================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(Mark One)

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

                  For the quarterly period ended March 31, 2005

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

             For the transition period from __________ to __________

                         Commission file number: 0-17363


                               LIFEWAY FOODS, INC.
--------------------------------------------------------------------------------
        (Exact name of small business issuer as specified in it charter)


           Illinois                                       36-3442829
--------------------------------------------------------------------------------
(State or other jurisdiction of                (IRS Employer Identification No.)
 incorporation or organization)


                 6431 WEST OAKTON, MORTON GROVE, ILLINOIS 60053
--------------------------------------------------------------------------------
                    (Address of principal executive offices)

                                 (847) 967-1010
--------------------------------------------------------------------------------
                           (Issuer's telephone number)


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

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


                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of April 15, 2005, the issuer had
8,412,388 shares of common stock, no par value, outstanding.

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
================================================================================
<PAGE>

                                      INDEX


PART I - FINANCIAL INFORMATION................................................3

   ITEM 1.  FINANCIAL STATEMENTS..............................................3
   ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........17
   ITEM 3.  CONTROLS AND PROCEDURES..........................................19

PART II - OTHER INFORMATION..................................................19

   ITEM 5. OTHER INFORMATION.................................................19
   ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................19

SIGNATURE....................................................................21






















                                        2
<PAGE>
                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.


                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                             MARCH 31, 2005 AND 2004
                              AND DECEMBER 31, 2004

<TABLE><CAPTION>
                                                                         (UNAUDITED)              YEAR ENDED
                                                                 THREE MONTHS ENDED MARCH 31,    DECEMBER 31,
                                                                 ----------------------------    ------------
                                                                     2005            2004            2004
                                                                 ------------    ------------    ------------
<S>                                                              <C>             <C>             <C>
ASSETS
------
Current assets
   Cash and cash equivalents                                     $  5,434,032    $  4,632,830    $  5,773,285
   Marketable securities                                            6,895,472       6,615,579       6,741,987
   Accounts receivable, net of allowance for doubtful
      accounts of $15,000 at March 31, 2005 and 2004
      and December 31, 2004                                         2,522,971       2,006,629       2,024,036
   Other receivables                                                  105,759         160,968          72,137
   Inventories                                                        996,245         795,370         905,697
   Prepaid expenses and other current assets                               --           5,485           7,260
   Deferred income taxes                                               89,535          27,288              --
   Refundable income taxes                                            103,451         343,023         258,617
                                                                 ------------    ------------    ------------
   TOTAL CURRENT ASSETS                                            16,147,465      14,587,172      15,783,019

PROPERTY AND EQUIPMENT, NET                                         3,432,149       3,617,411       3,420,138

Intangible assets
   Goodwill                                                            75,800              --          75,800
   Other intangible assets, net of amortization of $43,185
      and $26,990 at March 31, 2005 and December 31, 2004             392,815              --         409,010
                                                                 ------------    ------------    ------------

TOTAL INTANGIBLE ASSETS                                               468,615              --         484,810

TOTAL ASSETS                                                     $ 20,048,229    $ 18,204,583    $ 19,687,967
                                                                 ============    ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
   Current maturities of notes payable                           $      8,934    $     24,248    $      8,784
   Accounts payable                                                   789,247         739,253         641,651
   Accrued expenses                                                   125,017         100,634         195,541
   Deferred income taxes - current portion                                 --              --          36,214
                                                                 ------------    ------------    ------------

   TOTAL CURRENT LIABILITIES                                          923,198         864,135         882,190

NOTES PAYABLE                                                         460,940         468,768         463,541

DEFERRED INCOME TAXES                                                 406,468         448,590         424,039

STOCKHOLDERS' EQUITY
   Common stock                                                     6,509,267       6,509,267       6,509,267
   Paid-in-capital                                                     72,089              --          64,314
   Stock subscription receivable                                           --         (15,000)             --
   Treasury stock, at cost                                           (870,831)       (679,956)       (649,039)
   Retained earnings                                               12,599,866      10,587,615      11,874,475
   Accumulated other comprehensive income (loss), net of taxes        (52,768)         21,164         119,180
                                                                 ------------    ------------    ------------

   TOTAL STOCKHOLDERS' EQUITY                                      18,257,623      16,423,090      17,918,197
                                                                 ------------    ------------    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       $ 20,048,229    $ 18,204,583    $ 19,687,967
                                                                 ============    ============    ============
</TABLE>

                 See accompanying notes to financial statements

                                        3
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
               FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
                      AND THE YEAR ENDED DECEMBER 31, 2004

<TABLE><CAPTION>
                                                                         (UNAUDITED)              YEAR ENDED
                                                                 THREE MONTHS ENDED MARCH 31,    DECEMBER 31,
                                                                 ----------------------------    ------------
                                                                     2005            2004            2004
                                                                 ------------    ------------    ------------
<S>                                                              <C>             <C>             <C>
Sales                                                            $  4,656,860    $  3,935,079    $ 16,319,210

Cost of goods sold                                                  2,577,956       2,099,198       9,034,971
                                                                 ------------    ------------    ------------

GROSS PROFIT                                                        2,078,904       1,835,881       7,284,239

Operating expenses                                                  1,155,180         882,029       4,333,788
                                                                 ------------    ------------    ------------

INCOME FROM OPERATIONS                                                923,724         953,852       2,950,451

Other income (expense):
   Interest and dividend income                                        65,276          41,124         185,575
   Interest expense                                                    (7,442)         (7,611)        (31,441)
   Gain (loss) on sale of marketable securities, net                  198,140         268,367         354,128
   Gain (loss) on marketable securities classified as trading           3,516              --         (16,487)
                                                                 ------------    ------------    ------------
   Total other income (expense)                                       259,490         301,880         491,775
                                                                 ------------    ------------    ------------

INCOME BEFORE PROVISION FOR INCOME TAXES                            1,183,214       1,255,732       3,442,226

Provision for income taxes                                            457,823         490,533       1,390,167
                                                                 ------------    ------------    ------------

NET INCOME                                                       $    725,391    $    765,199    $  2,052,059
                                                                 ============    ============    ============

BASIC AND DILUTED EARNINGS PER COMMON SHARE                              0.09            0.09            0.24
                                                                 ============    ============    ============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                       8,432,653       8,436,888       8,439,159
                                                                 ============    ============    ============

COMPREHENSIVE INCOME
--------------------

NET INCOME                                                       $    725,391    $    765,199    $  2,052,059

Other comprehensive income (loss), net of tax:
   Unrealized gains (losses) on marketable securities
      (net of taxes)                                                  (56,722)         21,422         170,107
   Less reclassification adjustment for (gains) losses
      included in net income (net of taxes)                          (115,226)       (156,495)       (207,164)
                                                                 ------------    ------------    ------------
COMPREHENSIVE INCOME                                             $    553,443    $    630,126    $  2,015,002
                                                                 ============    ============    ============
</TABLE>

                 See accompanying notes to financial statements

                                        4
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                    FOR THE THREE MONTHS ENDED MARCH 31, 2005
                      AND THE YEAR ENDED DECEMBER 31, 2004


<TABLE><CAPTION>
                                COMMON STOCK, NO PAR VALUE
                                     10,000,000 SHARES
                                        AUTHORIZED            # OF SHARES
                                ---------------------------        OF
                                 # OF SHARES    # OF SHARES     TREASURY        COMMON         PAID IN
                                   ISSUED      OUTSTANDING        STOCK          STOCK         CAPITAL
                                ------------   ------------   ------------   ------------   ------------
<S>                             <C>            <C>            <C>            <C>            <C>
BALANCES AT DECEMBER 31, 2003   $  8,636,888   $  8,436,888   $    200,000   $  6,509,267   $         --

Issuance of treasury stock                --          4,550         (4,550)            --         64,314

Other comprehensive income:
   Unrealized losses on
   securities, net of taxes
   and reclassification
   adjustment                             --             --             --             --             --

Payment on subscription
receivable                                --             --             --             --             --

Net income for the year ended
December 31, 2004                         --             --             --             --             --
                                ------------   ------------   ------------   ------------   ------------

BALANCES AT DECEMBER 31, 2004   $  8,636,888   $  8,441,438   $    195,450   $  6,509,267   $     64,314


Issuance of treasury stock                --            550           (550)            --          7,775

Redemption of stock                       --        (29,600)        29,600             --             --

Other comprehensive income:
   Unrealized losses on
   securities, net of taxes
   and reclassification
   adjustment                             --             --             --             --             --

Net income for the three
months ended March 31, 2005               --             --             --             --             --
                                ------------   ------------   ------------   ------------   ------------

BALANCES AT MARCH 31, 2005
(UNAUDITED)                        8,636,888      8,412,388        224,500   $  6,509,267   $     72,089
                                ============   ============   ============   ============   ============



                                                                              ACCUMULATED
                                                                                 OTHER
                                    STOCK                                    COMPREHENSIVE
                                SUBSCRIPTION     TREASURY       RETAINED     INCOME (LOSS),
                                 RECEIVABLE       STOCK         EARNINGS      NET OF TAX        TOTAL
                                ------------   ------------   ------------   ------------   ------------
BALANCES AT DECEMBER 31, 2003   $    (15,000)  $   (679,956)  $  9,822,416   $    156,237   $ 15,792,964

Issuance of treasury stock                --         30,917             --             --         95,231

Other comprehensive income:
   Unrealized losses on
   securities, net of taxes
   and reclassification
   adjustment                             --             --             --        (37,057)       (37,057)

Payment on subscription
receivable                            15,000             --             --             --         15,000

Net income for the year ended
December 31, 2004                         --             --      2,052,059             --      2,052,059
                                ------------   ------------   ------------   ------------   ------------

BALANCES AT DECEMBER 31, 2004   $         --   $   (649,039)  $ 11,874,475   $    119,180   $ 17,918,197


Issuance of treasury stock                --          3,737             --             --         11,512

Redemption of stock                       --       (225,529)            --             --       (225,529)

Other comprehensive income:
   Unrealized losses on
   securities, net of taxes
   and reclassification
   adjustment                             --             --             --       (171,948)      (171,948)

Net income for the three
months ended March 31, 2005               --             --        725,391             --        725,391
                                ------------   ------------   ------------   ------------   ------------

BALANCES AT MARCH 31, 2005
(UNAUDITED)                     $         --   $   (870,831)  $ 12,599,866   $    (52,768)  $ 18,257,623
                                ============   ============   ============   ============   ============
</TABLE>

                 See accompanying notes to financial statements

                                        5
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
                      AND THE YEAR ENDED DECEMBER 31, 2004


<TABLE><CAPTION>
                                                                           (UNAUDITED)              YEAR ENDED
                                                                   THREE MONTHS ENDED MARCH 31,    DECEMBER 31,
                                                                   ----------------------------    ------------
                                                                       2005            2004            2004
                                                                   ------------    ------------    ------------
<S>                                                                <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
   NET INCOME                                                      $    725,391    $    765,199    $  2,052,059
   Adjustments to reconcile net income to net
   cash flows from operating activities:
      Depreciation and amortization                                     140,742         155,905         669,994
      Gain on sale of marketable securities, net                       (198,140)       (268,367)       (354,128)
      (Gain)/Loss on marketable securities classified as trading         (3,516)             --          16,487
      Deferred income taxes                                             (22,343)         75,127          45,560
      Treasury stock issued for services                                 11,512              --          95,231
      (Increase) decrease in operating assets:
         Accounts receivable                                           (498,935)       (206,488)       (223,895)
         Other receivables                                              (33,622)          4,799          93,630
         Inventories                                                    (90,548)         16,202         (94,125)
         Refundable income taxes                                        155,166         (36,852)         47,554
         Prepaid expenses and other current assets                        7,260          (4,694)         (6,469)
      Increase (decrease) in operating liabilities:
         Accounts payable                                               147,596         (56,069)       (153,670)
         Accrued expenses                                               (70,524)        (82,966)         11,941
                                                                   ------------    ------------    ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                               270,039         361,796       2,200,169

CASH FLOWS FROM INVESTING ACTIVITIES:
-------------------------------------
      Purchase of marketable securities                              (1,910,623)     (3,141,028)     (6,265,671)
      Sales of marketable securities                                  1,665,869       2,862,610       6,096,652
      Purchases of property and equipment                              (136,558)        (40,585)       (330,411)
      Acquisition of Ilya's Farms, Inc.
         net of assets acquired                                              --              --        (511,800)
                                                                   ------------    ------------    ------------
NET CASH USED IN INVESTING ACTIVITIES                                  (381,312)       (319,003)     (1,011,230)

CASH FLOWS FROM FINANCING ACTIVITIES:
-------------------------------------
   Proceeds from stock subscription receivable                               --              --          15,000
   Purchases of treasury stock                                         (225,529)             --              --
   Repayment of notes payable                                            (2,451)         (7,782)        (28,473)
                                                                   ------------    ------------    ------------
NET CASH USED IN FINANCING ACTIVITIES                                  (227,980)         (7,782)        (13,473)
                                                                   ------------    ------------    ------------

Net increase/(decrease) in cash and cash equivalents                   (339,253)         35,011       1,175,466

Cash and cash equivalents at the beginning of the period              5,773,285       4,597,819       4,597,819
                                                                   ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD                 $  5,434,032    $  4,632,830    $  5,773,285
                                                                   ============    ============    ============
</TABLE>

                 See accompanying notes to financial statements

                                       6
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                              AND DECEMBER 31, 2004

NOTE 1 - NATURE OF BUSINESS

Lifeway Foods, Inc. (The "Company") commenced operations in February 1986 and
incorporated under the laws of the state of Illinois on May 19, 1986. The
Company's principal business activity is the production of dairy products.
Specifically, the Company produces Kefir, a drinkable product which is similar
to but distinct from yogurt, in several flavors sold under the name "Lifeway's
Kefir;" a plain farmer's cheese sold under the name "Lifeway's Farmer's Cheese;"
a fruit sugar-flavored product similar in consistency to cream cheese sold under
the name of "Sweet Kiss;" and a dairy beverage, similar to Kefir, with increased
protein and calcium, sold under the name "Basics Plus." The Company also
produces several soy-based products under the name "Soy Treat" and a
vegetable-based seasoning under the name "Golden Zesta." The Company currently
distributes its products throughout the Chicago Metropolitan area through local
food stores. In addition, the products are sold throughout the United States and
Ontario, Canada by distributors. The Company also distributes some of its
products to Eastern Europe. During the year ended December 31, 2004 and for the
three months ended March 31, 2005 and 2004, export sales of the Company were
approximately $37,050, $0 and $221,000, respectively.

On July 23, 2004, LFIE acquired certain assets and inventory of Ilya's Farms,
Inc., a Pennsylvania corporation, for a total purchase price of $575,600. The
asset acquisition included approximately $63,800 of tangible assets (including
certain manufacturing equipment, a delivery truck and inventory) as well as
intangible assets such as the brand name "Ilya's Farms" and the recipes and
manufacturing processes previously used by Ilya's Farms, Inc. At present, LFIE
manufactures and distributes certain cream cheese products under the brand names
"Ilya's Farms" and under Lifeway Foods in the Philadelphia, Pennsylvania
metropolitan area.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     A summary of the significant accounting policies applied in the preparation
     of the accompanying financial statements follows:

         Principles of consolidation
         ---------------------------
         The consolidated financial statements include the accounts of the
         Company and its wholly-owned subsidiary, LFI Enterprises, Inc. All
         significant intercompany accounts and transactions have been
         eliminated.

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

         Revenue Recognition
         -------------------
         Sales represent sales of Company produced dairy products that are
         recorded at the time of shipment. In addition, shipping costs invoiced
         to the customers are included in net sales and the related cost in cost
         of sales.

                                        7
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                              AND DECEMBER 31, 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

         Cash and cash equivalents
         -------------------------
         All highly liquid investments purchased with an original maturity of
         three months or less are considered to be cash equivalents.

         The Company maintains cash deposits at several institutions located in
         the greater Chicago, Illinois and Philadelphia, Pennsylvania
         metropolitan areas. Deposits at each institution are insured up to
         $100,000 by the Federal Deposit Insurance Corporation or the Securities
         Investor Protector Corporation.

         Bank balances of amounts reported by financial institutions are
         categorized as follows:
<TABLE><CAPTION>
                                                        (UNAUDITED)
                                                         MARCH 31,          DECEMBER 31,
                                                  -----------------------   -----------
                                                     2005         2004          2004
                                                  ----------   ----------   -----------
         <S>                                      <C>          <C>          <C>
         Amounts insured                          $  500,000   $  400,000   $   472,341
         Uninsured and uncollateralized amounts    5,303,533    4,337,104     5,456,188
                                                  ----------   ----------   -----------
         Total bank balances                      $5,803,533   $4,737,104   $ 5,928,529
                                                  ==========   ==========   ===========
</TABLE>

         Marketable securities
         ---------------------
         Marketable securities are classified as available-for-sale or trading
         and are stated at fair value or quoted prices. Gains and losses related
         to marketable securities sold are determined by the specific
         identification method.

         Accounts receivable
         -------------------
         Credit terms are extended to customers in the normal course of
         business. The Company performs ongoing credit evaluations of its
         customers' financial condition and generally requires no collateral.

         Accounts receivable are recorded at invoice amounts, and reduced to
         their estimated net realizable value by recognition of an allowance for
         doubtful accounts. The Company's estimate of the allowance for doubtful
         accounts is based upon historical experience, its evaluation of the
         current status of specific receivables, and unusual circumstances, if
         any. Accounts are considered past due if payment is not made on a
         timely basis in accordance with the Company's credit terms. Accounts
         considered uncollectible are charged against the allowance.

         Inventories
         -----------
         Inventories are stated at lower of cost or market, cost being
         determined by the first-in, first-out method.

         Property and equipment
         ----------------------
         Property and equipment are stated at depreciated cost or fair value
         where depreciated cost is not recoverable. Depreciation is computed
         using the straight-line method. When assets are retired or otherwise
         disposed of, the cost and related accumulated depreciation are removed
         from the accounts, and any resulting gain or loss is recognized in
         income for the period. The cost of maintenance and repairs is charged
         to income as incurred; significant renewals and betterments are
         capitalized.


         Property and equipment are being depreciated over the following useful
         lives:

                 CATEGORY                      YEARS
         --------------------------          ---------
         Buildings and improvements          31 and 39
         Machinery and equipment               5 - 12
         Office equipment                      5 - 7
         Vehicles                                5


                                        8
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                              AND DECEMBER 31, 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

         Intangible assets
         -----------------
         The Company accounts for intangible assets at historical cost.
         Intangible assets acquired in a business combination are recorded under
         the purchase method of accounting at their estimated fair values at the
         date of acquisition. Goodwill represents the excess purchase price over
         the fair value of the net tangible and other intangible assets
         acquired. Goodwill is not amortized. The Company amortizes other
         intangible assets over their estimated useful lives, as disclosed in
         the table below.

         Goodwill is reviewed for impairment at least annually. The Company will
         perform its annual impairment test on July 23 (or the first business
         day immediately following that date). Since the Company only has one
         reporting unit, the test is based on a fair value approach applied for
         the entire company.

         The Company will review intangible assets and their related useful
         lives at least once a year to determine if any adverse conditions exist
         that would indicate the carrying value of these assets may not be
         recoverable. This review is called an impairment assessment. The
         Company will conduct more frequent impairment assessments if certain
         conditions exist, including: a change in the competitive landscape, any
         internal decisions to pursue new or different strategies, a loss of a
         significant customer, or a significant change in the market place
         including changes in the prices paid for the Company's products or
         changes in the size of the market for the Company's products.

         If the estimate of an intangible asset's remaining useful life is
         changed, the remaining carrying amount of the intangible asset is
         amortized prospectively over the revised remaining useful life.

         Intangible assets are being amortized over the following useful lives:

                   CATEGORY                    YEARS
         --------------------------          ---------
         Recipes                                 4
         Customer lists and other
           customer related intangibles          8
         Lease agreement                         7


         Income taxes
         ------------
         Deferred income taxes arise from temporary differences resulting from
         income and expense items reported for financial accounting and tax
         purposes in different periods. Deferred taxes are classified as current
         or non-current, depending on the classification of the assets and
         liabilities to which they relate. Deferred taxes arising from temporary
         differences that are not related to an asset or liability are
         classified as current or non-current depending on the periods in which
         the temporary differences are expected to reverse.

         The principal sources of temporary differences are different
         depreciation and amortization methods for financial statement and tax
         purposes, unrealized gains or losses related to marketable securities,
         capitalization of indirect costs for tax purposes, and the recognition
         of an allowance for doubtful accounts for financial statement purposes.

         Treasury stock
         --------------
         Treasury stock is recorded using the cost method.

                                        9
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                              AND DECEMBER 31, 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

     Advertising costs
     -----------------
     The Company expenses advertising costs as incurred. During the years ended
     December 31, 2004 and for the three months ended March 31, 2005 and 2004,
     approximately $909,179, $272,191 and $214,581, of such costs respectively,
     were expensed.

     Earning per common share
     ------------------------
     Earnings per common share were computed by dividing net income available to
     common stockholders by the weighted average number of common shares
     outstanding during the period. For all periods presented, diluted and basic
     earnings per share were the same, as the effect of dilutive securities
     options outstanding was not significant.

NOTE 3 - ACQUISITION OF ILYA'S FARMS, INC.

     On July 23, 2004, LFI Enterprises, Inc., an Illinois corporation and wholly
     owned subsidiary of Lifeway ("LFIE"), acquired certain assets of Ilya's
     Farms, Inc., a Pennsylvania corporation. The aggregate purchase price was
     $575,600, paid by LFIE in cash from its current assets.

     As a result of the acquisition LFIE now manufactures and distributes
     certain cream cheese products under the brand name "Ilya's Farms" in the
     Philadelphia, Pennsylvania metropolitan area. The results of operations of
     the acquired business have been included in the consolidated financial
     statements since the acquisition date.

     The following table summarizes the values of the assets and inventory
     acquired at the date of acquisition, July 23, 2004.

     ASSETS AND INVENTORY ACQUIRED             VALUE
     ------------------------------          ---------
     Machinery and equipment                 $  38,200
     Inventory                                  25,600
     Intangible assets                         511,800
                                             ---------
     Total aggregate purchase price          $ 575,600
                                             =========

     Intangible assets, and the related accumulated amortization, consist of the
     following as of March 31, 2005:

                                                          ACCUMULATED
                                              COST        AMORTIZATION
                                             ---------    ------------
     Recipes                                 $  43,600    $      7,267
     Customer lists and other customer
       related intangibles                     305,200          27,613
     Lease acquisition                          87,200           8,305
     Goodwill                                   75,800              --
                                             ---------    ------------
                                             $ 511,800    $     43,185
                                             =========    ============

                                       10
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                              AND DECEMBER 31, 2004


NOTE 3 - ACQUISITION OF ILYA'S FARMS, INC. - CONTINUED

     Amortization expense is expected to be as follows for the 12 months ending
     March 31:

     2006                          $   64,777
     2007                              64,777
     2008                              64,777
     2009                              60,235
     2010                              50,244
     Thereafter                        88,005
                                   ----------
                                   $  392,815
                                   ==========

     Amortization expense during the three months ended March 31, 2005 and year
     ended December 31, 2004 was $16,195 and $26,990. Goodwill amortization, for
     tax purposes, totaled $8,530 and $2,527 for the three months ended March
     31, 2005 and year ended December 31, 2004.


NOTE 4 - MARKETABLE SECURITIES

     The cost and fair value of marketable securities classified as available
     for sale and trading are as follows:
<TABLE><CAPTION>
                                                                                     LOSS ON
                                                                                    MARKETABLE
                                                                                    SECURITIES
                                                      UNREALIZED     UNREALIZED     CLASSIFIED        FAIR
     MARCH 31, 2005 (UNAUDITED)           COST          GAINS          LOSSES       AS TRADING        VALUE
     --------------------------       ------------   ------------   ------------   ------------   ------------
     <S>                              <C>            <C>            <C>            <C>            <C>
     Equities and Mutual Funds        $  3,824,477   $    152,989   $   (184,109)            --   $  3,793,357
     Preferred Securities                   65,000            200         (2,262)            --         62,938
     Certificates of Deposit               150,000             --         (7,530)            --        142,470
     Corporate Bonds                     2,333,986             50        (49,948)            --      2,284,088
     Municipal bonds, maturing
       within five years                    24,875            715             --             --         25,590
     Government agency obligations,
       maturing after five years           600,000             --             --        (12,971)       587,029
                                      ------------   ------------   ------------   ------------   ------------
     Total                            $  6,998,338   $    153,954   $    243,849        (12,971)  $  6,895,472
                                      ============   ============   ============   ============   ============
</TABLE>
                                       11
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                              AND DECEMBER 31, 2004


NOTE 4 - MARKETABLE SECURITIES - CONTINUED
<TABLE><CAPTION>
                                                                                     LOSS ON
                                                                                    MARKETABLE
                                                                                    SECURITIES
                                                      UNREALIZED     UNREALIZED     CLASSIFIED        FAIR
     MARCH 31, 2004 (UNAUDITED)           COST          GAINS          LOSSES       AS TRADING        VALUE
     --------------------------       ------------   ------------   ------------   ------------   ------------
     <S>                              <C>            <C>            <C>            <C>            <C>
     Equities/Mutual Funds            $  3,718,091   $     95,725   $    (62,081)  $         --   $  3,751,735
     Preferred Securities                   75,505          3,925             --             --         79,430
     Certificates of Deposit               150,000             --         (2,790)            --        147,210
     Corporate Bonds                       775,010          2,524           (160)            --        777,374
     Municipal bonds, maturing
       within five years                   907,244          4,544             (9)            --        911,779
     Government agency Obligations,
       maturing After five years           953,234             --         (5,183)            --        948,051
                                      ------------   ------------   ------------   ------------   ------------
     Total                            $  6,579,084   $    106,718   $    (70,223)  $         --   $  6,615,579
                                      ============   ============   ============   ============   ============


                                                                                     LOSS ON
                                                                                    MARKETABLE
                                                                                    SECURITIES
                                                      UNREALIZED     UNREALIZED     CLASSIFIED        FAIR
     DECEMBER 31, 2004                    COST          GAINS          LOSSES       AS TRADING        VALUE
     -----------------                ------------   ------------   ------------   ------------   ------------
     Equities and Mutual Funds        $  3,414,459   $    341,230   $   (120,991)  $         --   $  3,634,698
     Preferred Securities                   65,000            596             --             --         65,596
     Certificates of Deposit               150,000             --         (4,935)            --        145,065
     Corporate Bonds                     1,639,275             --        (14,862)            --      1,624,413
     Municipal bonds, maturing
       within five years                   132,226          1,992             --             --        134,218
     Government agency obligations,
       maturing after five years         1,154,484             --             --        (16,487)     1,137,997
                                      ------------   ------------   ------------   ------------   ------------
     Total                            $  6,555,444   $    343,818   $   (140,788)  $    (16,487)  $  6,741,987
                                      ============   ============   ============   ============   ============
</TABLE>

     Proceeds from the sale of marketable securities were $6,096,652, $1,665,869
     and $2,862,610 during the year ended December 31, 2004 and for the three
     months ended March 31, 2005 and 2004, respectively.


                                       12
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                              AND DECEMBER 31, 2004


NOTE 4 - MARKETABLE SECURITIES - CONTINUED

     Gross gains of $354,128, $198,140 and $268,367 were realized on these sales
     during the year ended December 31, 2004 and for the three months ended
     March 31, 2005 and 2004, respectively.

NOTE 5 - INVENTORIES

     Inventories consist of the following:

                                               (UNAUDITED)
                                                MARCH 31,           DECEMBER 31,
                                      ---------------------------   ------------
                                          2005           2004           2004
                                      ------------   ------------   ------------
     Finished goods                   $    444,519   $    349,431   $    404,206
     Production supplies                   326,986        232,432        297,791
     Raw materials                         224,740        213,507        203,700
                                      ------------   ------------   ------------
     Total inventories                $    996,245   $    795,370   $    905,697
                                      ============   ============   ============

NOTE 6 - PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

                                               (UNAUDITED)
                                                MARCH 31,           DECEMBER 31,
                                      ---------------------------   ------------
                                          2005           2004           2004
                                      ------------   ------------   ------------
     Land                             $    470,900   $    470,900   $    470,900
     Buildings and improvements          2,483,007      2,459,090      2,481,257
     Machinery and equipment             5,476,656      5,176,788      5,394,932
     Vehicles                              459,815        359,383        408,898
     Office equipment                       80,930         78,763         78,763
                                      ------------   ------------   ------------
                                         8,971,308      8,544,924      8,834,750
     Less accumulated depreciation       5,539,159      4,927,513      5,414,612
                                      ------------   ------------   ------------
     Total property and equipment     $  3,432,149   $  3,617,411   $  3,420,138
                                      ============   ============   ============

     Depreciation expense during the year ended December 31, 2004 and for the
     three months ended March 31, 2005 and 2004 was $643,004, $124,547 and
     $155,905, respectively.

NOTE 7 - NOTES PAYABLE

     Notes payable consist of the following:

                                               (UNAUDITED)
                                                MARCH 31,           DECEMBER 31,
                                      ---------------------------   ------------
                                          2005           2004           2004
                                      ------------   ------------   ------------
     Mortgage note payable to a bank,
     payable in monthly installments
     of $3,273 including interest at
     6.25%, with a balloon payment of
     $454,275 due September 25, 2006
     Collateralized by real estate    $    469,874   $    479,054   $    472,325
     Notes payable to finance
     companies; paid in full November
     2004                                       --         13,962             --
                                      ------------   ------------   ------------
     Total notes payable                   469,874        493,016        472,325
     Less current maturities                 8,934         24,248          8,784
                                      ------------   ------------   ------------
     Total long-term portion          $    460,940   $    468,768   $    463,541
                                      ============   ============   ============

                                       13
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                              AND DECEMBER 31, 2004


     Maturities of notes payables are as follows:

     As of March 31,
     2005                             $      8,934
     2006                                  460,940
                                      ------------
     Total                            $    469,874
                                      ============


NOTE 8 - PROVISION FOR INCOME TAXES

     The provision for income taxes consists of the following:

                                              (UNAUDITED)             FOR THE
                                      FOR THE THREE MONTHS ENDED     YEAR ENDED
                                               MARCH 31,            DECEMBER 31,
                                      ---------------------------   ------------
                                          2005           2004           2004
                                      ------------   ------------   ------------
     Current:
        Federal                       $    384,812   $    336,538   $  1,084,557
        State                               95,354         78,868        260,050
                                      ------------   ------------   ------------
     Total current                         480,166        415,406      1,334,607
     Deferred                              (22,343)        75,127         45,560
                                      ------------   ------------   ------------
     Provision for income taxes       $    457,823   $    490,533   $  1,390,167
                                      ============   ============   ============

     A reconciliation of the provision for income taxes and the income tax
     computed at the statutory rate are as follows:

                                              (UNAUDITED)             FOR THE
                                      FOR THE THREE MONTHS ENDED     YEAR ENDED
                                               MARCH 31,            DECEMBER 31,
                                      ---------------------------   ------------
                                          2005           2004           2004
                                      ------------   ------------   ------------
     Federal income tax expense
       computed at the statutory rate $    372,925   $    395,782   $  1,084,921
     State taxes, expense                   86,375         91,668        251,283
     Permanent book/tax differences         (1,477)         3,083         53,963
                                      ------------   ------------   ------------
     Provision for income taxes       $    457,823   $    490,533   $  1,390,167
                                      ============   ============   ============

                                       14
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                              AND DECEMBER 31, 2004


     Amounts for deferred tax assets and liabilities are as follows:

                                               (UNAUDITED)           FOR THE
                                       FOR THE THREE MONTHS ENDED   YEAR ENDED
                                                MARCH 31,          DECEMBER 31,
                                       --------------------------  ------------
                                           2005          2004          2004
                                       ------------  ------------  ------------
     Non-current deferred tax
     liabilities arising from:
       Temporary differences -
       principally Book/tax,
       accumulated depreciation        $   (406,468) $   (448,590) $   (424,039)
     Current deferred tax liability
     arising from:
       Book/tax, unrealized losses
      (gains) on marketable securities       37,127       (15,072)      (83,850)
     Current deferred tax assets
     arising from:
       Book/tax, inventory                   52,408        42,360        47,636
                                       ------------  ------------  ------------
     Total current deferred tax assets
     (liabilities)                           89,535        27,288       (36,214)
                                       ------------  ------------  ------------
     Net deferred tax asset (liability)$   (316,933) $   (421,302) $   (460,253)
                                       ============  ============  ============


NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest and income taxes are as follows:

                                              (UNAUDITED)           FOR THE YEAR
                                         FOR THE THREE MONTHS          ENDED
                                            ENDED MARCH 31,         DECEMBER 31,
                                      ---------------------------   ------------
                                          2005           2004           2004
                                      ------------   ------------   ------------
     Interest                         $      7,442   $      7,611   $     31,441
     Income taxes                     $    325,372   $    452,000   $  1,298,348


NOTE 10 - STOCK OPTION PLANS

     The Company has a registration statement filed with the Securities and
     Exchange Commission in connection with a Consulting Service Compensation
     Plan covering up to 600,000 of the Company's common stock shares. Pursuant
     to such Plan, the Company may issue common stock or options to purchase
     common stock to certain consultants, service providers, and employees of
     the Company. There were 468,000 shares available for issuance under the
     Plan at December 31, 2004 and at March 31, 2005 and 2004. The option price,
     number of shares, grant date, and vesting terms are determined at the
     discretion of the Company's Board of Directors.

     As of December 31, 2004 and at March 31, 2005 and 2004, there were no stock
     options outstanding or exercisable.

                                       15
<PAGE>
                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004
                              AND DECEMBER 31, 2004


NOTE 10 - STOCK OPTION PLANS - CONTINUED

     On February 12, 2004, Lifeway's Board of Directors approved awards of an
     aggregate amount of 5,100 shares to be awarded under its Employee and
     Consulting Services and Compensation Plan to certain employees and
     consultants for services rendered to the Company. The stock awards were
     made on April 1, 2004 and have vesting periods that vary from six months to
     one year, depending upon the individual grantee. The expense for the awards
     is measured as of April 1, 2004 at $20.93 per share for 5,100 shares, or a
     total stock award expense of $106,743. This expense is being recognized as
     the stock awards vest beginning with the recognition of $41,860 for 2,000
     shares vested on April 1, 2004. There were a total of 4,550 vested shares
     resulting in a stock award expense of $95,231 for the year ended December
     31, 2004, and an additional 550 shares vested during the quarter ended
     March 31, 2005 for an additional expense of $11,512.


NOTE 11 - STOCK SPLIT

     On February 12, 2004, the Board of Directors of the Company declared a
     two-for-one stock split of the common stock of the Company payable on March
     8, 2004 to all of the Company's shareholders of record as of February 27,
     2004.

     As a result of the stock split, shareholders received two shares of common
     stock for every one share held on the record date. Upon completion of the
     split, the total number of shares of common stock outstanding increased
     from 4,218,444 to 8,436,888.

     The earnings per share calculations as presented on the consolidated
     statements of income and comprehensive income and the number of shares
     issued and outstanding per statement of changes in stockholders' equity
     have been adjusted to reflect split adjusted share amounts.


NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair value of the Company's financial instruments is as
     follows at:
<TABLE><CAPTION>
                                      ---------------------------   ---------------------------
                                              (UNAUDITED)
                                             MARCH 31, 2005             DECEMBER 31, 2004
                                      ---------------------------   ---------------------------
                                        CARRYING         FAIR         CARRYING         FAIR
                                         AMOUNT          VALUE         AMOUNT          VALUE
                                      ------------   ------------   ------------   ------------
     <S>                              <C>            <C>            <C>            <C>
     Cash and cash equivalents        $  5,434,032   $  5,434,032   $  5,773,285   $  5,773,285
     Marketable securities            $  6,895,472   $  6,895,472   $  6,741,987   $  6,741,987
     Notes payable                    $    469,874   $    466,069   $    472,325   $    469,696
</TABLE>

     The carrying values of cash and cash equivalents, and marketable securities
     approximate fair values. The fair value of the notes payable is based on
     the discounted value of contractual cash flows. The discount rate is
     estimated using rates currently offered for debt with similar maturities.

NOTE 13 - PENDING LITIGATION

     On December 4, 2004 a former employee requested a Motion for Summary
     Judgment on the issue of Liability in a lawsuit filed against the Company
     by the former employee. The motion was granted on February 10, 2005 and on
     February 18, 2005 the case was referred to a Magistrate Judge for a
     settlement conference.

     The lawsuit alleges non payment of overtime wages in violation of federal
     employment laws, with an estimated amount between $7,500 and $15,000. The
     suit was filed in the United States District Court for the Northern
     District of Illinois on behalf of all employees who were classified as
     non-exempt during 2001 through 2003. Outside counsel for the company has
     advised that at this stage in the proceedings he cannot offer an opinion as
     to the probable outcome.

                                       16
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

COMPARISON OF QUARTER ENDED MARCH 31, 2005 TO QUARTER ENDED MARCH 31, 2004

The following analysis should be read in conjunction with the unaudited
financial statements of the Company and related notes included elsewhere in this
quarterly report and the audited financial statements and Management's
Discussion and Analysis contained in our Form 10-KSB, for the fiscal year ended
December 31, 2004.

RESULTS OF OPERATIONS

Sales increased by $721,781 (approximately 18%) to $4,656,860 during the three
month period ended March 31, 2005 from $3,935,079 during the same three month
period in 2004. This increase is primarily attributable to increased sales and
awareness of Lifeway existing drinkable dairy product, including La Fruta, and
its flagship line, Kefir. Sav a Lot, which was one of Lifeway's largest
customers, and accounted for $362,000 in sales in the first quarter 2004, ceased
ordering in the second quarter of 2004, and therefore was absent from the first
quarter of 2005.

Lifeway's wholly-owned subsidiary, LFI Enterprises, Inc. ("LFIE") accounted for
$213,644 of total sales revenues during the first quarter 2005. Of the total
$213,644 revenues from LFIE, $97,275 was earned due to sales of Lifeway's Kefir
and Farmer Cheese products sent from our Morton Grove, Illinois facility to
Philadelphia, Pennsylvania for distribution in the tri-state area of
Pennsylvania, New Jersey and New York. The remaining $116,369 of LFIE revenues
for the first quarter 2005 were earned from sales of the Cream Cheese Gourmet
line of products acquired from Ilya's Farms, Inc. in the third quarter of 2004.

Cost of goods sold as a percentage of sales was approximately 55% during the
first quarter 2005, compared to about 53% during the same period in 2004. This
increase is directly related to the increased cost of milk during this period.
The average cost of milk, Lifeway's largest cost of goods sold component,
increased approximately 25% in the first quarter 2005 compared to the same
period in 2004. Even though the price of milk experienced such a dramatic
increase, Lifeway was able to maintain strong relative gross margins by more
efficiently using our other material components.

Operating expenses as a percentage of sales was approximately 25% during the
first quarter 2005, compared to about 22% during the same period in 2004. This
increase is primarily attributable to an overall increase in utility expenses
and rising insurance and professional fees associated with the Sarbanes-Oxley
Act of 2002 and other regulatory compliance requirements.

Provision for income taxes was $457,823 during the first quarter 2005 compared
with $490,533 during the same period in 2004. Income taxes are discussed in Note
8 of the Notes to Consolidated Financial Statements.


SOURCES AND USES OF CASH

Net cash used in financing activities was $227,980 during the quarter ended
March 31, 2005, which is an increase of $220,198 compared to the same period in
2004. This increase is primarily attributable to the purchase of treasury stock.
The Company purchased 29,600 shares of its treasury stock at a cost of $225,529
in the first quarter 2005.

During the quarter ended March 31, 2005, Lifeway's cash used in investing
activities totalled $381,312 due to a rebalancing of our portfolio in our
continued efforts to move away from higher-risk securities towards large cap
value, higher dividend yielding and tax-advantaged equities. Our efforts in this
regard during the first calendar quarter of 2005 also are reflected by a gain of
$198,140 on the sale of marketable securities evident on the Company's
consolidated income statement, which appears in this quarterly report. We
believe, given the current market conditions, this asset allocation strategy
offers a positive risk-reward ratio for our Company.

                                       17
<PAGE>

A significant portion of our assets are held in marketable securities. The
majority of our marketable securities are classified as available-for-sale on
our balance sheet, while the mortgage-backed securities are classified as
trading. All of these securities are stated thereon at market value as of the
end of the applicable period. Gains and losses on the portfolio are determined
by the specific identification method.

We anticipate being able to fund the Company's foreseeable liquidity
requirements internally. We continue to explore potential acquisition
opportunities in our industry in order to boost sales while leveraging our
distribution system to consolidate and lower costs.

OTHER DEVELOPMENTS

On February 12, 2004, Lifeway's Board of Directors approved awards of an
aggregate amount of 5,100 shares to be awarded under its Employee and Consulting
Services and Compensation Plan to certain employees and consultants for services
rendered to the Company. The stock awards were made on April 1, 2004 and have
vesting periods that vary from six months to one year, depending upon the
individual grantee. The expense for the awards is measured as of April 1, 2004
at $20.93 per share for 5,100 shares, or a total stock award expense of
$106,743. This expense will be recognized as the stock awards vest beginning
with the recognition of $41,860 for 2,000 shares vested on April 1, 2004. An
additional 2,000 shares of the total 5,100 vested in the third quarter of 2004.
550 shares vested in the fourth quarter of 2004. The remaining 550 shares vested
in the first quarter of 2005 and resulted in an expense of $11,512.

CRITICAL ACCOUNTING POLICIES

Lifeway's analysis and discussion of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The preparation of financial statements in
accordance with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses.
US GAAP provides the framework from which to make these estimates, assumptions
and disclosures. Lifeway chooses accounting policies within US GAAP that
management believes are appropriate to accurately and fairly report Lifeway's
operating results and financial position in a consistent manner. Management
regularly assesses these policies in light of current and forecasted economic
conditions and has discussed the development and selection of critical
accounting policies with its audit committee of the Board of Directors. For
further information concerning accounting policies, refer to Note 2 -- Summary
of Significant Accounting Policies in the notes to the consolidated financial
statements.

FORWARD LOOKING STATEMENTS

In this report, in reports subsequently filed by Lifeway with the SEC on Form
10-QSB and filed or furnished on Form 8-K, and in related comments by
management, our use of the words "believe," "expect," "anticipate," "estimate,"
"forecast," "objective," "plan," "goal," "project," "explore,"
"priorities/targets," and similar expressions is intended to identify
forward-looking statements. While these statements represent our current
judgment on what the future may hold, and we believe these judgments are
reasonable, actual results may differ materially due to numerous important
factors that are described in this report and other factors that may be
described in subsequent reports which Lifeway may file with the SEC on Form
10-QSB and filed or furnished on Form 8-K, including but not limited to:

     o    Changes in economic conditions, commodity prices;

     o    Shortages of and price increase for fuel, labor strikes or work
          stoppages, market acceptance of the Company's new products;

     o    Significant changes in the competitive environment;

     o    Changes in laws, regulations, and tax rates; and

     o    Management's ability to achieve reductions in cost and employment
          levels, to realize production efficiencies and to implement capital
          expenditures, all at of the levels and times planned by management.


                                       18
<PAGE>

ITEM 3. CONTROLS AND PROCEDURES

     The Chief Executive Officer and the Chief Accounting Officer conducted an
evaluation of the effectiveness of the Company's disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as
of March 31, 2005. The Company has historically operated on strictly monitored
cost constraints; with that perspective, the Chief Executive Officer and the
Chief Accounting Officer concluded that the disclosure controls and procedures
are effective in ensuring that all material information required to be filed in
this quarterly report has been made known to them. However, based upon the
Company's recent growth and improved cash position, as well as consultation with
its auditors, management intends to implement additional procedures to improve
internal controls over financial reporting in 2005. Specifically, an enhanced
accounting software package has been identified and continues to be evaluated
which will permit enhanced data recording and internal reporting as well as
additional on-site accounting staff and some changes to the Company's internal
control procedures over financial reporting.

     As of the date of this quarterly report, there have been no known
significant changes in internal controls or in other factors that could
significantly affect these controls subject to the date of such evaluation.


                           PART II - OTHER INFORMATION


ITEM 5. OTHER INFORMATION


On May 16, 2005, the Company announced its financial results for the fiscal
quarter ended March 31, 2005 and certain other information. A copy of the
Company's press release announcing these financial results and certain other
information is attached as Exhibit 99.1 hereto. The information contained in
Exhibit 99.1 hereto is being furnished, and should not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liabilities imposed by that Section. The information
contained in Exhibit 99.1 shall not be incorporated by reference into any
registration statement or other document or filing under the Securities Act of
1933, as amended, except as may be expressly set forth in a specific filing. The
press release filed as an exhibit to this report includes "safe harbor" language
pursuant to the Private Securities Litigation Reform Act of 1995, as amended,
indicating that certain statements about the Company's business and other
matters contained in the press release are "forward-looking." The press release
also cautions investors that "forward-looking" statements may be different from
actual operating results. Finally, the press release states that a more thorough
discussion of risks and uncertainties which may affect the Company's operating
results is included in the Company's reports on file with the Securities and
Exchange Commission.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

Exhibit
Number        Description
------        -----------

3.4       Amended and Restated By-laws (incorporated by reference to Exhibit No.
          3.5 of Lifeway's Current Report on Form 8-dated and filed on December
          10, 2002). (File No. 000-17363)

3.5       Articles of Incorporation, as amended and currently in effect
          (incorporated by reference to Exhibit 3.5 of Lifeway's Quarterly
          Report on Form 10-QSB for the quarter ended June 30, 2000 and filed on
          August 8, 2000). (File No. 000-17363)

                                       19
<PAGE>

11        Statement re: Computation of per share earnings (incorporated by
          reference to Note 2 of the Consolidated Financil Statements).

31.1      Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky.

31.2      Rule 13a-14(a)/15d-14(a) Certification of Edward P. Smolyansky.

32.1      Section 1350 Certification of Julie Smolyansky.

32.2      Section 1350 Certification of Edward P. Smolyansky.

99.1      Press Release dated May 16, 2005- "Lifeway Foods, Inc. Reports First
          Quarter Results: Sales up 18%"

(b) Reports on Form 8-K

Current Report on Form 8-K dated January 13, 2005 and filed January 14, 2005
(File No 000-17363)

                                       20
<PAGE>

                                    SIGNATURE


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

Date: May 16, 2005
                                    LIFEWAY FOODS, INC.



                                    By: /s/ Julie Smolyansky
                                        -------------------------------------
                                        Julie Smolyansky
                                        Chief Executive Officer, President, and
                                        Director


                                        /s/ Edward P. Smolyansky
                                        -------------------------------------
                                        Chief Financial and Accounting Officer
                                        and Treasurer























                                       21
<PAGE>

                                 EXHIBIT INDEX
                                 -------------

Exhibit
Number                          Description
------                          -----------

31.1      Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky.

31.2      Rule 13a-14(a)/15d-14(a) Certification of Edward P. Smolyansky.

32.1      Section 1350 Certification of Julie Smolyansky.

32.2      Section 1350 Certification of Edward P. Smolyansky.

99.1      Press Release dated May 16, 2005- "Lifeway Foods Announces First
          Quarter Results."





















                                       22