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

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

                                   FORM 10-QSB

(Mark One)

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

              For the quarterly period ended March 31, 2002

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

              For the transition period from ___________ to ___________

                         Commission file number: 0-17363

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

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

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

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


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

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

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the issuer filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court.        Yes [ ]    No [ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: AS OF MAY 1, 2002, THE ISSUER HAD
4,268,844 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING.

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

                                      INDEX

                                                                            PAGE
                                                                            ----
PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

     Lifeway Foods, Inc. and Subsidiary
     March 31, 2002 and 2001, and
     December 31, 2001                                                       F-1

     Consolidated Statements of Financial Condition
     December 31, 2001 and
     March 31, 2002 and 2001 (unaudited)                                     F-2

     Consolidated Statements of Income and
     Comprehensive Income (Loss)
     for the year ended December 31, 2001 and
     for the three months ended March 31, 2002 and 2001 (unaudited)          F-3

     Consolidated Statements of Changes in Stockholders' Equity
     for the year ended December 31, 2001 and
     for the three months ended March 31, 2002 (unaudited)                   F-4

     Consolidated Statements of Cash Flows
     for the year ended December 31, 2001 and
     for the three months ended March 31, 2002 and 2001 (unaudited)          F-5

     Notes to Financial Statements (unaudited)                        F-6 - F-13


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


PART II - OTHER INFORMATION                                                   3


SIGNATURES                                                                    4

                                       1
<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                              FINANCIAL STATEMENTS
                             MARCH 31, 2002 AND 2001


















                                      F-1
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                             MARCH 31, 2002 AND 2001
                             AND DECEMBER 31, 2001
<TABLE><CAPTION>
                                                                       (Unaudited)
                                                                         March 31,
                                                            -----------------------------------            December 31,
                                                                2002                   2001                   2001
                                                            ------------           ------------           ------------
ASSETS
------
Current assets
<S>                                                         <C>                    <C>                    <C>
 Cash and cash equivalents                                  $  1,160,120           $  1,832,127           $    936,949
 Marketable securities                                         5,155,707              4,279,098              5,754,986
 Accounts receivable, net of allowance for doubtful
  accounts of $15,000 at March 31, 2002 and
  December 31, 2001 and $0 at March 31, 2001                   1,468,561              1,437,486              1,316,626
 Other receivables                                                58,380                  5,434                 52,602
 Inventories                                                     859,261                794,740                800,773
 Prepaid expenses and other current assets                        33,550                   --                   33,686
 Deferred income taxes                                           719,411                169,138                560,543
                                                            ------------           ------------           ------------
 Total current assets                                          9,454,990              8,518,023              9,456,165

Property, plant, and equipment, net                            4,865,456              5,028,100              5,020,865
                                                            ------------           ------------           ------------

Total assets                                                $ 14,320,446           $ 13,546,123           $ 14,477,030
                                                            ============           ============           ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
 Current maturities of notes payable                        $     74,150           $    688,141           $     90,249
 Margin account                                                  198,107                   --                  431,795
 Accounts payable                                                603,418                594,300                543,401
 Accrued expenses                                                166,125                174,831                163,715
 Income taxes payable                                            124,725                 93,171                144,916
                                                            ------------           ------------           ------------
 Total current liabilities                                     1,166,525              1,550,443              1,374,076

Notes payable                                                    955,549                522,843              1,116,410

Deferred income taxes                                            462,797                381,962                436,265

Stockholders' equity
 Common stock                                                  6,509,267              6,509,267              6,509,267
 Stock subscription receivable                                   (15,000)               (15,000)               (15,000)
 Treasury stock, at cost                                        (319,478)                  --                 (287,033)
 Retained earnings                                             6,519,351              5,179,579              6,071,793
 Accumulated other comprehensive loss, net of tax               (958,565)              (582,971)              (728,748)
                                                            ------------           ------------           ------------
 Total stockholders' equity                                   11,735,575             11,090,875             11,550,279
                                                            ------------           ------------           ------------

Total liabilities and stockholders' equity                  $ 14,320,446           $ 13,546,123           $ 14,477,030
                                                            ============           ============           ============
</TABLE>
                 See accompanying notes to financial statements

                                       F2
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
        CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
               FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
                      AND THE YEAR ENDED DECEMBER 31, 2001
<TABLE><CAPTION>
                                                                            (Unaudited)
                                                                              March 31,
                                                                -----------------------------------           December 31,
                                                                    2002                   2001                   2001
                                                                ------------           ------------           ------------
<S>                                                             <C>                    <C>                    <C>
Sales                                                           $  2,887,853           $  2,636,440           $ 10,683,983

Cost of goods sold                                                 1,523,281              1,547,227              6,448,992
                                                                ------------           ------------           ------------

Gross profit                                                       1,364,572              1,089,213              4,234,991

Operating expenses                                                   648,540                657,219              2,797,747
                                                                ------------           ------------           ------------

Income from operations                                               716,032                431,994              1,437,244

Other income (expense):
 Interest and dividend income                                         37,274                 71,972                232,173
 Interest expense                                                    (20,091)               (24,888)              (107,425)
 Gain on sale of marketable securities, net                           36,020                 84,984                249,522
                                                                ------------           ------------           ------------
 Total other income                                                   53,203                132,068                374,270
                                                                ------------           ------------           ------------

Income before provision for income taxes                             769,235                564,062              1,811,514

Provision for income taxes                                           321,677                235,349                590,587
                                                                ------------           ------------           ------------

Net income                                                      $    447,558           $    328,713           $  1,220,927
                                                                ============           ============           ============

Earnings per share common share                                         0.10                   0.08                   0.28
                                                                ============           ============           ============

Weighted average shares outstanding                                4,269,736              4,318,444              4,318,158
                                                                ============           ============           ============
COMPREHENSIVE INCOME (LOSS)
---------------------------
Net income                                                      $    447,558           $    328,713           $  1,220,927

Other comprehensive income (loss), net of tax:
 Unrealized losses on marketable securities (net of tax
  benefits of $168,480, $381,128 and $129,492)                      (235,592)              (389,698)              (537,505)
 Less reclassification adjustment for gains
  included in net income                                               5,775                 11,840                 13,870
                                                                ------------           ------------           ------------

Comprehensive income (loss)                                     $    217,741           $    (49,145)          $    697,292
                                                                ============           ============           ============
</TABLE>
                 See accompanying notes to financial statements

                                       F3
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                    FOR THE THREE MONTHS ENDED MARCH 31, 2002
                      AND THE YEAR ENDED DECEMBER 31, 2001
<TABLE><CAPTION>
                                             Common Stock, No Par Value
                                                10,000,000 Shares
                                                    Authorized             # of Shares
                                             -------------------------          of
                                            # of Shares    # of Shares       Treasury       Common
                                               Issued      Outstanding        Stock          Stock
                                             ----------     ----------      ----------     ----------
<S>                                          <C>             <C>             <C>            <C>
Balances at December 31, 2000                 4,318,444      4,318,444            --       $6,509,267

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

Purchase of Treasury Stock                         --          (45,000)         45,000           --

Net income for the year
 ended December 31, 2000                           --             --              --             --
                                             ----------     ----------      ----------     ----------

Balances at December 31, 2001                 4,318,444      4,273,444          45,000      6,509,267

Purchase of treasury stock                         --           (4,600)          4,600           --

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

Net income for the three months
 ended March 31, 2002                              --             --              --             --
                                             ----------     ----------      ----------     ----------

Balances at March 31, 2002 (Unaudited)        4,318,444      4,268,844          49,600     $6,509,267
                                             ==========     ==========      ==========     ==========

                                                                                           Accumulated
                                                                                              Other
                                               Stock                                      Comprehensive
                                            Subscription      Treasury        Retained       Income,
                                             Receivable         Stock         Earnings      Net of Tax
                                             ----------      ----------      ----------     ----------

Balances at December 31, 2000                $  (15,000)     $     --        $4,850,866     $ (205,113)

Other comprehensive income:
 Unrealized losses on securities, net of
 taxes and reclassification adjustment             --              --              --         (523,635)

Purchase of Treasury Stock                         --          (287,033)           --             --

Net income for the year
 ended December 31, 2000                           --              --         1,220,927           --
                                             ----------      ----------      ----------     ----------

Balances at December 31, 2001                   (15,000)       (287,033)      6,071,793       (728,748)

Purchase of treasury stock                         --           (32,445)           --             --

Other comprehensive income:
 Unrealized losses on securities, net of
 taxes and reclassification adjustment             --              --              --         (229,817)

Net income for the three months
 ended March 31, 2002                              --              --           447,558           --
                                             ----------      ----------      ----------     ----------

Balances at March 31, 2002 (Unaudited)       $  (15,000)     $ (319,478)     $6,519,351     $ (958,565)
                                             ==========      ==========      ==========     ==========
</TABLE>
                 See accompanying notes to financial statements

                                       F4
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
                      AND THE YEAR ENDED DECEMBER 31, 2001
<TABLE><CAPTION>
                                                                        (Unaudited)
                                                                          March 31,                   December 31,
                                                              -------------------------------         -----------
                                                                  2002                2001                2001
                                                              -----------         -----------         -----------
<S>                                                           <C>                 <C>                 <C>
Cash flows from operating activities:
  Net income                                                  $   447,558         $   328,713         $ 1,220,927
  Adjustments to reconcile net income to net
    cash flows from operating activities:
      Depreciation and amortization                               204,201             179,971             777,350
      Gain on sale of marketable securities, net                  (36,020)            (84,984)           (249,522)
      Deferred income taxes                                       (27,381)              3,926              47,952
      Provision for doubtful accounts                                --                  --                15,000
      (Increase) decrease in operating assets:
        Accounts receivable                                      (151,935)           (255,826)           (149,966)
        Other receivables                                          (5,778)             (5,434)            (52,602)
        Inventories                                               (58,488)            125,271             119,238
        Prepaid expenses and other current assets                     136                --               (33,686)
      Increase (decrease) in operating liabilities:
        Accounts payable                                           60,017              76,675              25,776
        Accrued expenses                                            2,410             (67,639)             (4,105)
        Income taxes payable                                      (20,191)             28,617              80,362
                                                              -----------         -----------         -----------
Net cash provided by operating activities                         414,529             329,290           1,796,724

Cash flows from investing activities:
  Purchase of marketable securities                              (273,955)         (4,017,334)         (9,246,972)
  Sales of marketable securities                                  574,482           4,295,719           7,687,102
  Purchases of property, plant and equipment                      (48,792)           (188,456)           (712,798)
  Change in margin account                                       (233,688)               --               357,145
                                                              -----------         -----------         -----------
Net cash provided by (used in)
  investing activities                                             18,047              89,929          (1,915,523)

Cash flows from financing activities:
  Repayment of notes payable                                     (176,960)            (24,193)            (94,320)
  Purchase of treasury stock                                      (32,445)               --              (287,033)
                                                              -----------         -----------         -----------
Net cash used in financing activities                            (209,405)            (24,193)           (381,353)
                                                              -----------         -----------         -----------

Net increase (decrease) in
  cash and cash equivalents                                       223,171             395,026            (500,152)
Cash and cash equivalents at the beginning of the year            936,949           1,437,101           1,437,101
                                                              -----------         -----------         -----------
Cash and cash equivalents at end of year                      $ 1,160,120         $ 1,832,127         $   936,949
                                                              ===========         ===========         ===========
</TABLE>
                 See accompanying notes to financial statements

                                       F5
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2002 AND 2001

Note 1 - NATURE OF BUSINESS

Lifeway Foods, Inc. (The "Company") commenced operations in February 1986 and
incorporated under the laws of the state of Illinois on May 19, 1986. The
Company's principal business activity is the production of dairy products.
Specifically, the Company produces Kefir, a drinkable product which is similar
to but distinct from yogurt, in several flavors sold under the name "Lifeway's
Kefir;" a plain farmer's cheese sold under the name "Lifeway's Farmer's Cheese;"
a fruit sugar-flavored product similar in consistency to cream cheese sold under
the name of "Sweet Kiss;" and a dairy beverage, similar to Kefir, with increased
protein and calcium, sold under the name "Basics Plus." The Company also
produces several soy-based products under the name "Soy Treat" and a
vegetable-based seasoning under the name "Golden Zesta." The Company currently
distributes its products throughout the Chicago Metropolitan area through local
food stores. In addition, the products are sold throughout the United States and
Ontario, Canada. The Company also distributes some of its products
internationally by exporting to Eastern Europe. During the year 2001 and for the
three months ended March 31, 2002 and 2001, export sales of the Company were
approximately $154,000, $19,867, and $31,796, respectively.

On September 30, 1992, the Company formed a wholly owned subsidiary corporation,
LFI Enterprises, Inc., (LFIE) incorporated in the state of Illinois. LFIE was
formed for the purpose of operating a "Russian" theme restaurant and supper club
on property acquired by the Company on October 9, 1992. The restaurant/supper
club commenced operations in late November 1992. As of July 2001, the
restaurant/supper club terminated all operations.

The majority of the Company's revenues are derived from the sale of the
Company's principal products.

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. 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.

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 metropolitan area. Deposits at each institution are
insured up to $100,000 by the Federal Deposit Insurance Corporation or the
Securities Investor Protector Corporation.

                                       F-6
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2002 AND 2001

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Bank balances of amounts reported by financial institutions are categorized as
follows at March 31, 2002.

     Amounts insured                                $      300,000
     Uninsured and uncollateralized amounts                802,751
                                                    --------------
     Total bank balances                            $    1,102,751
                                                    ==============

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

ACCOUNTS RECEIVABLE
-------------------
The allowance for doubtful accounts is based on management's evaluation of
outstanding accounts receivable at the end of the year.

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

PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at lower of depreciated cost or fair value.
Depreciation is computed using the straight-line method. When assets are retired
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is recognized in
income for the period. The cost of maintenance and repairs is charged to income
as incurred; significant renewals and betterments are capitalized.

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

                Category                                   Years
        --------------------------                    ---------------
        Buildings and improvements                       31 and 39
        Machinery and equipment                            5 - 12
        Office equipment                                   5 - 7
        Vehicles                                             5

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
methods for financial statement and tax purposes, unrealized gains or losses
related to marketable securities, capitalization of indirect costs for tax
purposes, and the use of an allowance for doubtful accounts for financial
statement purposes.

                                      F-7
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2002 AND 2001

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

ADVERTISING COSTS
-----------------
The Company expenses advertising costs as incurred. During the year 2001 and for
the three months ended March 31, 2002 and 2001, approximately $473,800, $71,700,
and $87,800, respectively, were expensed.

EARNING PER COMMON SHARE
------------------------
Earnings per common share were computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the year. For 2002 and 2001, diluted and basic earnings per share were
the same, as the effect of dilutive securities options outstanding was not
significant.

Note 3 - MARKETABLE SECURITIES

The cost and fair value of marketable securities available for sale are as
follows:
<TABLE><CAPTION>
                                                     Unrealized         Unrealized             Fair
     March 31, 2002                  Cost              Gains              Losses              Value
     --------------              -----------        -----------        -----------         -----------
<S>                              <C>                <C>                <C>                 <C>
Equities                         $ 3,197,586        $    14,115        $(1,508,034)        $ 1,703,667
Preferred securities                 384,875               --              (13,686)            371,189
Municipal bonds, maturing
  within five years                2,962,155               --             (113,042)          2,849,113
Government agency
  obligations, maturing
  after five years                   248,755               --              (17,017)            231,738
                                 -----------        -----------        -----------         -----------
Total                            $ 6,793,371        $    14,115        $(1,651,779)        $ 5,155,707
                                 ===========        ===========        ===========         ===========


                                                     Unrealized         Unrealized             Fair
     March 31, 2001                  Cost              Gains              Losses              Value
     --------------              -----------        -----------        -----------         -----------

Equities                         $ 5,121,965        $    42,227        $  (708,627)        $ 4,455,565
Options, maturing within
  one year                           (86,900)             2,063            (91,630)           (176,467)
                                 -----------        -----------        -----------         -----------
Total                            $ 5,035,065        $    44,290        $  (800,257)        $ 4,279,098
                                 ===========        ===========        ===========         ===========
</TABLE>
                                       F-8
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2002 AND 2001

Note 3 - MARKETABLE SECURITIES - continued
<TABLE><CAPTION>
                                                      Unrealized         Unrealized             Fair
     December 31, 2001                Cost              Gains              Losses              Value
     -----------------            -----------        -----------        -----------         -----------
<S>                              <C>                <C>                <C>                 <C>
Equities                         $ 3,447,853        $    46,888        $(1,238,666)        $ 2,256,075
Preferred securities                 777,723              6,827             (6,240)            778,310
Municipal bonds, maturing
  within five years                2,554,622               --              (63,184)          2,491,438
Government agency
  obligations, maturing
  after five years                   248,755               --               (7,392)            241,363
Options, maturing within
  one year                           (34,600)            22,400               --               (12,200)
                                 -----------        -----------        -----------         -----------
Total                            $ 6,994,353        $    76,115        $(1,315,482)        $ 5,754,986
                                 ===========        ===========        ===========         ===========
</TABLE>

Proceeds from the sale of marketable securities were $7,687,102, $574,482, and
$4,295,719 during the year 2001 and for the three months ended March 31, 2002
and 2001, respectively.

Gross gains of $249,522, $36,020, and $84,984, were realized on these sales
during the year 2001 and for the three months ended March 31, 2002 and 2001,
respectively.

Note 4 - INVENTORIES

   Inventories consist of the following:

                                  (Unaudited)
                                   March 31,
                           ------------------------       December 31,
                             2002            2001            2000
                           --------        --------        --------
Finished goods             $157,244        $425,876        $273,932
Production supplies         241,451         217,303         280,897
Raw materials               460,566         151,561         245,944
                           --------        --------        --------
Total inventories          $859,261        $794,740        $800,773
                           ========        ========        ========

                                      F-9
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2002 AND 2001

Note 5 - PROPERTY, PLANT, AND EQUIPMENT

   Property, plant, and equipment consists of the following:

                                            (Unaudited)
                                             March 31,
                                     --------------------------     December 31,
                                        2002            2001            2000
                                     ----------      ----------      ----------
Land                                 $  658,400      $  658,400      $  658,400
Buildings and improvements            2,731,070       2,646,809       2,727,986
Machinery and equipment               4,714,571       4,259,112       4,668,863
Vehicles                                359,383         273,580         359,383
Office equipment                         84,945          71,532          84,945
                                     ----------      ----------      ----------
                                      8,548,369       7,909,433       8,499,577
Less accumulated depreciation         3,682,913       2,881,333       3,478,712
                                     ----------      ----------      ----------
                                     $4,865,456      $5,028,100      $5,020,865
                                     ==========      ==========      ==========

Depreciation expense during the year ended December 31, 2001 and for the three
months ended March 31, 2002 and 2001 was $777,350, $204,201, and $179,971,
respectively.

Note 6 - NOTES PAYABLE

  Notes payable consist of the following:
<TABLE><CAPTION>
                                                                  (Unaudited)
                                                           For the three months ended
                                                                   March 31,
                                                          ----------------------------    December 31,
                                                              2002            2001            2001
                                                          ------------    ------------    ------------
<S>                                                      <C>             <C>             <C>
Mortgage  note  payable to a bank,  paid in full in
2002.                                                     $        --     $    163,514    $    155,506

Mortgage note payable to a bank, payable in monthly
installments of $3,161 including interest at 7.25%,
with a balloon payment of $343,151 due August 2003.
Collateralized by real estate.                                363,391          374,169         366,253

Note payable to a bank, paid in full in 2002.                      --           10,484           6,169

Mortgage note payable to a bank, payable in monthly
installments of principal of $3,435 plus interest at
6.51%, with a balloon payment of $412,142 due November
2006. Collateralized by real estate.                          607,910          659,086         614,779
</TABLE>
                                      F-10
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2002 AND 2001

Note 6 - NOTES PAYABLE - continued
<TABLE><CAPTION>
                                                                   (Unaudited)
                                                                    March 31,
                                                          ----------------------------     December 31,
                                                              2002            2001             2001
                                                          ------------    ------------    ------------
<S>                                                      <C>             <C>             <C>
Note payable to finance company, matured October 2001.              --           3,731              --

Notes  payable  to  finance  companies,  payable in
monthly installments of $1,851,  including interest
at  0%,  due  November  2004.   Collateralized   by
vehicles.                                                       58,398              --          63,952
                                                          ------------    ------------    ------------
Total notes payable                                          1,029,699       1,210,984       1,206,659

Less current maturities                                         74,150         688,141          90,249
                                                          ------------    ------------    ------------
Total long-term portion                                   $     955,549   $    522,843    $  1,116,410
                                                          ============    ============    ============
</TABLE>

   Maturities of notes payables are as follows:

     As of March 31,
          2002                 $      74,150
          2003                       416,104
          2004                        55,177
          2005                        41,214
          2006                       443,054
                               -------------
          Total                $   1,029,699
                               =============

Note 7 - PROVISION FOR INCOME TAXES

   The provision for income taxes consists of the following:

                                         (Unaudited)              For The
                                          March 31,              Year Ended
                                  ------------------------       December 31,
                                    2002            2001             2001
                                  --------       ---------        --------

Current:
    Federal                       $239,247        $165,282        $435,620
    State                           55,049          38,835         107,015
                                  --------        --------        --------
Total current                      294,296         204,117         542,635
Deferred                            27,381          31,232          47,952
                                  --------        --------        --------
Provision for income taxes        $321,677        $235,349        $590,587
                                  ========        ========        ========

                                      F-11
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2002 AND 2001

Note 7 - PROVISION FOR INCOME TAXES - continued

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

                                             (Unaudited)
                                     For the three months ended       For the
                                              March 31,             Year Ended
                                    ---------------------------     December 31,
                                       2002              2001           2001
                                    ---------         ---------      ---------
Federal income tax expense          $ 261,540         $ 191,781      $ 570,953
  computed at the statutory rate
State taxes, expense                   55,385            40,613        132,240
Temporary book/tax differences
  Depreciation                          9,445            (7,960)       (38,950)
  Other                               (12,143)          (23,965)       (18,071)
Permanent book/tax differences          7,450            34,880        (55,585)
                                    ---------         ---------      ---------
Provision for income taxes          $ 321,677         $ 235,349      $ 590,587
                                    =========         =========      =========

Amounts for deferred tax assets and liabilities are as follows:
<TABLE><CAPTION>
                                                            (Unaudited)
                                                             March 31,
                                                     -----------------------    December 31,
                                                        2002          2001          2001
                                                     ---------     ---------     ---------
Non-current deferred tax liabilities arising from:
<S>                                                 <C>           <C>           <C>
  Temporary differences - principally
    Book/tax, accumulated depreciation               $(462,797)    $(381,962)    $(436,265)
Current deferred tax assets arising from:
  Book/tax, allowance for unrealized losses            670,337       136,539       510,620
  Book/tax, inventory                                   49,074        32,599        49,923
                                                     ---------     ---------     ---------
  Total deferred tax assets                            719,411       169,138       560,543
                                                     ---------     ---------     ---------
Net deferred tax asset (liability)                   $ 256,614     $(212,824)    $ 124,278
                                                     =========     =========     =========
</TABLE>

Note 8 - SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes are as follows:

                           (Unaudited)
                       For the Three Months         For the
                         Ended March 31,           Year Ended
                    ------------------------       December 31,
                      2002            2001            2000
                    --------        --------        --------
Interest            $ 20,091        $ 24,888        $107,425
Income taxes        $308,000        $175,500        $505,500

Non-cash investing and financing transactions during 2001 include the purchase
of vehicles via note payables for $65,802 and the refinancing of debt for
$618,214.

                                      F-12
<PAGE>

                       LIFEWAY FOODS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2002 AND 2001

Note 9 - STOCK OPTION PLANS

The Company has a registration statement filed with the Securities and Exchange
Commission in connection with a Consulting Service Compensation Plan covering up
to 300,000 of the Company's common stock shares. Pursuant to the Plan, the
Company may issue common stock or options to purchase common stock to certain
consultants, service providers, and employees of the Company. There were 234,300
shares available for issuance under the Plan at March 31, 2002 and 2001.

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 March 31, 2002 and 2001, there were no stock options outstanding or
exercisable.

Note 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company's financial instruments, none of which
are held for trading purposes, are as follows at March 31, 2002:

                                  Carrying             Fair
                                   Amount             Value
                                 ----------        ----------
Cash and cash equivalents        $1,160,120        $1,160,120
Marketable securities            $5,155,707        $5,155,707
Notes payable                    $1,029,699        $  928,441

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










                                      F-13
<PAGE>

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

(1)  MATERIAL CHANGES IN RESULTS OF OPERATIONS

     Sales increased by $251,413, up to $2,887,853 during the three month period
ending March 31, 2002, from $2,636,440 during the same three month period in
2001 (a 9.5% increase). This increase is primarily attributable to increased
sales of existing products.

     Net income increased by $118,845, up to $447,558 for the three month
period ending March 31, 2002, from $328,713 during the same three month period
in 2001 (a 36% increase).

     Cost of goods sold as a percentage of sales was 53% for the three months
ending March 31, 2002, compared to 59% for the same three month period in 2001.
Despite the increases in production and sales, cost of goods sold decreased by
$23,946, down to $1,523,281 during the three month period ending March 31, 2002,
from $1,547,227 during the same three month period in 2001. This decrease is
primarily due to decreased costs of raw materials and the Company's ability to
obtain raw materials in bulk quantities at reduced prices.

     Despite the increased production, operating expenses remained virtually
unchanged, decreasing by $8,679, down to $648,540 for the three month period
ending March 31, 2002, from $657,219 during the same three month period in 2001.
This decrease is primarily attributable to increased production and efficiency
associated with the continuing automation of manufacturing functions.

     Earnings per share for the quarter ended March 31, 2002 were $.10, compared
to $.08 for the same quarter of 2001.

(2)  LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 2002, the Company had working capital in the amount of
$8,288,465, cash and cash equivalents in the amount of $1,160,120, and
marketable securities of $5,155,707. The Company expects all cash requirements
can be met internally for the next 12-month period.

     Net cash provided by operating activities increased by 85,239 (or 26%), to
$414,529 for the three months ended March 23, 2002, from $329,290 for the same
three month period in 2001.

     Net cash used in financing activities increased by $185,212, to $209,405
for the three months ended March 31, 2002, from $24,193 for the same three month
period in 2001. This difference was primarily due to the repayment of $176,960
in notes payable, representing the remaining mortgage on the Company's smaller
processing plant and loans due for two company vehicles, as well as due to the
purchase of 4,600 shares of the company's common stock in market transactions
during the first quarter of 2002, which shares now constitute treasury stock, at
a cost of $32,445.

     Total current liabilities as of March 31, 2002 was $1,166,525, a $383,918
decrease from $1,550,443 as of March 31, 2001. This decrease primarily due to
the repayment of a mortgage note payable on the Company's smaller processing
plant in the current year, as well as the reclassification of a mortgage note
payable in 2001 from a current liability to a long-term liability, as a result
of a refinancing of the note. Likewise, there was a corresponding increase in
long-term liabilities due to the refinancing, with notes payable, a long term
liability, increasing to $955,549 as of March 31, 2002, from $522,843 as of
March 31, 2001.

     The Company held marketable securities with a fair market value of
$5,155,707 as of March 31, 2002. These marketable securities have a cost basis
of $6,793,371, which represents $1,637,664 in unrealized losses (net of
unrealized gains) as of March 31, 2002.

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

                                        2
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     There have been no material developments in the pending legal proceeding
described in the Company's annual report on Form 10-KSB for the year ended
December 31, 2001.

ITEM 2.  CHANGES IN SECURITIES - None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES - None.

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

ITEM 5. OTHER INFORMATION - None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)     EXHIBITS:

        Exhibit Number and Brief Description
        ------------------------------------

        3.4    Bylaws, as amended. (Incorporated by reference to Exhibit No. 3.4
               of the Company's Annual Report on Form 10-KSB for the year ended
               December 31, 1999, and filed on March 29, 2000.)

        3.5    Articles of Incorporation, as amended and currently in effect.
               (Incorporated by reference to Exhibit 3.5 of the Company's
               Quarterly Report on Form 10-QSB for the quarter ended June 30,
               2000 and filed on August 8, 2000.)

        10.1   Lifeway Foods, Inc. Consulting and Services Compensation Plan,
               dated June 5, 1995. (Incorporated by reference to Exhibit 10.1 of
               the Company's Registration Statement on Form S-8, File No.
               33-93306.)

        10.10  Stock Purchase Agreement with Danone Foods, Inc., dated October
               1, 1999. (Incorporated by reference to Exhibit 10.10 of the
               Company's Current Report on Form 8-K dated October 1, 1999, and
               filed October 12, 1999.)

        10.11  Stockholders' Agreement with Danone Foods, Inc. dated October 1,
               1999. (Incorporated by reference to Exhibit 10.11 of the
               Company's Current Report on Form 8-K dated October 1, 1999, and
               filed October 12, 1999.)

        10.12  Letter Agreement dated December 24, 1999 amending the
               Stockholders' Agreement with Danone Foods, Inc. dated October 1,
               1999. (Incorporated by reference to Exhibit 10.12 of the
               Company's Current Report on Form 8-K dated December 24, 1999 and
               filed January 11, 2000.)

        10.13  Support Agreement with The Dannon Company, Inc. dated December
               24, 1999. (Incorporated  by reference to Exhibit 10.13 of the
               Company's Current Report on Form 8-K dated December 24, 1999 and
               filed January 11, 2000.)

 (b)    REPORTS ON FORM 8-K - None.

                                        3
<PAGE>

                                   SIGNATURES

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


                                LIFEWAY FOODS, INC.


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

Date: May 15, 2002





















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