foreign
            Currency Risk
 We
            are
            exposed to the impact of foreign currency fluctuations. Our sales are
            not
            materially impacted by foreign currency fluctuations, as a minimal amount
            of our
            revenues are currently generated outside the United States. We use certain
            suppliers in Germany for product packing materials, and we settle these
            transactions in Euro’s. We do not use any foreign currency hedging activities or
            other techniques to mitigate our risk to currency fluctuations. Consequently,
            our product cost may suffer from a weak dollar and we may not be able
            to pass
            along foreign currency fluctuations to our customers.
  Overall
            Market Risk
 With
            regard to overall market risk, we attempt to mitigate our exposure to such
            risks by assessing the relative proportion of our investments in cash
            and cash
            equivalents and the relatively stable and risk-minimized returns available on
            such
            investments. At September 30, 2005, our cash was primarily invested in non-interest
            bearing checking accounts.
  Item
              3.
              CONTROLS AND PROCEDURES
 
 (a)
              Evaluation of Disclosure Controls and Procedures.
 
 Our
              management, with the participation of our principal executive officer
              and
              principal financial officer, has evaluated the effectiveness of the
              design and
              effectiveness of our disclosure controls and procedures (as defined
              in Rules
              13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
              as amended)
              as of the end of the period covered by this quarterly report. Based
              on this
              evaluation, our principal executive officer and principal financial
              officer
              concluded, as of the end of such period, that these disclosure controls
              and
              procedures are effective and designed to ensure that the information
              required to
              be disclosed in our reports filed or submitted under the Securities
              Exchange Act
              of 1934 is recorded, processed, summarized and reported within the
              requisite
              time periods.
 
 (b)
              Changes in Internal Controls.
 
 There
              was
              no change in our internal control over financial reporting (as defined
              in Rules
              13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
              as amended)
              identified in connection with the evaluation of our internal control
              performed
              during our last fiscal quarter that has materially affected, or is
              reasonably
              likely to materially affect, our internal control over financial reporting.






**Part
      II**




Item
      1.
      Legal Proceedings




Not
      applicable




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




Not
      applicable




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




Not
      applicable