UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549




FORM
10-Q


______________________________________




(Mark
      One)





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




For
the quarterly period ended:  March 31, 2009




o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
      ACT OF 1934




For
the transition period from __________ to __________






Commission
File Number: 000-17363






______________________________________




LIFEWAY
FOODS, INC.


(Exact
Name of Registrant as Specified in its Charter)




______________________________________






Illinois
              36-3442829(State
      or Other Jurisdiction of Incorporationor
      Organization)
              (I.R.S.
      Employer Identification No.)






6431 West Oakton, Morton Grove, IL
60053


(Address
of Principal Executive Offices, Zip Code)






(847-967-1010)


(Registrant’s
Telephone Number, Including Area Code)






Indicate
      by check mark whether the registrant (1) filed all reports required to be
      filed by Section 13 or 15(d) of theSecurities
      Exchange Act of 1934 during the past 12 months (or for such shorter period
      that the registrant was requiredto
      file such reports), and (2) has been subject to such filing requirements
      for the past 90 days.   Yes  o  
      No  xIndicate
      by check mark whether the registrant has submitted electronically and
      posted on its corporate Web site, ifany,
      every Interactive Data file required to be submitted and posted pursuant
      to Rule 405 of Regulation S-T (§232.405of
      this chapter) during the preceding 12 months (or for such shorter period
      that the registrant was required to submitand
      post such files).   Yes  o  
      No  oIndicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-acceleratedfiler
      or a smaller reporting company. See definition of “large accelerated
      filer,” “accelerated filer” and “smallerreporting
      company” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer o
            Accelerated
      filer o
            Non-accelerated
      filer  o
            Smaller
      reporting company x




Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).Yes 
      o  
      No  xAs
      of April 30, 2009, the issuer had 16,819,920 shares of common
      stock, no par value, outstanding.















LIFEWAY
FOODS, INC.


CONTENTS
TO FORM 10-Q






PART
      I —
                FINANCIAL
      INFORMATION
                Page(s)ITEM
      1.
                FINANCIAL
      STATEMENTS.
                2NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                7ITEM
      2.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
                22ITEM
      3.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
                24ITEM 4T.
                CONTROLS
      AND PROCEDURES.
                24PART
      II —
                OTHER
      INFORMATIONITEM
      1.
                LEGAL
      PROCEEDINGS.
                24ITEM 1A.
                RISK
      FACTORS.
                24ITEM
      2.
                UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
                24ITEM
      3.
                DEFAULTS
      UPON SENIOR SECURITIES.
                25ITEM
      4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS.
                25ITEM
      5.
                OTHER
      INFORMATION.
                25ITEM
      6.
                EXHIBITS.
                25SIGNATURES
                
                26EXHIBIT
      INDEX
                
                27




1


LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 MARCH
31, 2009 and 2008
 
 AND
DECEMBER 31, 2008
   
 
 2
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Consolidated
Statements of Financial Condition
 March
31, 2009 and 2008 (Unaudited) and December 31, 2008
  (Unaudited)March
      31,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2008ASSETSCurrent
      assetsCash
      and cash equivalents
                                      
                                      $
                                      607,098
                                      
                                      
                                      $
                                      392,790
                                      
                                      
                                      $
                                      277,248Marketable
      securities
                                      
                                      
                                      4,286,451
                                      
                                      
                                      
                                      6,790,850
                                      
                                      
                                      
                                      5,262,168Inventories
                                      
                                      
                                      3,641,748
                                      
                                      
                                      
                                      3,669,990
                                      
                                      
                                      
                                      3,097,542Accounts
      receivable, net of allowance for doubtful accountsof $35,011 and
      $39,460 at March 31, 2009 and 2008 and$110,011 at December
      31, 2008
                                      
                                      
                                      6,062,316
                                      
                                      
                                      
                                      4,926,058
                                      
                                      
                                      
                                      4,765,865Prepaid
      expenses and other current assets
                                      
                                      
                                      23,051
                                      
                                      
                                      
                                      9,087
                                      
                                      
                                      
                                      23,226Other
      receivables
                                      
                                      
                                      27,472
                                      
                                      
                                      
                                      134,298
                                      
                                      
                                      
                                      40,314Deferred
      income taxes
                                      
                                      
                                      862,607
                                      
                                      
                                      
                                      467,695
                                      
                                      
                                      
                                      919,649Refundable
      income taxes
                                      
                                      
                                      73,174
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      356,416Total
      current assets
                                      
                                      
                                      15,583,917
                                      
                                      
                                      
                                      16,390,768
                                      
                                      
                                      
                                      14,742,428Property
      and equipment, net
                                      
                                      
                                      13,723,923
                                      
                                      
                                      
                                      9,854,945
                                      
                                      
                                      
                                      11,062,714Intangible
      assetsGoodwill
      and other non amortizable brand asset
                                      
                                      
                                      12,253,845
                                      
                                      
                                      
                                      5,414,858
                                      
                                      
                                      
                                      5,414,858Other
      intangible assets, net of accumulated amortization of$1,092,112
      and $681,837 at March 31, 2009 and 2008 and$921,422 at December
      31, 2008
                                      
                                      
                                      6,765,526
                                      
                                      
                                      
                                      3,175,801
                                      
                                      
                                      
                                      2,936,216Total
      intangible assets
                                      
                                      
                                      19,019,371
                                      
                                      
                                      
                                      8,590,659
                                      
                                      
                                      
                                      8,351,074Other
      assets
                                      
                                      
                                      500,000
                                      
                                      
                                      
                                      500,000
                                      
                                      
                                      
                                      500,000Total
      assets
                                      
                                      $
                                      48,827,211
                                      
                                      
                                      $
                                      35,336,372
                                      
                                      
                                      $
                                      34,656,216LIABILITIES AND STOCKHOLDERS’
      EQUITYCurrent
      liabilitiesCurrent
      maturities of notes payable
                                      
                                      $
                                      6,982,001
                                      
                                      
                                      $
                                      1,131,725
                                      
                                      
                                      $
                                      928,444Accounts
      payable
                                      
                                      
                                      2,368,732
                                      
                                      
                                      
                                      1,966,926
                                      
                                      
                                      
                                      2,260,272Accrued
      expenses
                                      
                                      
                                      486,718
                                      
                                      
                                      
                                      392,384
                                      
                                      
                                      
                                      458,282Margin
      payable
                                      
                                      
                                      423,032
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Accrued
      income taxes
                                      
                                      
                                      —
                                      
                                      
                                      
                                      203,529
                                      
                                      
                                      
                                      —Total
      current liabilities
                                      
                                      
                                      10,260,483
                                      
                                      
                                      
                                      3,694,564
                                      
                                      
                                      
                                      3,646,998Notes
      payable
                                      
                                      
                                      8,376,389
                                      
                                      
                                      
                                      3,813,825
                                      
                                      
                                      
                                      3,108,014Deferred
      income taxes
                                      
                                      
                                      1,763,059
                                      
                                      
                                      
                                      1,679,859
                                      
                                      
                                      
                                      1,607,155Stockholders’
      equityCommon
      stock, no par value; 20,000,000 shares authorized; 17,273,776 shares
      issued; 16,843,476 shares outstanding at March 31, 2009; 17,273,776
      shares issued; 16,792,826 shares outstanding at March 31, 2008; and
      17,273,776 shares issued; 16,720,842 shares outstanding at December 31,
      2008
                                      
                                      
                                      6,509,267
                                      
                                      
                                      
                                      6,509,267
                                      
                                      
                                      
                                      6,509,267Paid-in-capital
                                      
                                      
                                      1,886,375
                                      
                                      
                                      
                                      1,137,709
                                      
                                      
                                      
                                      1,202,009Treasury
      stock, at cost
                                      
                                      
                                      (3,056,859
                                      )
                                      
                                      
                                      (2,437,517
                                      )
                                      
                                      
                                      (3,302,025
                                      )Retained
      earnings
                                      
                                      
                                      23,931,173
                                      
                                      
                                      
                                      21,360,037
                                      
                                      
                                      
                                      22,383,707Accumulated
      other comprehensive loss, net of taxes
                                      
                                      
                                      (842,676
                                      )
                                      
                                      
                                      (421,372
                                      )
                                      
                                      
                                      (498,909
                                      )Total
      stockholders’ equity
                                      
                                      
                                      28,427,280
                                      
                                      
                                      
                                      26,148,124
                                      
                                      
                                      
                                      26,294,049Total
      liabilities and stockholders’ equity
                                      
                                      $
                                      48,827,211
                                      
                                      
                                      $
                                      35,336,372
                                      
                                      
                                      $
                                      34,656,216
 See accompanying notes to
financial statements
 3
 
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Consolidated
Statements of Income and Comprehensive Income
 For the
Three Months Ended March 31, 2009 and 2008 (Unaudited)
 and the
Year Ended December 31, 2008
  (Unaudited)Three
      Months Ended
                                                    
                                                    
                                                    Year
      EndedMarch
      31,
                                                    
                                                    
                                                    December
      31,2009
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2008Sales
                                                    
                                                    $
                                                    13,736,080
                                                    
                                                    
                                                    $
                                                    11,122,238
                                                    
                                                    
                                                    $
                                                    44,461,455Cost
      of goods sold
                                                    
                                                    
                                                    8,000,052
                                                    
                                                    
                                                    
                                                    7,442,083
                                                    
                                                    
                                                    
                                                    30,926,114Depreciation
      expense
                                                    
                                                    
                                                    216,774
                                                    
                                                    
                                                    
                                                    189,424
                                                    
                                                    
                                                    
                                                    777,715Total
      cost of goods sold
                                                    
                                                    
                                                    8,216,826
                                                    
                                                    
                                                    
                                                    7,631,507
                                                    
                                                    
                                                    
                                                    31,703,829Gross
      profit
                                                    
                                                    
                                                    5,519,254
                                                    
                                                    
                                                    
                                                    3,490,731
                                                    
                                                    
                                                    
                                                    12,757,626Selling
      Expenses
                                                    
                                                    
                                                    1,307,925
                                                    
                                                    
                                                    
                                                    1,059,166
                                                    
                                                    
                                                    
                                                    4,098,176General
      and Administrative
                                                    
                                                    
                                                    1,497,126
                                                    
                                                    
                                                    
                                                    985,046
                                                    
                                                    
                                                    
                                                    4,149,010Amortization
      expense
                                                    
                                                    
                                                    170,690
                                                    
                                                    
                                                    
                                                    79,861
                                                    
                                                    
                                                    
                                                    319,446Total
      Operating Expenses
                                                    
                                                    
                                                    2,975,741
                                                    
                                                    
                                                    
                                                    2,124,073
                                                    
                                                    
                                                    
                                                    8,566,632Income
      from operations
                                                    
                                                    
                                                    2,543,513
                                                    
                                                    
                                                    
                                                    1,366,658
                                                    
                                                    
                                                    
                                                    4,190,994Other
      income (expense):Interest
      and dividend income
                                                    
                                                    
                                                    62,211
                                                    
                                                    
                                                    
                                                    103,133
                                                    
                                                    
                                                    
                                                    343,329Rental
      Income
                                                    
                                                    
                                                    9,347
                                                    
                                                    
                                                    
                                                    11,647
                                                    
                                                    
                                                    
                                                    48,886Interest
      expense
                                                    
                                                    
                                                    (154,383
                                                    )
                                                    
                                                    
                                                    (85,956
                                                    )
                                                    
                                                    
                                                    (298,619
                                                    )Impairment
      of marketable securities
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (958,879
                                                    )Gain
      (loss) on sale of marketablesecurities, net
                                                    
                                                    
                                                    (149,790
                                                    )
                                                    
                                                    
                                                    51,029
                                                    
                                                    
                                                    
                                                    (733,647
                                                    )Total
      other income (Expense)
                                                    
                                                    
                                                    (232,615
                                                    )
                                                    
                                                    
                                                    79,853
                                                    
                                                    
                                                    
                                                    (1,598,930
                                                    )Income
      before provision forincome
    taxes
                                                    
                                                    
                                                    2,310,898
                                                    
                                                    
                                                    
                                                    1,446,511
                                                    
                                                    
                                                    
                                                    2,592,064Provision
      for income taxes
                                                    
                                                    
                                                    763,432
                                                    
                                                    
                                                    
                                                    557,906
                                                    
                                                    
                                                    
                                                    679,789Net
      income
                                                    
                                                    $
                                                    1,547,466
                                                    
                                                    
                                                    $
                                                    888,605
                                                    
                                                    
                                                    $
                                                    1,912,275Basic
      and diluted earnings percommon
      share
                                                    
                                                    
                                                    0.09
                                                    
                                                    
                                                    
                                                    0.05
                                                    
                                                    
                                                    
                                                    0.11Weighted
      average number ofshares
      outstanding
                                                    
                                                    
                                                    16,846,671
                                                    
                                                    
                                                    
                                                    16,814,740
                                                    
                                                    
                                                    
                                                    16,765,080COMPREHENSIVE INCOMENet
      income
                                                    
                                                    $
                                                    1,547,466
                                                    
                                                    
                                                    $
                                                    888,605
                                                    
                                                    
                                                    $
                                                    1,912,275Other
      comprehensive income (loss),net of tax:Unrealized
      gains (losses) onmarketable securities(net of tax
      benefits)
                                                    
                                                    
                                                    (343,767
                                                    )
                                                    
                                                    
                                                    (182,376
                                                    )
                                                    
                                                    
                                                    (720,517
                                                    )Less
      reclassification adjustmentfor (gains) lossesincluded in net
      income (net of taxes)
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (29,954
                                                    )
                                                    
                                                    
                                                    430,651Comprehensive
      income
                                                    
                                                    $
                                                    1,203,699
                                                    
                                                    
                                                    $
                                                    676,275
                                                    
                                                    
                                                    $
                                                    1,622,409
 
 4
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Consolidated
Statements of Changes in Stockholder’s Equity
 For the
Three Months Ended March 31, 2009 (Unaudited)
 and the
Year Ended December 31, 2008
 Common
      Stock,
                                                            No
      Par Value
                                                          
                                                          
                                                          #
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          Accumulated20,000,000
      Shares
                                                          
                                                          
                                                          of Shares
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          OtherAuthorized
                                                          
                                                          
                                                          of
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          Comprehensive#
      of Shares
                                                          
                                                          
                                                          #
      of Shares
                                                          
                                                          
                                                          Treasury
                                                          
                                                          
                                                          Common
                                                          
                                                          
                                                          Paid
      In
                                                          
                                                          
                                                          Treasury
                                                          
                                                          
                                                          Retained
                                                          
                                                          
                                                          Income
      (Loss),Issued
                                                          
                                                          
                                                          Outstanding
                                                          
                                                          
                                                          Stock
                                                          
                                                          
                                                          Stock
                                                          
                                                          
                                                          Capital
                                                          
                                                          
                                                          Stock
                                                          
                                                          
                                                          Earnings
                                                          
                                                          
                                                          Net
      of Tax
                                                          
                                                          
                                                          TotalBalances
      at December 31, 2007
                                                          
                                                          
                                                          17,273,776
                                                          
                                                          
                                                          
                                                          16,827,726
                                                          
                                                          
                                                          
                                                          446,050
                                                          
                                                          
                                                          
                                                          6,509,267
                                                          
                                                          
                                                          
                                                          1,120,669
                                                          
                                                          
                                                          
                                                          (2,078,165
                                                          )
                                                          
                                                          
                                                          20,471,432
                                                          
                                                          
                                                          
                                                          (209,043
                                                          )
                                                          
                                                          
                                                          25,814,160Redemption
      of stock
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (112,009
                                                          )
                                                          
                                                          
                                                          112,009
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (1,239,488
                                                          )
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (1,239,488
                                                          )Issuance
      of treasury stock for compensation
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          8,750
                                                          
                                                          
                                                          
                                                          (8,750
                                                          )
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          81,340
                                                          
                                                          
                                                          
                                                          15,628
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          96,968Other
      comprehensive income (loss):Unrealized
      losses on securities, net oftaxes and reclassification
      adjustment
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (289,866
                                                          )
                                                          
                                                          
                                                          (289,866
                                                          )Net
      income for the yearended December 31, 2008
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          1,912,275
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          1,912,275Balances
      at December 31, 2008
                                                          
                                                          
                                                          17,273,776
                                                          
                                                          
                                                          
                                                          16,724,467
                                                          
                                                          
                                                          
                                                          549,309
                                                          
                                                          
                                                          
                                                          6,509,267
                                                          
                                                          
                                                          
                                                          1,202,009
                                                          
                                                          
                                                          
                                                          (3,302,025
                                                          )
                                                          
                                                          
                                                          22,383,707
                                                          
                                                          
                                                          
                                                          (498,909
                                                          )
                                                          
                                                          
                                                          26,294,049Redemption
      of stock
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (15,195
                                                          )
                                                          
                                                          
                                                          15,195
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (101,628
                                                          )
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (101,628
                                                          )Issuance
      of treasury stock for compensation
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          5,257
                                                          
                                                          
                                                          
                                                          (5,257
                                                          )
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          39,628
                                                          
                                                          
                                                          
                                                          11,532
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          51,160Issuance
      of treasury stock for Fresh Madeacquisition
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          128,947
                                                          
                                                          
                                                          
                                                          (128,947
                                                          )
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          644,738
                                                          
                                                          
                                                          
                                                          335,262
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          980,000Other
      comprehensive income (loss):Unrealized
      gains on securities, net oftaxes and reclassification
      adjustment
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          (343,767
                                                          )
                                                          
                                                          
                                                          (343,767
                                                          )Net
      income for the three months endedMarch 31,
    2009
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          1,547,466
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          1,547,466Balances
      at March 31, 2009
                                                          
                                                          
                                                          17,273,776
                                                          
                                                          
                                                          
                                                          16,843,476
                                                          
                                                          
                                                          
                                                          430,300
                                                          
                                                          
                                                          $
                                                          6,509,267
                                                          
                                                          
                                                          $
                                                          1,886,375
                                                          
                                                          
                                                          $
                                                          (3,056,859
                                                          )
                                                          
                                                          $
                                                          23,931,173
                                                          
                                                          
                                                          $
                                                          (842,676
                                                          )
                                                          
                                                          $
                                                          28,427,280
 
 5
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Consolidated
Statements of Cash Flows
 For the
Three Months Ended March 31, 2009 and 2008 (Unaudited)
 and the
Year Ended December 31, 2008
 March
      31,
                              
                              
                              March
      31,
                              
                              
                              December
      31,2009
                              
                              
                              2008
                              
                              
                              2008Cash flows from operating
      activities:Net
      income
                              
                              $
                              1,547,466
                              
                              
                              $
                              888,605
                              
                              
                              $
                              1,912,275Adjustments
      to reconcile net income to netcash flows from operating
      activities, net of acquisition:Depreciation
      and amortization
                              
                              
                              387,464
                              
                              
                              
                              269,285
                              
                              
                              
                              1,092,995(Gain)Loss
      on sale of marketable securities, net
                              
                              
                              149,790
                              
                              
                              
                              (51,029
                              )
                              
                              
                              733,647Impairment
      of marketable securities
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              958,879Deferred
      income taxes
                              
                              
                              8,549
                              
                              
                              
                              (39,280
                              )
                              
                              
                              (509,386
                              )Treasury
      stock issued for compensation
                              
                              
                              51,160
                              
                              
                              
                              20,790
                              
                              
                              
                              96,968Increase
      (decrease) in allowance for doubtful accounts
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              70,551(Increase)
      decrease in operating assets:Accounts
      receivable
                              
                              
                              (1,136,258
                              )
                              
                              
                              (716,396
                              )
                              
                              
                              (626,754
                              )Other
      receivables
                              
                              
                              106,826
                              
                              
                              
                              (91,187
                              )
                              
                              
                              2,797Inventories
                              
                              
                              28,242
                              
                              
                              
                              (163,436
                              )
                              
                              
                              409,012Refundable
      income taxes
                              
                              
                              (155,386
                              )
                              
                              
                              240,880
                              
                              
                              
                              (115,536
                              )Prepaid
      expenses and other current assets
                              
                              
                              (13,965
                              )
                              
                              
                              12,166
                              
                              
                              
                              (1,973
                              )Increase
      (decrease) in operating liabilities:Accounts
      payable
                              
                              
                              401,833
                              
                              
                              
                              372,596
                              
                              
                              
                              665,942Accrued
      expenses
                              
                              
                              94,334
                              
                              
                              
                              (21,655
                              )
                              
                              
                              44,243Margin
      payable
                              
                              
                              423,032
                              
                              
                              
                              —
                              
                              
                              
                              —Accrued
      income taxes
                              
                              
                              (197,694
                              )
                              
                              
                              203,529
                              
                              
                              
                              —Net
      cash provided by operating activities
                              
                              
                              1,695,393
                              
                              
                              
                              924,868
                              
                              
                              
                              4,733,660Cash flows from investing
      activities:Purchases
      of marketable securities
                              
                              
                              (1,757,574
                              )
                              
                              
                              (1,976,684
                              )
                              
                              
                              (5,782,452
                              )Sale
      of marketable securities
                              
                              
                              2,318,620
                              
                              
                              
                              1,864,617
                              
                              
                              
                              5,323,423Purchases
      of property and equipment
                              
                              
                              (349,849
                              )
                              
                              
                              (365,421
                              )
                              
                              
                              (2,157,315
                              )Acquisition
      of Fresh Made, net of cash acquired
                              
                              
                              (2,850,888
                              )
                              
                              
                              —
                              
                              
                              
                              —Net
      cash used in investing activities
                              
                              
                              (2,639,691
                              )
                              
                              
                              (477,488
                              )
                              
                              
                              (2,616,344
                              )Cash flows from financing
      activities:Proceeds
      of note payable
                              
                              
                              1,729,990
                              
                              
                              
                              —
                              
                              
                              
                              —Purchases
      of treasury stock, net
                              
                              
                              (101,628
                              )
                              
                              
                              (363,102
                              )
                              
                              
                              (1,239,488
                              )Repayment
      of notes payable
                              
                              
                              (354,214
                              )
                              
                              
                              (287,373
                              )
                              
                              
                              (1,196,465
                              )Net
      cash used in financing activities
                              
                              
                              1,274,148
                              
                              
                              
                              (650,475
                              )
                              
                              
                              (2,435,953
                              )Net
      increase (decrease) in cash and cash equivalents
                              
                              
                              329,850
                              
                              
                              
                              (203,095
                              )
                              
                              
                              (318,637
                              )Cash
      and cash equivalents at the beginning of the period
                              
                              
                              277,248
                              
                              
                              
                              595,885
                              
                              
                              
                              595,885Cash
      and cash equivalents at the end of the period
                              
                              $
                              607,098
                              
                              
                              $
                              392,790
                              
                              
                              $
                              277,248
  
 6
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
  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 and various
cities in the East Coast 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.
 
 
 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, LFI Enterprises, Inc., Helios Nutrition, Ltd., Pride
of Main Street, L.L.C., Starfruit, L.L.C. and Fresh Made Dairy. 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.  Significant estimates made in preparing the consolidated
financial statements include the allowance for doubtful accounts, the valuation
of goodwill, intangible assets and deferred taxes.
 
 Revenue
Recognition
 Sales
represent sales of Company produced dairy products that are recorded at the time
of shipment and the following four criteria have been met: (i)  The
product has been shipped and the Company has no significant remaining
obligations; (ii)  Persuasive evidence of an agreement exists;
(iii)  The price to the buyer is fixed or determinable and
(iv)  Collection is probable.  In addition, shipping costs
invoiced to the customers are included in net sales and the related cost in cost
of sales.
 
 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.
 7
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 
 
 Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
 
 
 Bank
balances of amounts reported by financial institutions are categorized as
follows:
 
 March
      31,
                
                
                December
      31,2009
                
                
                2008
                
                
                2008Amounts
      insured
                
                $
                648,222
                
                
                $
                280,180
                
                
                $
                847,711Uninsured
      and uncollateralized amounts
                
                
                —
                
                
                
                762,102
                
                
                
                —Total
      bank balances
                
                $
                648,222
                
                
                $
                1,042,282
                
                
                $
                847,711
 
  Marketable
securities
 All
investment securities are classified as available-for-sale, are carried at fair
value or quoted market prices. Unrealized gains and on available-for-sale
securities losses are reported as a separate component of stockholders’ equity.
Amortization, accretion, interest and dividends, realized gains and losses, and
declines in value judged to be other-than-temporary on available-for-sale
securities are recorded in other income. All of the Company’s securities are
subject to a periodic impairment evaluation. This evaluation depends on the
specific facts and circumstances. Factors that we consider in determining
whether an other-than-temporary decline in value has occurred include: the
market value of the security in relation to its cost basis; the financial
condition of the investee; and the intent and ability to retain the investment
for a sufficient period of time to allow for possible recovery in the market
value of the investment.
  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 the 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.
 8
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
  Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
 
 Property
and equipment are being depreciated over the following useful
lives:
 
 Category
                  
                  YearsBuildings
      and improvements
                  
                  31
      and 39Machinery
      and equipment
                  
                  5 –
      12Office
      equipment
                  
                  5 –
      7Vehicles
                  
                  5
 
 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 and is reviewed for impairment at
least annually.  Brand assets represent the fair value of brands
acquired.  Brand assets have an indefinite life, therefore are not
amortized, rather are reviewed periodically for impairment.  The
Company amortizes other intangible assets over their estimated useful lives, as
disclosed in the table below.
 
 The
Company reviews 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.   The
Company conducts 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
                  
                  YearsRecipes
                  
                  4Customer
      lists and othercustomer
      related intangibles
                  
                  7-10Lease
      agreement
                  
                  7Trade
      names
                  
                  15Formula
                  
                  10Customer
      relationships
                  
                  12
 
 
 9
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 
 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 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.
 
 As of
January 1, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an interpretation of FASB
Statement No. 109” (FIN 48), which clarifies the accounting and disclosure
for uncertainty in tax positions, as defined. Pursuant to FIN 48, the Company
has analyzed filing positions in all of the federal and state jurisdictions
where it is required to file income tax returns, as well as all open tax years
in these jurisdictions. The only periods subject to examination for the
Company’s federal return are the 2004 through 2007 tax years. The Company
believes that its income tax filing positions and deductions would be sustained
on audit and does not anticipate any adjustments that would result in a material
change to its financial position. Therefore, no reserves for uncertain income
tax positions have been recorded pursuant to FIN 48. In addition, the Company
did not record a cumulative effect adjustment related to the adoption of FIN
48.
 
 The
Company’s policy for recording interest and penalties associated with audits is
to record such items as a component of income before taxes. There were no such
items during the periods covered in this report.
 
 Treasury
stock
 Treasury
stock is recorded using the cost method.
 
 Advertising
costs
 The
Company expenses advertising costs as incurred.  During the year ended
December 31, 2008 and for the three months ended March 31, 2009 and 2008,
approximately $1,530,207, $347,247 and $403,623 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 the three months ended March 31, 2009 and 2008
and the year ended December 31, 2008, diluted and basic earnings per share
were the same, as the effect of dilutive securities options outstanding was not
significant.
 10
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 
 Note
3 – Acquisition
  On
February 6, 2009, the Company completed a Stock Purchase Agreement
(the “Stock Agreement”) by and among Lifeway, Ilya Mandel, an individual and
Michael Edelson, an individual (each a “Seller” and collectively
“Sellers”).
 
 Lifeway
purchased from Sellers all of the issued and outstanding stock (the “Shares”) of
Fresh Made, Inc., a Pennsylvania corporation (“Fresh”).  The
consideration for the Shares was an aggregate of $8,048,000, less certain
offsets for any selling expenses in excess of certain limits set forth in the
Stock Agreement and other payments and funded debt all as set forth in the Stock
Agreement, a note in the principal amount of $2,735,000, due on February 6,
2011, 128,948 shares of common stock of Lifeway valued at a total of $980,000
(“Lifeway’s Common Stock”), the cancellation of a loan in the principal amount
of $265,000 and not more than $98,000 in funds held in Fresh’s two accounts with
Vist Financial Corp.  The issuance of Lifeway’s Common Stock was
exempted from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.
 
 Also on
February 6, 2009, Lifeway entered into and consummated a Real Property Purchase
Agreement (the “Real Property Agreement”) by and among Sellers and
Lifeway.  Pursuant to the Real Property Agreement, Lifeway acquired
1.1355 acres of land in Philadelphia, PA (the “Property”) from
Sellers.  The consideration for the Property was
$2,000,000.
 
 The
acquisition was accounted for using the purchase accounting method of
accounting, and accordingly, the purchase price was allocated to assets acquired
and the liabilities assumed based on the fair value as of the merger
date.  Acquisition costs for legal and professional fees have been
included in General and Administrative costs.
 
 The
estimated fair value of assets acquired, including the real property, and
liabilities assumed consisted of the following:
 
 Cash
      and cash equivalents
                
                $
                226,000Accounts
      receivable (contractual amounts totaling $546,000)
                
                
                546,000Other
      current assets
                
                
                373,000Building
      and other fixed assets
                
                
                2,528,000Customer
      list
                
                
                4,000,000Non
      amortizable goodwill and brand asset
                
                
                6,816,000Current
      liabilities
                
                
                (461,000
                )Total
      fair value of assets acquired and laiblities assumed
                
                $
                14,028,000
  11
 Note
4 – INTANGIBLE ASSETS
 
 Intangible
assets, and the related accumulated amortization, consist of the
following:
 
 March
      31, 2009
                  
                  
                  March
      31, 2008
                  
                  
                  December
      31, 2008Cost
                  
                  
                  Accumulated
      Amortization
                  
                  
                  Cost
                  
                  
                  Accumulated
      Amortization
                  
                  
                  Cost
                  
                  
                  Accumulated
      AmortizationRecipes
                  
                  $
                  43,600
                  
                  
                  $
                  43,600
                  
                  
                  $
                  43,600
                  
                  
                  $
                  38,831
                  
                  
                  $
                  43,600
                  
                  
                  $
                  43,600Customer
      lists and other customer related intangibles
                  
                  
                  4,305,200
                  
                  
                  
                  284,052
                  
                  
                  
                  305,200
                  
                  
                  
                  151,873
                  
                  
                  
                  305,200
                  
                  
                  
                  182,938Lease
      acquisition
                  
                  
                  87,200
                  
                  
                  
                  58,133
                  
                  
                  
                  87,200
                  
                  
                  
                  45,676
                  
                  
                  
                  87,200
                  
                  
                  
                  55,019Other
                  
                  
                  6,638
                  
                  
                  
                  6,638
                  
                  
                  
                  6,638
                  
                  
                  
                  3,651
                  
                  
                  
                  6,638
                  
                  
                  
                  4,647Customer
      relationship
                  
                  
                  985,000
                  
                  
                  
                  218,889
                  
                  
                  
                  985,000
                  
                  
                  
                  136,806
                  
                  
                  
                  985,000
                  
                  
                  
                  198,368Contractual
      backlog
                  
                  
                  12,000
                  
                  
                  
                  12,000
                  
                  
                  
                  12,000
                  
                  
                  
                  12,000
                  
                  
                  
                  12,000
                  
                  
                  
                  12,000Trade
      names
                  
                  
                  1,980,000
                  
                  
                  
                  352,000
                  
                  
                  
                  1,980,000
                  
                  
                  
                  220,000
                  
                  
                  
                  1,980,000
                  
                  
                  
                  319,000Formula
                  
                  
                  438,000
                  
                  
                  
                  116,800
                  
                  
                  
                  438,000
                  
                  
                  
                  73,000
                  
                  
                  
                  438,000
                  
                  
                  
                  105,850$
                  7,857,638
                  
                  
                  $
                  1,092,112
                  
                  
                  $
                  3,857,638
                  
                  
                  $
                  681,837
                  
                  
                  $
                  3,857,638
                  
                  
                  $
                  921,422
 
 Amortization
expense is expected to be as follows for the 12 months ending March
31:
 
 2010
                      
                      $
                      672,6142011
                      
                      
                      669,3752012
                      
                      
                      661,4022013
                      
                      
                      635,4502014
                      
                      
                      624,550Thereafter
                      
                      
                      3,502,135$
                      6,765,526
 
 Amortization
expense during the three months ended March 31, 2009 and 2008 and for the year
ended December 31, 2008 was $170,690, $79,861 and $319,446,
respectively.
 
 Goodwill
and brand assets increased during the period ending March 31, 2009 due to the
acquisition of Fresh Made (See Note 3).
 
 Note
5 – MARKETABLE SECURITIES
 
 The cost
and fair value of marketable securities classified as available for sale are as
follows:
 
 March 31, 2009
                  
                  Cost
                  
                  
                  Unrealized
                    Gains
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair
                    ValueEquities
                  
                  $
                  1,429,461
                  
                  
                  $
                  46,956
                  
                  
                  $
                  ( 363,537
                  )
                  
                  $
                  1,112,880Mutual
      Funds
                  
                  
                  704,256
                  
                  
                  
                  160
                  
                  
                  
                  ( 376,113
                  )
                  
                  
                  328,303Preferred
      Securities
                  
                  
                  826,295
                  
                  
                  
                  —
                  
                  
                  
                  ( 397,324
                  )
                  
                  
                  428,971Corporate
      Bonds
                  
                  
                  506,165
                  
                  
                  
                  2,959
                  
                  
                  
                  ( 25,193
                  )
                  
                  
                  483,931Government
      agencyObligations
                  
                  
                  1,929,788
                  
                  
                  
                  6,539
                  
                  
                  
                  ( 3,961
                  )
                  
                  
                  1,932,366Total
                  
                  $
                  5,395,965
                  
                  
                  $
                  56,614
                  
                  
                  $
                  ( 1,166,128
                  )
                  
                  $
                  4,286,451
 
 
 12
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 
 Note
5 – MARKETABLE SECURITIES - Continued
 
  March 31, 2008
                  
                  Cost
                  
                  
                  Unrealized
                    Gains
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair
                    ValueEquities
                  
                  $
                  3,074,223
                  
                  
                  $
                  114,067
                  
                  
                  $
                  ( 481,142
                  )
                  
                  $
                  2,707,148Mutual
      Funds
                  
                  
                  927,055
                  
                  
                  
                  3,744
                  
                  
                  
                  ( 144,622
                  )
                  
                  
                  786,177Preferred
      Securities
                  
                  
                  1,655,421
                  
                  
                  
                  7,680
                  
                  
                  
                  ( 167,259
                  )
                  
                  
                  1,495,842Corporate
      Bonds
                  
                  
                  1,249,426
                  
                  
                  
                  1,585
                  
                  
                  
                  ( 55,070
                  )
                  
                  
                  1,195,942Municipal
      Bonds
                  
                  
                  4,586
                  
                  
                  
                  330
                  
                  
                  
                  —
                  
                  
                  
                  4,916Government
      agencyObligations
                  
                  
                  597,978
                  
                  
                  
                  2,956
                  
                  
                  
                  ( 108
                  )
                  
                  
                  600,825Total
                  
                  $
                  7,508,689
                  
                  
                  $
                  130,362
                  
                  
                  $
                  ( 848,201
                  )
                  
                  $
                  6,790,850
 
 December 31, 2008
                  
                  Cost
                  
                  
                  Unrealized
                    Gains
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair
                    ValueEquities
                  
                  $
                  2,116,004
                  
                  
                  $
                  75,333
                  
                  
                  $
                  ( 279,487
                  )
                  
                  $
                  1,911,850Mutual
      Funds
                  
                  
                  888,182
                  
                  
                  
                  202
                  
                  
                  
                  ( 339,970
                  )
                  
                  
                  548,414Preferred
      Securities
                  
                  
                  1,541,423
                  
                  
                  
                  13,075
                  
                  
                  
                  ( 308,963
                  )
                  
                  
                  1,245,535Corporate
      Bonds
                  
                  
                  783,761
                  
                  
                  
                  1,559
                  
                  
                  
                  ( 19,289
                  )
                  
                  
                  766,031Municipal
      Bonds
                  
                  
                  4,586
                  
                  
                  
                  414
                  
                  
                  
                  —
                  
                  
                  
                  5,000Government
      agencyObligations
                  
                  
                  778,140
                  
                  
                  
                  8,668
                  
                  
                  
                  ( 1,470
                  )
                  
                  
                  785,338Total
                  
                  $
                  6,112,096
                  
                  
                  $
                  99,251
                  
                  
                  $
                  ( 949,179
                  )
                  
                  $
                  5,262,168
 
 Proceeds
from the sale of marketable securities were $5,323,423, $2,318,620 and
$1,864,617 during the year ended December 31, 2008 and for the three months
ended March 31, 2009 and 2008 respectively.
 
 Gross
gains of $384,574, $103,520 and $217,112 and gross losses of $1,118,221,
$243,310 and $166,083 were realized on these sales during the year ended
December 31, 2008 and for the three months ended March 31, 2009 and 2008,
respectively.
 
 The
following table shows the gross unrealized losses and fair value of Company’s
investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at March 31, 2009:
 13
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 
 Note
5 – MARKETABLE SECURITIES - Continued
 
 Less
      Than 12 Months
                
                
                12
      Months or Greater
                
                
                TotalDescription
      of Securities
                
                Fair
      Value
                
                
                Unrealized
      Losses
                
                
                Fair
      Value
                
                
                Unrealized
      Losses
                
                
                Fair
      Value
                
                
                Unrealized
      LossesEquities
                
                $
                872,423
                
                
                $
                ( 316,691
                )
                
                $
                59,422
                
                
                $
                ( 46,846
                )
                
                $
                931,845
                
                
                $
                ( 363,537
                )Mutual
      Funds
                
                
                148,400
                
                
                
                ( 71,155
                )
                
                
                172,520
                
                
                
                ( 304,958
                )
                
                
                320,920
                
                
                
                ( 376,113
                )Preferred
      Securities
                
                
                180,313
                
                
                
                ( 15,874
                )
                
                
                248,658
                
                
                
                ( 381,450
                )
                
                
                428,971
                
                
                
                ( 397,324
                )Corporate
      Bonds
                
                
                24,233
                
                
                
                ( 714
                )
                
                
                274,811
                
                
                
                ( 24,479
                )
                
                
                299,044
                
                
                
                ( 25,193
                )Government
      AgencyObligations
                
                
                —
                
                
                
                —
                
                
                
                695,308
                
                
                
                ( 3,961
                )
                
                
                695,308
                
                
                
                ( 3,961
                )$
                1,225,369
                
                
                $
                ( 404,434
                )
                
                $
                1,450,719
                
                
                $
                ( 761,694
                )
                
                $
                2,676,088
                
                
                $
                ( 1,166,128
                )
 
 
 For the
year ended December 31, 2008, we recorded other than temporary impairments
related to investments in marketable securities in certain investments of
$958,879.  The impairments recognized relate to securities that were
in an unrealized loss position at December 31, 2008 that were subsequently sold
and equity holdings that we consider other than temporarily impaired due to the
recent performance of the issuers of those securities.
 
 Equities,
Mutual Funds, Corporate Bonds and Government Agency Obligations -The Company’s
investments in equity securities, mutual funds, corporate bonds and government
agency obligations consist of investments in common stock, preferred stock and
debt securities of companies in various industries.  The Company
evaluated the near-term prospects of the issuer in relation to the severity and
duration of the impairment. Based on that evaluation and the Company’s ability
and intent to hold these investments for a reasonable period of time sufficient
for a forecasted recovery of fair value, the Company does not consider any
material investments to be other-than-temporarily impaired at March 31,
2009.
 
 Preferred
Securities - The Company’s investments in preferred securities consist of
investments in preferred stock of companies in various
industries.  The Company evaluated the continuing performance of the
securities, the credit worthiness of the issuers as well as the near-term
prospects of the security in relation to the severity and duration of the
impairment. Based on that evaluation and the Company’s ability and intent to
hold these investments for a reasonable period of time sufficient for a
forecasted recovery of fair value, the Company does not consider any material
investments to be other-than-temporarily impaired at March 31,
2009.
 14
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 Note
6 – INVENTORIES
 
 Inventories
consist of the following:
  March
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008
                    
                    
                    2008Finished
      goods
                    
                    $
                    1,397,435
                    
                    
                    $
                    1,201,472
                    
                    
                    $
                    1,343,811Production
      supplies
                    
                    
                    1,661,817
                    
                    
                    
                    1,357,834
                    
                    
                    
                    1,291,484Raw
      materials
                    
                    
                    582,496
                    
                    
                    
                    1,110,684
                    
                    
                    
                    462,247Total
      inventories
                    
                    $
                    3,641,748
                    
                    
                    $
                    3,669,990
                    
                    
                    $
                    3,097,542
 
 Note
7 – PROPERTY AND EQUIPMENT
 
 Property
and equipment consist of the following:
 March
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008
                    
                    
                    2008Land
                    
                    $
                    969,232
                    
                    
                    $
                    969,232
                    
                    
                    $
                    969,232Buildings
      and improvements
                    
                    
                    9,569,074
                    
                    
                    
                    6,772,762
                    
                    
                    
                    7,138,042Machinery
      and equipment
                    
                    
                    9,605,436
                    
                    
                    
                    8,166,465
                    
                    
                    
                    8,229,202Vehicles
                    
                    
                    964,956
                    
                    
                    
                    581,458
                    
                    
                    
                    610,558Office
      equipment
                    
                    
                    184,609
                    
                    
                    
                    102,830
                    
                    
                    
                    180,351Construction
      in process
                    
                    
                    2,630,334
                    
                    
                    
                    1,047,623
                    
                    
                    
                    2,309,04523,923,641
                    
                    
                    
                    17,640,370
                    
                    
                    
                    19,436,430Less
      accumulated depreciation
                    
                    
                    10,199,718
                    
                    
                    
                    7,785,425
                    
                    
                    
                    8,373,716Total
      property and equipment
                    
                    $
                    13,723,923
                    
                    
                    $
                    9,854,945
                    
                    
                    $
                    11,062,714
 
 Depreciation
expense during the year ended December 31, 2008 and for the three months ended
March 31, 2009 and 2008 was $777,715, $216,774  and $189,424,
respectively.
 
 
 Note8–ACCRUED EXPENSES
 
 Accrued
expenses consist of the following:
 
 March
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008
                    
                    
                    2008Accrued
      payroll and payroll taxes
                    
                    $
                    181,384
                    
                    
                    $
                    101,670
                    
                    
                    $
                    98,089Accrued
      property tax
                    
                    
                    225,303
                    
                    
                    
                    220,253
                    
                    
                    
                    291,819Other
                    
                    
                    80,031
                    
                    
                    
                    70,461
                    
                    
                    
                    68,374$
                    486,718
                    
                    
                    $
                    392,384
                    
                    
                    $
                    458,282
  15
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 Note
9 – NOTES PAYABLE
 
 Notes
payable consist of the following:
 March
      31,
                          
                          
                          December
      31,2009
                          
                          
                          2008
                          
                          
                          2008Mortgage
      note payable to a bank, payable in monthly installments of $3,273
      including interest at 7%, with a balloon payment of $416,825 due September
      25, 2011.  Collateralized by real estate.
                          
                          
                          —
                          
                          
                          $
                          444,499
                          
                          
                          $
                          438,926Mortgage
      note payable to a bank, payable in monthly installments of $19,513
      including interest at 5.6%, with a balloon payment of $2,652,143 due July
      14, 2010. Collateralized by real estate.
                          
                          
                          —
                          
                          
                          
                          2,816,481
                          
                          
                          
                          2,760,288Note
      payable to Amani Holding LLC, payable in quarterly installments of
      $262,500 plus interest at the floating prime rate per annum (7.25% at
      December 31, 2007) due September 1, 2010 secured by letter of
      credit.
                          
                          
                          574,308
                          
                          
                          
                          1,684,570
                          
                          
                          
                          837,244Note
      payable to Private Bank in monthly installments of $42,222, plus variable
      interest rate, currently at 2.945%, with a balloon payment of $5,066,667
      due February 6, 2014.  Collateralized by substantially all
      assets of the Company.
                          
                          
                          7,515,555
                          
                          
                          
                          —
                          
                          
                          
                          —Line
      of credit with Private Bank at variable interest rate, currently at
      2.945%, due on February 6, 2010.  Collateralized by real
      estate.
                          
                          
                          2,600,000
                          
                          
                          
                          —
                          
                          
                          
                          —Line
      of credit with Morgan Stanley at variable interest rate, currently at
      2.40%.  Secured by marketable securities.
                          
                          
                          1,933,527
                          
                          
                          
                          —
                          
                          
                          
                          —Subordinated
      notes payable to Ilya Mandel & Michael Edelson, payable in quarterly
      installments of $341,875, plus interest at the floating rate per annum
      (3.3% at March 31, 2009) due February 6, 2011.
                          
                          
                          2,735,000
                          
                          
                          
                          —
                          
                          
                          
                          —Total
      notes payable
                          
                          
                          15,358,390
                          
                          
                          
                          4,945,550
                          
                          
                          
                          4,036,458Less
      current maturities
                          
                          
                          6,982,001
                          
                          
                          
                          1,131,725
                          
                          
                          
                          928,444Total
      long-term portion
                          
                          $
                          8,376,389
                          
                          
                          $
                          3,813,825
                          
                          
                          $
                          3,108,014
  16
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 Note
9 – NOTES PAYABLE - Continued
 
 Maturities
of notes payables are as follows:
 
 For
      the Period Ended March 31,2010
                          
                          $
                          6,982,0012011
                          
                          
                          1,874,1672012
                          
                          
                          506,6672013
                          
                          
                          506,6672014
                          
                          
                          5,488,888Total
                          
                          $
                          15,358,390
 
 
 Note
10 – PROVISION FOR INCOME TAXES
 
 The
provision for income taxes consists of the following:
 
 For
      theFor
      the Three Months Ended
                      
                      
                      Year
      EndedMarch
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008
                      
                      
                      2008Current:Federal
                      
                      $
                      610,611
                      
                      
                      $
                      488,599
                      
                      
                      $
                      1,005,159State
      and local
                      
                      
                      144,272
                      
                      
                      
                      108,587
                      
                      
                      
                      184,016Total
      current
                      
                      
                      754,883
                      
                      
                      
                      597,186
                      
                      
                      
                      1,189,175Deferred
                      
                      
                      8,549
                      
                      
                      
                      ( 39,280
                      )
                      
                      
                      ( 509,386
                      )Provision
      for income taxes
                      
                      $
                      763,432
                      
                      
                      $
                      557,906
                      
                      
                      $
                      679,789
 
 A
reconciliation of the provision for income taxes and the income tax computed at
the statutory rate is as follows:
 
 For
      theFor
      the Three Months Ended
                    
                    
                    Year
      EndedMarch
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008
                    
                    
                    2008Federal
      income tax expensecomputed
      at the statutory rate
                    
                    $
                    828,045
                    
                    
                    $
                    491,814
                    
                    
                    $
                    881,302State
      and local tax expense, net
                    
                    
                    116,900
                    
                    
                    
                    69,433
                    
                    
                    
                    124,419Permanent
      differences
                    
                    
                    ( 181,513
                    )
                    
                    
                    ( 3,341
                    )
                    
                    
                    ( 150,772
                    )Other
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    ( 175,160
                    )Provision
      for income taxes
                    
                    $
                    763,432
                    
                    
                    $
                    557,906
                    
                    
                    $
                    679,789
  17
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 
 Note
10 – PROVISION FOR INCOME TAXES - Continued
 
 
 Amounts
for deferred tax assets and liabilities are as follows:
 March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008
                      
                      
                      2008Non-current
      deferred tax liabilitiesarising
      from:
                        Temporary
      differences -accumulated
      depreciation and amortization
                      
                      $
                      ( 1,763,059
                      )
                      
                      $
                      ( 1,679,859
                      )
                      
                      $
                      ( 1,607,155
                      )Current
      deferred tax assets arising from:Unrealized
      losses on marketable securities
                      
                      
                      458,320
                      
                      
                      
                      296,468
                      
                      
                      
                      351,020Impairment
      of marketable securities
                      
                      
                      204,537
                      
                      
                      
                      —
                      
                      
                      
                      396,017Inventory
                      
                      
                      154,315
                      
                      
                      
                      154,930
                      
                      
                      
                      127,177Allowance
      for doubtful accounts
                      
                      
                      14,460
                      
                      
                      
                      16,297
                      
                      
                      
                      14,460Allowance
      for promotions
                      
                      
                      30,975
                      
                      
                      
                      —
                      
                      
                      
                      30,975Total
      current deferred tax assets
                        (liabilities)
                      
                      
                      862,607
                      
                      
                      
                      467,695
                      
                      
                      
                      919,649Net
      deferred tax liability
                      
                      $
                      ( 900,452
                      )
                      
                      $
                      ( 1,212,164
                      )
                      
                      $
                      ( 687,506
                      )
 
 
 Note
11 – SUPPLEMENTAL CASH FLOW INFORMATION
 
 Cash paid
for interest and income taxes are as follows:
 For
      the Three Months EndedMarch
      31,
                        
                        
                        For
      theYear
      EndedDecember
      31,2009
                        
                        
                        2008
                        
                        
                        2008Interest
                        
                        $
                        74,743
                        
                        
                        $
                        85,956
                        
                        
                        $
                        307,620Income
      taxes
                        
                        $
                        454,526
                        
                        
                        $
                        133,250
                        
                        
                        $
                        1,288,428
 
 
 Note
12 – STOCK AWARD AND 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 1,200,000 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.  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, 2008 and at March 31, 2009 and 2008, there were no stock options
outstanding or exercisable. There were approximately 940,000 shares
available for issuance under the Plan at March 31, 2009.
 18
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 
 Note
12 – STOCK AWARD AND STOCK OPTION PLANS - Continued
 
 
 On June
13, 2008, Lifeway’s Board of Directors approved awards of an aggregate amount
of 10,500 shares to be awarded under its Employee and Consulting Services
and Compensation Plan to certain key employees and consultants for services
rendered to the Company.  The stock awards were made on June 13,
2008 and have vesting periods of one year. The expense for the awards is
measured as of July 1, 2008 at $11.87 per share for 10,500 shares, or
a total stock award expense of $124,635. This expense will be recognized as the
stock awards vest in 12 equal portions of $10,386, or 875 shares per month
for one year.
 
 On May
18, 2007, Lifeway’s Board of Directors approved awards of an aggregate amount of
8,400 shares to be awarded under its Employee and Consulting Services and
Compensation Plan to certain key employees and consultants for services rendered
to the Company.  The stock awards were made on June 1, 2007 and have
vesting periods of one year. The expense for the awards is measured as of June
1, 2007 at $9.90 per share for 8,400 shares, or a total stock award expense of
$83,160. This expense will be recognized as the stock awards vest in 12 equal
portions of $6,930, or 700 shares per month for one year.
 
 
 Note
13 – FAIR VALUE MEASUREMENTS
 
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.”  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with U.S. GAAP, and expands
disclosures about fair value measurements.  The Statement clarifies
that the exchange price is the price in an orderly transaction between market
participants to sell an asset or transfer a liability at the measurement
date.  The statement emphasizes that fair value is a market-based
measurement and not an entity-specific measurement.  The statement
establishes a fair value hierarchy used in fair value measurements and expands
the required disclosures of assets and liabilities measured at fair
value.
 
 Level 1 –
Inputs use quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access.
 
 Level 2 –
Inputs use other inputs that are observable, either directly or
indirectly.  These inputs include quoted prices for similar assets and
liabilities in active markets, and other inputs such as interest rates and yield
curves that are observable at commonly quoted intervals.
 
 Level 3 –
Inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset
or liability.
 
 In
instances where inputs used to measure fair value fall into different levels in
the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation.  The Company’s assessment of the significance of particular
inputs to these fair measurements requires judgment and considers factors
specific to each asset or liability.
 19
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 
 Note
13 – FAIR VALUE MEASUREMENTS - Continued
 
 
 Disclosures
concerning assets and liabilities measured at fair value are as
follows:
 
 Quoted
      Prices in Active Markets for Identical Assets
                      (Level
      1)
                    
                    
                    Significant
      Other Observable Inputs (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level
      3)
                    
                    
                    Balance
      at
                      March
      31, 2009AssetsInvestment
      securities- available - for - sale
                    
                    $
                    4,286,251
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    4,286,251
 
 
 Note
14 – RECENT ACCOUNTING PRONOUNCEMENTS
 
 
 In
December 2007, the FASB issued SFAS No. 141(R) “Business
Combinations.”  SFAS No. 141(R) states that all business combinations
(whether full, partial or step acquisitions) will result in all assets and
liabilities of an acquired business being recorded at their acquisition date
fair values.  Earn-outs and other forms of contingent consideration
and certain acquired contingencies will also be recorded at fair value at the
acquisition date.  SFAS No. 141(R) also states acquisition costs will
generally be expensed as incurred; in-process research and development will be
recorded at fair value as an indefinite-lived intangible asset at the
acquisition date; changes in deferred tax asset valuation allowances and income
tax uncertainties after the acquisition date generally will affect income tax
expense; and restructuring costs will be expensed in periods after the
acquisition date.  This statement is effective for financial
statements issued for fiscal years beginning after December 15,
2008.  The Company will apply the provisions of this standard to any
acquisitions that it completes on or after December 15, 2008.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.”  This
statement amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest (minority interest) in a subsidiary
and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling
interests will be classified as equity in the consolidated balance
sheets.  This statement also provides guidance on a subsidiary
deconsolidation as well as stating that entities need to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008.  The adoption of this standard is not expected to
have a material impact on the Company’s financial condition, results of
operations or liquidity.
 20
 LIFEWAY
FOODS, INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 March
31, 2009 and 2008
 and
December 31, 2008
 
 
 Note
14 – RECENT ACCOUNTING PRONOUNCEMENTS - Continued
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No.
161”).  This statement requires enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows.  SFAS No. 161 also requires that objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation and requires cross-referencing within the footnotes.  This
statement also suggests disclosing the fair values of derivative instruments and
their gains and losses in a tabular format.  This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.  The adoption of this standard is
not expected to have a material impact on the Company’s financial condition,
results of operations or liquidity.
 21
 ITEM 2.    MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.


Comparison
of Quarter Ended March 31, 2009 to Quarter Ended March 31, 2008
 
 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-K, for the fiscal year ended December 31,
2008.
 
 Results
of Operations
 
 Total
consolidated group sales increased by $2,613,842, (approximately 24%) to
$13,736,080 during the three month period ended March 31, 2009 from $11,122,238
during the same three month period in 2008. This increase is primarily
attributable to increased sales and awareness of Lifeway’s flagship line, Kefir,
as well as ProBugsTM Organic Kefir for kids.  Additionally, Lifeway
recorded revenues from its February 6, 2009 acquisition of Fresh Made
Dairy.  Included in the total group sales was $1,390,873 of revenue
related to this acquisition and recorded from the period of February 7, 2009 to
March 31, 2009.
 
 Cost of
goods sold as a percentage of sales was approximately 60% during the first
quarter 2009, compared to about 69% during the same period in 2008. The decrease
was primarily attributable to the decreased cost of conventional milk, our
largest raw material, and the cost of transportation and other petroleum based
production supplies.  Gross profit increased approximately 58% during
the first quarter 2009, when compared with the same period in 2008.
 
 Operating
expenses as a percentage of sales were approximately 22% during the first
quarter 2009, compared to about 19% during the same period in 2008. This
increase is primarily attributable to the increase in professional fees related
to the February 6, 2009 acquisition of Fresh Made Dairy and a 114% increase in
amortization expense, a non cash expense, also related to the Fresh Made
acquisition.   Many of the acquisition related professional fees are
non recurring expenses.
 
 Total
operating income increased by $1,176,855, (approximately 86%) to $2,543,513
during the first quarter 2009, from $1,366,658 during the same period in
2008.
 
 Total
other expenses for the first quarter 2009 were $232,615 compared with total
other income of $79,853 during the same period in 2008.  This increase
is primarily attributable to a higher interest expense related to the February
6, 2009 Fresh Made acquisition.  Interest expenses during the first
quarter 2009 were $154,383, which includes approximately a $55,000 pre -payment
penalty on one of Lifeway’s real estate mortgages related to the financing of
the acquisition.  This pre-payment expense is a non recurring
expense.  Additionally, interest income decreased by $40,922 to
$62,211 during the first quarter 2009 from $103,133 during the same period in
2008 primarily due to lower interest rates.
 22
 Total net
income was $1,547,466 or $.09 per share for the first quarter ended March 31,
2009, compared with $888,605 or $.05 per share in the same period in
2008.  This represents a 74% increase in net income from the first
quarter 2009 when compared to the same period in 2008.
 Total
intangible assets increased $10,428,712 to $19,019,371 as of March 31, 2009, up
from $8,590,659 as of March 31, 2008.  This increase is primarily
attributable to an increase in goodwill and other intangible assets related to
the February 6, 2009 acquisition of Fresh Made Dairy.  Intangible assets
are discussed in Note 4 of the Notes to Consolidated Financial
Statements.
 
 Total
current liabilities increased $6,565,919 to $10,260,483 as of March 31, 2009, up
from $3,694,564 as of March 31, 2008.  Additionally, the long term portion
of notes payable increased $4,562,564 to $8,376,389 as of March 31, 2009, up
from $3,813,825.  These increases are primarily attributable to increases
in notes payable related to the February 6, 2009 acquisition of Fresh Made
Dairy. Notes payable are discussed in Note 9 of the Notes to Consolidated
Financial Statements.
  Sources
and Uses of Cash
 
 Net cash
provided by operating activities was $1,695,393 during the three months ended
March 31, 2009, which is an increase of $770,525 when compared to the same
period in 2008.  This increase is primarily attributable to the
increase in net income of $658,861.
 
 Net cash used in investing activities was $2,639,691 during the
three months ended March 31, 2009, which is an increase of $2,162,203 when
compared to the same period in 2008.  This increase is primarily due
to the Company’s acquisition of Fresh Made, net of cash
acquired.
 
 Lifeway
had a net increase in cash and cash equivalents of $329,850 during the first
quarter of 2009 when compared to the same period in 2008.
 
 Significant
portions 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.


23


ITEM
3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
applicable.





ITEM
4T.    CONTROLS AND PROCEDURES.




Evaluation
of Disclosure Controls and Procedures




As of
March 31, 2009, we carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective at the reasonable assurance level as
of March 31, 2009 in ensuring that information required to be disclosed by us
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified under the Exchange Act rules and forms due to the
material weaknesses as disclosed in our Form 10-K filed on March 31, 2009. As a
result, we performed additional analysis and other post-closing procedures to
ensure our consolidated financial statements were prepared in accordance with
generally accepted accounting principles.  Accordingly, management
believes the consolidated financial statements included in this Form 10-Q fairly
present, in all material respects, our financial condition, results of
operations and cash flows for the periods presented.




There was
no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.







PART
II — OTHER INFORMATION





ITEM 1.    LEGAL PROCEEDINGS.





None.





ITEM
1A.    RISK FACTORS.





Not
applicable.




ITEM
2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.




(c)           PURCHASES
OF THE COMPANY’S SECURITIES





Period
                                                  
                                                  (a)
      Total
                                                    Numbers
      of
                                                    Shares
      (or Units)
                                                    Purchased
                                                  
                                                  (b)
      Average Price Paid per Share (or Unit)
                                                  
                                                  (c)
      Total Number of Shares (or Units) Purchased as Part of Publicly Announced
      Plans or Programs
                                                  
                                                  (d) Maximum Number (or
      Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased
      Under the Plans or ProgramsJanuary
      1, 2009 to January 31, 2009
                                                  
                                                  —
                                                  
                                                  
                                                  —
                                                  
                                                  —
                                                  
                                                  87,991February 1,
      2009 to February 28, 2009
                                                  
                                                  —
                                                  
                                                  
                                                  —
                                                  
                                                  —
                                                  
                                                  87,991March
      1, 2009 to March 31, 2009*
                                                  
                                                  15,195
                                                  
                                                  
                                                  6.69
                                                  
                                                  15,195
                                                  
                                                  72,796*Total
                                                  
                                                  15,195
                                                  
                                                  $
                                                  6.69
                                                  
                                                  15,195
                                                  
                                                  72,796




*
Pursuant to the share repurchase program approved November 20, 2008
for 100,000 split adjusted shares with a plan expiration date of one
year.




24


ITEM 3.    DEFAULTS
UPON SENIOR SECURITIES.





None.




ITEM 4.    SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.





None.




ITEM
5.    OTHER INFORMATION.










ITEM
6.    EXHIBITS.





Exhibit
                                      Number
                                    
                                    Description
      of Document3.4
                                    
                                    Amended
      and Restated By-laws (incorporated by reference to
      Exhibit No. 3.5 ofLifeway’s Current Report
      on Form 8-K 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 toExhibit 3.5 of
      Lifeway’s Quarterly Report on Form 10-QSB for the quarter ended
      June 30, 2000 andfiled
      on August 8, 2000). (File No. 000-17363)31.1
                                    
                                    Officer’s
      Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
      of the Sarbanes-Oxley
      Act of 2002.31.2
                                    
                                    Officer’s
      Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
      of the Sarbanes-Oxley
      Act of 2002.32.1
                                    
                                    Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuantto Section
      906 of the Sarbanes-Oxley Act of 2002.32.2
                                    
                                    Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant toSection
      906 of the Sarbanes-Oxley Act of 2002.




25


SIGNATURES




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






LIFEWAY
FOODS, INC.


(Registrant)






Date:
                    May
      15, 2009
                    
                    By:
                    /s/
      Julie SmolyanskyJulie
      Smolyansky
                      Chief
      Executive Officer, President andDirectorDate:
                    May
      15, 2009
                    
                    By:
                    /s/
      Edward P. SmolyanskyEdward
      P. Smolyansky
                      Chief
      Financial and Accounting Officerand
      Treasurer






26


EXHIBIT
INDEX


Exhibit
                                        Number
                                      
                                      Description
      of Document3.4
                                      
                                      Amended
      and Restated By-laws (incorporated by reference to
      Exhibit No. 3.5 ofLifeway’s Current Report
      on Form 8-K 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 toExhibit 3.5 of
      Lifeway’s Quarterly Report on Form 10-QSB for the quarter ended
      June 30, 2000 andfiled
      on August 8, 2000). (File No. 000-17363)31.1
                                      
                                      Officer’s
      Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
      of the Sarbanes-Oxley
      Act of 2002.31.2
                                      
                                      Officer’s
      Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
      of the Sarbanes-Oxley
      Act of 2002.32.1
                                      
                                      Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuantto Section
      906 of the Sarbanes-Oxley Act of 2002.32.2
                                      
                                      Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant toSection
      906 of the Sarbanes-Oxley Act of 2002.




27