UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q


(Mark
One)


[X]
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the quarterly period ended December 28, 2008





OR





[  ]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
transition period from ________ to ________


Commission
file number 1-16699





OVERHILL
FARMS, INC.


(Exact
name of registrant as specified in its charter)








Nevada
                      
                      75-2590292(State
      or other jurisdiction of
                      
                      (IRS
      Employerincorporation
      or organization)
                      
                      Identification
      Number)2727
      East Vernon AvenueVernon,
      California
                      
                      90058(Address
      of principal executive offices)
                      
                      (Zip
      code)


(323)
582-9977


(Registrant’s
telephone number, including area code)





Not
applicable


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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [  ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      Accelerated Filer [  ]
            Accelerated
      Filer [ X]





Non-Accelerated
      Filer [  ]
            Smaller
      Reporting Company [  ]





(Do not
check if smaller reporting company)





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


Yes
[  ] No [X]





As of
February 5, 2009, there were 15,823,271 shares of the issuer’s common stock,
$.01 par value, outstanding.





OVERHILL
FARMS, INC.


FORM
10-Q


QUARTER
ENDED DECEMBER 28, 2008











TABLE
OF CONTENTS





PART I – FINANCIAL
    INFORMATION
                Page No.Item
      1.  Financial StatementsCondensed
      Balance Sheets as of December 28, 2008 (unaudited) and September 28,
      2008
                2Condensed
      Statements of Income (unaudited) for the Quarters Ended December 28, 2008
      and December 30, 2007
                4Condensed
      Statements of Cash Flows (unaudited) for the Quarters Ended December 28,
      2008 and December 30, 2007
                5Notes
      to Condensed Financial Statements (unaudited)
                7Item
      2.   Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                12Item
      3.   Quantitative and Qualitative Disclosures about Market
      Risk
                20Item
      4.   Controls and Procedures
                20PART II – OTHER INFORMATIONItem
      1.   Legal Proceedings
                21Item
      6.   Exhibits
                21SIGNATURES
                22EXHIBITS
      ATTACHED TO THIS FORM 10-Q
                23





1


Item
1.   Financial Statements





OVERHILL
FARMS, INC.


CONDENSED
BALANCE SHEETS











Assets





December
      28,
                    2008
                  
                  
                  September
      28,
                    2008(Unaudited)Current
      assets:Cash
                  
                  $
                  5,071,951
                  
                  
                  $
                  6,637,576Accounts
      receivable, net of allowance for doubtful accounts of $8,000 and zero at
      December 28, 2008 and September 28, 2008, respectively
                  
                  
                  17,900,731
                  
                  
                  
                  20,253,633Inventories
                  
                  
                  20,080,609
                  
                  
                  
                  17,294,076Prepaid
      expenses and other
                  
                  
                  977,865
                  
                  
                  
                  1,492,977Deferred
      income taxes
                  
                  
                  1,223,241
                  
                  
                  
                  1,223,241Total
      current assets
                  
                  
                  45,254,397
                  
                  
                  
                  46,901,503Property
      and equipment, at cost:Fixtures
      and equipment
                  
                  
                  23,804,317
                  
                  
                  
                  23,705,525Leasehold
      improvements
                  
                  
                  10,432,701
                  
                  
                  
                  10,373,256Automotive
      equipment
                  
                  
                  50,854
                  
                  
                  
                  50,85434,287,872
                  
                  
                  
                  34,129,635Less
      accumulated depreciation and amortization
                  
                  
                  (16,982,712
                  )
                  
                  
                  (16,220,194
                  )Total
      property and equipment
                  
                  
                  17,305,160
                  
                  
                  
                  17,909,441Other
      non-current assets:Goodwill
                  
                  
                  12,188,435
                  
                  
                  
                  12,188,435Deferred
      financing costs, net of accumulated amortization of $359,000 and $339,000
      at December 28, 2008 and September 28, 2008, respectively
                  
                  
                  227,000
                  
                  
                  
                  247,127Other
                  
                  
                  2,186,512
                  
                  
                  
                  2,173,058Total
      other non-current assets
                  
                  
                  14,601,947
                  
                  
                  
                  14,608,620Total
      assets
                  
                  $
                  77,161,504
                  
                  
                  $
                  79,419,564












The
accompanying notes are an integral part


of these
condensed financial statements.


2


OVERHILL
FARMS, INC.


CONDENSED
BALANCE SHEETS (continued)











Liabilities
and Stockholders’ Equity





December
      28,
                                  2008
                                
                                
                                September
      28,
                                  2008(Unaudited)Current
      liabilities:Accounts
      payable
                                
                                $
                                9,140,311
                                
                                
                                $
                                11,177,686Accrued
      liabilities
                                
                                
                                3,781,470
                                
                                
                                
                                3,201,548Current
      maturities of long-term debt
                                
                                
                                5,076,337
                                
                                
                                
                                6,228,881Total
      current liabilities
                                
                                
                                17,998,118
                                
                                
                                
                                20,608,115Long-term
      accrued liabilities
                                
                                
                                420,697
                                
                                
                                
                                406,309Deferred
      tax liabilities
                                
                                
                                1,730,185
                                
                                
                                
                                1,730,185Long-term
      debt, less current maturities, net of unamortized debt discount of
      $779,000 and $861,000 at December 28, 2008 and September 28, 2008,
      respectively
                                
                                
                                31,284,047
                                
                                
                                
                                33,479,461Total
      liabilities
                                
                                
                                51,433,047
                                
                                
                                
                                56,224,070Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.01 par value, authorized 50,000,000 shares, 4.43 designated as
      Series A convertible preferred stock, 0 shares issued and
      outstanding
                                
                                
                                -
                                
                                
                                
                                -Common
      stock, $0.01 par value, authorized 100,000,000 shares, 15,823,271 shares
      issued and outstanding at December 28, 2008 and September 28,
      2008
                                
                                
                                158,233
                                
                                
                                
                                158,233Additional
      paid-in capital
                                
                                
                                11,558,479
                                
                                
                                
                                11,558,479Retained
      earnings
                                
                                
                                14,011,745
                                
                                
                                
                                11,478,782Total
      stockholders’ equity
                                
                                
                                25,728,457
                                
                                
                                
                                23,195,494Total
      liabilities and stockholders’ equity
                                
                                $
                                77,161,504
                                
                                
                                $
                                79,419,564











The
accompanying notes are an integral part


of these
condensed financial statements.


3


OVERHILL
FARMS, INC.


CONDENSED
STATEMENTS OF INCOME


(Unaudited)











For
      the Quarter EndedDecember
      28,
                                      2008
                                    
                                    
                                    December
      30,
                                      2007Net
      revenues
                                    
                                    $
                                    55,272,029
                                    
                                    
                                    $
                                    56,826,629Cost
      of sales
                                    
                                    
                                    47,764,510
                                    
                                    
                                    
                                    50,839,325Gross
      profit
                                    
                                    
                                    7,507,519
                                    
                                    
                                    
                                    5,987,304Selling,
      general and administrative expenses
                                    
                                    
                                    2,534,216
                                    
                                    
                                    
                                    2,211,232Operating
      income
                                    
                                    
                                    4,973,303
                                    
                                    
                                    
                                    3,776,072Interest
      expense:Interest
      expense
                                    
                                    
                                    (712,584
                                    )
                                    
                                    
                                    (993,008
                                    )Amortization
      of debt discount and deferred financing costs
                                    
                                    
                                    (101,504
                                    )
                                    
                                    
                                    (101,504
                                    )Total
      interest expense
                                    
                                    
                                    (814,088
                                    )
                                    
                                    
                                    (1,094,512
                                    )Other
      expense
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (11,603
                                    )Income
      before income taxes
                                    
                                    
                                    4,159,215
                                    
                                    
                                    
                                    2,669,957Income
      taxes
                                    
                                    
                                    1,626,252
                                    
                                    
                                    
                                    1,092,013Net
      income
                                    
                                    $
                                    2,532,963
                                    
                                    
                                    $
                                    1,577,944Net
      income per share:Basic
                                    
                                    $
                                    0.16
                                    
                                    
                                    $
                                    0.10Diluted
                                    
                                    $
                                    0.16
                                    
                                    
                                    $
                                    0.10Shares
      used in computing net income per share:Basic
                                    
                                    
                                    15,823,271
                                    
                                    
                                    
                                    15,620,271Diluted
                                    
                                    
                                    16,018,339
                                    
                                    
                                    
                                    15,862,067













The
accompanying notes are an integral part


of these
condensed financial statements.




4


OVERHILL
FARMS, INC.


CONDENSED
      STATEMENTS OF CASH FLOWS


(Unaudited)











For
      the Quarter EndedDecember
      28,
                            2008
                          
                          
                          December
      30,
                            2007Operating
      Activities:Net
      income
                          
                          $
                          2,532,963
                          
                          
                          $
                          1,577,944Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                          
                          
                          784,419
                          
                          
                          
                          730,668Amortization
      of debt discount and deferred financing costs
                          
                          
                          101,504
                          
                          
                          
                          101,505Loss
      on asset disposals
                          
                          
                          415
                          
                          
                          
                          55,325Provision
      for doubtful accounts
                          
                          
                          7,900
                          
                          
                          
                          (1,941
                          )Loss
      on sale of marketable securities
                          
                          
                          -
                          
                          
                          
                          11,644Changes
      in:Accounts
      receivable
                          
                          
                          2,345,002
                          
                          
                          
                          419,334Inventories
                          
                          
                          (2,786,533
                          )
                          
                          
                          1,340,129Prepaid
      expenses and other assets
                          
                          
                          501,658
                          
                          
                          
                          382,254Accounts
      payable
                          
                          
                          (2,037,375
                          )
                          
                          
                          (4,835,284
                          )Accrued
      liabilities
                          
                          
                          579,922
                          
                          
                          
                          711,665Net
      cash provided by operating activities
                          
                          
                          2,029,875
                          
                          
                          
                          493,243Investing
      Activities:Additions
      to property and equipment
                          
                          
                          (166,164
                          )
                          
                          
                          (403,800
                          )Sale
      of marketable securities
                          
                          
                          -
                          
                          
                          
                          53,976Net
      cash used in investing activities
                          
                          
                          (166,164
                          )
                          
                          
                          (349,824
                          )












The
accompanying notes are an integral part


of these
condensed financial statements.


5


OVERHILL
FARMS, INC.


CONDENSED
STATEMENTS OF CASH FLOWS (continued)


(Unaudited)











For
      the Quarter EndedDecember
      28,
                                    2008
                                
                                
                                December
      30,
                                    2007Financing
      Activities:Borrowings
      under financing arrangements
                                
                                $
                                -
                                
                                
                                $
                                1,000,000Principal
      payments on debt
                                
                                
                                (3,300,000
                                )
                                
                                
                                (1,054,100
                                )Principal
      payments on equipment loans
                                
                                
                                (55,181
                                )
                                
                                
                                (51,206
                                )Principal
      payments on capital lease obligation
                                
                                
                                (74,155
                                )
                                
                                
                                (68,369
                                )Net
      cash used in financing activities
                                
                                
                                (3,429,336
                                )
                                
                                
                                (173,675
                                )Net
      decrease in cash
                                
                                
                                (1,565,625
                                )
                                
                                
                                (30,256
                                )Cash
      at beginning of period
                                
                                
                                6,637,576
                                
                                
                                
                                1,325,868Cash
      at end of period
                                
                                $
                                5,071,951
                                
                                
                                $
                                1,295,612Supplemental
      Schedule of Cash Flow Information:Cash
      paid during the period for:Interest
                                
                                $
                                749,419
                                
                                
                                $
                                679,236Income
      taxes
                                
                                $
                                -
                                
                                
                                $
                                -








The
accompanying notes are an integral part


of these
condensed financial statements.


6


OVERHILL
FARMS, INC.


NOTES
      TO CONDENSED FINANCIAL STATEMENTS


December
      28, 2008


(Unaudited)








1.
                  NATURE
      OF BUSINESS AND ORGANIZATIONAL
MATTERS





Overhill
Farms, Inc. (the “Company” or “Overhill Farms”) is a leading value-added
manufacturer of high quality, prepared frozen food products for branded retail,
private label, foodservice and airline customers.  The Company’s
product line includes entrées, plated meals, bulk-packed meal components,
pastas, soups, sauces, poultry, meat and fish specialties, and organic and
vegetarian offerings.





2.
                BASIS
      OF PRESENTATION





The
accompanying unaudited condensed financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter ended December 28, 2008 are not
necessarily indicative of the results that may be expected for the year ending
September 27, 2009 or for any other period.





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes.  Actual results could differ from those estimates.





The
condensed balance sheet at September 28, 2008 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements.





For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
September 28, 2008.





3.
                RECENT
      ACCOUNTING
PRONOUNCEMENTS





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value and requires enhanced disclosures about fair value
measurements. SFAS 157 requires companies to disclose the fair value of their
financial instruments according to a fair value hierarchy (i.e., levels 1, 2,
and 3, as defined). Additionally, companies are required to provide enhanced
disclosure regarding instruments in the level 3 category, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities. SFAS 157 became effective for the Company’s
fiscal year that began on September 29, 2008.  The adoption of
SFAS 157 did not have a material impact on the Company’s financial position
or results of operations.  As of December 28, 2008, the Company has
financial assets in cash, which is measured at fair value using quoted prices
for identical assets in an active market (Level 1 fair value hierarchy) in
accordance with SFAS 157.





In
February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of
FASB Statement No. 157,” which permits a one-year deferral of the application of
SFAS 157 for all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually).  The Company will adopt SFAS
157 for non-financial assets and non-financial liabilities on February 1, 2009
and does not expect the provisions to have a material impact on its results of
operations, financial position or cash flows.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007)
(“SFAS 141(R)”), “Business Combinations,” which replaces FASB Statement
141. SFAS 141(R) establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired. SFAS 141(R) also modifies the
recognition for preacquisition contingencies, such as environmental or legal
issues, restructuring plans and acquired research and development value in
purchase accounting.


7


SFAS 141(R) amends
SFAS No. 109, “Accounting for Income Taxes,” to require the acquirer to
recognize changes in the amount of its deferred tax benefits that are
recognizable because of a business combination either in income from continuing
operations in the period of the combination or directly in contributed capital,
depending on the circumstances. SFAS 141(R) also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. SFAS 141(R) is effective on or after the beginning
of the first annual reporting period beginning on or after December 15,
2008.The Company currently is evaluating the impact adoption
may have on its financial condition or results of operations relating to
potential future acquisitions.





In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”),
“Accounting for Noncontrolling Interests,” which clarifies the classification of
noncontrolling interests in consolidated statements of financial position and
the accounting for and reporting of transactions between the reporting entity
and holders of such noncontrolling interests. SFAS 160 will be effective
for fiscal years beginning after December 15, 2008.  The Company
currently is evaluating the impact adoption may have on its financial condition
or results of operations.





In May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), “The Hierarchy of Generally
Accepted Accounting Principles.”  SFAS 162 is intended to improve financial
reporting by identifying a consistent hierarchy for selecting accounting
principles to be used in preparing financial statements that are prepared in
conformity with generally accepted accounting principles. Unlike Statement on
Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With
GAAP,” SFAS 162 is directed to the entity rather than the
auditor.  SFAS 162 is effective 60 days following approval by the U.S.
Securities and Exchange Commission of the Public Company Accounting Oversight
Board’s amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.” The Company does not
expect SFAS 162 to have a material impact on its financial position or results
of operations.





4.
                INVENTORIES





Inventories
are summarized as follows:


December
      28,
                            2008
                          
                          
                          September
      28,
                            2008Raw
      ingredients
                          
                          $
                          6,437,092
                          
                          
                          $
                          5,287,858Finished
      product
                          
                          
                          11,563,569
                          
                          
                          
                          9,580,980Packaging
                          
                          
                          2,079,948
                          
                          
                          
                          2,425,238$
                          20,080,609
                          
                          
                          $
                          17,294,076





5.
                LONG-TERM
      DEBT





Long-term
debt of the Company as of December 28, 2008 and September 28, 2008 is summarized
as follows:





December
      28,
                      2008
                    
                    
                    September
      28, 2008Tranche
      A Term Loans payable to GCF
                    
                    $
                    23,489,762
                    
                    
                    $
                    23,989,762Tranche B
      Term Loans payable to GCF
                    
                    
                    12,850,000
                    
                    
                    
                    15,650,000Equipment
      loans
                    
                    
                    594,701
                    
                    
                    
                    649,882Capital
      lease
                    
                    
                    205,267
                    
                    
                    
                    279,42237,139,730
                    
                    
                    
                    40,569,066Less
      current maturities
                    
                    
                    (5,076,337
                    )
                    
                    
                    (6,228,881
                    )Less
      debt discount
                    
                    
                    (779,346
                    )
                    
                    
                    (860,724
                    )$
                    31,284,047
                    
                    
                    $
                    33,479,461





The
Company executed a senior secured credit agreement with Guggenheim Corporate
Funding, LLC (“GCF”) on April 17, 2006. Under the credit agreement, GCF acts as
collateral agent, administrative agent, arranger and syndication agent in
connection with loans made by various lenders, including affiliates of
GCF.  The facility was originally structured as a $7.5 million
non-amortizing revolving loan, a $25.0 million amortizing Tranche A Term Loan
and a $15.0 million non-amortizing Tranche B Term Loan.


8


On March
9, 2007, the Company executed a second amendment to the senior secured credit
agreement allowing for $7.0 million of additional capital expenditures to
facilitate new business by increasing plant capacity and improving line
efficiency, to be funded by increases of $3.5 million in each of the Tranche A
and Tranche B Term Loans.





As of
December 28, 2008, the facility with GCF, reflecting principal payments and the
March 9, 2007 amendment, was a $49.7 million senior secured credit facility
maturing in May 2011, secured by a first priority lien on substantially all of
the Company’s assets. As of December 28, 2008, the facility was structured as a
$7.5 million non-amortizing revolving loan, a $26.5 million amortizing Tranche A
Term Loan and a $15.7 million non-amortizing Tranche B Term Loan. The facility
bears interest, adjustable quarterly, at the London Inter Bank Offered Rate
(“LIBOR”) plus the applicable margin for LIBOR loans or, at the Company’s option
in the case of the revolving loans, an alternate base rate equal to the greater
of the prime rate and the federal funds effective rate plus 0.50%, plus the
applicable margin for alternate base rate loans, as follows:





Applicable
      Margin for Alternate Base Rate Loans
              
              
              Applicable
      Margin for
                LIBOR
      LoansTotal
      Debt to EBITDA Ratio for Last Twelve Months
              
              Revolving
      Loan
              
              
              Revolving
      Loan
              
              
              Tranche
      A
                Term
      Loan
              
              
              Tranche
      B
                Term
      LoanGreater
      than
              3.00:1.00
              
              
              2.50%
              
              
              
              3.50%
              
              
              
              3.75%
              
              
              
              6.25%Greater
      than or equal to but less than or equal to
              2.00:1.00
                3.00:1.00
              
              
              2.25%
              
              
              
              3.25%
              
              
              
              3.50%
              
              
              
              6.00%Less
      than
              2.00:1.00
              
              
              2.00%
              
              
              
              3.00%
              
              
              
              3.25%
              
              
              
              5.75%





As of
December 28, 2008, the Company’s principal balances on the loans totaled $36.4
million, consisting of $23.5 million in Tranche A Term Loans and $12.9 million
in Tranche B Term Loans.  At December 28, 2008, interest rates on the
Tranche A Term Loans and Tranche B Term Loans were 4.7% and 7.2%,
respectively.  As of September 28, 2008, the Company’s total debt to
EBITDA ratio for the last twelve months was less than
2.00:1.00.  Therefore, for the quarter ended December 28, 2008, the
Company qualified for the lowest applicable margin for the alternate base rate
and LIBOR loans.  For the quarter ended December 28, 2008, the Company
incurred $713,000 in interest expense, excluding amortization of deferred
financing costs.  For the quarter ended December 30, 2007, the Company
incurred $993,000 in interest expense, excluding amortization of deferred
financing costs, net of $43,000 in capitalized interest.  During the
quarter ended December 28, 2008, the outstanding balance of the facility was
reduced by mandatory principal payments on the Tranche A Term Loan of $500,000
and voluntary principal payments on the Tranche B Term Loan of $2.8
million.  In addition, as of December 28, 2008, the Company was
required to make an excess cash prepayment of $2.4 million on its Tranche A
debt.  The prepayment amount is included in the current maturities of
long-term debt, as it was paid on December 29, 2008.   As of
December 28, 2008, the Company had $7.5 million available to borrow under the
revolving loan.





Initial
proceeds from the GCF facility, received on or about May 16, 2006, were used to
repay approximately $44.5 million in existing debt and related fees and expenses
in connection with the termination of the Company’s former financing
arrangements and to pay approximately $1.6 million in fees and expenses relating
to the new financing.  Of these fees, $779,000 is recorded as debt
discount, net of accumulated amortization, on the accompanying balance sheet as
of December 28, 2008.  The Company recorded a pretax charge of
approximately $176,000 in connection with the termination of the former
financing arrangements in the third quarter of fiscal year 2006.  The
Company paid GCF an additional $132,000 in fees and expenses on March 9, 2007
related to the second amendment, which was recorded as a debt
discount.





The GCF
facility contains covenants whereby, among other things, the Company is required
to maintain compliance with agreed levels of earnings before interest, taxes,
depreciation and amortization, interest coverage, fixed charge coverage,
leverage targets, annual capital expenditures and incremental indebtedness
limits.


9


Mandatory
prepayments under the facility are required based on excess cash flow, as
defined in the agreement, and upon receipt of proceeds from a disposition or
payment from a casualty or condemnation of the collateralized assets, and
voluntary prepayments under the facility are generally permitted as provided in
the agreement.  The facility also contains customary restrictions on
incurring indebtedness and liens, making investments, paying dividends and
making loans or advances.





As of
December 28, 2008, the Company was in compliance with the covenant requirements
of the agreement with GCF.  The Company believes it is probable that
it will remain in compliance with all of those covenant requirements for the
foreseeable future.  However, if the Company fails to achieve certain
revenue, expense and profitability levels, a violation of the financial
covenants under its financing arrangements could result and interest rate
increases and acceleration of maturity of the loans could occur, which could
adversely affect its financial condition, results of operations and cash
flows.





The
Company entered into the following amortizing loans with Key Bank to finance the
purchase of machinery used for manufacturing processes: a 5-year loan in the
principal amount of $324,000 at a fixed interest rate of 7.5% on September 21,
2006, a 5-year loan in the principal amount of $216,617 at a fixed interest rate
of 7.5% on November 27, 2006 and a 4-year loan in the principal amount of
$476,043 at a fixed interest rate of 7.5% on January 9, 2007.





The
Company amended its existing operating lease agreements with General Electric
Capital Corporation on October 2, 2006. The amended lease resulted in a
three-year capital lease in the principal amount of $842,168 at a fixed interest
rate of 8.15%, with a $1 bargain purchase option at the expiration of the
lease.  As of December 28, 2008, the remaining balance of the capital
lease was due within 12 months.  The assets acquired under this
capital lease have an acquisition cost of $911,647.  As of December
28, 2008 the net book value of the assets was $518,336.





6.
                PER
      SHARE DATA





The
following table sets forth the calculation of earnings per share (“EPS”) for the
periods presented:




Quarter
      EndedDecember
      28,
                    2008
                  
                  
                  December
      30,
                    2007Basic
      EPS Computation:Numerator:Net
      income
                  
                  $
                  2,532,963
                  
                  
                  $
                  1,577,944Denominator:Weighted
      average common shares outstanding
                  
                  
                  15,823,271
                  
                  
                  
                  15,620,271Total
      shares
                  
                  
                  15,823,271
                  
                  
                  
                  15,620,271Basic
      EPS
                  
                  $
                  0.16
                  
                  
                  $
                  0.10Diluted
      EPS Computation:Numerator:Net
      income
                  
                  $
                  2,532,963
                  
                  
                  $
                  1,577,944Denominator:Weighted
      average common shares outstanding
                  
                  
                  15,823,271
                  
                  
                  
                  15,620,271Incremental
      shares from assumed exercise
      of stock options
                  
                  
                  195,068
                  
                  
                  
                  241,796Total
      shares
                  
                  
                  16,018,339
                  
                  
                  
                  15,862,067Diluted
      EPS
                  
                  $
                  0.16
                  
                  
                  $
                  0.10




7.
                STOCK
      OPTIONS





In
December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (“SFAS
123R”), which requires the Company to measure the cost of all employee
stock-based compensation awards based on the grant date fair value of those
awards and to record that cost as compensation expense over the period during
which the employee is required to perform service in exchange for the award
(generally over the vesting period of the award).  Accordingly, with
the adoption of


10


SFAS
123R, any future option awards will have an impact on the Company’s results of
operations.  The Company adopted SFAS 123R on October 3, 2005
utilizing the modified prospective method.  The Company’s adoption of
SFAS 123R did not impact the Company’s income before income tax expense, net
income and basic and diluted earnings per share since no options were granted
during the quarters ended December 28, 2008 and December 30, 2007 and all of the
Company’s outstanding options were fully vested at the date of adoption of this
standard.  No compensation expense related to this standard was
recorded to date.





8.
                INCOME
      TAXES





The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty of Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN
48”) on October 1, 2007.  FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”).  FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return.  FIN 48 also provides guidance on derecognition of
tax benefits, classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure and transition.  The total amount
of unrecognized tax benefits as of the date of adoption was not material. 
The Company has substantially concluded all U.S. federal income tax matters
for years through fiscal year 2005.  As a result of the implementation
of FIN 48, the Company recorded no increase in the liability for unrecognized
tax benefits.  The balance of unrecognized tax benefits was zero at
December 28, 2008 and September 28, 2008.





The
Company has adopted the accounting policy that interest recognized in accordance
with Paragraph 15 of FIN 48 and penalty recognized in accordance with Paragraph
16 of FIN 48 are classified as part of income taxes. The total amount of
interest and penalty recognized in the statement of income was zero for the
quarters ended December 28, 2008 and December 30, 2007.





The
Company does not anticipate any significant change within 12 months of this
reporting date of its uncertain tax positions.





The
effective tax rates were 39.1% and 40.9% for the first quarter of each of fiscal
years 2009 and 2008, respectively, which is consistent with the statutory
rate.





9.
                CONTINGENCIES





Legal
Proceedings





The
Company is involved in certain legal actions and claims arising in the ordinary
course of business.  Management believes that such contingencies will
be resolved without materially and adversely affecting the Company’s financial
position, results of operations or cash flows.





During
the first quarter of fiscal year 2008, the Company informed one of its
customers, American Pie, LLC, who distributes products under the name “Claim
Jumper,” that the Company intended to discontinue production for
them.  The decision was based on the Company’s evaluation of the
overall economics of that account.  The customer represented it would
pay price increases for continued manufacturing during a transition period to a
new manufacturer.  After completing production for the customer in
June 2008, the customer withheld payment of approximately $1.9 million for
product produced and shipped pursuant to the customer’s purchase
orders.  After several discussions and subsequent to the closing of
the Company’s third quarter of fiscal year 2008, the customer made a partial
payment of approximately $1.0 million against the outstanding receivable
balance.  However, prior to fiscal year end, the customer still
refused payment of the remaining outstanding receivable balance and the Company
filed a lawsuit against the customer as of September 23, 2008 (Overhill Farms,
Inc. v. American Pie (United States District Court for the Central District of
California, Case No. CV 0806268 R (CTx))).  This action involves a
complaint by the Company against customer American Pie and two of its officers,
William R. Collins and Robert G. Blume (collectively,
“defendants”).  The complaint asserts claims for: 1) breach of
contract; 2) breach of implied covenant of good faith and fair dealing; 3)
fraud; 4) unfair business practices; and 5) declaratory relief to recover
amounts American Pie refused to pay for goods delivered by the Company pursuant
to purchase orders and invoices reflecting price increases effective December 9,
2007 and thereafter.  On November 4, 2008, the defendants filed a
motion to dismiss the Company's third and fourth claims for fraud and unfair
business practices for failure to state a claim.  On December 1, 2008,
the United States District Court denied the defendants’ motion to dismiss the
Company's claims for fraud and unfair business practices.  The
defendants responded to the complaint on December 10,


11


2008 and
also filed a counterclaim against the Company alleging:  1) breach of
an oral contract; 2) breach of a written contract; and 3) breach of implied
warranties of merchantability and fitness for a intended purpose to recover
price increases, compensation for products the Company allegedly failed to
produce, and for purportedly contaminated product.  Discovery in the
litigation has not commenced.  Based on the information now available,
the Company believes the customer’s claims lack merit and that the balance due
is collectible.





Concentrations
of Credit Risk





The
Company’s financial instruments that are exposed to concentrations of credit
risk consist primarily of trade receivables.  The Company performs
on-going credit evaluations of each customer’s financial condition and generally
requires no collateral from its customers.  The Company charges off
uncollectible accounts at the point in time when no recovery is
expected.





A
significant portion of the Company’s total net revenues during the first quarter
of fiscal years 2009 and 2008 was derived from four customers.  Jenny
Craig, Inc., H. J. Heinz Company, Safeway Inc. and Panda Restaurant Group, Inc.
accounted for approximately 23%, 20%, 17% and 15%, respectively, of the
Company’s total net revenues for the quarter ended December 28, 2008 and
approximately 21%, 16%, 11% and 24%, respectively, of the Company’s total net
revenues for the quarter ended December 30, 2007.  Receivables related
to H. J. Heinz Company, Panda Restaurant Group, Inc. (through its distributors),
Jenny Craig, Inc. and Safeway Inc. accounted for approximately 23%, 21%, 21% and
12%, respectively, of the Company’s total accounts receivable balance for the
quarter ended December 28, 2008 and approximately 26%, 28%, 13% and 9%,
respectively, of the Company’s total accounts receivable balance for the quarter
ended December 30, 2007.





10.
                RELATED
      PARTY TRANSACTIONS





In
February 2004, the Company engaged Alexander Auerbach & Co., Inc. (“AAPR”)
to provide the Company with public relations and marketing
services.  AAPR provides public relations, media relations and
communications marketing services to support the Company’s sales
activities.  Alexander Auerbach, who is a director and stockholder of
the Company, is a stockholder, director and officer of AAPR.  Fees
paid to AAPR for services rendered under this engagement during the first
quarter of each of fiscal years 2009 and 2008 were immaterial.





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





Forward-Looking
Statements





The
following discussion and analysis should be read in conjunction with our
condensed financial statements and notes to condensed financial statements
included elsewhere in this report. This report, and our condensed financial
statements and notes to our condensed financial statements, contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements generally include the plans and
objectives of management for future operations, including plans and objectives
relating to our future economic performance and our current beliefs regarding
revenues we might earn if we are successful in implementing our business
strategies.  The forward-looking statements are based on current
expectations or beliefs.  For this purpose, statements of historical
fact may be deemed to be forward-looking statements.  Forward-looking
statements include statements which are predictive in nature, which depend upon
or refer to future events or conditions, or which include words such
as  “continue,” “efforts,” “expects,” “anticipates,” “intends,”
“plans,” “believes,” “estimates,” “projects,” “forecasts,” “strategy,” “will,”
“goal,” “target,” “prospects,” “optimistic,” “confident” or similar
expressions.  In addition, any statements concerning future financial
performance (including future revenues, earnings or growth rates), on-going
business strategies or prospects, and possible future company actions, which may
be provided by management, are also forward-looking statements.  We
caution that these statements by their nature involve risks and uncertainties,
and actual results may differ materially depending on a variety of important
factors, including, among others:





·
            the
      impact of competitive products and
pricing;





·
            fulfillment
      by suppliers of existing raw material
contracts;





·
            market
      conditions that may affect the costs and/or availability of raw materials,
      fuels, energy, logistics and labor as well as the market for our products,
      including our customers’ ability to pay and consumer
    demand;


12


·
            changes
      in our business environment, including actions of competitors and changes
      in customer


preferences,
as well as disruptions to our customers’ businesses;





·
            seasonality
      in the retail category;





·
            loss
      of key customers due to competitive environment or production being moved
      in-house by customers;





·
            natural
      disasters that can impact, among other things, costs of fuel and raw
      materials;





·
            the
      occurrence of acts of terrorism, such as the events of September 11, 2001,
      or acts of war;





·
            changes
      in governmental laws and regulations, including income
    taxes;





·
            change
      in control due to takeover or other significant changes in
      ownership;





·
            financial
      viability of our customers during deep recessionary
    periods;





·
            ability
      to obtain additional financing as and when needed, and rising costs of
      credit that may be associated with new
  borrowings;





·
            voluntary
      or government-mandated food recalls;
and





·
            other
      factors as may be discussed in this report and other reports we file with
      the Securities and Exchange Commission (“Commission”), including those
      described in Item 1A of Part I of our annual report on Form 10-K for the
      fiscal year ended September 28, 2008 and any updates
    thereto.





We do not
undertake to update, revise or correct any forward-looking statements, except as
otherwise required by law.





Overview





We are a
leading value-added manufacturer of high quality, prepared frozen food products
for branded retail, private label, foodservice and airline
customers.  Our product line includes entrées, plated meals,
bulk-packed meal components, pastas, soups, sauces, poultry, meat and fish
specialties, and organic and vegetarian offerings.  Our extensive
research and development efforts, combined with our extensive catalogue of
recipes and flexible manufacturing capabilities, provide customers with a
one-stop solution for new product ideas, formulations and product manufacturing,
as well as precise replication of existing recipes.  Our capabilities
allow customers to outsource product development, product manufacturing and
packaging, thereby avoiding significant fixed-cost and variable investments in
resources and equipment.  Our customers include prominent nationally
recognized names such as Jenny Craig, Inc., H. J. Heinz Company, American
Airlines, Inc., Safeway Inc., Pinnacle Foods Group LLC and Panda Restaurant
Group, Inc.





Our goal
is to be a leading developer and manufacturer of value-added food products and
provider of custom prepared frozen foods.  We intend to create
superior value for our stockholders by continuing to execute our growth and
operating strategies, including:





·
            diversifying
      and expanding our customer base by focusing on sectors we believe have
      attractive growth characteristics, such as foodservice and
      retail;





·
            investing
      in and operating efficient production
  facilities;





·
            providing
      value-added ancillary support services to
  customers;





·
            offering
      a broad range of products to customers in multiple channels of
      distribution; and





·
            continuing
      to pursue growth through strategic acquisitions and
      investments.





For the
quarter ended December 28, 2008, net revenues of $55.3 million reflected a 2.6%
decrease compared to the quarter ended December 30, 2007.  For the
quarter ended December 28, 2008, an increase in sales in the retail category
was


13


offset by
declines in foodservice and airline sales resulting from the anticipated reduced
volume from one foodservice customer and softness in the airline industry caused
by a slowing economy.





Gross
profit was $7.5 million for the quarter ended December 28, 2008, compared to
$6.0 million for the quarter ended December 30, 2007.  Gross profit
increased as a percentage of net revenues during the quarter ended December 28,
2008 to 13.6% from 10.5% for the quarter ended December 30,
2007.  Gross profit as a percentage of revenues increased due to
higher margin sales along with on-going manufacturing improvements, increased
efficiencies and yields, improved and increased financial reviews and controls
and modest increases in sales prices to several customers, offset partially by
new product development costs.   As previously disclosed, in
order to improve our gross profit margins, we continue to analyze our lower
margin accounts in order to increase margins or change to more profitable
business.





Operating
income as a percentage of net revenues for the quarter ended December 28, 2008
increased to 9.0% compared to 6.7% for the quarter ended December 30, 2007 due
primarily to improvements in gross profit margins as noted
above.  SG&A expenses as a percentage of net revenues increased to
4.5% for the quarter ended December 28, 2008 compared to 3.9% for the quarter
ended December 30, 2007.  SG&A expenses increased due to higher
brokerage fees as a result of higher retail sales and higher legal
fees.  Net income of $2.5 million increased as a percentage of net
revenues to 4.5% for the quarter ended December 28, 2008 compared to 2.8% for
the quarter ended December 30, 2007.





As
described under “Liquidity and Capital Resources” below, on March 9, 2007, we
executed a second amendment to the senior credit agreement allowing for $7.0
million of additional financing for capital expenditures.  The
facility is now a $49.7 million senior secured credit facility and is structured
as a $7.5 million non-amortizing revolving loan, a $26.5 million amortizing
Tranche A Term Loan and a $15.7 million non-amortizing Tranche B Term
Loan.





Critical
Accounting Policies





Management’s
discussion and analysis of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.  The
preparation of these financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes.  Actual results could differ from those
estimates.  See Note 2 to the financial statements contained in our
2008 annual report on Form 10-K for the year ended September 28, 2008 for a
summary of our significant accounting policies.  Management believes
the following critical accounting policies are related to our more significant
estimates and assumptions used in the preparation of our financial
statements.





Inventories.  Inventories,
which include material, labor and manufacturing overhead, are stated at the
lower of cost, which approximates the first-in, first-out (“FIFO”) method, or
market.  We use a standard costing system to estimate our FIFO cost of
inventory at the end of each reporting period.  Historically, standard
costs have been materially consistent with actual costs.  We
periodically review our inventory for excess items, and write it down based upon
the age of specific items in inventory and the expected recovery from the
disposition of the items.





We
write-down our inventory for the estimated aged surplus, spoiled or damaged
products and discontinued items and components.  We determine the
amount of the write-down by analyzing inventory composition, expected usage,
historical and projected sales information and other factors.  Changes
in sales volume due to unexpected economic or competitive conditions are among
the factors that could result in material increases in the write-down of our
inventory.





Property and Equipment.The
cost of property and equipment is depreciated over the estimated useful lives of
the related assets, which range from three to ten years.  Leasehold
improvements to our Plant No. 1 in Vernon, California are amortized over the
lesser of the initial lease term plus one lease extension period, initially
totaling 15 years, or the estimated useful lives of the assets.  Other
leasehold improvements are amortized over the lesser of the term of the related
lease or the estimated useful lives of the assets.  Depreciation is
generally computed using the straight-line method.





We assess
property and equipment for impairment whenever events or changes in
circumstances indicate that an asset’s carrying amount may not be
recoverable.





Expenditures
for maintenance and repairs are charged to expense as incurred.  The
cost of materials purchased and labor expended in betterments and major renewals
are capitalized.  Costs and related accumulated depreciation of
properties sold or otherwise retired are eliminated from the accounts, and gains
or losses on disposals are included in operating income.


14


Goodwill.We
evaluate goodwill at least annually for impairment in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other
Intangible Assets.”  We have one reporting unit and estimate fair
value based on a variety of market factors, including discounted cash flow
analysis, market capitalization, and other market-based data.  At
December 28, 2008, we had goodwill of $12.2 million.  A deterioration
of our operating results and the related cash flow effect could decrease the
estimated fair value of our business and, thus, cause our goodwill to become
impaired and cause us to record a charge against operations in an amount
representing the impairment.





Income Taxes.We
evaluate the need for a valuation allowance on our deferred tax assets based on
whether we believe that it is more likely than not that all deferred tax assets
will be realized.  We consider future taxable income and on-going
prudent and feasible tax planning strategies in assessing the need for valuation
allowances.  In the event we were to determine that we would not be
able to realize all or part of our deferred tax assets, we would record an
adjustment to the deferred tax asset and a charge to income at that
time.





We
adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty of Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN
48”) on October 1, 2007.  FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109, “Accounting for Income Taxes.”  FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return.  FIN 48 also provides guidance on derecognition of tax
benefits, classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure and transition.  As a result
of the implementation of FIN 48, we recorded no increase in the liability for
unrecognized tax benefits, and the balance of unrecognized tax benefits was zero
at December 28, 2008.





We have
also adopted the accounting policy that interest recognized in accordance with
Paragraph 15 of FIN 48 and penalties recognized in accordance with Paragraph 16
of FIN 48 are classified as part of income taxes.  No interest and
penalties were recognized in the statement of income for the first quarter of
fiscal year 2009.




Concentrations
of Credit Risk





Our
financial instruments that are exposed to concentrations of credit risk consist
primarily of trade receivables.  We perform on-going credit
evaluations of each customer’s financial condition and generally require no
collateral from our customers.  A bankruptcy or other significant
financial deterioration of any customer could impact its future ability to
satisfy its receivables with us.  Our allowance for doubtful accounts
is calculated based primarily upon historical bad debt experience and current
market conditions.  For the quarters ended December 28, 2008 and
December 30, 2007, our write-offs, net of recoveries, to the allowance for
doubtful accounts were immaterial.





A
significant portion of our total net revenues during the first quarters of
fiscal years 2009 and 2008 was derived from four customers.  Jenny
Craig, Inc., H. J. Heinz Company and Safeway Inc. and Panda Restaurant Group,
Inc. accounted for approximately 23%, 20%, 17% and 15%, respectively, of our
total net revenues for the quarter ended December 28, 2008 and approximately
21%, 16%, 11% and 24%, respectively, of our total net revenues for the quarter
ended December 30, 2007.  Receivables related to H. J. Heinz Company,
Panda Restaurant Group, Inc. (through its distributors), Jenny Craig, Inc. and
Safeway Inc. accounted for approximately 23%, 21%, 21% and 12%, respectively, of
our total accounts receivable balance for the quarter ended December 28, 2008
and approximately 26%, 28%, 13% and 9%, respectively, of our total accounts
receivable balance for the quarter ended December 30, 2007.





Cash used
primarily for working capital purposes is maintained in two accounts with one
major financial institution. Account balances as of December 28, 2008 exceeded
the Federal Deposit Insurance Corporation insurance limits.  If the
financial banking markets experience disruption, we may need to temporarily rely
on other forms of liquidity, including borrowing under our credit
facility.





Other
Matters





We
manufactured for one of our customers, American Pie, LLC, who distributes
products under the name “Claim Jumper,” pursuant to a written manufacturing
agreement that expired automatically on April 30, 2007.  Thereafter,
we manufactured for the customer on a purchase order basis pursuant to increased
prices for some products.  During the first quarter of fiscal year
2008, we informed the customer that we intended to discontinue production for
them.  The decision was based on our evaluation of the overall
economics of that account.  The customer represented it would pay
price increases for continued manufacturing during a transition period to a new
manufacturer.  After completing production for the customer in June
2008, the customer withheld payment of approximately $1.9 million for product
produced and shipped


15


pursuant
to the customer’s purchase orders.  After several discussions and
subsequent to the closing of our third quarter of fiscal year 2008, the customer
made a partial payment of approximately $1.0 million against the outstanding
receivable balance.  However, prior to fiscal year end, the customer
still refused payment of the remaining outstanding receivable balance and we
filed a lawsuit against the customer as of September 23, 2008 (Overhill Farms,
Inc. v. American Pie (United States District Court for the Central District of
California, Case No. CV 0806268 R (CTx))).  This action involves a
complaint by us against customer American Pie and two of its officers, William
R. Collins and Robert G. Blume (collectively, “defendants”).  The
complaint asserts claims for: 1) breach of contract; 2) breach of implied
covenant of good faith and fair dealing; 3) fraud; 4) unfair business practices;
and 5) declaratory relief to recover amounts American Pie refused to pay for
goods delivered by us pursuant to purchase orders and invoices reflecting price
increases effective December 9, 2007 and thereafter.  On November 4,
2008, the defendants filed a motion to dismiss our third and fourth claims for
fraud and unfair business practices for failure to state a claim.  On
December 1, 2008, the United States District Court denied the defendants’ motion
to dismiss our claims for fraud and unfair business practices.  The
defendants responded to the complaint on December 10, 2008, and also filed a
counterclaim against us.  The counterclaim alleges:  1)
breach of an oral contract; 2) breach of a written contract; and 3) breach of
implied warranties of merchantability and fitness for an intended purpose to
recover price increases, compensation for products not produced by us, and for
purportedly contaminated product.  Discovery in the litigation has not
commenced.  Based on the information now available, we believe the
customer’s claims lack merit and that the balance due on our complaint is
collectible once the complaint and counterclaim are resolved.





Results
of Operations





Quarter
Ended December 28, 2008 Compared to Quarter Ended December 30, 2007





While we
operate as a single business unit, manufacturing various products on common
production lines, revenues from similar customers are grouped into the following
natural categories: retail, foodservice and airlines.





The
quarters ended December 28, 2008 and December 30, 2007 were both 13-week
periods.





Net Revenues.Net
revenues for the first quarter of fiscal year 2009 decreased $1.5 million (2.6%)
to $55.3 million from $56.8 million for the first quarter of fiscal year 2008
due to a decrease in airline and foodservice revenues.





Retail
net revenues increased $5.9 million (16.1%) to $42.5 million for first quarter
of fiscal year 2009 from $36.6 million for the first quarter of fiscal year 2008
due largely to the additional product line of 30 new items for Safeway Inc., as
well as increased sales to other retail customers.





As
previously disclosed, one of our retail customers, H. J. Heinz Company, has
indicated that they will be self-manufacturing a greater share of their volume
requirements.  As a result, we previously projected a revenue
reduction of approximately $19 million for the fiscal year, beginning in our
second quarter.  However, we believe other retail customers and
committed foodservice business will offset the reduction of H. J. Heinz Company
sales in fiscal and calendar year 2009.





Foodservice
net revenues decreased $5.1 million (34.9%) to $9.5 million for first quarter of
fiscal year 2009 from $14.6 million for the first quarter of fiscal year 2008
due to anticipated reduced volume from one customer and softness in the
foodservice industry caused by a slowing economy.  However, we
continue our sales efforts in this category and believe that foodservice
represents a significant opportunity for us.





Airline
net revenues decreased $2.3 million (41.1%) to $3.3 million for the first
quarter of fiscal year 2009 from $5.6 million for the first quarter of fiscal
year 2008.  Given record high fuel costs in 2008 and airline
initiatives to cut costs, going forward we expect a further decrease in airline
net revenues and are transitioning away to opportunities outside of this
category.





The
current economic decline will affect all businesses, including our
own.  We were not significantly affected by the economic decline
during the quarter ended December 28, 2008. However with the current uncertainty
and rapidly changing events, it is difficult at the present time to predict the
magnitude of the impact on revenues and the corresponding effect on gross profit
margin for the upcoming quarters and for the fiscal year.  As
previously disclosed, we expect to make up the reduction in our sales to H. J.
Heinz Company with committed new business.  The timing of the new
business will not coincide exactly with the H. J. Heinz Company reduction;
however, we expect the new business to begin later in our second fiscal
quarter.


16


Also due to the economy, we believe our
customers will be managing their inventories more closely, and will take a more
conservative approach on new product launches and promotions. However, we
believe this will be a short-term adjustment to changing market conditions, and
that order volumes and product introductions will normalize over the course of
the year.





On the
positive side, we believe our opportunities remain strong for new business, both
from new customers and from additional products and volume from existing
customers. Our gross margins have grown during the quarter ended December 28,
2008 due to process improvements and as we have shifted away from low margin
accounts.





Gross
Profit.  Gross profit for the first quarter of fiscal year 2009
increased by $1.5 million (25.0%) to $7.5 million from $6.0 million for the
first quarter of fiscal year 2008.  Gross profit as a percentage of
net revenues increased to 13.6% for the first quarter of fiscal year 2009 from
10.5% for the first quarter of fiscal year 2008 due to on-going manufacturing
improvements, increased efficiencies and yields, improved and increased
financial reviews and controls and modest increases in sales prices to several
customers, offset partially by costs incurred for new product
development.





Selling, General and Administrative
Expenses. Selling, general and administrative (“SG&A”) expenses
increased $300,000 (13.6%) to $2.5 million (4.5% of net revenues) for the first
quarter of fiscal year 2009 from $2.2 million (3.9% of net revenues) for the
first quarter of fiscal year 2008.  SG&A expenses were driven by
higher brokerage fees due to higher retail sales and higher legal
fees.





Operating
Income.Operating income increased $1.2 million (31.6%) to
$5.0 million for the first quarter of fiscal year 2009 from $3.8 million for the
first quarter of fiscal year 2008.  The increase in operating income
was the result of improvements in gross profit as noted above.





Total Interest Expense.
Total interest expense for the first quarter of fiscal year 2009 was $814,000,
compared to $1.1 million for the first quarter of fiscal year
2008.  The decrease in interest expense is due to lower variable
interest rates and lower debt balances.





Income Tax
Provision.  Income tax expense was $1.6 million for the first
quarter of fiscal year 2009, compared to $1.1 million for the first quarter of
fiscal year 2008.  The difference was a result of income before taxes
increasing $1.5 million from $2.7 million for the first quarter of fiscal year
2008 to $4.2 million for the first quarter of fiscal year 2009.  The
effective tax rates were 39.1% and 40.9% for the first quarter of fiscal years
2009 and 2008, respectively.  The effective tax rate for the first
quarter of fiscal years 2009 and 2008 did not materially differ from the
statutory rate.





Net Income.Net income for
the first quarter of fiscal year 2009 was $2.5 million, or $0.16 per basic and
diluted share, compared to net income of $1.6 million, or $0.10 per basic and
diluted share, for the first quarter of fiscal year 2008.





Liquidity
and Capital Resources





During
the first quarter of fiscal year 2009, our operating activities provided cash of
$2.0 million compared to cash provided of $493,000 during the first quarter of
fiscal year 2008.  Cash generated from operations before working
capital changes for the first quarter of fiscal year 2009 was $3.4
million.  Cash used from changes in working capital was $1.4 million
during the first quarter of fiscal year 2009 and resulted from a decrease in
accounts receivable of $2.3 million as well as a decrease in accounts payable of
$2.0 million offset by an increase in inventory of $2.8 million.  In
addition, cash provided by prepaid expenses and other assets and accrued
liabilities were $502,000 and $580,000, respectively.  As of December
28, 2008, we had working capital of $27.3 million compared to working capital of
$26.3 million at fiscal year end 2008.  We were able to fund our
growth in sales in the first quarter of fiscal year 2009 internally without
increasing our external debt.





During
the first quarter of fiscal year 2009, our investing activities, consisting
primarily of capital expenditures, resulted in a net use of cash of
approximately $166,000, compared to a net use of cash of approximately $350,000
during the first quarter of fiscal year 2008.





During
the first quarter of fiscal year 2009, our financing activities resulted in a
use of cash of $3.4 million, compared to a use of cash of $174,000 during the
first quarter of fiscal year 2008.  The increased use of cash was
largely due to a voluntary principal payment we made on our Tranche B Term loan
of $2.8 million as of December 28, 2008.


17


On March
9, 2007, we executed a second amendment to the senior secured credit agreement
with Guggenheim Corporate Funding, LLC (“GCF”) allowing for $7.0 million of
additional capital expenditures to facilitate new business by increasing plant
capacity and improving line efficiency, to be funded by increases of $3.5
million in each of the Tranche A and Tranche B Term Loans.





As of
December 28, 2008, the facility with GCF, reflecting principal payments and the
March 9, 2007 amendment, was a $49.7 million senior secured credit facility
maturing in May 2011, secured bya first priority lien on
substantially all of our assets. As of December 28, 2008, the facility was
structured as a $7.5 million non-amortizing revolving loan, a $26.5 million
amortizing Tranche A Term Loan and a $15.7 million non-amortizing Tranche B Term
Loan. The facility bears interest, adjustable quarterly, at the London Inter
Bank Offered Rate (“LIBOR”) plus the applicable margin (listed below) for LIBOR
loans or, at our option in the case of the revolving loans, an alternate base
rate equal to the greater of the prime rate and the federal funds effective rate
plus 0.50%, plus an applicable margin, as follows:





Applicable
      Margin for Alternate Base Rate Loans
              
              
              Applicable
      Margin for
                LIBOR
      LoansTotal
      Debt to EBITDA Ratio for Last Twelve Months
              
              Revolving
      Loan
              
              
              Revolving
      Loan
              
              
              Tranche
      A
                Term
      Loan
              
              
              Tranche
      B
                Term
      LoanGreater
      than
              3.00:1.00
              
              
              2.50%
              
              
              
              3.50%
              
              
              
              3.75%
              
              
              
              6.25%Greater
      than or equal to but less than or equal to
              2.00:1.00
                3.00:1.00
              
              
              2.25%
              
              
              
              3.25%
              
              
              
              3.50%
              
              
              
              6.00%Less
      than
              2.00:1.00
              
              
              2.00%
              
              
              
              3.00%
              
              
              
              3.25%
              
              
              
              5.75%





As of
December 28, 2008, our principal balances on the loans totaled $36.4 million,
consisting of $23.5 million in Tranche A Term Loans and $12.9 million in Tranche
B Term Loans.  At December 28, 2008, interest rates on the Tranche A
Term Loans and Tranche B Term Loans were 4.7% and 7.2%,
respectively.  As of September 28, 2008, our total debt to EBITDA
ratio for the last twelve months was less than 2.00:1.00 and therefore, for the
quarter ended December 28, 2008, we qualified for the lowest applicable margin
for the alternate base rate and LIBOR loans  For the quarter ended
December 28, 2008, we incurred $713,000 in interest expense, excluding
amortization of deferred financing costs.  For the quarter ended
December 30, 2007, we incurred $993,000 in interest expense, excluding
amortization of deferred financing costs, net of $43,000 in capitalized
interest.  During the quarter ended December 28, 2008, the outstanding
balance of the facility was reduced by mandatory principal payments on the
Tranche A Term Loan of $500,000 and voluntary principal payments on the Tranche
B Term Loan of $2.8 million.  In addition, as of December 28, 2008, we
were required to make an excess cash prepayment of $2.4 million on our Tranche A
debt.  The prepayment amount is included in the current maturities of
long-term debt as it was paid on December 29, 2008.  As of December
28, 2008, we had $7.5 million available to borrow under the revolving
loan.





Initial
proceeds from the GCF facility, received on or about May 16, 2006, were used to
repay approximately $44.5 million in existing debt and related fees and expenses
in connection with the termination of our former financing arrangements and to
pay approximately $1.6 million in fees and expenses relating to the new
financing.  Of these fees, $779,000 is recorded as debt discount, net
of accumulated amortization, on our balance sheet as of December 28,
2008.  We recorded a pretax charge of approximately $176,000 in
connection with the termination of the former financing arrangements in the
third quarter of fiscal year 2006.  We paid GCF an additional $132,000
in fees and expenses on March 9, 2007 related to the second amendment, which we
recorded as a debt discount.




The GCF
facility contains covenants whereby, among other things, we are required to
maintain compliance with agreed levels of earnings before interest, taxes,
depreciation and amortization, interest coverage, fixed charge coverage,
leverage targets, annual capital expenditures and incremental indebtedness
limits.  Mandatory prepayments under the facility are required based
on excess cash flow, as defined in the agreement, and upon receipt of proceeds
from a disposition or payment from a casualty or condemnation of the
collateralized assets, and voluntary prepayments under the facility are
generally


18




permitted
as provided in the agreement.  The facility also contains customary
restrictions on incurring indebtedness and liens, making investments, paying
dividends and making loans or advances.




As of
December 28, 2008, we were in compliance with the covenant requirements of the
agreement with GCF.  We believe it is probable that we will remain in
compliance with all of those covenant requirements for the foreseeable
future.  However, if we fail to achieve certain revenue, expense and
profitability levels, a violation of the financial covenants under our financing
arrangements could result and interest rate increases and acceleration of
maturity of the loans could occur, which could adversely affect our financial
condition, results of operations or cash flows.





We
entered into the following amortizing loans with Key Bank to finance the
purchase of machinery used for manufacturing processes: a 5-year loan in the
principal amount of $324,000 at a fixed interest rate of 7.5% on September 21,
2006, a 5-year loan in the principal amount of $216,617 at a fixed interest rate
of 7.5% on November 27, 2006 and a 4-year loan in the principal amount of
$476,043 at a fixed interest rate of 7.5% on January 9, 2007.





We
amended our existing operating lease agreements with General Electric Capital
Corporation on October 2, 2006. The amended lease resulted in a three-year
capital lease in the principal amount of $842,168 at a fixed interest rate of
8.15%, with a $1 bargain purchase option at the expiration of the
lease.  As of December 28, 2008, the remaining balance of the capital
lease was due within 12 months.  The assets acquired under this
capital lease have an acquisition cost of $911,647.  As of December
28, 2008 the net book value of the assets was $518,336.





We
believe that funds available to us from operations and existing capital
resources will be adequate for our capital requirements for at least the next
twelve months.





Following
is a summary of our contractual obligations at December 28, 2008:





Payments
      Due By PeriodContractual
                        Obligations
                      
                      Total
                      
                      
                      Remainder
      of Fiscal Year 2009
                      
                      
                      2-3
      Years
                      
                      
                      4-5
      Years
                      
                      
                      More
      than
                        5
      YearsDebt
      maturities
                      
                      $
                      36,934,463
                      
                      
                      $
                      4,186,605
                      
                      
                      $
                      32,739,258
                      
                      
                      $
                      8,600
                      
                      
                      $
                      -Interest
      expense(1)
                      
                      
                      5,836,051
                      
                      
                      
                      1,910,095
                      
                      
                      
                      3,925,875
                      
                      
                      
                      81
                      
                      
                      
                      -Capital
      lease obligation
                      
                      
                      205,267
                      
                      
                      
                      205,267
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Operating
      leaseobligations
      (2)
                      
                      
                      18,720,783
                      
                      
                      
                      2,560,408
                      
                      
                      
                      6,572,232
                      
                      
                      
                      4,836,185
                      
                      
                      
                      4,751,958Other
      contractualobligations
                      
                      
                      640,007
                      
                      
                      
                      542,505
                      
                      
                      
                      97,502
                      
                      
                      
                      -
                      
                      
                      
                      -Open
      purchase orders
                      
                      
                      11,140,062
                      
                      
                      
                      10,418,607
                      
                      
                      
                      721,455
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      contractualobligations
                      
                      $
                      73,476,633
                      
                      
                      $
                      19,823,487
                      
                      
                      $
                      44,056,322
                      
                      
                      $
                      4,844,866
                      
                      
                      $
                      4,751,958


____________


(1)
            Assumes
      only mandatory principal pay-downs and the use of LIBOR as of December 28,
      2008 on the GCF debt and fixed rate interest payments on equipment loans
      and capital lease obligation.


(2)
            Includes
      real estate leases.


19





Item
      3.
                Quantitative
      and Qualitative Disclosures about Market
Risk





Interest Rate Risk –
Obligations. We are subject to
interest rate risk on variable interest rate obligations.  A
hypothetical 10% increase in average market interest rates would increase by
approximately $208,000 the annual interest expense
on our debt outstanding as of December 28, 2008.  We are also subject
to interest rate risk on our fixed interest rate obligations.  Based
upon outstanding amounts of fixed rate obligations as of December 28, 2008, a
hypothetical 10% decrease in average market interest rates would increase the
fair value of outstanding fixed rate debt by approximately $4,000.





Item
      4.
                Controls
      and Procedures





Our Chief
Executive Officer and Interim Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) have concluded, based on
their evaluation as of December 28, 2008, that the design and operation of our
“disclosure controls and procedures” (as defined in Rule 13a-15(e) under the
Exchange Act) are effective at a reasonable assurance level to ensure that
information required to be disclosed by us in the reports filed or submitted by
us under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Commission’s rules and forms, including
to ensure that information required to be disclosed by us in the reports we file
or submit under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Interim Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.





During
the quarter ended December 28, 2008, there were no changes in our "internal
control over financial reporting" (as defined in Rule 13a-15(f) under the
Exchange Act) that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





20


PART
II - OTHER INFORMATION





Item
      1.
                Legal
      Proceedings





We are
involved in various lawsuits, claims and proceedings related to the conduct of
our business. Management does not believe that the disposition of any pending
claims is likely to have a material adverse effect our financial condition,
results of operations, or cash flows.




Item
      6.
                  Exhibits







(a)
            Exhibits





Number
                                        Description10.1(1)
                                        Amended
      and Restated 2002 Employee Stock Option Plan of Overhill Farms, Inc.
      (Exhibit 10.8)10.2(1)
                                        Amended
      and Restated 2005 Stock Plan of Overhill Farms, Inc. (Exhibit
      10.9)31.1(2)
                                        Certification
      of Chief Executive Officer Required by Rule 13a-14(a) of the Securities
      Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002 (2)31.2(2)
                                        Certification
      of Interim Chief Financial Officer Required by Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended, as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002 (2)32(2)
                                        Certification
      of Chief Executive Officer and Interim Chief Financial Officer Pursuant to
      18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (2)_______(1)
                                        Incorporated
      by reference to the exhibit shown in parentheses included in the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended
      September 28, 2008.(2)
                                        Attached
      hereto.








21


SIGNATURES








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






OVERHILL
      FARMS, INC.(Registrant)Date:  February
      6, 2009
              
              
              
              
              
              
              
              
              
              
              
              
              By:
              /s/
      James RudisJames
      RudisChairman,
      President andChief
      Executive OfficerDate:  February
      6, 2009
              
              
              
              
              
              
              
              
              
              
              
              
              By:
              /s/
      Tracy E. QuinnTracy
      E. QuinnInterim
      Chief Financial Officer
















22


EXHIBITS
ATTACHED TO THIS FORM 10-Q











Number
              Description31.1
              Certification
      of Chief Executive Officer Required by Rule 13a-14(a) of the Securities
      Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200231.2
              Certification
      of Interim Chief Financial Officer Required by Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended, as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232
              Certification
      of Chief Executive Officer and Interim Chief Financial Officer Pursuant to
      18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002






23