REEDS INC (Form: SB-2, Received: 06/21/2006 14:28:22)

We have audited the accompanying balance sheet of Reed’s, Inc. as of December 31, 2005 and the related statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2005 and 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Reed’s, Inc. as of December 31, 2005 and the results of its operations and its cash flows for the years ended December 31, 2005 and 2004 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company incurred a loss of $825,955 and used $42,610 of cash in operating activities during the year ended December 31, 2005, and had a working capital deficiency of $1,594,758 as of December 31, 2005. These factors, among others, as discussed in Note 1 to the financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ WEINBERG & COMPANY, P.A.

Weinberg & Company, P.A.

Los Angeles, California

April 7, 2006

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Index to Financial Statements

REED’S, INC.

BALANCE SHEET

ASSETS

	March 31, 2006 (Unaudited)			December 31, 2005
CURRENT ASSETS
Cash	$	195,457		$	27,744
Inventory		1,420,692			1,208,019
Trade accounts receivable, net of allowance for doubtful accounts and returns and discounts of $82,000 at March 31, 2006 and $70,000 at December 31, 2005		742,009			534,906
Receivable from sale of common stock		48,629			—
Other receivables		9,363			10,563
Prepaid expenses		37,976			74,279
Total Current Assets		2,454,126			1,855,511
Property and equipment, net of accumulated depreciation of $542,867 at March 31, 2006 and $508,136 at December 31, 2005		1,869,893			1,885,354
OTHER ASSETS
Brand names		800,201			800,201
Other intangibles, net of accumulated amortization of $3,909 at March 31, 2006 and $3,723 at December 31, 2005		14,705			14,891
Deferred stock offering costs		—			356,238
Total Other Assets		814,906			1,171,330
TOTAL ASSETS	$	5.138,925		$	4,912,195
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,843,631		$	1,644,491
Lines of credit		1,539,946			1,445,953
Current portion of long term debt		168,877			169,381
Accrued interest		142,648			136,240
Accrued expenses		74,180			54,204
Total Current Liabilities		3,769,282			3,450,269
Notes payable, related party		252,358			252,358
Long term debt, less current portion		1,032,374			1,060,573
Total Liabilities		5,054,014			4,763,200
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $10.00 par value, 500,000 shares authorized, 58,940 shares issued and outstanding		589,402			589,402
Common stock, $.0001 par value, 11,500,000 shares authorized, 5,281,247 and 5,042,197 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively		528			503
Common stock to be issued (7,362 shares)		29,470			29,470
Additional paid in capital		3,094,171			2,788,683
Accumulated deficit		(3,628,660	)		(3,259,063	)
Total stockholders’ equity		84,911			148,995
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,138,925		$	4,912,195

The accompanying notes are an integral part of these financial statements

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Index to Financial Statements

REED’S, INC.

STATEMENTS OF OPERATIONS

	Three Months Ended March 31,						Year Ended December 31,

	2006			2005
	(Unaudited)			(Unaudited)			2005			2004
SALES	$	1,979,272		$	1,817,336		$	9,470,285		$	8,978,365
COST OF SALES		1,688,876			1,486,287			7,745,499			7,103,037
GROSS PROFIT		290,396			331,049			1,724,786			1,875,328
OPERATING EXPENSES
Selling		287,158			287,145			1,124,705			791,975
General & Administrative		262,660			211,954			955,764			1,074,536
Provision for amounts due from director		—			—			124,210			—
Legal Fees		9,568			2,126			36,558			80,156
		559,386			501,225			2,241,237			1,946,667
LOSS FROM OPERATIONS		(268,990	)		(170,176	)		(516,451	)		(71,339	)
OTHER EXPENSES
Interest Expense		(100,607	)		(71,210	)		(309,504	)		(255,032	)
Loss on extinguishment of debt		—			—			—			(153,000
NET LOSS		(369,597	)		(241,386	)		(825,955	)		(479,371	)
Preferred stock dividend		—			—			(29,470	)		—
Net Loss Attributable to Common Stockholders	$	(369,597	)	$	(241,386	)	$	(855,425	)	$	(479,371	)
LOSS PER SHARE Available to common stockholders — Basic and Fully Diluted	$	(.07	)	$	(0.05	)	$	(0.18	)	$	(.10	)
WEIGHTED AVERAGE SHARES OUTSTANDING, Basic and Fully Diluted		5,157,077			4,726,091			4,885,151			4,726,091

The accompanying notes are an integral part of these financial statements

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Index to Financial Statements

REED’S, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2005 and 2004,

and the Three Months Ended March 31, 2006 (Unaudited)

	Common Stock								Preferred Stock
	Shares		Amount		Common Stock to be Issued		Additional Paid In Capital		Shares		Amount		Accumulated Deficit			Total

Balance, January 1, 2004	4,726,091	$	472		—	$	2,429,824		—	$	—	$	(1,723,627	)	$	706,669
Issuance of preferred stock	—		—		—		—		33,440		334,400		—			334,400
Conversion of debt to preferred stock	—		—		—		—		25,500		255,002		—			255,002
Recognition of beneficial conversion feature on issuance of preferred stock	—		—		—		353,640		—		—		(200,640	)		153,000
Net loss for year ended 2004	—		—		—		—		—		—		( 479,371	)		(479,371	)
Balance, December 31, 2004	4,726,091		472		—		2,783,464		58,940		589,402		(2,403,638	)		969,700
Exercise of warrants	262,500		26				5,224		—		—		—			5,250
Preferred Stock Dividend	—		—		29,470		—		—		—		(29,470	)		—
Common stock issued for cash	53,606		5		—		196,570		—		—		—			196,575
Deferred stock offering costs charged to additional paid in capital	—		—		—		(196,575	)	—		—		—			(196,575	)
Net loss for year ended December 31, 2005	—		—		—		—		—		—		( 825,955	)		( 825,955	)
Balance December 31, 2005	5,042,197		503		29,470		2,788,683		58,940		589,402		(3,259,063	)		148,995
Common stock issued for cash and receivable from common stock	239,050		25		—		860,559		—		—		—			860,584
Deferred stock offering costs charged to additional paid in capital	—		—		—		(555,071	)	—		—		—			(555,071	)
Net loss for the three months ended March 31, 2006	—		—		—		—		—		—		(369,597	)		(369,597	)
Balance March 31, 2006 (Unaudited)	5,281,247	$	528	$	29,470	$	3,094,171		58,940	$	589,402	$	(3,628,660	)	$	84,911

The accompanying notes are an integral part of these financial statements

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Index to Financial Statements

REED’S, INC.

STATEMENTS OF CASH FLOWS

	For The Three Months Ended March 31,						For The Year Ended December 31 ,

	2006 (Unaudited)			2005 (Unaudited)			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(369,597	)	$	(241,386	)	$	(825,955	)	$	(479,371	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		34,918			21,429			118,517			97,329
Provision for amounts due from director		—			—			124,210			—
Loss on extinguishment of debt		—			—			—			153,000
(Increase) decrease in operating assets and increase (decrease) in operating liabilities:
Accounts receivable		(207,103	)		141,480			262,708			(231,557	)
Inventory		(212,673	)		6,584			93,006			(3,665	)
Prepaid expenses		36,303			(41,267	)		(68,627	)		11,730
Other receivables		1,200			(2,209	)		(7,400	)		7,589
Accounts payable		199,140			197,752			232,367			233,447
Accrued expenses		19,976			47,587			2,655			(9,755	)
Accrued interest		6,408			5,495			25,909			45,233
Net cash (used in) provided by operating activities		(491,428	)		135,465			(42,610	)		(176,020	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(19,271	)		(24,188	)		(181,654	)		(204,147	)
Due from director		—			(12,813	)		( 33,013	)		(44,040	)
Net cash used in investing activities		(19,271	)		(37,001	)		( 214,667	)		(248,187	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for deferred offering costs		(198,833	)		(63,062	)		(332,858	)		(219,955	)
Principal payments on debt		(28,703	)		(44,536	)		(263,815	)		(208,852	)
Proceeds from issuance of common stock		811,955			—			196,575
Proceeds received from issuance of preferred stock					—			—			334,400
Proceeds from borrowings					—			295,900			208,464
Net borrowings (payments) on lines of credit		93,993			(194	)		367,731			339,708
Proceeds on debt to related parties		—			—			(21,000	)		—
Net cash provided by (used in) financing activities		678,412			(107,792	)		242,533			453,765
NET INCREASE (DECREASE) IN CASH		167,713			(9,328	)		(14,744	)		29,558
CASH — Beginning of year		27,744			42,488			42,488			12,930
CASH — End of year	$	195,457		$	33,160		$	27,744		$	42,488
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	94,199		$	66,314		$	283,595		$	227,669
Taxes	$	—		$	—		$	—		$	—

Non cash Investing and Financing Activities
Notes payable converted to preferred stock	$	—		$	—		$	—		$	224,000
Accrued interest converted to preferred stock		—			—			—			31,002
Beneficial conversion feauture		—			—			—			353,640
Common stock issued in settlement of accrued interest on related party debt upon exercise of warrants		—			—			5,250			—
Common stock to be issued in settlement of preferred stock dividend (7,362 shares)		—			—			29,740			—
Conversion of a line of credit to term loan		—			—			50,000			—

The accompanying notes are an integral part of these financial statements.

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REED’S, INC.

NOTES TO FINANCIAL STATEMENTS

(1) Operations and Summary of Significant Accounting Policies

A) Nature of Operations

Reed’s, Inc. (the “Company”) was organized under the laws of the state of Florida in January 1991. In 2001, the Company changed its name from Original Beverage Corporation to Reed’s, Inc. and changed its state of incorporation from Florida to Delaware. The Company is engaged primarily in the business of developing, manufacturing and marketing natural non-alcoholic beverages, as well as candies and ice creams. The Company currently offers 14 beverages, two candies, and three ice creams.

The Company sells its products primarily in upscale gourmet and natural food stores and supermarket chains in the United States and, to a lesser degree, in Canada.

B) Going Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company had a net loss of $825,955 and utilized cash of $42,610 in operating activities during the year ended December 31, 2005, and had a working capital deficiency of $1,564,758 at December 31, 2005. In addition, f rom August 3, 2005 through April 17, 2006, the Company issued 333,156 shares of its common stock in connection with its initial public offering pursuant to a Registration Statement on Form SB-2. The shares issued in connection with its initial public offering may have been issued in violation of either federal or state securities laws, or both, and may be subject to rescission. In order to address this issue, the Company will make a rescission offer to the holders of these shares. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty. The Company plans to continue its initial public offering after it concludes its rescission offer.

C) Use of Estimates

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 and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

D) Accounts Receivable

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

The allowance for doubtful accounts and returns and discounts is established through a provision for returns and discounts charged against sales. Receivables are charged off against the allowance when payments are received or products returned. The allowance for doubtful accounts and returns and discounts as of December 31, 2005 was $70,000 and was $82,000 (Unaudited) at March 31, 2006.

E) Property and Equipment and Related Depreciation

Property and equipment is stated at cost. Depreciation is calculated using accelerated and straight-line methods over the estimated useful lives of the assets as follows:

Property and Equipment Type	Years of Depreciation

Building		39 years
Machinery and equipment		7-12 years
Computer		3-5 years
Automobile		5 years
Office equipment		7 years

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REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Management regularly reviews property, equipment and other long-lived assets 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, 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. Management believes that the accounting estimate related to impairment of its property and equipment 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 are expected to continue to do so.

F) Intangible Assets

The Company records intangible assets in accordance with Statement of Financial Accounting Standard (SFAS) Number 142, “Goodwill and Other Intangible Assets.” Goodwill and other intangible assets deemed to have indefinite lives are not subject to annual amortization. The Company reviews, at least quarterly, its investment in brand names and other intangible assets for impairment and if impairment is deemed to have occurred the impairment is charged to expense. Intangible assets which have finite lives are amortized on a straight line basis over their remaining useful life; they are also subject to annual impairment reviews. See Note 4.

Management applies the impairment tests contained in SFAS number 142 to determine if an impairment has occurred. Accordingly, management compares the carrying value of the asset to its fair value in determining the amount of the impairment. No impairments were identified for the years ended December 31, 2005 and 2004 or for the three months ended March 31, 2006 and 2005 (Unaudited).

Management believes that the accounting estimate related to impairment of its intangible assets, 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 are expected to continue to do so.

G) 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 year ended December 31, 2005 and the three months ended March 31, 2006 (Unaudited).

During the years ended December 31, 2005 and 2004 the Company’s had two customers, which accounted for approximately 39% and 15% and 39% and 14% of sales, respectively. During the three months ended March 31, 2006 and 2005 (Unaudited), those two customers accounted for approximately 45% and 18.7% and 40% and 15.7%, respectively. No other customer accounted for more than 10% of sales in either year. As of December 31, 2005, the Company had approximately $181,580 and $38,000, respectively, of accounts receivable due from these customers. As of March 31, 2006 , the Company had approximately $375,600 (Unaudited) and $38,000 (unaudited) of accounts receivable from those customers.

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REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The Company currently relies on a single contract packer for a majority of its production and bottling of beverage products. The Company has different packers for their non-beverage products. Although there are other packers and the Company is in the process of outfitting their own brewery and bottling plant, a change in packers may cause a delay in the production process, which could ultimately affect operating results.

H) Fair Value of Financial Instruments

The carrying amount of the Company’s financial instruments including cash, accounts and other receivables, accounts payable, accrued interest and accrued expenses approximate their fair value as of December 31, 2005 and March 31, 2006 (Unaudited) due to their short maturities. The carrying amount of lines of credit, loans payable, related party and long term debt approximate fair value because the related effective interest rates on these instruments approximate the rates currently available to the Company.

I) Cost of sales

The Company, with one exception, classifies shipping and handling costs of the sale of its products as a component of cost of sales. The one exception regards shipping and handling costs associated with local sales and local distribution. Since these activities are integrated, those costs are combined and are included as selling expenses in the year ended 2005 and general and administrative expenses in the year ended 2004. For the years ended December 31, 2005 and 2004 those costs were approximately $88,000 and $63,000, respectively. For the three months ended March 31, 2006 and 2005 those costs approximated $36,000 (Unaudited) and $19,000 (Unaudited), respectively.

In addition, the Company classifies purchasing and receiving costs, inspection costs, warehousing costs, freight costs, internal transfer costs and other costs associated with product distribution as costs of sales. Certain of these costs become a component of the inventory cost and are expensed to costs of sales when the product to which the cost has been allocated is sold.

Expenses not related to the production of our products are classified as operating expenses.

J) 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. The Company considers future taxable income and ongoing, prudent and feasible tax planning strategies, in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company 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 the Company’s judgment. If the Company 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.

K) Deferred Stock Offering Costs

The Company capitalizes costs incurred related to an initial public offering and future issuance of common stock until such time as the stock is issued, or the stock offering is abandoned by the Company. These costs include attorney’s fees, accountant’s fees, SEC filing fees, state filing fees, and other specific incremental costs directly related to the initial public offering and related issuance of common stock. At December 31, 2005, deferred offering costs were $356,238. At March 31, 2006, there were no remaining deferred offering costs (Unaudited). The offering associated with these costs is continuing. As proceeds are received from the offering the deferred offering costs are charged to additional paid in capital. During the year ended December 31, 2005, $196,575 of deferred offering costs where charged to additional paid in capital. No such charge was made to additional paid in capital during 2004, as the offering had not commenced until 2005. During the three months ended March 31, 2006 and 2005 $555,071 (Unaudited) and $-0- (Unaudited) of deferred offering costs were charged to additional paid in capital.

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REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

L) Stock Options

Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), establishes a fair value method of accounting for stock-based compensation plans and for transactions in which an entity acquires goods or services from non-employees in exchange for equity instruments. SFAS No. 123 also encourages, but does not require, companies to record compensation cost for stock-based employee compensation. SFAS No. 123 was amended by SFAS No. 148, which now requires companies to disclose in interim financial statements the pro forma effect on net income (loss) and net income (loss) per common share of the estimated fair market value of stock options or warrants issued to employees. The Company has chosen to continue to account for stock-based compensation issued to employees utilizing the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, with pro forma disclosures of net income (loss) as if the fair value method had been applied. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.

For the year ended December 31, 2005, 218,500 options were issued that immediately vested. The pro forma disclosure related to the issuance and vesting of these options is as follows:

Net loss as reported	$	(825,955	)
Stock based compensation		(530,955	)

Pro forma loss	$	(1,356,910	)

Primary and fully diluted loss per share, as reported	$	(0.18	)
Proforma fully and diluted loss per share	$	(0.28	)

No options were granted during 2004, or for the three months ended March 31, 2006 and 2005, (Unaudited) therefore, pro forma disclosure of the fair value method is not applicable and is not presented. The assumptions used in calculating the fair value of the options granted during 2005, using the Black-Scholes option pricing model, were: risk free interest rate, 4.05%, expected life, 5 years, expected volatility, 70%,and no expected dividends.

M) 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.

N) Net Loss Per Share

Loss per share calculations are made in accordance with SFAS No. 128, “Earnings Per Share.” Basic loss per share is calculated by dividing net loss by weighted average number of common shares outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding plus the dilutive effect of outstanding common stock warrants and convertible debentures.

For the years ended December 31, 2005 and 2004 and for the three months ended March 31, 2006 and 2005 the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an anti-dilutive effect.

The potentially dilutive securities consisted of the following as of December 31, 2005 and March 31, 2006 (Unaudited):

	December 31, 2005	March 31, 2006 (Unaudited)
Warrants	613,241	613,241
Convertible notes	133,954	136,158
Preferred Stock	235,760	235,760
Options	291,000	291,000

Total	1,273,955	1,276,159

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Index to Financial Statements

REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

O) Advertising Costs

The Company accounts for advertising production costs by expensing such production costs the first time the related advertising is run.

Advertising costs are expensed as incurred and are included in selling expense in the amount of $90,176 and $42,828 for the years ended December 31, 2005 and 2004, respectively. Advertising costs for the three months ended March 31, 2006 and 2005 were $22,339 (Unaudited) and $14,533 (Unaudited), respectively.

The Company accounts for certain sales incentives, including slotting fees, as a reduction of gross sales, in accordance with Emerging Issues Task Force on Issue 01-9 “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products.” These sales incentives for the years ended December 31, 2005 and 2004 approximated $292,000 and $400,000, respectively. The sales incentives for the three months ended March 31, 2006 and 2005 approximated $139,000 (Unaudited) and $92,000 (Unaudited), respectively.

P) Reporting Segment of the Company

Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS No. 131) requires certain disclosures of operating segments, as defined in SFAS No. 131. Management has determined that the Company has only one operating segment and therefore is not required to disclose operating segment information. The Company does not account for the net sales of its various products separately, and the disclosure required by SFAS No. 131 of product revenue is not presented because it would be impracticable to do so.

Q) Comprehensive Income

A statement of comprehensive income is not presented in our financial statements since we did not have any of the items of other comprehensive income in any period presented.

R) Recent Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by Statement 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company has evaluated the impact of the adoption of SFAS 151, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the Board believes this Statement produces financial reporting that more faithfully represents the economics of the transactions. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied prospectively. The Company has evaluated the impact of the adoption of SFAS 153, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

F-11

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Index to Financial Statements

REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment.” Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after June 15, 2005 and small business issuers will be required to adopt for reporting periods beginning after December 15, 2005. The Company has evaluated the impact of the adoption of SFAS 123(R), and does not believe the impact will be significant to the Company's overall results of operations or financial position. All options issued prior to December 31, 2005 vested immediately, and therefore, there is no associated unamortized compensation that will be recorded in future periods relating to these options.

In May 2005 the FASB issued SFAS Number 154, “Accounting Changes and Error Corrections.” This SFAS provides guidance on accounting for and reporting of accounting changes and error corrections. The Company has evaluated the impact of SFAS 154 and does not believe the impact will be significant to the Company’s overall results of operations or financial position.

The Company does not believe that the adoption of the above recent pronouncements will have a material effect on the Company’s consolidated financial position or results of operations.

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F-12

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Index to Financial Statements

REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

(2) Inventory

Inventory is valued at the lower of cost (first-in, first-out) or market, and is comprised of the following as of December 31, 2005 and March 31, 2006 (Unaudited):

	December 31, 2005		March 31, 2006 (unaudited)
Raw Materials	$	678,343	$	845,326
Finished Goods		529,676		575,366
	$	1,208,019	$	1,420,692

(3) Fixed Assets

Fixed assets are comprised of the following as of December 31, 2005 and March 31, 2006 (Unaudited):

	December 31, 2005			March 31, 2006 (unaudited)
Land	$	409,546		$	409,546
Building		915,932			916,738
Vehicles		223,867			223,867
Machinery and equipment		734,886			746,485
Office equipment		109,259			116,124
		2,393,490			2,412,760
Accumulated depreciation		(508,136	)		(542,867	)
	$	1,885,354		$	1,869,893

Depreciation expense for the years ended December 31, 2005 and 2004 was $117,773 and $96,585, respectively. Depreciation expense for the three months ended March 31, 2006 and 2005 was, $34,731(unaudited) and $21,451 (unaudited), respectively.

(4) Intangible Assets

Brand Names

Brand Names consist of two (2) trademarks for natural beverages which the Company acquired in previous years. As long as the Company continues to renew its trademarks, these intangible assets will have an indefinite life. Accordingly, they are not subject to amortization. The Company determines fair value for Brand Names by reviewing the net sales of the associated beverage and applying industry multiples for which similar beverages are sold. As of March 31, 2006 (Unaudited) and December 31, 2005, carrying amounts for Brand Names were $800,201.

F-13

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Index to Financial Statements

REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Other Intangible Assets

Other Intangible Assets as of December 31 ,2005 consist of:


Asset		Gross Amount		Accumulated Amortization		Current Year Amortization	Useful Life
Building Loan Fees	$	18,614	$	3,723	$	745	300 months

Other Intangible Assets as of March 31 ,2006 (Unuadited) consist of:


Asset		Gross Amount		Accumulated Amortization		Current Period Amortization	Useful Life
Building Loan Fees	$	18,614	$	3,909	$	186	300 months

The estimated aggregate amortization as of December 31, 2005 for each of the next five years is:

Year		Amount
2006	$	745
2007		745
2008		745
2009		745
2010		745

(5) Lines of Credit

The Company had outstanding borrowings of $1,539,946 (Unaudited) and $1,445,953 and as of March 31, 2006 and December 31, 2005, respectively, under the following line of credit agreements:

The Company has an unsecured $50,000 line of credit with a bank. Interest is payable monthly at the prime rate, as published in the Wall Street Journal, plus 12% per annum. The Company’s outstanding balance was $26,646 (Unaudited) and $27,321 at March 31, 2006 and December 31, 2005, repectively. The interest rate in effect at December 31, 2005 was 19.25%. The line of credit expires in December 2009.

The Company has a line of credit in the amount of $642,209 (Unaudited) and $482,264 at March 31, 2006 and December 31, 2005 with Merrill Lynch. The loan was co-signed by Robert T. Reed, Jr., the Company’s Vice President and National Sales Manager — Mainstream and a brother of the Company’s founder and CEO, Christopher J. Reed. Robert Reed also pledged his personal stock account on deposit with Merrill Lynch as collateral. The line of credit bears interest at a rate of rate of 3.785% per annum plus LIBOR (8.255% as of December 31, 2005). In consideration for Mr. Reed’s pledging his stock account at Merrill Lynch as collateral, the Company pays Mr. Reed 5% per annum of the amount the Company borrows from Merrill Lynch as a loan fee. During the years ended December 31, 2005 and 2004, the Company paid Mr. Reed $15,250 and $3,125, respectively, under this agreement. During the three months ended March 31, 2006 and 2005 the interest paid to Mr. Reed was $ 5,875(Unaudited) and $3,125 (Unaudited), respectively.

The Company has a line of credit with a finance company. This line of credit allows the Company to borrow a maximum amount of $1,910,000, based on a borrowing base of accounts receivables and inventory. The borrowing base on the accounts receivable is 80% of all eligible receivables, which are primarily accounts receivables under 90 days. The inventory borrowing base is 50% of eligible inventory. As of March 31, 2006 and December 31, 2005, the amounts borrowed on this line of credit were $871,091(Unaudited) and $ 936,368, respectively. The interest rate on this line of credit is Prime plus 2.75%, making the interest rate at December 31, 2005 10%. The line of credit expires in June 2006 and is guaranteed by Chris and Judy Reed, the principal stockholders of the Company. This revolving line of credit is secured by all Company assets, including accounts receivable, inventory, trademarks and other intellectual property, building and equipment. As of December 31, 2005, the Company had approximately $10,000 of availability on this line of credit. At March 31, 2006 the Company had approximately $257,000 (Unaudited) of availability.

F-14

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Index to Financial Statements

REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

(6) Notes Payable to Related Parties

The Company has three unsecured loans payable to Robert T. Reed, Sr., the father of the Company’s founder Christopher J. Reed, in an amount of $252,358 as of March 31, 2006 (Unaudited) and December 31, 2005.

The first loan bears interest at 10% per annum and matures in October 2007. The outstanding principal balance of the loan as of March 31, 2006 (Unaudited) and December 31, 2005 was $24,648.

The second loan bears interest at 8% per annum and matures in October 2007. The outstanding principal balance of this loan as of March 31, 2006 (Unaudited) and December 31, 2005 was $177,710. As long as the debt is outstanding, Mr. Reed has the right to convert this loan and accrued interest into shares of our common stock at a rate of one share of common stock for every $2.00 owed to Mr. Reed. As of December 31, 2005, the loan was convertible into 125,313 shares of common stock. As of March 31, 2006 the loan was convertible into 127,065 shares (Unaudited) of common stock.

The third loan bears interest at 8% per annum and matures in October 2007. The outstanding principal balance of this loan as of March 31, 2006 (Unaudited) and December 31, 2005 was $50,000.

(7) Long-term Debt

Long-term debt consists of the following:

	December 31, 2005	March 31 2006 (Unaudited)
Note payable to SBA in the original amount of $748,000 with interest at the Wall Street Journal prime rate plus 1% per annum, adjusted monthly with no cap or floor. The combined monthly principal and interest payments are $5,851, subject to annual adjustments. The interest rate in effect at December 31, 2005 was 8%. The note is secured by land and building and guaranteed by the majority stockholder. The note matures November 2025.	$674,582	$670,942

Notes payable, unsecured, with interest at 10% per annum. Principal and accrued interest are payable in full at the end of the note term. Theses notes were issued with warrants, exercisable at issuance. The warrants have an exercise price of $3 and a term of 5 years. Principal and any unpaid interest are due in June 2006.	50,000	50,000

Building improvement loan with a maximum draw of $168,000. The interest rate is at the Wall Street Journal prime rate plus 1%, adjusted monthly with no cap or floor. The combined monthly principal and interest payments are $1,186; subject to annual adjustments. The rate in effect at December 31, 2005 was 8% per annum. The note is secured by land and building and guaranteed by the majority stockholder and matures November 2025.	142,119	141,346

F-15

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Index to Financial Statements

REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Notes payable, due on demand, unsecured, with interest at 10% per annum. The note is convertible to common stock at 60% of the initial public offering price or 100% of a private offering price.	9,000	9,000

Note payable to a bank, unsecured, interest rate is prime plus 3.25%. The interest rate in effect December 31, 2005 was10.5%. The note matures in December 2009.	50,000	46,563

Notes payable to GMAC, secured by automobiles, payable in monthly installments of $758 including interest at 0.0%, with maturity in 2008.	18,204	15,931

Notes payable to Chrysler Financial Corp., secured by automobiles, payable in monthly installments of $658, including interest at 1.9% per annum, with maturity in 2008.	21,151	19,272

Equipment line of credit up to a maximum of $150,000, secured by certain plant equipment. Payable in ratable monthly installments of principal and applicable interest. This loan bears interest at prime plus 2.75% per annum. The interest rate in effect at December 31, 2005 was 10.00%. This loan matures in May 2009.	93,900	86,700

Installment loan secured by certain plant equipment. Payable in monthly installments of $3,167 plus interest. This loan bears interest at prime plus 2.75% per annum. The interest rate in effect at December 31, 2005 was 10.00%. This loan matures in June 2010.	170,998	161,497

Total	1,229,954	1,201,251

Less current portion	169,381	168,877
	$1,060,573	$1,032,374

The aggregate maturities of long-term debt for each of the next five years and thereafter are as follows as of December 31, 2005:


2006	$	169,381
2007		111,321
2008		102,654
2009		87,348
2010		38,090
Thereafter		721,160
Total	$	1,229,954

(8) Stockholders’ Equity

Common stock consists of $.0001 par value, 11,500,000 shares authorized, 5,281,247 (Unaudited) and 5,042,197 shares issued and outstanding as of March 31, 2006 and December 31, 2005, respectively.

Preferred stock consists of 500,000 shares authorized to Series A, $10.00 par value, 5% non-cumulative, participating, preferred stock. As of March 31, 2005 (Unaudited) and December 31, 2005 there were 58,940 shares issued and outstanding, with a liquidation preference of $10.00.

These preferred shares have a 5% pro-rata annual non-cumulative dividend. The dividend can be paid in cash or, in the sole and absolute discretion of our board of directors, in shares of common stock based on its then fair market value. We cannot declare or pay any dividend on shares of our securities ranking junior to the preferred stock until the holders of our preferred stock have received the full non-cumulative dividend to which they are entitled. In addition, the holders of our preferred stock are entitled to receive pro rata distributions of dividends on an “as converted” basis with the holders of our common stock.

F-16

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Index to Financial Statements

REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

In the event of any liquidation, dissolution or winding up of the Company, or if there is a change of control event, then, subject to the rights of the holders of our more senior securities, if any, the holders of our Series A preferred stock are entitled to receive, prior to the holders of any of our junior securities, $10.00 per share plus all accrued and unpaid dividends. Thereafter, all remaining assets shall be distributed pro rata among all of our security holders.

At any time after June 30, 2007, we have the right, but not the obligation, to redeem all or any portion of the Series A preferred stock by paying the holders thereof the sum of the original purchase price per share, which was $10.00, plus all accrued and unpaid dividends.

The Series A preferred stock may be converted, at the option of the holder, at any time after issuance and prior to the date such stock is redeemed, into four shares of common stock, subject to adjustment in the event of stock splits, reverse stock splits, stock dividends, recapitalization, reclassification and similar transactions. We are obligated to reserve out of our authorized but unissued shares of common stock a sufficient number of such shares to effect the conversion of all outstanding shares of Series A preferred stock.

Except as provided by law, the holders of our Series A preferred stock do not have the right to vote on any matters, including, without limitation, the election of directors. However, so long as any shares of Series A preferred stock are outstanding, we shall not, without first obtaining the approval of at least a majority of the holders of the Series A preferred stock authorize or issue any equity security having a preference over the Series A preferred stock with respect to dividends, liquidation, redemption or voting, including any other security convertible into or exercisable for any equity security other than any senior preferred stock.

During 2004, the Company sold its preferred stock in a private placement. 33,440 shares were issued in connection with this offering and $334,400 of proceeds were received. The Company recorded a beneficial conversion feature (BCF) in accordance with Emerging Issues Task Force (EITF) 98-5. The BCF arises from the conversion price of the preferred stock being less than the fair market value of the common stock at the commitment date of the offering. The fair market value of the stock has been determined to be $4.00 per share, based on the initial public offering price which is expected to be $4.00. The excess of the fair market price of the underlying common stock over the conversion price is $1.50. Since the conversion feature of this offering allows for the conversion of preferred stock into 4 shares of common stock for each share of preferred stock, 133,760 shares of common stock could be issued if fully converted. Accordingly, the BCF recorded was $200,640 and was reflected as a charge to accumulated deficit during the year ended December 31, 2004.

In addition, during 2004 the Company negotiated with certain of its debt holders to convert debt and accrued interest to preferred stock. In connection with this conversion $224,000 of debt principal and $31,002 of accrued interest were converted in exchange for 25,500 shares of Series A Convertible Preferred Stock. Upon conversion, the excess of the fair market price of the underlying common stock over the conversion price of $1.50 per share as described above, resulted in a loss on extinguishment of debt of $153,000. In connection with this transaction, the Company recorded a BCF of $153,000, since the conversion of all of the preferred stock associated with this transaction could be converted into 102,000 shares of common stock at $1.50 per share based on the excess of the fair market price of the conversion price as described above.

During the year ended December 31, 2005, the Company accrued a $29,740 dividend payable to the preferred shareholders, which management has elected to pay in shares of common stock. As such, common stock to be issued as of December 31, 2005 represents the preferred stock dividend to be paid with the issuance of common stock.

For the three months ended March 31, 2006, the Company issued 239,050 (Unaudited) shares of its common stock in connection with its initial public offering. From April 1, 2006 to April 7, 2006 the Company issued 39,500 (Unaudited) shares of its common stock in connection with its initial public offering. The Company received net proceeds of $860,584 (Unaudited) and $142,196 (Unaudited), respectively, during the two time periods.

From August 3, 2005 through April 7 2005, the Company issued 333,156 shares of it common stock in connection with its initial public offering pursuant to a Registration Statement on Form SB-2. The shares issued in connection with the initial public offering may have been issued in violation of either federal or state securities laws, of both, and may be subject to rescission. In order to address this issue, the Company will make a rescission offer to the holders of these shares. The Company will offer to rescind the holders of these shares the price paid for these shares plus interest, calculated from the date of the purchase through the date on which the rescission offer expires, at the applicable statutory interest rate per year. If the rescission offer is accepted by all the offerees, the Company would have been required to make an aggregate payment to the holders of these shares of up to approximately $1,332,624, plus statutory interest. The Company has made arrangements for related parties to purchase any of the shares tendered in connection with this rescission, thereby avoiding the expenditure of Company funds.

F-17

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Index to Financial Statements

REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

(9) Stock Options and Warrants

A) Stock Options

The Company has granted certain employees and other individuals stock options to purchase the Company’s common stock under employment agreements. The options generally vest immediately or when services are performed and have a maximum term of five (5) years.

In 2001, the Company adopted the Original Beverage Corporation 2001 Stock Option Plan. The options shall be granted from time to time by the Compensation Committee. Individuals eligible to receive options include employees of the Company, consultants to the Company and directors of the Company. The options shall have a fixed price, which will not be less than 100% of the fair market value per share on the grant date. Options granted to employees are accounted for according to APB 25. The following table summarizes the stock option activity for the years ended December 31, 2005 and 2004:

	Options

Balance January 1, 2004		72,500
Options granted in 2004		—
Options exercised in 2004		—

Balance December 31, 2004		72,500
Options granted in 2005		218,500
Options exercised in 2005		---

Balance December 31, 2005		291,000

No option activity occurred during the three months ended March 31, 2006 (Unaudited)

Exercise Price Range	Weighted Average Remaining Number	Weighted Average Remaining Contractual Life
$2.00	37,500	44 months
$3.00	17,500	42 months
$4.00	218,500	60 months
$6.00	17,500	42 months

Total options	291,000	56 months

All options are vested and exercisable as of December 31, 2005.

B) Warrants

A summary of the warrants outstanding and exercisable at December 31, 2005 is as follows:


Exercise Price Range	Weighted Average Remaining Number	Weighted Average Remaining Contractual Life
$2.00	119,876	42 months
$3.00	493,365	42 months

	613,241

The warrants expire at various dates in 2009 and all are fully exercisable.

No warrant activity occurred during the three months ended March 31, 2006 (Unaudited)

F-18

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Index to Financial Statements

REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

(10) Income Taxes

At December 31, 2005, the Company had available Federal and state net operating loss carryforwards to reduce future taxable income. The amounts available were approximately $2,745,000 for Federal purposes and $1,284,000 for state purposes. The Federal carryforward expires in 2025 and the state carryforward expires in 2010. Given the Company’s history of net operating losses, management has determined that it is more likely than not the Company will not be able to realize the tax benefit of the carryforwards.

Accordingly, the Company has not recognized a deferred tax asset for this benefit. Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the carryforwards and will recognize a deferred tax asset at that time.

Significant components of the Company’s deferred income tax assets as of December 31, 2005 are as follows:

Deferred income tax asset:
Net operating loss carry forward	$	1,061,000
Valuation allowance		(1,061,000	)
Net deferred income tax asset	$	—

Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:

	Year Ended
	December 31,
		2005		2004
Tax expense at the U.S. statutory income tax		(34.00	)%	(34.00	)%
Increase in the valuation allowance		34.00	%	34.00	%
Effective tax rate		—		—

(11) Commitments and Contingencies

Lease Commitments

The Company leases machinery under non-cancelable operating leases. Rental expense for the years ended December 31, 2005 and 2004 was $67,816 and $55,157, respectively. Rental expense for the three months ended March 31, 2006 and 2005 was $17,157 (Unaudited) and $17,093 (Unaudited).

Future payments under these leases as of December 31, 2005 are as follows:

Year Ending December 31,
2006	$	58,433
2007		20,968
2008		10,905
2009		4,173
Total	$	94,479

F-19

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Index to Financial Statements

REED’S, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

(12) Legal Proceedings

The Company currently and from time to time is involved in litigation incidental to the conduct of its business. The Company is not currently a party to any lawsuit or proceeding which, in the opinion of its management, is likely to have a material adverse effect on it.

During 2005 and 2004 the Company incurred $30,901 and $80,156, respectively, of legal costs associated with a lawsuit which the Company has won. For the three months ended March 31, 2006 and 2005 those costs were $9,568 (Unaudited) and $2,126 (Unaudited), repectively. The Plaintiff has appealed. The judgment in favor of the Company is to have the Plaintiff reimburse the Company for its legal defense costs. If the Company is successful in the appeals process, it will record income from the judgment when the monies are collected.

On January 20, 2006, Consac Industries, Inc. (dba Long Life Teas and Long Life Beverages) filed a lawsuit in the United States District Court for the Central District of California against Reed’s Inc. and Christopher Reed, Case No. CV06-0376. The complaint asserts claims for negligence, breach of contract, breach of warranty, and breach of express indemnity relating to Reed’s, Inc.’s manufacture of approximately 13,000 cases of “Prism Green Tea Soda” for Consac. Consac contends that we negligently manufactured the soda resulting in at least one personal injury. Consac seeks $2.6 million in damages, plus interest and attorneys fees. We contend that Consac was responsible for the soda’s condition by providing a defective formula which had not been adequately tested. Management has filed a motion to dismiss. We believe that we will successfully defend Consac’s claims and the case is without merit. Some of the allegations made against the company are covered by insurance and some allegations are not covered by insurance. While there is no assurance, we believe that the Consac litigation will have no material adverse effect upon our operations.

(13) Related Party Activity

The Company has notes payable to related parties. See Note 6.

As of December 31, 2005, the Company was owed $124,210 from Peter Sharma, a former director. For financial reporting purposes, Company Management has decided to reserve 100% of this receivable as of December 31, 2005. The collection of the receivable was deemed by management to be impaired. Management is pursuing collection efforts. In January 2006, the director, Peter Sharma, resigned from the Board of Directors.

In June 2005, Robert T. Reed, Sr. converted 262,500 of warrants to 262,500 shares of common stock. In lieu of receiving cash, the Company reduced the amount of accrued interest it owed on debt payable to Robert T Reed, Sr. The amount of the exercise price and the corresponding reduction in accrued interest was $5,250.

Delaware	2086	95-4348325
(State or jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)
13000 South Spring Street Los Angeles, California 90061 (310) 217-9400
	(Address and telephone number of principal executive offices and principal place of business)

Title of Each Class of Securities to be Registered	Amount to be Registered	Proposed Maximum Aggregate Offering Price Per Share ⁽¹⁾	Proposed Maximum Aggregate Offering Price ⁽¹⁾	Amount of Registration Fee
Common stock, $0.0001 par value	333,156	$4.00	$1,332,624	$142.59

State	Interest Rate	State	Interest Rate
California	7%	Montana	10%
Colorado	8%	New York *	7%
Connecticut	6%	Oregon	9%
Hawaii	10%	South Carolina	11.25%
Illinois	10%	Utah	12%
Indiana	8%	Vermont	12%
Louisiana	8%	Virginia	6%
Massachusetts	6%	Washington	8%
Missouri	8%	Israel *	7%

Balance Sheet Data:	March 31, 2006 (Unaudited)	December 31, 2005
Total assets	$5,138,925	$4,912,195
Current liabilities	3,769,282	3,450,269
Long-term liabilities, less current portion	1,284,732	1,312,931
Stockholders’ equity	84,911	148,995

Statements of Operations Data :	Three Months Ended March 31,		Years Ended December 31,
	2006 (Unaudited)	2005 (Unaudited)	2005	2004
Sales	$1,979,272	$1,817,336	$9,470,285	$8,978,365
Gross profit	290,396	331,049	1,724,786	1,875,328
Operating expenses	559,386	501,225	2,241,237	1,946,667
Loss from operations	(268,990)	(170,176)	(516,451)	(71,339)
Net Loss attributable to common stockholders	(369,597)	(241,386)	(855,425)	(479,371)
Net Loss per share, basic and diluted ⁽¹⁾	(0.07)	(0.05)	(0.18)	(0.10)
Weighted average shares used to compute net loss per share	5,157,077	4,726,091	4,885,151	4,726,091


	Christopher J. Reed Chief Executive Officer 13000 South Spring Street Los Angeles, California 90061 (310) 217-9400
	(Name, address and telephone number of agent for service)
	*With copies to:* Jeffrey P. Berg, Esq. Jenkens & Gilchrist, LLP 12100 Wilshire Boulevard Suite 1500 Los Angeles, California 90025-7120 (310) 820-8800

	Page
Questions and Answers About the Rescission Offer	1
Summary	4
Risk Factors	7
Rescission Offer	16
Material U.S. Federal Income Tax Consequences	28
Special Note Regarding Forward-Looking Statements	30
Dividend Policy	32
Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Business	44
Management	58
Certain Relationships and Related Transactions	62
Principal Stockholders	63
Description of Our Securities	65
Shares Eligible for Future Sale	69
Our Public Offering	70
Legal Matters	75
Experts	75
Where You Can Find Additional Information	75
Index to Financial Statements	F-1

	Direct sales to large retailer accounts	% of total sales	Local direct distribution	% of total sales	Natural, gourmet and mainstream distributors	% of total	Total sales
2005	$1,536,896	16	$751,999	8	$7,181,390	76	$9,470,285
2004	1,983,598	22	395,601	4	6,599,166	74	8,978,365
2003	1,286,365	19	90,121	1	5,405,290	80	6,781,776

	2001	2002	2003	2004	2005
Net sales	$6,200,000	$6,400,000	$6,800,000	$9,000,000	$9,500,000

Name	Position	Age

Christopher J. Reed	President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board	47
Eric Scheffer	Vice President and National Sales Manager - Natural Foods	38
Robert T. Reed, Jr.	Vice President and National Sales Manager - Mainstream	50
Robert Lyon	Vice President Sales - Special Projects	56
Judy Holloway Reed	Secretary and Director	46
Mark Harris	Director	49
Dr. D.S.J. Muffoletto, N.D.	Director	51
Michael Fischman	Director	50

	Annual Compensation								Long-term Compensation		All Other Compensation
Name and Principal Position	Year		Salary		Bonus		Other Annual Compensation		Securities Underlying Options

Christopher J. Reed. Chief Executive Officer and President		2005 2004 2003	$	150,000 150,000 150,000		0 0 0		0 0 0		0 0 0		0 0 0

			Percentage of Shares
	Number of Shares		Beneficially Owned ⁽¹⁾
Name of Beneficial Owner	Beneficially Owned		Before this Offering			After this Offering
Directors and Named Executive Officers
Christopher J. Reed ⁽²⁾		3,200,000		60.06	%		45.75	%
Judy Holloway Reed ⁽²⁾		3,200,000		60.06	%		45.75	%
Mark Harris ⁽³⁾		4,000		*			*
Dr. Daniel S.J. Muffoletto, N.D.		0		0			0
Michael Fischman		0		0			0
Robert T. Reed, Jr. ⁽⁴⁾		387,500		7.13	%		5.45	%
Directors and executive officers as a group (8 persons) ⁽⁵⁾		3,727,000		66.83	%		51.45	%

5% or greater stockholders
Joseph Grace ⁽⁶⁾		500,000		9.38	%		7.15	%
Robert T. Reed, Sr. ⁽⁷⁾		389,565		7.14	%		5.47	%

Year Issued	Option Strike Price issued		Highest Price Paid for Common Shares
1991		0.02		0.27
1992		1.00		1.00
2000		2.00		2.00
2001		3.00		3.00
2002		6.00		6.00
2005		4.00		4.00

Type of Issuance	Class*		No. of Shares Issued		Price/Share		Year of Issue
Founder’s stock		C		3,200,000		0.0001		1991
Private investment		C		187,500		0.267		1991
Private investment		C		50,000		0.75		1993
Private investment		C		10,000		1.50		1996
Exempt private placement		C		141,100		1.50		1999
SCOR direct public offering		C		450,275		2.00		2000
Exempt private placement (existing shareholder)		C		250,000		2.00		2000
Note conversion options exercise (from 1991)		C		200,000		0.75		2000
Warrant exercise (from 1991)		C		37,500		1.00		2000
Employee bonus grants		C		1,500		2.00		2000
China Cola acquisition		C		130,000		2.00		2000
Options exercise (from 1991)		C		20,000		1.00		2001
Employee bonus grants		C		14,500		2.00		2001
Vendor payment		C		3,200		2.00		2001
Exempt private placement (existing shareholder)		C		500		3.00		2001
Loan conversion option exercise (from 1991)		C		8,889		1.125		2001
Loan conversion option exercise (from 1992)		C		11,877		1.50		2001
Exempt private placement (existing shareholder)		C		3,750		4.00		2001
Employee bonus grants		C		1,500		3.333		2003
Exempt private placement (existing shareholder)		C		3,000		3.50		2003
Exempt private placement (existing shareholders)		‡Pr		‡33,440		‡10.00		2004
Corporate note conversion exercised (from 2001)		‡Pr		‡25,500		‡10.00		2004
Exercise of options, exercise price of $0.20		C		262,500		0.20		2005
Issuance of shares on preferred stock dividend		C		7,362		4.00		2005-06
Sale of common stock in our public offering		C		333,156		4.00		2005-06

Listing Requirement	NASDAQ Capital Market	OTCBB

Market value of publicly held shares	$5,000,000	N/A
Number of publicly held shares	1,000,000	N/A
Number of public shareholders	300	N/A
Bid price of listed securities	$4.00	No minimum
Shareholders’ equity	$5,000,000	No minimum
Corporate governance requirements	Yes	No
Market makers	3	1

Security Holder	Quantity	Type of Security
Christopher J. Reed and Judy Holloway Reed	3,200,000	shares
Robert T. Reed, Jr. ⁽¹⁾	387,500	shares and option shares
Robert T. Reed, Sr. ⁽²⁾	389,565	shares and note shares
Peter Sharma III	137,539	warrant shares
Joseph Grace	250,000	shares
Eric Scheffer	75,500	shares and options
Mark Harris	4,000	shares
Total	4,444,104

Index to Financial Statements	F-1
Report of Independent Registered Public Accounting Firm	F-2
Balance Sheets	F-3
Statements of Operations	F-4
Statements of Changes In Stockholders’ Equity	F-5
Statements of Cash Flows	F-6
Notes to Financial Statements	F-7

Description		Amount to Be Paid
SEC registration fee	$	143
Postage and printing expenses	$	5,000	*
Legal Fees	$	100,000	*
Accounting fees	$	10,000	*
Blue sky fees and expenses	$	5,000	*
TOTAL	$	120,143

1.1	Underwriting Agreement - US EURO Securities, Inc. #
1.2	Subscription Agreement *
1.3	Underwriters’ Warrant #
1.4	Selected Dealers’ Agreement #
3.1	Certificate of Incorporation *
3.2	Amendment to Certificate of Incorporation *
3.3	Certificate of Designations *
3.4	Certificate of Correction to Certificate of Designations *
3.5	Bylaws, as amended *
4.1	Form of common stock certificate *
4.2	Form of Series A preferred stock certificate *
4.3	2001 Employee Stock Option Plan *
4.4	Convertible promissory notes issued to investors *
4.5	Amendment to Promissory Note *
5.1	Legal opinion of Jenkens & Gilchrist, LLP
10.1	Purchase Agreement for Virgil’s Root Beer *
10.2	Brewing Agreement dated as of May 15, 2001 between the Company and The Lion Brewery, Inc. *
10.3	Loan Agreement with U.S. Bank National Association for purchase of the Brewery *
10.4	Loan Agreement with U.S. Bank National Association for improvements at the Brewery *
10.5	Loan Agreement with Bay Business Credit *
10.6	Credit Agreement with Merrill Lynch *
10.7	Form of Promotional Share Lock-In Agreement *
10.7(a)	Promotional Share Lock-In Agreement For Christopher J. Reed *
10.7(b)	Promotional Share Lock-In Agreement For Robert T. Reed, Jr. *
10.7(c)	Promotional Share Lock-In Agreement For Robert T. Reed, Sr. *
10.7(d)	Promotional Share Lock-In Agreement For Peter Sharma, III *
10.7(e)	Promotional Share Lock-In Agreement For Joseph Grace *
10.7(f)	Promotional Share Lock-In Agreement for Judy Holloway Reed *
10.7(g)	Promotional Share Lock-In Agreement for Eric Scheffer *
10.7(h)	Promotional Share Lock-In Agreement for Mark Harris
10.8	Loan Agreement dated September 28, 2004 with Bay Business Credit *
10.9	Sirius/Pureprophet, Ltd. Vendor’s Credit Line Agreement with Original Beverage Corp. *
10.10	Terms Of Amortization for Peter Sharma III for Sirius/Pureprophet, Ltd. - Vendor’s Credit Line Agreement with Original Beverage Corp. *

10.11	Co-Sign Agreement *
10.12	Loan Agreement with Robert T. Reed, Sr. *
10.13	Loan Agreement with William Holiman *
10.14	Loan Agreement with Bay Business Credit *
10.15	Loan Agreement with Robert T. Reed, Sr. *
10.16	Loan Agreement with Robert T. Reed, Sr. *
10.17	Amendment to Loan Agreement with Bay Business Credit *
10.18	Suspension of Loan Payment Agreement with Robert T. Reed, Sr. *
10.19	Agreement to Assume Repurchase Obligations
14.1	Code of Ethics
23.1	Consent of Weinberg & Co., P.A.
23.2	Consent of Jenkens & Gilchrist, LLP (contained in Exhibit 5.1)
24	Power of Attorney (included in the signature page to the Registration Statement)


	REED'S, INC.

	By:	/s/ Christopher J. Reed

		Name: Christopher J. Reed Title: Chief Executive Officer

Signature	Title	Date

/s/ Christopher J. Reed	Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors	June 21, 2006
Christopher J. Reed	(Principal Executive Officer and Principal Accounting Officer)

/s/ Judy Holloway Reed	Director	June 21, 2006
Judy Holloway Reed

/s/ Mark Harris	Director	June 21, 2006
Mark Harris

	Director
Daniel S.J. Muffoletto

/s/ Michael Fischman	Director	June 21, 2006
Michael Fischman


¨	1.	I hereby elect to reject the rescission offer and desire to retain the shares.

¨	2.	I hereby elect to accept the rescission offer and rescind the sale of ________________ (fill in number) shares and to receive a full refund for all sums paid therefore together with interest at the applicable statutory rate per year. My Stock Power(s) is/are also enclosed with this Notice of Election.

	Date of Purchase (The date you were issued stock. If you do not know, leave blank.)		Number of Shares Purchased	Certificate Number (If you do not know, leave blank.)


Dated: ______________, 2006

Print name of stockholder:		Name of stockholder:



Authorized signature:		Authorized signature (if shares held in more than one name):



Title of authorized signatory (if applicable):		Title of authorized signatory (if applicable):



Address of stockholder:		Phone number of stockholder:



Fax number of stockholder:		Email of stockholder:



Dated: _____________, 2006		SELLING STOCKHOLDER

		Print Name(s) of Selling Stockholder(s)

		Authorized Signature

		Title of Authorized Signatory (if applicable) ¹

		Authorized Signature (if shares held in more than one name)

		Title of Authorized Signatory (if applicable)

		Address of Selling Stockholder (Line 1)

		Address of Selling Stockholder (Line 2)

		Phone

		Email

		Fax