UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-QSB





(Mark
      One)


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





For
      the
      quarterly period ended June 30, 2007




o
            TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
                ACT




For
      the
      transition period from__ to___


Commission
      file number





Commission
      file number: 001-32501


----------




REED'S
      INC.


(Exact
      name of registrant as specified in its charter)




Delaware
            35-2177773(State
                of incorporation)
            (I.R.S.
                Employer Identification No.)





13000
      South Spring St.  Los
      Angeles, Ca. 90061


(Address
      of principal executive offices) (Zip Code)





(310)
      217-9400


(Registrant's
      telephone number, including area code)








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





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).  Yes o  No
x




APPLICABLE
      ONLY TO CORPORATE ISSUERS




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date:


There
      were 8,701,045 shares of the registrant's common stock outstanding as of 
August 15, 2007.





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











**Part
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**




**REED’S,
      INC**




**CONDENSED
      BALANCE SHEETS**




**ASSETS**June
                30, 2007
              (Unaudited)
            
            December
                31, 2006**CURRENT
                ASSETS**Cash
            
            $
            7,178,413
            
            $
            1,638,917Restricted
                cash
            
            
            1,590,929
            
            
            1,580,456Inventory
            
            
            1,970,957
            
            
            1,511,230Trade
                accounts receivable, net of allowance for doubtful accounts and returns
                and discounts of $188,000 as of June 30, 2007 and $173,253 as of
                December
                31, 2006
            
            
            1,365,559
            
            
            1,183,763Other
                receivables
            
            
            143,388
            
            
            24,811Prepaid
                expenses
            
            
            133,299
            
            
            164,462Total
                Current Assets
            
            
            12,382,545
            
            
            6,103,639Property
                and equipment, net of accumulated depreciation of $744,785 as of
                June 30,
                2007 and $663,251 as of December 31, 2006
            
            
            2,124,260
            
            
            1,795,163**OTHER
                ASSETS**Brand
                names
            
            
            800,201
            
            
            800,201Other
                intangibles, net of accumulated amortization of $4,840 as of June
                30, 2007
                and $4,467 as of December 31, 2006
            
            
            13,774
            
            
            14,146Total
                Other Assets
            
            
            813,975
            
            
            814,347**TOTAL
                ASSETS**
            
            $
            15,320,780
            
            $
            8,713,149**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****CURRENT
                LIABILITIES**Accounts
                payable
            
            $
            1,421,222
            
            $
            1,695,014Lines
                of credit
            
            
            1,523,438
            
            
            1,355,526Current
                portion of long term debt
            
            
            43,936
            
            
            71,860Accrued
                interest
            
            
            8,703
            
            
            27,998Accrued
                expenses
            
            
            76,754
            
            
            118,301Total
                Current Liabilities
            
            
            3,074,053
            
            
            3,268,699Long
                term debt, less current portion
            
            
            830,205
            
            
            821,362Total
                Liabilities
            
            
            3,904,258
            
            
            4,090,061**COMMITMENTS
                AND CONTINGENCIES****STOCKHOLDERS’
                EQUITY**Preferred
                stock, $10 par value, 500,000 shares authorized, 55,540 shares outstanding
                at June 30, 2007 and 58,940 shares at December 31, 2006
            
            
            555,402
            
            
            589,402Common
                stock, $.0001 par value, 11,500,000 shares authorized,
                8,701,045 shares issued and outstanding at June 30, 2007 and
                7,143,185 at December 31, 2006
            
            
            870
            
            
            714Additional
                paid in capital
            
            
            17,571,155
            
            
            9,535,114Accumulated
                deficit
            
            
            (6,710,905
            )
            
            (5,502,142
            )Total
                stockholders’ equity
            
            
            11,416,522
            
            
            4,623,088**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            $
            15,320,780
            
            $
            8,713,149




See
      accompanying Notes to Condensed Financial Statements





2




**REED’S,
      INC.**




**CONDENSED
      STATEMENTS OF OPERATIONS**


**For
      the Three and Six Months Ended June 30, 2007 and 2006**


**(Unaudited)**


**Three
                months ended**
            
            **Six
                months ended****June
                30,**
            
            **June
                30,**
            
            **June
                30,**
            
            **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****SALES**
            
            $
            3,472,360
            
            $
            3,157,818
            
            $
            6,485,050
            
            $
            5,137,089**COST
                OF SALES**
            
            
            2,791,932
            
            
            2,589,864
            
            
            5,265,000
            
            
            4,278,741**GROSS
                PROFIT**
            
            
            680,428
            
            
            567,954
            
            
            1,220,050
            
            
            858,348**OPERATING
                EXPENSES**Selling
            
            
            888,104
            
            
            313,462
            
            
            1,442,269
            
            
            600,619General &
                Administrative
            
            
            450,148
            
            
            743,982
            
            
            899,491
            
            
            1,016,210Total
                Operating Expenses
            
            
            1,338,252
            
            
            1,057,444
            
            
            2,341,760
            
            
            1,616,829**LOSS FROM
                OPERATIONS**
            
            
            (657,824
            )
            
            (489,490
            )
            
            (1,121,710
            )
            
            (758,481
            )**OTHER
                INCOME (EXPENSE)**Interest
                Income
            
            
            29,109
            
            
            -
            
            
            52,600
            
            
            --Interest
                Expense
            
            
            (64,330
            )
            
            (97,748
            )
            
            (111,883
            )
            
            (198,354
            )Total
                Other Income (Expense)
            
            
            (35,221
            )
            
            (97,748
            )
            
            59,283
            
            
            (198,354
            )**NET
                LOSS**
            
            
            (693,045
            )
            
            (587,238
            )
            
            (1,180,993
            )
            
            (956,835
            )Preferred
                stock dividend
            
            
            (27,770
            )
            
            (29,470
            )
            
            (27,770
            )
            
            (29,470
            )Net
                loss attributable to common shareholders
            
            $
            (720,815
            )
            $
            (616,708
            )
            $
            (1,208,763
            )
            $
            (986,305
            )**LOSS
                PER SHARE**-
                Available to Common Stockholders
              ****Basic and Diluted
            
            $
            (.10
            )
            $
            (.12
            )
            $
            (.17
            )
            $
            (.19
            )**WEIGHTED
                AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED**
            
            
            7,403,777
            
            
            5,322,755
            
            
            7,274,201
            
            
            5,239,913






See
      accompanying Notes to Condensed Financial Statements




3




**REED’S
      INC.**




**STATEMENT
      OF CHANGES IN STOCKHOLDERS’ EQUITY**


For
      the
      six months ended June 30, 2007 (Unaudited)




CommonStock
            
            
            
            PreferredStockShares
            
            Amount
            
            Additional
                Paid in Capital
            
            Shares
            
            Amount
            
            Accumulated
                Deficit
            
            TotalBalance,
                January 1, 2007
            
            
            7,143,185
            
            $
            714
            
            $
            9,535,114
            
            
            58,940
            
            $
            589,402
            
            $
            (5,502,142
            )
            $
            4,623,088Fair
                Value of Common stock issued for services
            
            
            440
            
            
            -
            
            
            3,783
            
            
            -
            
            
            -
            
            
            -
            
            
            3,783Preferred
                Stock Dividend
            
            
            3,820
            
            
            1
            
            
            27,769
            
            
            -
            
            
            -
            
            
            (27,770
            )
            
            -Preferred
                stock conversion
            
            
            13,600
            
            
            1
            
            
            33,999
            
            
            (3,400
            )
            
            (34,000
            )
            
            -
            
            
            -Exercise
                of Warrants
            
            
            40,000
            
            
            4
            
            
            104,996
            
            
            -
            
            
            -
            
            
            -
            
            
            105,000Common
                stock issued for cash, net of offering costs
            
            
            1,500,000
            
            
            150
            
            
            7,862,074
            
            
            
            
            
            
            
            
            
            
            
            7,862,224Public
                offering expenses
            
            
            **-**
            
            
            -
            
            
            (45,000
            )
            
            -
            
            
            -
            
            
            -
            
            
            (45,000
            )Fair
                value of vested options issued to employees
            
            
            **-**
            
            
            -
            
            
            48,420
            
            
            -
            
            
            -
            
            
            -
            
            
            48,420Net
                Loss for the six months ended June 30, 2007
            
            
            **-**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,180,993
            )
            
            (1,180,993
            )Balance,
                June 30, 2007
            
            
            8,701,045
            
            $
            870
            
            $
            17,571,155
            
            
            55,540
            
            $
            555,402
            
            $
            (6,710,905
            )
            $
            11,416,522








See
      accompanying Notes to Condensed Financial Statements




4




**REED’S
      INC.**




**CONDENSED
      STATEMENTS OF CASH FLOWS**


**For
      the six months ended June 30, 2007 and 2006**


**(Unaudited)**







**Six
                Months Ended******
            
            **June
                30,**
              **2006**
            
            **June
                30,**
              **2005****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                Loss
            
            $
            (1,180,993
            )
            $
            (956,835
            )Adjustments
                to reconcile net loss to net cash used in operating activities:Compensation
                expense from stock issuance
            
            
            3,783
            
            
            --Fair
                value of stock options issued to employees
            
            
            48,420
            
            
            --Depreciation
                and amortization
            
            
            81,907
            
            
            58,684Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (181,796
            )
            
            (447,578
            )Inventory
            
            
            (459,727
            )
            
            (67,800
            )Prepaid
                Expenses
            
            
            31,163
            
            
            (32,032
            )Other
                receivables
            
            
            (118,576
            )
            
            4,296Accounts
                payable
            
            
            (273,792
            )
            
            736,612Accrued
                expenses
            
            
            (41,547
            )
            
            21,565Accrued
                interest
            
            
            (19,296
            )
            
            17,951Net
                cash used in operating activities
            
            
            (2,110,454
            )
            
            (665,137
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            (410,631
            )
            
            (36,969
            )Increase
                in restricted cash
            
            
            (10,473
            )
            
            --Net
                cash used in investing activities
            
            
            (421,104
            )
            
            (36,969
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                received from warrants exercise
            
            
            105,000
            
            
            --Proceeds
                received from borrowings on long term debt
            
            
            163,276
            
            
            --Principal
                payments on debt
            
            
            (182,356
            )
            
            (53,870
            )Proceeds
                received on sale of common stock
            
            
            9,000,000
            
            
            1,002,779Payments
                for stock offering costs
            
            
            (1,182,777
            )
            
            (237,287
            )Net
                borrowing  on lines of credit
            
            
            167,911
            
            
            17,508Net
                cash provided by financing activities
            
            
            8,071,054
            
            
            729,130**NET
                INCREASE****IN
                CASH**
            
            
            5,539,496
            
            
            27,024**CASH —
                Beginning of period**
            
            
            1,638,917
            
            
            27,744**CASH —
                End of period**
            
            $
            7,178,413
            
            $
            54,768**Supplemental
                Disclosures of Cash Flow Information**Cash
                paid during the period for:Interest
            
            $
            131,176
            
            $
            180,403Taxes
            
            $
            --
            
            $
            --**Noncash
                Investing and Financing Activities:**Common
                stock to be issued in settlement of preferred stock
                dividend
            
            $
            --
            
            $
            29,470Deferred
                stock offering costs charged to paid in capital
            
            $
            --
            
            $
            356,238Preferred
                Stock converted to Common Stock
            
            $
            34,000
            
            $
            --Common
                stock issued in settlement of preferred stock dividend
            
            $
            27,770
            
            $
            29,470





See
      accompanying Notes to Condensed Financial Statements




5




**REED’S,
      INC.**




**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**


**Six
      Months Ended June 30, 2007 and 2006 (UNAUDITED)**




****1. BASIS OF
      PRESENTATION




The
      accompanying interim condensed financial statements are unaudited, but in the
      opinion of management of Reeds, Inc. (the Company), contain all adjustments,
      which include normal recurring adjustments necessary to present fairly the
      financial position at June 30, 2007 and the results of operations and cash
      flows
      for the six months ended June 30, 2007 and 2006. The balance sheet as of
      December 31, 2006 is derived from the Company’s audited financial
      statements.





Certain
      information and footnote disclosures normally included in financial statements
      that have been prepared in accordance with generally accepted accounting
      principles have been condensed or omitted pursuant to the rules and regulations
      of the Securities and Exchange Commission, although management of the Company
      believes that the disclosures contained in these financial statements are
      adequate to make the information presented herein not misleading. For further
      information, refer to the financial statements and the notes thereto included
      in
      the Company’s Annual Report, Form 10-KSB, as filed with the Securities and
      Exchange Commission on April 16, 2007.





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





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





Income
      (Loss) per Common Share





Basic
      income (loss) per share is calculated by dividing net income (loss) available
      to
      common stockholders by the weighted average number of common shares outstanding
      during the year. Diluted income per share is calculated assuming the issuance
      of
      common shares, if dilutive, resulting from the exercise of stock options and
      warrants. As the Company had a loss in the three and six month periods ended
      June 30, 2007 and 2006, basic and diluted loss per share are the same because
      the inclusion of common share equivalents would be anti-dilutive. At June 30,
      2007 and 2006, potentially dilutive securities consisted of convertible
      preferred stock, common stock options and warrants aggregating 2,412,896 and
      1,276,159 common shares, respectively.





Adoption
      of New Accounting Policy








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







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




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






6





Recent
      Accounting Pronouncements





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





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





Concentrations





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





During
      the three months ended June 30, 2007 and 2006, the Company had two customers,
      which accounted for approximately 14% and 34% and 18% and 47% of sales,
      respectively. No other customers accounted for more than 10% of sales in either
      year.





During
      the six months ended June 30, 2007 and 2006, the Company had two customers,
      which accounted for approximately 15% and 36% and 18% and 46% of sales,
      respectively . No other customers accounted for more than 10% of sales in either
      year. As of June 30, 2007, the Company had approximately $187,000 and $498,000,
      respectively, of accounts receivable from these customers.




2. Restricted
        Cash
  The
        restricted cash of $1,590,929 relates to a collateral deposit for a line
        of
        credit facility.





3. Inventory




Inventory
      consists of the following at:





June
                30, 2007
            
            December
                31, 2006Raw
                Materials
            
            $
            757,787
            
            $
            593,458Finished
                Goods
            
            
            1,213,170
            
            
            917,772$
            1,970,957
            
            $
            1,511,230




4. Long
      term
      debt





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





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





7
 
  5.           Stockholders’
Equity 
 From
          May
          25, 2007 through June 15, 2007, the Company completed a private placement
          to
          accredited investors only, on subscriptions for the sale of 1,500,000 shares
          of
          common stock and warrants to purchase up to 749,995 shares of common stock,
          resulting in an aggregate of $9,000,000 of gross proceeds to the Company.
          The
          Company sold the shares at a purchase price of $6.00 per share. The warrants
          issued in the private placement have a five-year term and an exercise price
          of
          $7.50 per share. We paid cash commissions of $900,000 to the placement
          agent for
          the private placement and issued warrants to the placement agent to purchase
          up
          to 150,000 shares of common stock with an exercise price of $6.60 per share.
          We
          also issued additional warrants to purchase up to 15,000 shares of common
          stock
          with an exercise price of $6.60 per share and paid an additional $60,000
          in cash
          to the placement agent as an investment banking fee. Total proceeds received,
          net of underwriting commissions and the investment banking fee and excluding
          other expenses of the private placement, was $8,040,000.


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





6. Stock
      Based Compensation





The
      impact on our results of operations of recording stock-based compensation for
      the three-month period ended June 30, 2007 and 2006 was to increase selling
      expenses by $16,793 and $0, respectively, and increase general and
      administrative expenses by $6,500 and $0, respectively.




The
      impact on our results of operations of recording stock-based compensation for
      the six-month period ended June 30, 2007 and 2006 was to increase selling
      expenses by $41,920 and $0, respectively, and increase general and
      administrative expenses by $6,500 and $0, respectively. As of June 30, 2007,
      the
      Company has unvested options of 224,000, which will be reflected as compensation
      cost of approximately $576,100 over the remaining vesting period of three
      years.




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





Risk-free
                interest rate
            
            4.83
            %Expected
                lives (in years)
            
            5.00Dividend
                yield
            
            0
            %Expected
                volatilty
            
            70
            %





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




The
      following table summarizes stock option activity for the six months ended June
      30, 2007 :




Shares
            
            Weighted
                AverageExercise
                Price
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
                (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at January 1, 2007
            
            
            363,500
            
            $
            3.84
            
            
            -
            
            
            -Granted
            
            
            139,000
            
            $
            5.90
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                at June 30, 2007
            
            
            502,500
            
            $
            4.41
            
            
            3.71
            
            $
            1,441,225Exercisable
                at June 30, 2007
            
            
            278,500
            
            $
            3.79
            
            
            3.01
            
            $
            962,625







8




Stock
      options granted under our equity incentive plans generally vest over three
      years
      from the date of grant, 1/3 per year and generally expire five years from the
      date of grant. The weighted average exercise price of stock options granted
      during the period was $5.90 per share and the related weighted average
      grant date fair value was $3.65 per share.





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





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





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




The
      following table summarizes warrant activity for the six months ended June 30,
      2007 :





Shares
            
            Weighted
                AverageExercise
                Price
            
            Weighted-Average
              Remaining
                Contractual
              Term
                (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at January 1, 2007
            
            
            813,241
            
            $
            3.74
            
            
            -
            
            
            -Issued
            
            
            914,995
            
            $
            7.34
            
            
            -
            
            
            -Exercised
            
            
            (40,000
            )
            $
            2.63
            
            
            -
            
            
            -Outstanding
                at June 30, 2007
            
            
            1,688,236
            
            $
            5.72
            
            
            3.81
            
            $
            2,776,900Exercisable
                at June 30, 2007
            
            
            1,488,236
            
            $
            5.60
            
            
            3.74
            
            $
            2,646,900






The
      warrants granted in 2007 were granted in connection with our private placement,
      see note 5, and were fully vested at issuance on June 15, 2007 and expire in
      June 2012. The weighted average exercise price of the warrants was $7.34. The
      weighted average issue date fair value was $4.26 per warrant, resulting in
      an aggregate fair value of $3,091,779. The accounting affect of this is to
      both
      include and deduct the amount from Additional Paid in Capital. All of the
      warrants issued to the investors, 749,995 warrants, include a call provision
      which the Company may exercise and will require the warrant holder, within
      20
      days written notice of the call provision being exercised by the Company, to
      exercise the warrants or have them expire. The Company may exercise its call
      provision anytime the Company’s common stock closes at or above $10.00 per share
      for a period of 10 consecutive trading days.





7.          
      Subsequent Events


In
        July
        2007, the Company made an unsecured loan of $300,000 to
        an unaffiliated third party. The loan requires interest to be paid
        quarterly, at a rate of 7.5%. The principal is due in full in April
        2008.
 
 In
        August
        2007, the Company acquired a property adjacent to its Los Angeles, CA location
        for approximately $1,730,000. The Company intends to use the facility to
        store
        finished goods inventory. No major renovations are expected to be made to
        the
        property in order for it to attain its intended use.


9




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





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





**Overview**





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





·
            Reed’s
                Ginger Brews,




·
            Virgil’s
                Root Beer and Cream Sodas,




·
            China
                Colas,




·
            Reed’s
                Ginger Juice Brews,




·
            Reed’s
                Ginger Candies, and




·
            Reed’s
                Ginger Ice Creams




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




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




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




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





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




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




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






10




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





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




For
      the
      six months ended June 30, 2007, our sales increase d approximately $1, 348,000 over the
      comparable period of the prior year, from
      approximately $5,137,000 to
      approximately $ 6,485,000.




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





·
            successes
                in our Southern California direct distribution
                strategy,




·
            increases
                in our core of national distribution to natural and gourmet food
                stores
                and mainstream supermarket chains, and increases in the mainstream
                distribution of our products. These include new distribution relationships
                in the following areas: Washington state, Oregon, New York, Massachusetts,
                New Hampshire, Connecticut, Pennsylvania, Ohio, Michigan, Minnesota
                and
                Colorado.We
                also arestarting upaco
                branded marketingplanwith
                these new distributors in these areas of the country..We
                hope to establish additional distributorship relationships in 10-20
                new
                areas by the end of 2007, and




·
            increases
                in our direct sales to large
                retailers.




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





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




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




In
      2002,
      we purchased and outfitted the Brewery, in part to help reduce both production
      costs and freight costs associated with our west coast sales. Gross margins
      decreased from 24.8% in 2002 to 19.5% in 2003 as a principal result of the
      start-up of the Brewery. Gross margins increased to 20.9% in 2004 as a principal
      result of attaining greater functionality and efficiencies in our operation
      of
      the Brewery by our own personnel and being able to produce and ship products
      in
      the western half of the United States from a west coast facility. However,
      in
      2005, gross margins decreased to 18.2% as a principal result of increases in
      fuel prices, which put downward pressure on our margins due to increased freight
      expenses and increased glass and production costs, both of which are sensitive
      to fuel costs. In February 2006, we decided to raise our prices on the Ginger
      Brew line for the first time in 16 years. In 2006, gross margins recovered
      to
      19.6% partially as a result of a price increase on our core Reed’s Ginger Brew
      line and offset by increased pressure from more expensive production,
      ingredients and packaging expenses due to fuel related price increases. For
      the
      six months ended June 30, 2007, our gross margins were 18.8% as compared to
      16.7% for the six months ended June 30, 2006.





Production
      costs are a significant
      portion of our “ cost of goods” and a
      major
      factor in determining our gross margins. Greater
      production volumes increase our ability to negotiate more favorable production
      costs. We
      are a ttempting
      to negotiate production arrangements with third parties that may result
      in production costs savings ,
      which,
      if successful, would improve
      our gross margins.
      In addition, our west coast Brewery facility is running at 50% of capacity.
      We
      have had difficulties with the flavor of our Ginger Brew products produced
      at
      the Brewery. As a result, we continue to supply our Ginger Brew products at
      the
      Brewery from our east coast co-packing facility, thereby causing us to incur
      increased freight and warehousing expenses on our products. Management is
      committed to selling a high quality, great tasting product and has elected
      to
      continue to sell certain of our Ginger Brew products produced from our east
      coast facility on the west coast, even though it negatively impacts our gross
      margins. We believe that increased production of our Virgil’s product line
      (non-Ginger Brew) has increased utilization of operating capacity at the
      Brewery. As we are able to more fully utilize the Brewery, we believe that
      we
      will experience improvements in gross margins due to freight and production
      savings. We are continuing to improve the Brewery’s operations and to work on
      the issue of our Ginger Brew product flavoring. In the second quarter of 2007,
      we expended approximately $100,000 for a conveyor system to improve our
      packaging line.





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





11




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





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





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




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





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





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





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





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





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





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




Cash
      Flow
      Requirements - Our growth will depend on the availability of additional capital
      infusions. We have a financial history of losses and are dependent on
      non-banking sources of capital, which tend to be more expensive and charge
      higher interest rates. In addition, our initial public offering, subsequent
      private placement and our outstanding options and warrants, while providing
      capital, also dilute the ownership of common stockholders. Any increase in
      costs
      of goods will further increase losses and will further tighten cash reserves.





Interest
      Rates - We use lines of credit as a source of capital and are negatively
      impacted as interest rates rise. Our use of lines of credit have been reduced
      with the capital raised from our initial public offering and subsequent private
      placement of common stock.


12




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





In
      accordance with SFAS No. 142, we evaluate our non-amortizing trademark
      license and trademarks quarterly for impairment. We measure impairment by the
      amount that the carrying value exceeds the estimated fair value of the trademark
      license and trademarks. The fair value is calculated by reviewing net sales
      of
      the various beverages and applying industry multiples. Based on our quarterly
      impairment analysis the estimated fair values of trademark license and
      trademarks exceeded the carrying value and no impairments were identified during
      the six months ended June 30, 2007 or 2006.





Long-Lived
      Assets. Our management regularly reviews property, equipment and other
      long-lived assets, including identifiable amortizing intangibles, for possible
      impairment. This review occurs quarterly or more frequently if events or changes
      in circumstances indicate the carrying amount of the asset may not be
      recoverable. If there is indication of impairment of property and equipment
      or
      amortizable intangible assets, then management prepares an estimate of future
      cash flows (undiscounted and without interest charges) expected to result from
      the use of the asset and its eventual disposition. If these cash flows are
      less
      than the carrying amount of the asset, an impairment loss is recognized to
      write
      down the asset to its estimated fair value. The fair value is estimated at
      the
      present value of the future cash flows discounted at a rate commensurate with
      management’s estimates of the business risks. Quarterly, or earlier if there is
      indication of impairment of identified intangible assets not subject to
      amortization, management compares the estimated fair value with the carrying
      amount of the asset. An impairment loss is recognized to write down the
      intangible asset to its fair value if it is less than the carrying amount.
      Preparation of estimated expected future cash flows is inherently subjective
      and
      is based on management’s best estimate of assumptions concerning expected future
      conditions. No impairments were identified during the six months ended June
      30,
      2007 or 2006.





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





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





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.


13




**Results
      of Operations**





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




Net
      sales
      increased by $314,542 or 10.0%, from $3,157,818 in the three months ended June
      30, 2006 to $3,472,360 in the three months ended June 30, 2007. Net
      sales
      in the first quarter of 2007 had
      increased by 52.2% from the comparable period in 2006. However, we believe
      that
      the amount of the percentage increase may have been unusually high between
      the
      periods because approximately $500,000 of sales recorded
      in the second quarter of 2006 related to unfilled orders from the
      first quarter of 2006 that were delayed due to a
      plant equipment retrofit .
      Conversely, we also believe that the 10% increase in net sales from the second
      quarter of 2006 to the second quarter of 2007 would have been higher had the
      delayed sales which occurred in the second quarter of 2006 actually taken place
      in the first quarter of 2006. However, as reflected below, net sales increased
      by 26.2% in the six month period ended June 30, 2007 from the six month period
      ended June 30, 2006. We
      believe that sales for the first
      half of 2007 have been within the range of our guidance
      of 20-40% growth for 2007. The
      Reed’s Ginger Brew product line decreased by 9.3% from $1,699,000 in the three
      months ended June 30, 2006 to $1,541,000 in the three months ended June 30,
      2007. Sales
      of
      our Virgil’s Root Beer product line increased by 32.3% from $1,104,000 to
      $1,461,000. These sales were due to a significant increase in the Virgil’s 5
      liter party keg sales that grew from $50,000 in the three months ended June
      30,
      2006 to $304,000 in the three months ended June 30, 2007. In
      addition, the new low calorie, herbally enhanced 12 ounce bottle Virgil
      line generated $92,000 of sales. Candy
      sales decreased by $24,000 or 11.8% from $204,000 in the three months ended
      June
      30, 2006 to $180,000 in the three months ended June 30, 2007. Ice cream sales
      increased by 9.1% from $33,000 in the three months ended June 30, 2006 to
      $36,000 in the three months ended June 30, 2007.




Cost
      of
      sales increased by $202,068 or 7.8%, from $2,589,864 in the three months ended
      June 30, 2006 to $2,791,932 in the three months ended June 30, 2007. As a
      percentage of net sales, cost of sales decreased from 82.0% in the three months
      ended June 30, 2006 to 80.4% in the three months ended June 30, 2007. The
      decrease in the costs of sales was primarily due to our negotiating
      better freight rates with
      transporters of our products .




Gross
      profit increased by $112,474 or 19.8% from $567,954 in the three months ended
      June 30, 2006 to $680,428 in the three months ended June 30, 2007. As a
      percentage of net sales, gross profit increased from 18.0% in the three months
      ended June 30, 2006 to 19.6% in the three months ended June 30, 2007. Our
      focus
      on reducing freight costs resulted in the improvement in margins. However,
      in July 2007, our
      main
      co-pack production facility increased its prices. We
      expect
      this increase
      to have an adverse effect on our gross margins
      in the short term. However ,
      we are
      looking at alternative co-pack production plants to reduce production costs,
      our
      largest expense ,
      and
      hope to reach arrangements with alternative co-pack facilities by the end
      of the
      third quarter of 2007.




Operating
      expenses increased by $280,808 or 26.7% from $1,057,444, in the three months
      ended June 30, 2006 to $1,338,252 in the three months ended June 30, 2007.
      Operating expenses increased as a percentage of net sales from 33.5% in the
      three months ended June 30, 2006 to 38.5% in the three months ended June 30,
      2007. The increase was primarily due to increases in sales salaries and
      commissions as a result of an increase in our sales force (6.5%), sales expenses
      (2.7%), advertising and promotional expenses (6.4%) and increased recycling
      fees
      (1.6%). These increases were offset by the elimination of non-recurring expenses which we incurred
      in the second quarter of 2006 relating
      to our rescission offer (-11.1%)
      We expect to see an increase in sales force expenses as we bring on more sales
      people to work with our new
      distributo rs .




Interest
      expense decreased by $33,418 or 34.2%, from $97,748 in the three months ended
      June 30, 2006 to $64,330 in the three months ended June 30, 2007. Interest
      income increased from $0 in the three months ended June 30, 2006 to $29,109
      in
      the three months ended June 30, 2007. The
      decrease in interest expense was principally due
      to
      the reduction
      of certain outstanding loans in the fourth quarter of 2006.




As
      a
      result of the foregoing, we experienced a net loss of $693,045 in the three
      months ended June 30, 2007 compared to a net loss of $587,238 in the three
      months ended June 30, 2006. Our net loss attributable to common stockholders
      was
      $(0.10) per share for the three months ended June 30, 2007 and $(0.12) per
      share for
      the
      three months ended June 30, 2006, inclusive of the value of our preferred stock
      dividend. Our
      net
      loss per share attributable to common stockholders decreased from the prior
      year, despite the rise in net loss, due to the increase in the number of our
      outstanding shares as a result of our initial public offering and private
      placement of our  common
      stock.




*Six
      Months Ended June 30, 2007 Compared to Six Months Ended June 30,
      2006*




Net
      sales
      increased by $1,347,961 or 26.2%, from $5,137,089 in the six months ended June
      30, 2006 to $6,485,050 in the six months ended June 30, 2007. Net
      sales in the first quarter of 2007 increased by 52.2% from the comparable period in 2006. However, we believe
      that
      the amount of the percentage increase may have been unusually high between
      the
      periods because approximately $500,000 of sales recorded
      in the second quarter of 2006 related to unfilled orders from the
      first quarter of 2006 that were delayed due to a
      plant equipment retrofit . Conversely, we also believe that the 10% increase in net sales from the second
      quarter of 2006 to the
      second quarter of 2007
      would have been higher had the delayed sales which occurred in the second
      quarter of 2006 actually taken place in the first quarter of 2006. However,
      as
      reflected above, net sales increased by 26.2% in the six month
      period ended
      June 30, 2007 from
      the
      six month period ended June 30, 2006. We
      believe that sales for the first
      half of 2007 have been within the range of our guidance
      of 20-40% growth for 2007. The
      Reed’s Ginger Brew product line increased by 8.7% from $2,778,000 in the six
      months ended June 30, 2006 to $3,021,000 in the six months ended June 30, 2007.
      Sales of our Virgil’s Root Beer product line increased by 34.3% from $1,803,000
      to $2,421,000. Candy sales increased by $27,000 or 6.6% from $410,000 in the
      six
      months ended June 30, 2006 to $437,000 in the six months ended June 30, 2007.
      Ice cream sales were flat at $68,000.






14


Cost
      of
      sales increased by $986,259 or 23.1%, from $4,278,741 in the six months ended
      June 30, 2006 to $5,265,000 in the six months ended June 30, 2007. As a
      percentage of net sales, cost of sales decreased from 83.3% in the six months
      ended June 30, 2006 to 81.2% in the six months ended June 30, 2007. The decrease
      in the costs of sales was primarily due to our negotiating
      better freight rates ** with
      transporters of our products .




Gross
      profit increased by $361,702 or 42.1% from $858,348 in the six months ended
      June
      30, 2006 to $1,220,050 in the six months ended June 30, 2007. As a percentage
      of
      net sales, gross profit increased from 16.7% in the six months ended June 30,
      2006 to 18.8% in the six months ended June 30, 2007. Our focus on reducing
      freight costs resulted in the improvement in margins. However,
      in July
      2007, our main co-pack production
      facility increased its prices.
      We expect this increase
      to have an adverse effect on our gross margins
      in the short term. However ,
      we are
      looking at alternative co-pack production plants to reduce production costs,
      our
      largest expense and
      hope
      to reach arrangements with alternative co-pack facilities by the end
      of the
      third quarter of 2007.




Operating
      expenses increased by $724,931 or 44.8% from $1,616,829, in the six months
      ended
      June 30, 2006 to $2,341,760 in the six months ended June 30, 2007. Operating
      expenses increased as a percentage of net sales from 31.5% in the six months
      ended June 30, 2006 to 36.1% in the six months ended June 30, 2007. The increase
      was primarily due to increases in sales salaries and commissions as a result
      of
      an increase in our sales force (4.8%), sales expenses (1.9%), advertising and
      promotional expenses (3.5%) and increased recycling fees (1.0%). These increases
      were offset by the elimination of non-recurring expenses
      which we incurred
      in the second quarter of 2006 relating
      to our rescission offer (-6.8%).
      We expect to see an increase in sales force expenses as we bring on more sales
      people to work with our new
      distributo rs .




Interest
      expense decreased by $86,471 or 43.6%, from $198,354 in the six months ended
      June 30, 2006 to $111,883 in the six months ended June 30, 2007. Interest income
      increased from $0 in the three months ended June 30, 2006 to $52,600 in the
      three months ended June 30, 2007. The decrease in interest expense was due principally due
      to
      the reduction
      of certain outstanding loans in the fourth quarter of 2006.




As
      a
      result of the foregoing, we experienced a net loss of $1,180,993 in the six
      months ended June 30, 2007 compared to a net loss of $956,835 in the six months
      ended June 30, 2006. Our net loss attributable to common stockholders was
      $(0.17) per share for the six months ended June 30, 2007 and $(0.19) per share
      for the six months ended June 30, 2006, inclusive of the value of our preferred
      stock dividend. Our net loss per share attributable to common stockholders
      decreased from the prior year, despite the rise in net loss attributable to
      common stockholders, due to the increase in the number of our outstanding shares
      as a result of our initial public offering and private placement of our common
      stock.




*Liquidity
      and Capital Resources*





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





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







15


As
      of
      June 30, 2007, we had an accumulated deficit of $6,710,905 and we had working
      capital of $9,308,492, compared to an
      accumulated deficit of $5,502,142 and working
      capital of $2,834,940 as of December 31, 2006. Cash and cash equivalents
      were $7,178,413 as of June 30, 2007, as compared to $1,638,917 as of December
      31, 2006. This increase in our working capital and cash position was primarily
      attributable to the completion of our private placement ** in
      the
      second quarter of 2007 .
      In
      addition to our cash position, we have availability under our lines of credit
      of
      approximately $727,000.





Net
      cash
      used in operating activities during the six months ended June 30, 2007 was
      $2,110,454 which was due primarily to our net loss of $1,180,993, net increases
      in our accounts receivable, inventory, other receivables and a decrease in
      accounts payable.




In
      the
      six months ended June 30, 2007, we used $421,104 of cash in investing
      activities, which was due primarily to the purchase of various equipment to
      support business growth.




Net
      cash
      provided by financing activities during the six months ended June 30, 2007
      was
      $8,071,054. The primary components of that were: the proceeds of our
      private  placement
      of $9,000,000, offset by related expenses
      directly associated with the private
      placement ,
      proceeds from the exercise
      of common stock purchase warrants of $105,000, increases in long term debt of $163,276, and
      borrowing from our lines of credit of
      $167,911, which was offset by payments of long term debt of
      $182,356.




As
      of
      June 30, 2007, we had outstanding borrowings of $1,523,438 under our lines
      of
      credit agreements:





·
            We
                have an unsecured $50,000 line of credit with US Bank which expires
                in
                December 2009. Interest is payable monthly at the prime rate, as
                published
                in the Wall Street Journal, plus 12% per annum. Our outstanding balance
                was $23,662 at June 30, 2007 and there was $26,338 available under
                the
                line of credit. The interest rate in effect at June 30, 2007 was
                20.25%.




·
            We
                have a line of credit with Merrill Lynch. Robert T. Reed, Jr., our
                Vice
                President and National Sales Manager - Mainstream and a brother of
                our
                Chief Executive Officer, Christopher J. Reed, has pledged certain
                securities (which do not include any of our securities which are
                owned by
                Mr. Reed) in his personal securities account on deposit with Merrill
                Lynch
                as collateral for repayment of the line of credit. The amount of
                the line
                of credit is based on a percentage value of such securities. At June
                30,
                2007, the outstanding balance on the line of credit was $-0-, and
                there
                was approximately $701,000 available under the line of credit. The
                line of
                credit bears interest at a rate of 3.785% per annum plus LIBOR (9.1%
                as of
                June 30, 2007). In consideration for Mr. Reed’s pledging his stock account
                at Merrill Lynch as collateral, we have agreed to pay Mr. Reed 5%
                per
                annum of the amount we borrow from Merrill Lynch, as a loan fee.
                In
                addition, Christopher J. Reed has pledged all of his shares of common
                stock to Robert T. Reed, Jr. as collateral for the shares pledged
                by
                Robert T. Reed, Jr.




·
            We
                have a line of credit with California United Bank. This line of credit
                allows us to borrow a maximum amount of $1,500,000. As of June 30,
                2007,
                the amount borrowed on this line of credit was $1,499,776. The interest
                rate on this line of credit is Prime, which was 8.25% at June 30,
                2007.
                The line of credit expires in June 2008. This revolving line of credit
                is
                secured by all Company assets, except real estate. In addition, we
                have
                assigned a security interest in a deposit account at the bank. The
                amount
                of the deposit and the security interest is $1,575,000 and may be
                offset
                by the bank against any balance on the line of credit. The deposit
                cannot
                be withdrawn during the term of the line of credit. We may terminate
                the
                line of credit arrangement at any time, without penalty. As of June
                30,
                2007, we had approximately $224 of availability on this line of credit.
                During the term of this line of credit, we are required to have a
                minimum
                stockholders’ equity balance of
                $1,500,000.





In
      the
      second quarter of 2007, we expended approximately $100,000 for new equipment
      at
      the Brewery for a conveyor system to improve our packaging line, but do not
      consider this improvement to have been a material capital expenditure for the
      purpose of improving plant capacity at the Brewery. In August 2007, we purchased
      the adjacent land and building to our Los Angeles location for approximately
      $ 1,730,000
      in cash. We intend to use
      the facility to store some of our finished
      goods inventory. No major renovations are expected to be made to the property
      in
      order for us to
      attain the intended
      use of the
      property.




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




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





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







16


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





·
            fund
                more rapid expansion,




·
            fund
                additional marketing expenditures,




·
            enhance
                our operating infrastructure,




·
            respond
                to competitive pressures, and




·
            acquire
                other businesses.




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





Recent
      Accounting Pronouncements





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





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





**Inflation**




Although
      management expects that our operations will be influenced by general economic
      conditions, we do not believe that inflation has a material effect on our
      results of operations.




Item
      3.
      Controls and Procedures




(a)
      Evaluation of Disclosure Controls and Procedures.





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





Based
      on
      this evaluation, our chief executive officer and chief financial officer concluded that ,
      as of June
      30,
      2007, such disclosure
      controls and procedures were effective to
      ensure
      that information
      required to be disclosed by
      us in the reports we
      file or
      submit under
      the Exchange
      Act is recorded, processed, summarized and reported within the time
      periods specified in the rules and forms of the SEC, and accumulated and communicated
      to
      our management, including our chief executive officer and chief financial
      officer, as appropriate to allow timely decisions regarding required disclosure.




In
      designing and evaluating the disclosure controls and procedures, our management
      recognized that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives and in reaching a reasonable level of assurance our management
      necessarily was required to apply its judgment in evaluating the cost-benefit
      relationship of possible controls and procedures .




(b)
        Changes in Internal Controls.
 
 There were no
        change s in our
        internal control s over
        financial reporting during
        the quarter ended
        June 30, 2007 that materially
        affected, or are reasonably likely to materially affect, our internal control s over
        financial reporting.


17





**Part
      II** **OTHER
      INFORMATION**





Item
      1.
      Legal Proceedings





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







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





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





Use
      of
      Proceeds from Initial Public Offering





On
      December 12, 2006, we completed the sale of 2,000,000 shares of our common
      stock
      at an offering price of $4.00 per share in our initial public offering. The
      public offering resulted in gross proceeds of $8,000,000 to us. In connection
      with the public offering (Registration Statement on Form SB-2, File No.
      333-120451, effective date October 11, 2006) , we paid aggregate commissions,
      concessions and non-accountable expenses to the underwriters of $800,000,
      resulting in net proceeds of $7,200,000, excluding other expenses of the public
      offering. From August 3, 2005 through April 7, 2006, we had issued 333,156
      shares of our common stock in connection with the public offering. We sold
      the
      balance of the 2,000,000 shares in connection with the public offering
      (1,666,844 shares) following October 11, 2006.




None
      of
      the proceeds were paid to directors, officers, affiliates or stockholders owning
      10% or more of our common stock. We used approximately $340,000 of the proceeds
      to pay expenses associated with our rescission offer, as described below. This
      may be deemed to represent a material change from the estimated use of proceeds
      contained in the final prospectus relating to our initial public offering.
      The
      following table sets forth the uses of approximately $8,000,000 of
      the
      proceeds from our initial public offering, as of June 30, 2007:




Commissions
                related to the public offering(1)
            
            $
            800,000Other
                offering expenses(2)
            
            
            830,000Expenses
                related to the rescission offer(3)
            
            
            340,000Investment
                in a restricted money market account(4)
            
            
            1,705,000Payment
                to reduce line of credit(5)
            
            
            720,000Payment
                of accounts payable and current operating expenses(6)
            
            
            2,298,000Costs
                of hiring of additional sales personnel(7)
            
            
            797,000New
                product launch costs(8)
            
            
            79,000Sales
                delivery vehicles(9)
            
            
            20,000Brand
                advertising (10)
            
            
            231,000New
                computer system and brewery equipment (11)
            
            
            180,000**Total
                estimated proceeds used**
            
            $
            8,000,000





(1)  This
      amount represents 10% of the gross proceeds of the public offering which were
      paid as selling commissions to the underwriters in accordance with the
      underwriting agreement.


(2)  This
      amount represents costs, including legal, accounting, printing and reimbursable
      expenses of the underwriters associated with the public offering.


(3)  This
      amount represents legal and accounting expenses associated with the rescission
      offer.


(4)  These
      funds were deposited in restricted money market accounts in order to secure
      a
      line of credit with California United Bank and a note payable to City National
      Bank.


(5)  These
      funds were used to reduce our obligation on a line of credit with Merrill Lynch
      in order to reduce interest expense. The line of credit remains in effect and
      the amount remaining on the line of credit is available for our use, from time
      to time.


(6)  These
        funds were used to settle accounts payable and pay for current operating
        expenses.
 (7)  These
        funds were used to pay the incremental increase of hiring new personnel and
        related expenses.
 (8)  These
        funds were used to pay for the development and product design costs for new
        product launches.
 (9)  These
        funds were used to purchase a new delivery vehicle related to the operations
        of
        the Brewery.
 (10)
        These funds were used to advertise our products.
 (11)
        These funds were used to purchase a new computer system and brewery equipment.
 
 From
        May
        25, 2007 through June 15, 2007, we completed a private placement to accredited
        investors only, on subscriptions for the sale of 1,500,000 shares of common
        stock and warrants to purchase up to 749,995 shares of common stock, resulting
        in an aggregate of $9,000,000 of gross proceeds to us. We sold the shares
        at a
        purchase price of $6.00 per share. The warrants issued in the private placement
        have a five-year term and an exercise price of $7.50 per share. We paid cash
        commissions of $900,000 to the placement agent for the private placement
        and
        issued warrants to the placement agent to purchase up to 150,000 shares of
        common stock with an exercise price of $6.60 per share. We also issued
        additional warrants to purchase up to 15,000 shares of common stock with
        an
        exercise price of $6.60 per share and paid an additional $60,000 in cash
        to the
        placement agent as an investment banking fee. Total
        proceeds received, net of underwriting commissions and the investment banking
        fee and excluding other expenses of the private placement, was
        $8,040,000.
  In
        the second quarter of 2007, we issued 440 shares of
        common stock as a bonus to certain of our employees. We also issued 3,820
        shares
        of common stock with a value of $27,770 in payment of a dividend to the holders
        of our Series A Preferred Stock.




18





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-Oxley Act
      of
      2002





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











**SIGNATURES**







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







REEDS,
      INC.





By
      /s/
      Christopher J.
      Reed


Christopher
      J. Reed


Chief
      Executive Officer, President


and
      Chief
      Financial Officer





August
      17, 2007




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