<PAGE>   1
                                 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,
                  1999

         [ ]      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 ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the issuer filed all documents and reports required to be filed
by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] 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 MAY 6, 1999, THE ISSUER
HAD 3,785,677 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING.

Transitional Small Business Disclosure Format (Check one):    Yes [ ]    No [X]


<PAGE>   2


                                                   
                                     INDEX



<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION                                                                   PAGE
                                                                                                 ----
ITEM 1.  FINANCIAL STATEMENTS.
<S>                                                                                              <C>
                                                                                                  F-1
         Lifeway Foods, Inc. and Subsidiaries
         March 31, 1999 and 1998

                  Consolidated Balance Sheets
                  December 31, 1998 and
                  March 31, 1999 and 1998 (unaudited)                                          F-2 - F-3

                  Consolidated Statements of Income
                  for the year ended December 31, 1998 and
                  for the three months ended March 31, 1999 and 1998 (unaudited)                  F-4

                  Consolidated Statements of Changes in Stockholders' Equity
                  for the year ended December 31, 1998 and
                  for the three months ended March 31, 1999 and 1998 (unaudited)                  F-5

                  Consolidated Statements of Cash Flows
                  for the year ended December 31, 1998 and
                  for the three months ended March 31, 1999 and 1998 (unaudited)               F-6 - F-7

                  Notes to Consolidated Financial Statements (unaudited)                       F-8 - F-15


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITIONS AND RESULTS OF OPERATIONS                                                 3


PART II - OTHER INFORMATION                                                                        4


SIGNATURES                                                                                         5
</TABLE>


                                       2
<PAGE>   3

                         PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS.










                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                              FINANCIAL STATEMENTS
                            MARCH 31, 1999 AND 1998







                                      F-1


<PAGE>   4

                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET





<TABLE>
<CAPTION>
                                               (UNAUDITED)
                                                 MARCH 31,                 
                                             -----------------------    DECEMBER 31,
ASSETS                                          1999        1998            1998      
                                             ----------   ----------   ------------

CURRENT ASSETS
<S>                                          <C>          <C>          <C>         
  Cash and cash equivalent                   $  592,420   $  482,090   $    628,415
  Certificates of Deposit                       243,063      230,115        239,993
  Marketable Securities                         165,221            0        100,435
  Accounts receivable, net of allowance
     for doubtful accounts of  $ 0 at
     March 31, 1999 and December 31, 1998,
     and $ 48,000 at March 31, 1998           1,037,000      857,105        847,269
  Other receivables                              16,200       16,200         16,200
  Inventories                                   796,517      605,022        851,517
  Prepaid expenses and other assets              51,772       43,655         11,772
  Deferred income taxes                          36,858       17,936         36,858
                                             ----------   ----------   ------------

      TOTAL CURRENT ASSET                     2,939,051    2,252,123      2,732,459

PROPERTY AND EQUIPMENT
  Land                                          658,400      658,400        658,400
  Buildings, machinery and equipment          5,271,833    4,621,169      5,150,248
                                             ----------   ----------   ------------
  Total property and equipment                5,930,233    5,279,569      5,808,648
  Less:  accumulated depreciation             1,761,295    1,371,355      1,660,628
                                             ----------   ----------   ------------
      PROPERTY AND EQUIPMENT, NET             4,168,938    3,908,214      4,148,020

OTHER ASSETS
      INTANGIBLE ASSETS, NET                      8,750       20,398         10,000
                                             ----------   ----------   ------------

TOTAL ASSETS                                 $7,116,739   $6,180,735   $  6,890,479
                                             ==========   ==========   ============
</TABLE>



                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                      F-2


<PAGE>   5
                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET




LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                         (UNAUDITED)
                                                                           MARCH 31,
                                                                 --------------------------    DECEMBER 31,
                                                                     1999           1998          1998 
                                                                 -----------    -----------    ------------
CURRENT LIABILITIES
<S>                                                              <C>            <C>            <C>         
  Current maturities of notes payable                            $    90,536    $   668,630    $     85,191
  Accounts Payable                                                   419,903        339,895         513,672
  Accrued expenses                                                   279,694        270,706         167,075
                                                                 -----------    -----------    ------------
      TOTAL CURRENT LIABILITIES                                      790,133      1,279,231         765,938



LONG-TERM LIABILITIES                                              1,307,721        776,593       1,314,812

DEFERRED INCOME TAXES                                                171,960         37,822         171,960


STOCKHOLDERS' EQUITY
  Common Stock                                                     1,426,916      1,396,316       1,426,916
  Retained Earnings                                                3,450,464      2,709,591       3,241,308
  Accumulated other comprehensive income, net of tax                ( 11,637)             0         (11,637)
  Treasury Stock                                                     (18,818)       (18,818)        (18,818)
                                                                 -----------    -----------    ------------
      TOTAL STOCKHOLDERS' EQUITY                                   4,846,925      4,087,089       4,637,769
                                                                 -----------    -----------    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       $ 7,116,739    $ 6,180,735    $  6,890,479
                                                                 ===========    ===========    ============
</TABLE>



                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                      F-3


<PAGE>   6

                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME




<TABLE>
<CAPTION>
                                                            (UNAUDITED)              FOR THE
                                                     FOR THE THREE MONTHS ENDED    YEAR ENDED
                                                              MARCH 31,            DECEMBER 31,
                                                     --------------------------
                                                          1999          1998           1998
                                                     -----------    -----------    ------------
<S>                                                  <C>            <C>            <C>           
SALES                                                $ 1,853,327    $ 1,630,568    $  6,795,099  
                                                                                                 
COST OF GOODS SOLD                                       884,663        692,302       3,697,080  
                                                     -----------    -----------    ------------  
                                                                                                 
GROSS PROFIT                                             968,664        938,266       3,098,019  
                                                                                                 
OPERATING EXPENSES                                       609,598        543,876       1,758,588  
                                                     -----------    -----------    ------------  
                                                                                                 
                                                                                                 
INCOME FROM OPERATIONS                                   359,066        394,390       1,339,431  
                                                                                                 
OTHER INCOME (EXPENSE)                                                                           
      Interest income                                      8,114          9,099          38,104  
      Interest expense                                   (25,840)       (26,656)       (106,222) 
      Gain on sale of marketable securities                    0              0          34,624  
                                                     -----------    -----------    ------------  
      TOTAL OTHER INCOME                                                                         
      (EXPENSE)                                          (17,726)       (17,557)        (33,494) 
                                                     -----------    -----------    ------------  
                                                                                                 
INCOME BEFORE INCOME TAXES                               341,340        376,833       1,305,937  
                                                                                                 
PROVISION FOR INCOME TAXES                               132,184        145,934         543,321  
                                                     -----------    -----------    ------------  
                                                                                                 
NET INCOME                                           $   209,156    $   230,899    $    762,616  
                                                     ===========    ===========    ============  
                                                                                                 
EARNINGS PER SHARE                                   $       .06    $       .06    $        .20  
                                                     ===========    ===========    ============  
                                                                                                 
WEIGHTED AVERAGE SHARES                                                                          
 OUTSTANDING                                           3,796,077      3,789,277       3,781,355  
                                                     ===========    ===========    ============  
                                                                                                 
                                                                                                 
COMPREHENSIVE INCOME;                                                                            
                                                                                                 
NET INCOME                                           $   209,155    $   230,899    $    762,616  
                                                                                                 
OTHER COMPREHENSIVE INCOME, NET OF TAX:                                                          
    UNREALIZED LOSSES ON SECURITIES                                                              
      (NET OF TAX BENEFIT OF $9.994)                           0              0         (11,637) 
                                                     -----------    -----------    ------------  
                                                                                                 
COMPREHENSIVE INCOME                                 $   209,155    $   230,899    $    750,979  
                                                     ===========    ===========    ============  
</TABLE>
                                                     


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                      F-4


<PAGE>   7
                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY






                                                      
                                                      

<TABLE>
<CAPTION>
                                                                   
                                        COMMON STOCK, NO PAR VALUE 
                                       10,000,000 SHARES AUTHORIZED
                                       ------------------------------- 
                                                              # OF                                                ACCUMULATED
                                                            SHARES OF                                                OTHER
                                       # OF SHARES ISSUED   TREASURY      COMMON       TREASURY      RETAINED    COMPREHENSIVE
                                         AND OUTSTANDING      STOCK        STOCK        STOCK        EARNINGS        INCOME
                                       ------------------   ----------   ----------   ----------    ----------   ------------- 
<S>                                    <C>                  <C>          <C>          <C>           <C>          <C>
BALANCES AT
  DECEMBER 31, 1996                             3,785,377       10,400   $1,374,754   $  (18,818)   $1,778,375   $           0  
                                                                                                                               
                                                                                                                               
Stock in exchange for                                                                                                          
   services rendered                                3,900            0       21,562            0             0               0 
                                                                                                                               
Net income for the year                                                                                                        
    ended December 31, 1997                             0            0            0            0       700,317               0 
                                       ------------------   ----------   ----------   ----------    ----------   ------------- 
                                                                                                                               
                                                                                                                               
BALANCES AT                                                                                                                    
   DECEMBER 31, 1997                            3,789,277       10,400    1,396,316       18,818     2,478,692               0 
                                                                                                                               
Stock in exchanged for                                                                                                         
     services rendered                              6,800            0       30,600            0             0               0 
                                                                                                                               
Other comprehensive income:                                                                                                    
     Unrealized losses on securities                    0            0            0            0             0         (11,637)
                                                                                                                               
Net income for the year                                                                                                        
    ended December 31, 1998                             0            0            0            0       762,616               0 
                                       ------------------   ----------   ----------   ----------    ----------   ------------- 
BALANCES AT                                                                                                                    
    DECEMBER 31, 1998                           3,796,077       10,400    1,426,916       18,818     3,241,308         (11,637)
                                                                                                                               
Net income for the three months                                                                                                
    ended March 31, 1999                                0            0            0            0       209,156               0 
                                       ------------------   ----------   ----------   ----------    ----------   ------------- 
                                                                                                                               
BALANCES AT                                                                                                                    
    MARCH 31, 1999                              3,796,077       10,400   $1,426,916   $   18,818    $3,450,464   $     (11,637)
                                       ==================   ==========   ==========   ==========    ==========   ============= 
</TABLE>
                                                            


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                      F-5


<PAGE>   8
                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                       (UNAUDITED)
                                                                                FOR THE THREE MONTHS ENDED    FOR THE YEAR ENDED
                                                                                         MARCH 31,               DECEMBER 31
                                                                                --------------------------
                                                                                   1999            1998              1998  
                                                                                ---------        ---------    ------------------   

<S>                                                                             <C>              <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                                                                $ 209,156        $ 230,899    $          762,616   
      Adjustments to reconcile net income to net                                                                                   
         cash flows from operating activities:                                                                                     
         Depreciation and amortization                                            101,919           91,337               391,007   
         Realized gain on sale of marketable securities                                 0                0               (34,624)  
         Issuance of common stock in exchange                                                                                      
            for services                                                                0                0                30,600   
         Decrease in allowance for doubtful accounts                                    0                0               (48,000)  
              Deferred income taxes                                                     0                0               115,217   
              (Increase) decrease in operating assets:                                                                             
              Accounts receivable                                                (189,731)         (38,860)               18,976   
              Other receivable                                                          0           (1,000)               (1,000)  
              Inventories                                                          55,000            9,000              (237,495)  
                    Prepaid expenses and other assets                             (40,000)         (35,941)               (4,058)  
               Increase (decrease) in operating liabilities:                                                                       
                    Accounts payable                                              (71,767)         (54,495)              119,282   
                    Accrued expenses                                              112,619         (158,491)             (262,122)  
                                                                                ---------        ---------    ------------------   
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                                  177,196           42,449               850,399   
                                                                                                                                   
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                              
      Purchase of marketable securities                                           (64,786)          (2,493)             (305,490)  
      Sale of marketable securities                                                     0                0               218,048   
      Purchase of property and equipment                                         (121,585)         (80,278)             (592,877)  
                                                                                ---------        ---------    ------------------   
NET CASH PROVIDED BY (USED) IN                                                                                                     
     INVESTING ACTIVITIES                                                        (186,371)         (82,771)             (680,319)  
                                                                                                                                   
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                              
      Repayments of notes payable                                                 (26,820)         (28,258)              (92,335)  
                                                                                ---------        ---------    ------------------   
                                                                                                                                   
NET CASH USED IN FINANCING ACTIVITIES                                             (26,820)         (28,258)              (92,335)  
                                                                                ---------        ---------    ------------------   
                                                                                                                                   
NET INCREASE (DECREASE) IN CASH AND                                                                                                
     CASH EQUIVALENTS                                                             (35,995)         (68,580)               77,745   
                                                                                                                                   
CASH AND CASH EQUIVALENTS AT                                                                                                       
     BEGINNING OF PERIOD                                                          628,415          550,670               550,670   
                                                                                ---------        ---------    ------------------   
                                                                                                                                   
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      $ 592,420        $ 482,090    $          628,415   
                                                                                =========        =========    ==================   
</TABLE>
                                              

                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                      F-6


<PAGE>   9
                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
                                                                              (UNAUDITED)
                                                                      FOR THE THREE MONTHS ENDED  FOR THE YEAR ENDED
                                                                                MARCH 31,            DECEMBER 31
                                                                      --------------------------
                                                                           1999          1998            1998 
                                                                      ------------  ------------  ------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

<S>                                                                   <C>           <C>           <C>                
      Cash paid for interest                                          $     25,840  $     26,656  $          106,222 
                                                                      ============  ============  ================== 
                                                                                                                     
      Cash paid for income taxes                                      $     50,000  $    260,000  $          623,000 
                                                                      ============  ============  ================== 
                                                                                                                     
                                                                                                                     
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING                                                                          
     AND FINANCING ACTIVITIES:                                                                                       
  Refinancing of mortgages                                            $          0  $          0  $          582,696 
                                                                      ============  ============  ================== 
                                                                                                                     
  Purchase of automobile by issuing a note payable                    $     22,002  $          0  $           18,857 
                                                                      ============  ============  ================== 
                                                                                                                     
  Issuance of common stock in exchange                                                                               
      for consulting fees                                             $          0  $          0  $           30,600 
                                                                      ============  ============  ================== 
</TABLE>
                                                                      




                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                      F-7


<PAGE>   10
                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998

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 principle 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 Farmers Cheese;" a fruit sugar-flavored product similar
      in consistency to cream cheese sold under the name of "Sweet Kiss;" and a
      new dairy beverage, similar to Kefir, with increased protein and calcium,
      sold under the name "Basics Plus." 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. The Company also distributes some of its products
      internationally by exporting to Eastern Europe. For the years ended
      December 31, 1998 and 1997 export sales of the Company were approximately
      $298,000 and $381,000, respectively.

      In 1992, the Company formed Lifeway International, Inc. ("LII") a
      wholly-owned subsidiary incorporated in the state of Illinois, to
      facilitate the distribution of its products to Eastern Europe. LII was
      dissolved in 1998, and its operations were merged into the operations of
      the Company to simplify the exporting of its products.

      On September 30, 1992, the Company formed a wholly-owned subsidiary
      corporation, LFI Enterprises, Inc., (LFIE) incorporated in the State of
      Illinois. LFIE was formed for the purpose of operating a "Russian" theme
      restaurant and supper club on the property acquired by the Company on
      October 9, 1992. The restaurant/supper club commenced operations in late
      November 1992.

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 subsidiaries. All significant intercompany accounts
      and transactions have been eliminated.

      Use of Estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities
      and 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.

      Cash Equivalents

      All highly liquid investments purchased with a maturity of three months
      or less are considered to be cash equivalents.

      The Company maintains cash deposits at several banks located in the
      greater Chicago, Illinois metropolitan area. Deposits at each bank are
      insured by the Federal Deposit Insurance Corporation up to $100,000.

                                      F-8


<PAGE>   11
                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

             Bank balances of amounts reported by financial institutions are
             categorized as follows at December 31, 1998:

<TABLE>
<S>                                                                 <C>         
             Amounts insured by FDIC                                $    212,418
             Uninsured and uncollateralized amounts                      537,431
                                                                    ------------
             Total bank balances                                    $    749,849
                                                                    ============
</TABLE>

      Marketable Securities

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

      Accounts Receivable

      The allowance for doubtful accounts is based on management's evaluation
      of outstanding accounts receivable at the end of the year. At December
      31, 1998, no allowance for doubtful accounts has been made since all
      receivables were considered collectible.

      Inventory

      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 lower of cost or net realized value.
      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:


<TABLE>
<CAPTION>
                   Category                                                        Years
                   --------                                                        -----

<S>                                                                              <C>    
                   Buildings and improvements                                    19 and 31
                   Machinery and equipment                                            5-12
                   Office equipment                                                    5-7
                   Vehicles                                                              5
</TABLE>

Intangible Assets

      Intangible Assets are stated at cost and are amortized over estimated
      useful lives of the assets using the straight-line method as follows:

<TABLE>
<S>                                                                              <C>     
                   Covenant not to compete                                       10 years
                   U.P.C. Codes                                                  7 years
                   Organization costs                                            5 years
</TABLE>


                                      F-9


<PAGE>   12
                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

      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 noncurrent, 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 noncurrent depending on the periods in which the temporary
      differences are expected to reverse.

      The principal sources of temporary differences are different depreciation
      methods for financial statement and tax purposes, capitalization of
      indirect costs for tax purposes, use of allowance method for book
      purposes verses the direct method for tax purposes as to bad debts.

      Advertising Costs

      The Company expenses advertising costs as incurred. During 1998 and 1997,
      $240,636 and $158,183, 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 year. For the year ended December 31, 1998 and
      1997, diluted and basic earnings per share were the same, as the effect
      of dilutive securities options outstanding was not significant.

NOTE 3 - MARKETABLE SECURITIES

      The cost and fair value of marketable securities available for sale at
December 31, 1998 follows:

<TABLE>
<CAPTION>
                                                            Unrealized      Unrealized            Fair
                                             Cost              Gains          Losses              Value    
                                        ------------       -----------     ------------       ------------    
<S>                                     <C>                <C>             <C>                <C>         
                     Equities           $    122,066       $    -0-        $    (21,631)      $    100,435
</TABLE>

      Proceeds from the sale of marketable securities were $218,048 in 1998.
      Gross gains of $34,624 were realized on those sales.

NOTE 4 - INVENTORIES

      Inventories consisted of the following:
<TABLE>
<CAPTION>
                                                                         (UNAUDITED)
                                                                 FOR THE THREE MONTHS ENDED   FOR THE YEAR ENDED
                                                                          MARCH 31,               DECEMBER 31
                                                                 --------------------------
                                                                     1999           1998                   1998      
                                                                 ------------  ------------  ------------------  

<S>                                                              <C>           <C>           <C>                 
                    Finished goods                               $    534,362  $    305,993  $          534,224  
                    Work in Process                                         0             0              49,560  
                    Production supplies                               126,803       138,527             132,281  
                    Raw materials                                     135,352       160,502             135,452  
                                                                 ------------  ------------  ------------------  
                                                                 $    796,517  $    605,022  $          851,517  
                                                                 ============  ============  ==================  
</TABLE>
                                                                               
                                      F-10


<PAGE>   13
                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:                    

<TABLE>
<CAPTION>
                                                                        (UNAUDITED)
                                                                 FOR THE THREE MONTHS ENDED    FOR THE YEAR ENDED
                                                                          MARCH 31,                DECEMBER 31
                                                                        1999         1998              1998        
                                                                 ------------  ------------    ------------------

<S>                                                              <C>           <C>             <C>                 
                    Land                                         $    658,400  $    658,400    $          658,400  
                    Buildings and improvement                       1,649,370     1,649,370             1,631,557
                    Machinery and equipment                         3,022,256     2,503,863             3,261,618
                    Vehicles                                          119,770       109,877               176,842
                    Office equipment                                   82,352        56,972                80,231
                                                                 ------------  ------------    ------------------
                                                                 $  5,532,148  $  4,978,482    $        5,808,648
                                                                 ============  ============    ==================
</TABLE>
                                                                 
      Depreciation charged to income for the three months ended March 31, 1999
      and 1998 was $ 100,669 and $87,869 respectively, and $377,142 for the
      year ended December 31, 1998.


NOTE 6 - NOTES PAYABLE                                                   

<TABLE>
<CAPTION>
                                                                                    (UNAUDITED)
                                                                             FOR THE THREE MONTHS ENDED    FOR THE YEAR ENDED
                                                                                      MARCH 31,               DECEMBER 31
                                                                             --------------------------
                                                                                  1999         1998               1998    
                                                                             ------------  ------------    ------------------
<S>                                                                          <C>           <C>             <C>               
Mortgage note payable, 1st National Bank of Morton Grove, payable in
 monthly installments of $1,767, including interest at 7.25%, with a
 balloon payment of $139,838 due November
 2003.  Collateralized by real estate.                                       $    180,890  $    193,108    $          184,282

Mortgage note payable, American National Bank and Trust Company of
 Chicago, payable in monthly installments of $3,161 including interest at
 7.25%, with a balloon payment of $343,151 due August
 2003.  Collateralized by real estate.                                            393,409       408,647               395,731

Mortgage note payable, American National Bank and Trust Company of
  Chicago, payable in monthly installments of principal of $5,109 plus
  interest at 8.05%, with a balloon payment of $618,214 due
  November 2001.  Collateralized by real estate.                                  786,811       843,010               802,138

Note payable, Ford Motor credit, payable in monthly installments of $540,
  including interest at 1.9%, due
  October 2001.  Collateralized by vehicle.                                        16,315             0                17,852

Note payable, 1st National Bank of Morton Grove,
  payable in monthly installments of $532, including
  interest at 7.5%, due December 2002.  Collateralized
  by vehicle.                                                                      20,832             0                     0
</TABLE>



                                      F-11


<PAGE>   14
                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998


NOTE 6 - NOTES PAYABLE - CONTINUED                              
                                                                              
<TABLE>
<CAPTION>
                                                                              (UNAUDITED)
                                                                      FOR THE THREE MONTHS ENDED   FOR THE YEAR ENDED
                                                                                MARCH 31,             DECEMBER 31
                                                                            1999        1998             1998    
                                                                      ------------  ------------   ------------------  
<S>                                                                   <C>           <C>            <C> 
Note payable, Glenview State Bank, payable in
    monthly installments of $460, including interest
    at 6.25%, due March 1998.  Collateralized by
    automobile                                                                   0           458                    0  
                                                                      ------------  ------------   ------------------  
                                                                                                                       
        Total                                                            1,398,257     1,445,223            1,400,003  
                                                                                                                       
Less current maturities                                                     90,536       668,630               85,191  
                                                                      ------------  ------------   ------------------  
                                                                                                                       
           Total                                                      $  1,307,721  $    776,593   $        1,314,812  
                                                                      ============  ============   ==================  
</TABLE>
                                                                      

      Maturities of notes payable are as follows:

            Year Ending December 31,

<TABLE>
<S>                                          <C>                                     <C>         
                                             1999                                    $     85,191
                                             2000                                          86,636
                                             2001                                         705,315
                                             2002                                          21,974
                                             2003                                         500,887
                                                                                      -----------

                                            Total                                     $ 1,400,003
                                                                                      ===========
</TABLE>


NOTE 7 - PROVISION FOR INCOME TAXES

      The provision for income taxes consists of the following:


<TABLE>
<CAPTION>
                                                              (UNAUDITED)
                                                       FOR THE THREE MONTHS ENDED    FOR THE YEAR ENDED
                                                                 MARCH 31,              DECEMBER 31
                                                             1999        1998              1998    
                                                       ------------  ------------    ------------------ 
<S>                                                    <C>           <C>             <C> 
Current
      Federal                                          $    107,748  $    118,948    $          339,750 
      State                                                  24,436        26,986                78,362 
                                                       ------------  ------------    ------------------ 
Total current                                               132,184       145,934               418,112 
Deferred                                                          0             0               125,209 
                                                       ------------  ------------    ------------------ 
                                                                                                        
Provision for income taxes                             $    132,184  $    145,934    $          543,321 
                                                       ============  ============    ================== 
</TABLE>
                                                       




                                      F-12


<PAGE>   15
                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998

NOTE 7 - PROVISION FOR INCOME TAXES - CONTINUED

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

<TABLE>
<CAPTION>
                                                                             (UNAUDITED)
                                                                      FOR THE THREE MONTHS ENDED   FOR THE YEAR ENDED
                                                                               MARCH 31,               DECEMBER 31
                                                                           1999           1998            1998 
                                                                      ------------   -----------   ------------------ 

          Federal income tax expense                                                                                   
<S>                                                                   <C>            <C>           <C>                
            computed at the statutory rate                            $    107,748   $   118,948   $          444,019 
          State taxes, expense                                              24,436        26,986               69,373 
          Permanent book/tax difference                                          0             0               29,929 
                                                                      ------------   -----------   ------------------
                                                                                                                      
          Provision for income taxes                                  $    132,184   $   145,934   $          543,321 
                                                                      ============   ===========   ==================
</TABLE>
                                                            
Amounts for deferred tax assets and liabilities as of December 31, 1998 are as
follows:

<TABLE>
<CAPTION>
            Non-current deferred tax liabilities arising from:
                  Temporary differences - principally
<S>                                                                         <C>         
                         Book/tax, accumulated depreciation                 $    171,960
                                                                            ------------
                  Total deferred tax liabilities                            $    171,960

             Current deferred tax assets arising from:
                         Book/tax, allowance for unrealized losses          $      9,994
                         Book/tax, inventory                                      26,864
             Total deferred tax assets                                            36,858
                                                                            ------------            
             Net deferred tax liability                                     $    135,102
                                                                            ============
</TABLE>

NOTE 8 - CUSTOMER AND CREDIT CONCENTRATIONS

      Concentrations of credit with regard to trade accounts receivable, which
      are uncollateralized, and sales are limited due to the fact the Company's
      customers are spread across different geographic areas. The customers are
      concentrated in the retail food industry. Two customers accounted for
      10.7% and 8.6% of 1998 sales and 19.4% and 14.6% of trade accounts
      receivable as of December 31, 1998, respectively.

NOTE 9 -  INTANGIBLE ASSETS

      Intangible assets consisted of the following at December 31, 1998:

<TABLE>
<S>                                                                           <C>       
                   Covenant Not to Compete                                    $   50,000
                   UPC Codes                                                     200,000
                   Organization Costs                                             44,343
                                                                              ----------
                                                                                 294,343
                   Accumulated amortization                                      284,343
                                                                              ----------          
                                                                              $   10,000
                                                                              ==========
</TABLE>

      Total amortization charged against income for the three months ended
      March 31, 1999 and 1998 was $1,250 and $3,468 respectively, and $13,865
      for the year ended December 31, 1998.


                                      F-13


<PAGE>   16




                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998


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 300,000 of the Company's Common Stock shares.
      Pursuant to the Plan, the Company may issue Common Stock or Option to
      purchase Common Stock to certain consultants, service providers and
      employees of the Company.

      The option price, number of shares and grant date are determined at the
      discretion of the Company's Board of Directors and are considered 100%
      vested at the grant date. Options issued under the plan expire June 30,
      2000.

      The fair value of each option grant is estimated on the date of grant
      using the Black-Scholes option- pricing model with the following
      weight-average assumptions used for grants: dividend yield of 0%,
      expected volatility of 54%, risk free interest rate of 6.2% and expected
      lives of three years. The weighted-average fair value of options granted
      during 1997 was $1.48 per share.

      The Company has chosen to account for stock-based compensation in
      accordance with APB Opinion 25. If compensation cost would have been
      recognized in accordance with Statement of Financial Accounting Standards
      No. 123, "Accounting for Stock-Based Compensation," compensation cost
      would have increased by approximately $81,000, net income would have been
      reduced by approximately $48,000 and earnings per share would have been
      reduced by $0.01.

      A summary of option transactions during the year ended December 31, 1997
is shown below:


<TABLE>
<CAPTION>
                                                                       Number      Weighted-Average
                                                                         of            Exercise
                                                                       Shares           Price   
                                                                      -------      ----------------
<S>                                                                   <C>          <C>   
Outstanding and excerisable at January 1, 1998                           --                   N/A   
Granted                                                                55,000      $           5.00 
Exercised                                                                --                    5.00 
Forfeited                                                                --                   --    
Expired                                                                  --                   --   
                                                                      ------- 
Outstanding and excerisable at December 31, 1998                       55,000                  5.00 
                                                                      =======                             
Available for issuance at December 31, 1998                           245,000                      
                                                                      =======                             
</TABLE>




                                      F-14


<PAGE>   17
                      LIFEWAY FOODS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998


NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS

      The estimated fair value of the Company's financial instruments, none of
      which are held for trading purposes, are as follows at December 31, 1998:

<TABLE>
<CAPTION>
                                                            Carrying       Fair
                                                             Amount        Value  
                                                           ----------   ----------
<S>                                                        <C>          <C>          
          Cash and cash equivalents                        $  628,415   $  628,415   
          Certificates of Deposit                             239,993      239,993  
          Note payable to bank                                 17,852       17,852  
          Marketable securities                               100,435      100,435  
          Mortgages payable                                 1,382,151    1,377,303  
                                                           ----------   ----------                      
          Total                                            $2,368,846   $2,363,998  
                                                           ==========   ==========
</TABLE>
                                                             
                                                           

      The carrying values of cash and cash equivalents, certificates of deposit
      and the note payable to bank approximate fair values. The fair value of
      the mortgage 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.



                                      F-15
<PAGE>   18

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

(1)      Material Changes in Results of Operations

         Sales increased by $222,759 up to $1,853,327 during the three month
period ending March 31, 1999, from $1,630,568 during the same three month
period in 1998. This increase is attributable to increased sales of existing
products. However, net income decreased by $21,743, down to $209,156 for the
three month period ending March 31, 1999, from $230,899 during the same three
month period in 1998. This small decrease in net income is attributable to
increases in cost of goods sold and operating expenses, as described below.

         Cost of goods sold increased by $192,361 up to $884,663 during the
three month period ending March 31, 1999, from $692,302 during the same three
month period in 1998. This increase is attributable to increased cost of milk,
which reached record levels during the first quarter of 1999. Wholesale milk
prices have since dropped sharply in the second quarter.

         Operating expenses increased by $65,722, up to $609,598 for the three
month period ending March 31, 1999, from $543,876 during the same three month
period in 1998. This increase is primarily attributable to increased production
and additional advertising.

(2)      Liquidity and Capital Resources

         As of the three month period ending March 31, 1999, as compared to the
three month period ending March 31, 1998, the Company had working capital in
the amount of $2,148,918 as compared to $972,892, respectively, an increase of
$1,176,026. This increase is attributable to increases in current assets,
primarily cash on hand ($110,330 increase), marketable securities ($165,221
increase) and inventory ($191,459 increase); as well as decreases in current
liabilities, primarily current maturities of notes payable (578,094 decrease)
due to the refinancing of several mortgage notes that were due in 1998, but are
now due in 2003.

         Net cash provided by operating activities increased by $134,747 to
$177,196 for the three month period ending March 31, 1999, from $42,449 for the
same three month period in 1998. The increase is primarily due to a substantial
increase in operating liabilities (accrued expenses), due to a timing
difference for the payment of income taxes in the first quarter of 1998,
compared to an accrued tax liability for the first quarter of 1999 that will be
paid in the second quarter. The increase is partially offset by an increase in
operating assets (accounts receivable).

         Net cash used in investing activities increased by $103,600 to
$186,371 for the three month period ending March 31, 1999 from $82,771 for the
same three month period in 1998. This increase is primarily a result of
purchases of additional equipment and marketable securities in 1999.

         The Company is not aware of any circumstances or trends which would
have a negative impact upon future sales or earnings. There have been no
material fluctuations in the standard seasonal variations of the Company's
business. The accompanying financial statements include all adjustments which
in the opinion of management are necessary in order to make the financial
statements not misleading.


                                       3
<PAGE>   19
                           PART II - OTHER INFORMATION

<TABLE>
<S>      <C>                          
ITEM 1.  LEGAL PROCEEDINGS - None.

ITEM 2.  CHANGES IN SECURITIES - None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES - None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - None.

ITEM 5.  OTHER INFORMATION - None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits:  Exhibit Number and Brief Description

         3.1......Articles of Incorporation of Registrant, with Certificate, and Amendments. (1)

         3.2......Bylaws of Registrant. (1)

         3.3......Corrected Amendment to the Bylaws of Registrant. (1)

         10.1.....Lifeway Foods, Inc. Consulting and Services Compensation Plan, dated June 5, 1995. (2)

         27.......Financial Data Schedule. (3)

         ------------------------------------
         footnotes:

(1)      Incorporated by reference to the Company's Registration Statement on
         Form S-18 (Commission File No. 33-14329-C), and Post-Effective
         Amendments thereto.

(2)      Incorporated by reference to the Company's Registration Statement on
         Form S-8 (Commission File No. 33-93306).

(3)      Filed herewith.

(b)      Reports on Form 8-K

          None.
</TABLE>


                                       4
<PAGE>   20
                                   SIGNATURES

         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.


                                 LIFEWAY FOODS, INC.


                                 By:  /s/ Michael Smolyansky                 
                                    -------------------------------------------
                                    Michael Smolyansky, Chief Executive Officer,
                                    Chief Financial and Accounting Officer,
                                    President, Treasurer and Director

Date:   May 13, 1999


                                       5
<PAGE>   21
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
NUMBER            BRIEF DESCRIPTION

<S>               <C>
3.1               Articles of Incorporation of Registrant, with Certificate, and Amendments. (1)

3.2               Bylaws of Registrant. (1)

3.3               Corrected Amendment to the Bylaws of Registrant. (1)

10.1              Lifeway Foods, Inc.  Consulting and Services  Compensation  Plan, dated June 5,
                  1995. (2)

27                Financial Data Schedule. (3)

--------------------------------------------

(1)      Incorporated by reference to the Company's Registration Statement on
         Form S-18 (Commission File No. 33-14329-C), and Post-Effective
         Amendments thereto.

(2)      Incorporated by reference to the Company's Registration Statement on
         Form S-8 (Commission File No. 33-93306).

(3)      Filed herewith.
</TABLE>