**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**







**FORM
      10-Q**







**QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
                  The Quarter Ended September 30, 2008**
              
              **Commission
                  File Number
                  000-51506**







**Smart
      Balance, Inc.**


**(Exact
      name of registrant as specified in its charter)**







**Delaware**
            
            **20-2949397****(State
                of or other jurisdiction**
              **of
                incorporation)**
            
            **(I.R.S.
                Employer**
              **Identification
                No.)**




**115
                West Century Road, Suite 260,**
              **Paramus,
                New Jersey**
            
            **07652****(Address
                of principal executive offices)**
            
            **(Zip
                code)**




**Registrant’s
      telephone number, including area code: (201) 568-9300**







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




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


Large Accelerated Filer
              £
              
              Accelerated Filer
              TNon-Accelerated Filer
              £(Do not check if a smaller reporting company)
              
              Smaller Reporting Company
              £




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).   Yes  ̈ No x .




As
      of
      November 5, 2008 the Registrant had 62,630,683 shares of common stock, par
      value
      $.0001 per share, outstanding.










**SMART
      BALANCE, INC.**




**INDEX**




**Page**Part
                I.
            
            Financial
                Information
            
            1Item
                1.
            
            Financial
                Statements
            
            1Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            24Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            35Item
                4.
            
            Controls
                and Procedures
            
            36Part
                II.
            
            Other
                Information
            
            37Item
                1.
            
            Legal
                Proceedings.
            
            37Item
                1A.
            
            Risk
                Factors.
            
            37Item
                6.
            
            Exhibits.
            
            37








**Part
      I.**  **Financial
      Information**


**Item 1.**  **Financial
      Statements** ****




**SMART
      BALANCE, INC. AND SUBSIDIARY**


**Consolidated
      Balance Sheets**





**September 30,**
            
            **December 31,****2008**
            
            **2007****(Unaudited**)******Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            7,384,472
            
            $
            37,648,754Accounts
                receivable, net of allowance 2008- $260,056 and2007-$228,871
            
            
            14,100,748
            
            
            11,733,117Accounts
                receivable - other
            
            
            446,883
            
            
            799,470Inventories
            
            
            9,678,544
            
            
            7,202,198Prepaid
                taxes
            
            
            4,453,155
            
            
            6,517,833Prepaid
                expenses and other assets
            
            
            6,841,525
            
            
            1,454,866Deferred
                tax asset
            
            
            1,072,297
            
            
            1,079,509Total
                current assets
            
            
            43,977,624
            
            
            66,435,747Property
                and equipment, net
            
            
            4,013,757
            
            
            1,805,331Other
                assets:Goodwill
            
            
            374,885,923
            
            
            374,885,923Other
                intangibles, net
            
            
            156,239,909
            
            
            159,645,634Deferred
                costs, net
            
            
            2,247,754
            
            
            3,519,412Other
                assets
            
            
            173,265
            
            
            74,975Total
                other assets
            
            
            533,546,851
            
            
            538,125,944Total
                assets
            
            $
            581,538,232
            
            $
            606,367,022**Liabilities
                and Stockholders' Equity**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            21,550,173
            
            $
            20,355,419Income
                taxes payable
            
            
            2,265,901
            
            
            1,035,149Total
                current liabilities
            
            
            23,816,074
            
            
            21,390,568Long
                term debt
            
            
            84,504,174
            
            
            119,504,174Deferred
                tax liability
            
            
            49,516,398
            
            
            53,293,528Derivative
                liability
            
            
            2,582,524
            
            
            -Other
                liabilities
            
            
            137,302
            
            
            -Total
                liabilities
            
            
            160,556,472
            
            
            194,188,270Commitment
                and contingencies:Stockholders'
                equitySeries
                A Convertible Preferred stock, $.0001 par value, 50,000,000 shares
                authorized; 15,388,889 preferred shares converted into 19,516,832
                shares
                of common stock on January 3, 2008
            
            
            -
            
            
            175,659,013Common
                stock, $.0001 par value, 250,000,000 shares authorized; 62,630,683
                (September 30, 2008) and 43,113,863 (December 31, 2007) issued and
                outstanding
            
            
            6,263
            
            
            4,311Additional
                paid in capital
            
            
            504,266,685
            
            
            315,479,759Retained
                deficit
            
            
            (83,291,188
            )
            
            (78,964,331
            )Total
                stockholders' equity
            
            
            420,981,760
            
            
            412,178,752Total
                liabilities and stockholders' equity
            
            $
            581,538,232
            
            $
            606,367,022




*See
      accompanying notes to the consolidated financial statements* **




1


**SMART
      BALANCE, INC. AND SUBSIDIARY**


**Consolidated
      Statements of Operations**


**(Unaudited)**





**Three**
              **months**
              **ended**
              **September 30,**
              **2008**
            
            **Three**
              **months**
              **ended**
              **September 30,**
              **2007**
            
            **Nine
                Months**
              **ended**
              **September 30,**
              **2008**
            
            **Nine
                Months**
              **ended**
              **September 30,**
              **2007**Net
                sales
            
            $
            57,531,521
            
            $
            41,502,575
            
            $
            156,311,306
            
            $
            60,151,818Cost
                of goods sold
            
            
            32,344,738
            
            
            21,591,160
            
            
            88,397,643
            
            
            31,499,243Gross
                profit
            
            
            25,186,783
            
            
            19,911,415
            
            
            67,913,663
            
            
            28,652,575Operating
                expenses:Marketing
            
            
            8,898,048
            
            
            6,472,666
            
            
            23,738,638
            
            
            9,520,155Selling
            
            
            4,565,600
            
            
            3,459,572
            
            
            12,677,592
            
            
            5,099,652General
                and administrative
            
            
            9,147,806
            
            
            9,063,951
            
            
            27,462,573
            
            
            12,860,284Total
                operating expenses
            
            
            22,611,454
            
            
            18,996,189
            
            
            63,878,803
            
            
            27,480,091Operating
                income
            
            
            2,575,329
            
            
            915,226
            
            
            4,034,860
            
            
            1,172,484Other
                income (expense):Interest
                income
            
            
            19,119
            
            
            42,675
            
            
            283,486
            
            
            2,342,644Interest
                expense
            
            
            (4,547,179
            )
            
            (3,922,836
            )
            
            (9,767,967
            )
            
            (6,022,417
            )Loss
                on derivative liability
            
            
            -
            
            
            (29,646,232
            )
            
            -
            
            
            (50,532,926
            )Other
                income (expense), net
            
            
            (434,153
            )
            
            10,721
            
            
            (1,412,869
            )
            
            130,327Total
                other (expense)
            
            
            (4,962,213
            )
            
            (33,515,672
            )
            
            (10,897,350
            )
            
            (54,082,372
            )(Loss)
                before income taxes
            
            
            (2,386,884
            )
            
            (32,600,446
            )
            
            (6,862,490
            )
            
            (52,909,888
            )(Benefit)
                provision for income taxes
            
            
            (772,811
            )
            
            407,129
            
            
            (2,535,633
            )
            
            948,851Net
                (loss)
            
            $
            (1,614,073
            )
            $
            (33,007,575
            )
            $
            (4,326,857
            )
            $
            (53,858,739
            )Less:
                Unpaid dividends on cumulativepreferred
                stock
            
            
            -
            
            
            2,817,868
            
            
            -
            
            
            4,062,467Net
                (loss) available for common stock
            
            $
            (1,614,073
            )
            $
            (35,825,443
            )
            $
            (4,326,857
            )
            $
            (57,921,206
            )(Loss)
                per share:Basic
            
            $
            (0.03
            )
            $
            (1.25
            )
            $
            (0.07
            )
            $
            (2.71
            )Diluted
            
            $
            (0.03
            )
            $
            (1.25
            )
            $
            (0.07
            )
            $
            (2.71
            )Weighted
                average shares outstanding:Basic
            
            
            62,630,683
            
            
            28,766,133
            
            
            62,487,703
            
            
            21,376,293Diluted
            
            
            62,630,683
            
            
            28,766,133
            
            
            62,487,703
            
            
            21,376,293




*See
      accompanying notes to the consolidated financial statements*




2


**SMART
      BALANCE, INC. AND SUBSIDIARY**


**Consolidated
      Statements of Cash Flows**


**(Unaudited)**





**Nine months**
              **ended**
              **September 30, 2008**
            
            **Nine months**
              **ended**
              **September 30, 2007**Cash
                flows from operating activitiesNet
                (loss)
            
            $
            (4,326,857
            )
            $
            (53,858,740
            )Adjustments
                to reconcile net (loss) to net cashprovided
                by operating activities:Depreciation
                and amortization
            
            
            3,584,893
            
            
            1,653,807Deferred
                income taxes
            
            
            (3,777,130
            )
            
            616,926Stock
                based compensation
            
            
            10,925,519
            
            
            4,777,450Increase
                in derivative liabilities
            
            
            2,582,524
            
            
            50,532,926Acceleration
                of deferred loan amortization
            
            
            1,017,331
            
            
            -Deferred
                interest income
            
            
            -
            
            
            (432,623
            )Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (2,367,631
            )
            
            1,213,126Inventories
            
            
            (2,476,346
            )
            
            (2,082,500
            )Prepaid
                expenses and other current assets
            
            
            (2,969,394
            )
            
            (5,681,573
            )Accounts
                payable and accrued expenses
            
            
            2,471,730
            
            
            1,438,536Net
                cash (used in) operating activities
            
            
            4,664,639
            
            
            (1,822,665
            )Cash
                flows (used in) from investing activitiesPurchase
                of property and equipment
            
            
            (2,483,819
            )
            
            (515,833
            )Capitalization/recovery
                of legal fees
            
            
            350,552
            
            
            -Purchase
                of GFA
            
            
            -
            
            
            (486,251,453
            )Net
                cash (used in) investing activities
            
            
            (2,133,267
            )
            
            (486,767,286
            )Cash
                flows from financing activitiesRepayment
                of debt
            
            
            (35,000,000
            )
            
            600,000Proceeds
                from issuance of long-term debt
            
            
            -
            
            
            160,000,000Proceeds
                from issuance of common stock
            
            
            -
            
            
            107,500,000Proceeds
                from issuance of preferred stock
            
            
            -
            
            
            138,500,001Proceeds
                from stock-related legal settlement
            
            
            2,204,346
            
            
            -Payments
                for costs of equity issuance
            
            
            -
            
            
            (12,667,046
            )Payment
                for acquiring long-term debt facility
            
            
            -
            
            
            (4,535,994
            )Payment
                of advances from stockholders
            
            
            -
            
            
            (206,276
            )Net
                cash provided by (used in) financing activities
            
            
            (32,795,654
            )
            
            387,990,685Net
                (decrease) in cash for the period
            
            
            (30,264,282
            )
            
            (100,599,266
            )Cash
                - Beginning of period
            
            
            37,648,754
            
            
            101,642,753Cash
                - End of period
            
            $
            7,384,472
            
            $
            1,043,487Supplemental
                disclosure of cash flow information:Cash
                paid during the period for:Income
                taxes
            
            $
            2,668,080
            
            $
            3,809,606Interest
            
            $
            6,316,471
            
            $
            5,707,512Supplemental
                disclosure of non-cash activity:Conversion
                of Series A Convertible Preferred Stock
            
            $
            175,659,013
            
            $
            -




*See
      accompanying notes to the consolidated financial statements*




3


**SMART
      BALANCE, INC. AND SUBSIDIARY**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**




**1.**
            **General**




On
      May 21, 2007, Smart Balance, Inc. (formerly known as Boulder Specialty
      Brands, Inc. or “Boulder”), completed a merger pursuant to an Agreement and Plan
      of Merger dated September 25, 2006, as extended by a letter agreement dated
      as of February 15, 2007, between Boulder and GFA Holdings, Inc. (“GFA
      Holdings”), the sole stockholder of GFA Brands, Inc. (“GFA Brands”) (on May 21,
      2007, GFA Holdings was merged into GFA Brands, the surviving company is referred
      to herein as “GFA”). Pursuant to the merger agreement, a wholly-owned Delaware
      subsidiary of Boulder merged with and into GFA, and GFA became a wholly-owned
      subsidiary of Boulder.




Immediately
      following the merger, Boulder changed its name to Smart Balance, Inc. All
      references to Smart Balance, Inc. (or the “Company”) herein should be considered
      to include the predecessor company Boulder.




The
      accompanying condensed consolidated financial statements include all adjustments
      (consisting only of normal recurring accruals) which are, in the opinion of
      management, considered necessary for a fair presentation of the results for
      the
      periods presented. These financial statements should be read in conjunction
      with
      the consolidated financial statements of Smart Balance, Inc. included in the
      Company's 2007 annual report on Form 10-K. The reported results for the three
      and nine month periods ended September 30, 2008 are not necessarily indicative
      of the results to be expected for the full year. Certain amounts have been
      reclassified to conform with current presentations.




Basis
      of Presentation:




The
      condensed consolidated financial statements included herein reflect the
      acquisition of GFA on May 21, 2007, with results of operations included from
      that date and the estimated fair value of the net assets of GFA included on
      May
      21, 2007 (see footnote 2). Prior to May 21, 2007, the Company was a blank check
      company with no operating activities, whose sole purpose was to serve as a
      vehicle for an acquisition in the consumer foods or beverage industry. The
      Company was capitalized through an initial public offering on December 21,
      2005,
      which raised approximately $96 million. Of this amount, approximately 96% was
      placed in a trust account until an acquisition was completed or until the
      Company was liquidated, as required by its charter.




Change
      in Accounting Principle: ****




During
      the first quarter of 2008, the Company changed its method of accounting for
      certain trade incentives and marketing costs and began deferring a portion
      of
      such items as prepaid expenses in proportion to forecasted revenues for the
      year.  This change enhances the matching of the Company’s expenses
      with revenues.  Additionally, this change provides better
      comparability to the Company’s industry peers, most of whom defer a portion of
      trade incentives and marketing costs as prepaid expenses earlier in the year
      and
      recognize those expenses in subsequent quarters in line with actual revenue
      earned.  While this methodology may create timing differences between
      quarters in 2007 as previously reported, it had no impact on the full year
      results. For more information, see the section entitled “Prepaid Expenses”
contained in footnote 3.




4


Statement
      of Financial Accounting Standards No. 154, “Accounting Changes and
      Error Corrections,” requires that a change in accounting principle be
      retrospectively applied to all prior periods presented. The Company has
      presented the effects of the change in accounting for trade incentives and
      marketing costs to the condensed consolidated statement of operations for the
      three and nine months ended September 30, 2007, the condensed consolidated
      balance sheet as of September 30, 2007 and the condensed consolidated statement
      of cash flows for the nine months ended September 30, 2007 in the tables below.
      The Company has condensed the comparative financial statements for the financial
      statement line items that were not affected by the change in accounting
      principle. The Company has presented the effects of the change of accounting
      principle in the selected unaudited pro forma financial information presented
      in
      footnote 2. The Company has also presented the effects of the change in
      accounting principle in the discussion of results on an operating basis included
      in management’s discussion and analysis included elsewhere in this quarterly
      report on Form 10-Q.




**Condensed
      Consolidated Statement of Operations**





**Three Months Ended September 30, 2007**
            
            **Nine Months Ended September 30, 2007****As originally**
              **reported**
            
            **Effect of**
              **change**
            
            **As adjusted**
            
            **As originally**
              **reported**
            
            **Effect
                of**
              **change**
            
            **As
                adjusted**Net
                sales
            
            $
            41,744,785
            
            $
            (242,210
            )
            $
            41,502,575
            
            $
            60,342,841
            
            $
            (191,023
            )
            $
            60,151,818Cost
                of goods sold
            
            
            21,591,160
            
            
            -
            
            
            21,591,160
            
            
            31,499,243
            
            
            -
            
            
            31,499,243Gross
                profit
            
            
            20,153,625
            
            
            (242,210
            )
            
            19,911,415
            
            
            28,843,598
            
            
            (191,023
            )
            
            28,652,575Operating
                expenses:Marketing
            
            
            2,317,550
            
            
            4,155,116
            
            
            6,472,666
            
            
            4,973,889
            
            
            4,546,266
            
            
            9,520,155SG&A,
                Other
            
            
            12,523,523
            
            
            -
            
            
            12,523,523
            
            
            17,959,936
            
            
            -
            
            
            17,959,936Total
                operating expenses
            
            
            14,841,073
            
            
            4,155,116
            
            
            18,996,189
            
            
            22,933,825
            
            
            4,546,266
            
            
            27,480,091Operating
                income (loss)
            
            
            5,312,552
            
            
            (4,397,326
            )
            
            915,226
            
            
            5,909,773
            
            
            (4,737,289
            )
            
            1,172,484Total
                other (expense)
            
            
            (33,515,672
            )
            
            -
            
            
            (33,515,672
            )
            
            (54,082,372
            )
            
            -
            
            
            (54,082,372
            )(Loss)
                before income taxes
            
            
            (28,203,120
            )
            
            (4,397,326
            )
            
            (32,600,446
            )
            
            (48,172,599
            )
            
            (4,737,289
            )
            
            (52,909,888
            )Provision
                for income taxes
            
            
            407,129
            
            
            -
            
            
            407,129
            
            
            948,851
            
            
            -
            
            
            948,851Net
                (loss)
            
            $
            (28,610,249
            )
            $
            (4,397,326
            )
            $
            (33,007,575
            )
            $
            (49,121,450
            )
            $
            (4,737,289
            )
            $
            (53,858,739
            )Unpaid
                dividends on cumulativepreferred
                stock
            
            
            2,817,868
            
            
            -
            
            
            2,817,868
            
            
            4,062,467
            
            
            -
            
            
            4,062,467Net
                (loss) available to commonstock
            
            $
            (31,428,117
            )
            $
            (4,397,326
            )
            $
            (35,825,443
            )
            $
            (53,183,917
            )
            $
            (4,737,289
            )
            $
            (57,921,206
            )(Loss)
                per share:Basic
            
            $
            (1.09
            )
            $
            (0.15
            )
            $
            (1.25
            )
            $
            (2.49
            )
            $
            (0.22
            )
            $
            (2.71
            )Diluted
            
            $
            (1.09
            )
            $
            (0.15
            )
            $
            (1.25
            )
            $
            (2.49
            )
            $
            (0.22
            )
            $
            (2.71
            )Weighted
                average shares outstanding:Basic
            
            
            28,766,133
            
            
            -
            
            
            28,766,133
            
            
            21,376,293
            
            
            -
            
            
            21,376,293Diluted
            
            
            28,766,133
            
            
            -
            
            
            28,766,133
            
            
            21,376,293
            
            
            -
            
            
            21,376,293




5




**Condensed
      Consolidated Balance Sheet**


**As
      of September 30, 2007**





**As originally**
            
            **Effect of****reported**
            
            **Change**
            
            **As adjusted****Assets**Current
                assets:Prepaid
                expenses and other assets
            
            $
            13,648,827
            
            $
            -
            
            $
            13,648,827Other
                current assets
            
            
            18,642,583
            
            
            1,894,916
            
            
            20,537,499Total
                current assets
            
            
            32,291,410
            
            
            1,894,916
            
            
            34,186,326Property
                and equipment, net
            
            
            620,214
            
            
            -
            
            
            620,214Total
                other assets
            
            
            548,923,576
            
            
            -
            
            
            548,923,576Total
                assets
            
            $
            581,835,200
            
            $
            1,894,916
            
            $
            583,730,116**Liabilities
                and Stockholders' Equity**Current
                liabilities:Income
                taxes payable
            
            $
            -
            
            $
            1,894,916
            
            $
            1,894,916Other
                current liabilities
            
            
            99,330,692
            
            
            4,737,289
            
            
            104,067,981Total
                current liabilities
            
            
            99,330,692
            
            
            6,632,205
            
            
            105,962,897Noncurrent
                liabilities
            
            
            229,427,593
            
            
            -
            
            
            229,427,593Total
                liabilities
            
            
            328,758,285
            
            
            6,632,205
            
            
            335,390,490Total
                stockholders' equity
            
            
            253,076,915
            
            
            (4,737,289
            )
            
            248,339,626Total
                liabilities and stockholders' equity
            
            $
            581,835,200
            
            $
            1,894,916
            
            $
            583,730,116





**Condensed
      Consolidated Statement of Cash Flows**


**Nine
      months ended September 30, 2007**





**As originally**
              **reported**
            
            **Effect of**
              **change**
            
            **As adjusted**Cash
                flows from operating activitiesNet
                (loss)
            
            $
            (49,121,451
            )
            $
            (4,737,289
            )
            $
            (53,858,740
            )Adjustments
                to reconcile net income (loss) to netcash
                provided by operating activities
            
            
            57,148,486
            
            
            -
            
            
            57,148,486Changes
                in operating assets and liabilities:Prepaid
                expenses and other current assets
            
            
            (3,786,588
            )
            
            (1,894,985
            )
            
            (5,681,573
            )Accounts
                payable and accrued expenses
            
            
            (5,193,738
            )
            
            4,737,289
            
            
            (456,449
            )Other
                changes in operating assets and liabilities
            
            
            (869,374
            )
            
            1,894,985
            
            
            1,025,611Other
                adjustments
            
            
            -
            
            
            -
            
            
            -Net
                cash (used in) provided by operating activities
            
            
            (1,822,665
            )
            
            -
            
            
            (1,822,665
            )Net
                cash (used in) investing activities
            
            
            (486,767,286
            )
            
            -
            
            
            (486,767,286
            )Net
                cash provided by (used in) financing activities
            
            
            387,990,685
            
            
            -
            
            
            387,990,685Net
                (decrease) in cash for the period
            
            
            (100,599,266
            )
            
            -
            
            
            (100,599,266
            )Cash
                - Beginning of period
            
            
            101,642,753
            
            
            -
            
            
            101,642,753Cash
                - End of period
            
            $
            1,043,487
            
            $
            -
            
            $
            1,043,487





For
      the
      fourth quarter of 2007, the estimated impact on operating income/net loss was
      $4.7 million and the estimated impact on diluted EPS was $0.14 per share. The
      effect on net sales was not material. The change had no impact on the full
      year
      results.




6




**2.**
            **Merger
                with GFA**




On
      May
      21, 2007, the Company, as part of the merger agreement, acquired 100% of the
      stock of GFA Holdings, Inc., the parent company of GFA Brands, Inc. GFA Brands,
      Inc. sells and markets consumer food products primarily under the Smart
      Balance ® and
      Earth
      Balance ® brand
      names to regional and national grocery stores. Concurrent with this acquisition,
      the Company changed its name to Smart Balance, Inc. The cost of the acquisition
      was approximately $491 million.




Under
      the
      GFA merger agreement, stockholders of GFA Holdings were paid an aggregate of
      $491.4 million in cash which included the assumption of post-closing bonus
      payments, net of tax benefits. The acquisition cost was paid with:
      (i) $101.1 million of cash held in a trust account established in
      connection with the Company’s initial public offering; (ii) the net
      proceeds of a private placement (see the stockholders’ equity note located
      elsewhere in these notes to the financial statements) of $246.0 million ($107.5
      million for common stock and $138.5 million for the Series A convertible
      preferred stock together with the investor warrants); and (iii) proceeds
      from the secured debt financing (see the long-term debt note located elsewhere
      in these notes to the financial statements) of $160.0 million.




The
      purchase price consists of the following:




Cash
                purchase price (excluding bonus assumption)
            
            $
            466,802,920Acquisition
                costs
            
            
            9,640,806Total
                purchase price
            
            $
            476,443,726




The
      Company’s purchase price allocation for the net assets acquired is as follows:




Cash
            
            $
            16,675,065Accounts
                receivable
            
            
            11,362,725Inventories
            
            
            4,657,010Prepaid
                assets
            
            
            5,153,157Other
                assets
            
            
            160,599Intangible
                assets
            
            
            161,000,000Goodwill
            
            
            374,885,923Total
                assets
            
            
            573,894,479Accounts
                payable, accrued expenses and other liabilities
            
            
            40,163,743Deferred
                taxes and other
            
            
            57,287,010Total
                liabilities assumed
            
            
            97,450,753Net
                assets acquired
            
            $
            476,443,726




The
      weighted-average amortization period is approximately 10.2 years. The amount
      of
      goodwill which was carried over from a predecessor acquisition and is deductible
      for tax purposes is $48.8 million.


7


***Selected
      Unaudited Pro Forma Financial Information***




The
      financial information in the table below summarizes the actual results of the
      Company for the nine months ended September 30, 2008 and the combined results
      of
      operations of Boulder and GFA for the nine months ended September 30, 2007,
      as
      though the GFA merger had occurred on January 1, 2007. A retrospective
      application of a change in accounting principle is being applied to the pro
      forma results for 2007 in order to improve comparability. For additional details
      regarding the change in accounting principle, see footnote 1. The unaudited
      pro
      forma financial information is presented for informational purposes only and
      is
      not indicative of the results of operations that would have been achieved if
      the
      merger had taken place on January 1, 2007 or that may result in the future.
      Prior to the completion of the merger, we were a blank check company with no
      operations.




**Nine Months**
              **Ended**
              **September 30, 2008**
            
            **Nine Months**
              **Ended**
              **September 30, 2007**
              **Pro forma****(1)**Net
                sales
            
            $
            156,311,308
            
            $
            124,566,758Operating
                income
            
            
            4,034,875
            
            
            12,436,030Net
                (loss)
            
            
            (4,326,844
            )
            
            (51,997,663
            )Less:
                Unpaid dividends on cumulative preferred stock
            
            
            -
            
            
            (8,310,000
            )Net
                (loss) available for EPS
            
            $
            (4,326,844
            )
            $
            (60,307,663
            )Loss
                per share
            
            $
            (0.07
            )
            $
            (2.10
            )Weighted
                average shares outstanding
            
            
            62,487,703
            
            
            28,766,133




**(1)**  The
      retrospective application of the change in accounting principle resulted in
      adjustments to previously reported amounts of $(0.191) million and $(4.737)
      million to net sales and operating income, respectively.




**3.**
            **Summary
                of significant accounting policies**




Cash
      and cash equivalents




The
      Company considers all highly liquid investments with original maturities of
      three months or less to be cash equivalents.




Accounts
      receivable




Accounts
      receivable are carried at original invoice amount less allowances for cash
      discounts and doubtful receivables based on a review of all outstanding amounts.
      Management determines the allowance for doubtful accounts by regularly
      evaluating individual customer receivables and considering a customer’s
      financial condition, credit history and current economic conditions. Accounts
      receivable are written off when deemed uncollectible. Recoveries of receivables
      previously written off are recorded when received. The Company does not charge
      interest on past due receivables.




Inventories




Inventories
      are stated at the lower of cost (first-in, first-out) or market and consist
      primarily of finished goods.




8


Prepaid
      Expenses




For
      interim reporting, the Company estimates certain annual sales incentives and
      marketing costs for most programs and records a pro rata share in proportion
      to
      forecasted annual revenue. The difference between the actual costs incurred
      to
      date and the amount deferred is shown as a prepaid asset. At September 30,
      2008,
      the Company has recorded a net prepaid asset of $5.4 million which will be
      charged to expense over the remaining quarter. Of this amount, approximately
      $2.2 million represents sales incentives with the remaining $3.2 million
      representing marketing costs.




Property
      and equipment




Property
      and equipment are stated at cost and depreciated using the straight-line method
      over the estimated useful lives of the assets ranging from 5 to 10 years.
      Leasehold improvements are amortized using the straight-line method over the
      shorter of the lease term or the estimated useful life of the improvement.
      The
      Company capitalizes software development costs related to its new Enterprise
      Resource Planning (ERP) and Trade Promotion Spend (TPS) management software
      packages. Amortization of these costs will commence when the programs are fully
      ready for their intended use. The ERP software was ready for use in the second
      quarter of 2008. The TPS software is expected to be ready for its intended
      use
      in the first quarter of 2009.




Goodwill




Goodwill
      is tested annually for impairment or more frequently if events or changes in
      circumstances indicate that impairment may have occurred. The impairment
      analysis for goodwill includes a comparison of the Company’s carrying value
      (including goodwill) to the Company’s estimated fair value. If the fair value of
      the Company does not exceed its carrying value, then an additional analysis
      is
      performed to allocate the fair value to all assets and liabilities of the
      Company as if the Company had been acquired in a business combination and the
      fair value was its purchase price. If the excess of the fair value of the
      Company over the fair value of its identifiable assets and liabilities is less
      than the carrying value of recorded goodwill, an impairment charge is recorded
      for the difference. The Company completed its impairment analysis at June 30,
      2008 with estimated fair value greater than the carrying value of recorded
      goodwill. There have been no events subsequent to June 30, 2008 that indicate
      an
      impairment has occurred.




Intangible
      Assets




Other
      intangibles are comprised of both definite and indefinite life intangible
      assets. Indefinite life intangible assets are not amortized but are tested
      annually for impairment, or more frequently if events or changes in
      circumstances indicate that the asset might be impaired. In assessing the
      recoverability of indefinite life intangible assets, the Company must make
      assumptions about the estimated future cash flows and other factors to determine
      the fair value of these assets. The Company completed its impairment analysis
      at
      June 30, 2008 for indefinite life intangible assets with the estimated fair
      value greater than the carrying value of these assets. There have been no events
      subsequent to June 30, 2008 that indicate an impairment has
      occurred.




9


An
      intangible asset is determined to have an indefinite useful life when there
      are
      no legal, regulatory, contractual, competitive, economic or any other factors
      that may limit the period over which the asset is expected to contribute
      directly or indirectly to the future cash flows of the Company. In each
      reporting period, the Company also evaluates the remaining useful life of an
      intangible asset that is not being amortized to determine whether events and
      circumstances continue to support an indefinite useful life. If an intangible
      asset that is not being amortized is determined to have a finite useful life,
      the asset will be amortized prospectively over the estimated remaining useful
      life and accounted for in the same manner as intangible assets subject to
      amortization.




The
      Company has determined that its Smart Balance ® and
      Earth Balance ® trademarks have indefinite lives and these assets are not being amortized.
      Certain other assets acquired, primarily patent technology, have been determined
      to have definite lives ranging from 10 to 20 years and their costs are being
      amortized over their expected lives.




The
      Company generally expenses legal and related costs incurred in defending or
      protecting its intellectual property unless it can be established that such
      costs have added economic value to the business enterprise, in which case the
      Company capitalizes the costs incurred as part of intangible assets. The primary
      consideration in making the determination of whether to capitalize the costs
      is
      whether the Company can prove that it has been successful in defending itself
      against such intellectual property challenges. The second consideration for
      capitalization is whether such costs have, in fact, increased the economic
      value
      of the Company’s intellectual property. Legal defense costs that do not meet the
      considerations described above will be expensed as incurred. Recovery of legal
      expenses as part of a settlement agreement will be recorded as a reduction
      of
      capitalized legal fees with any excess recorded as income. During 2007, the
      Company capitalized approximately $1.2 million of legal defense costs. During
      the nine months ended September 30, 2008, the Company was successful in
      recovering $0.4 million of legal expenses and, therefore, reduced previously
      capitalized costs by that amount.




Deferred
      costs




Deferred
      loan costs associated with the secured debt financing are being amortized over
      the life of debt, using the effective interest method. During the first quarter
      of 2008, the Company prepaid $30 million of second lien debt and, accordingly,
      accelerated the amortization of deferred loan costs in the amount of $0.9
      million. During the third quarter of 2008, the Company prepaid $5 million of
      first lien debt and, accordingly, accelerated the amortization of deferred
      loan
      costs in the amount of $0.2 million.




Revenue
      Recognition




Revenue
      is recognized when the earnings process is complete and the risks and rewards
      of
      ownership have transferred to the customer, which is generally considered to
      have occurred upon the receipt of product by the customer. The earnings process
      is complete once the customer order has been placed and approved and the product
      shipped has been received by the customer. Product is sold to customers on
      credit terms established on an individual basis. The credit factors used include
      historical performance, current economic conditions and the nature and volume
      of
      the product.




10


The
      Company offers its customers and consumers a variety of sales and incentive
      programs, including discounts, allowances, coupons and slotting fees; such
      amounts are estimated and recorded as a reduction in revenue. The Company sells
      their products to customers without the right of return and is not obligated
      to
      accept any returns.




Accounting
      for Warrants – Derivative Liability




*Common
      Stock:*




On
      December 21, 2005, the Company consummated its initial public offering of
      12,760,840 units. Each unit consisted of one share of common stock and one
      redeemable common stock purchase warrant (which we refer to as public warrants).
      Each public warrant entitled the holder to purchase from the Company one share
      of its common stock at an exercise price of $6.00. In addition, certain initial
      shareholders of the Company purchased 1,000,000 warrants for $1.70 per warrant
      with an exercise price of $6.00 per share (which we refer to as founders’
warrants).




Emerging
      Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial
      Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF
      00-19”), requires freestanding contracts that are settled in a company’s own
      stock, including common stock warrants, to be designated as an equity
      instrument, asset or a liability. Under the provisions of Statement of Financial
      Accounting Standard No. 133 (“SFAS No. 133”), “Accounting for
      Derivative Instruments and Hedging Activities,” as amended, a contract
      designated as an asset or a liability must be carried at fair value on a
      company’s balance sheet, with any changes in fair value recorded in the
      company’s results of operations. A contract designated as an equity instrument
      must be included within equity, and no fair value adjustments are required
      from
      period to period. In accordance with EITF 00-19, the 12,760,840 public warrants
      were separately accounted for as liabilities and the 1,000,000 founders’
warrants are accounted for as equity.




SFAS
      No. 133 requires all derivatives to be recorded on the balance sheet at
      fair value. Furthermore, paragraph 11 (a) of SFAS No. 133 precludes
      contracts issued or held by a reporting entity that are both (1) indexed to
      its own stock and (2) classified as stockholders’ equity in its statement
      of financial position from being treated as derivative instruments. While the
      public warrants were indexed to the Company’s common stock, the fact that the
      warrants were required to be settled in registered shares required the Company
      to classify these instruments as a liability in accordance with EITF 00-19
      paragraph 14. This derivative liability was adjusted to fair value, with any
      changes being recorded as non-operating gains or losses.




The
      public warrants began trading separately from the units in January 2006.
      Consequently, the fair value of these warrants was estimated at the market
      price
      of a warrant at each period end. To the extent that the market price increased
      or decreased, the Company’s derivative liabilities also increased or decreased,
      with a corresponding effect on the Company’s consolidated statement of
      operations. The net change in the valuation from December 31, 2006 through
      October 31, 2007, the redemption date, of $45.6 million was recorded as a
      non-operating loss.




11


On
      October 31, 2007, the Company called for redemption all of its outstanding
      public warrants for $.01 per warrant. Under the terms of the warrant agreement,
      the holders of the warrants had thirty days to exercise the warrants once
      called. Each public warrant entitled the holder to purchase one share of common
      stock of the Company at a price of $6.00 per public warrant share exercised.
      The
      public warrants were exercised by early December. The fair value of these
      warrants on the date the redemption was announced was $6.10 per warrant, which
      resulted in a decrease in the derivative liability from September 30, 2007
      of
      $4,976,728 with a corresponding effect on the Company’s consolidated statement
      of operations. The remaining balance of $77,841,121 was reclassified from
      derivative liability to additional paid in capital. The founders’ warrants are
      not redeemable by the Company so long as they are owned by the initial
      stockholders. As of September 30, 2008, all 1,000,000 founders’ warrants
      remained outstanding and unexercised.




*Series
      A Convertible Preferred Stock:*




In
      connection with the acquisition of GFA, the Company entered into a private
      placement transaction for common stock and Series A convertible preferred stock
      together with investor warrants, pursuant to a Securities Purchase Agreement
      dated September 25, 2006, as amended by letter agreement, dated February 15,
      2007. The Agreement included 14,410,188 shares of common stock and 15,388,889
      shares of Series A convertible preferred stock along with an equal number of
      investor warrants. The investor warrants were determined to have a di minimus
      value as the Company had assessed the probability very low that the investor
      warrants would ever be exercisable. The net proceeds of approximately $246
      million were used to fund a portion of the acquisition costs of GFA.




On
      January 3, 2008, the Company announced that it was forcing the conversion of
      all
      of its issued and outstanding shares of Series A convertible preferred stock
      into common stock. Each share of Series A convertible preferred stock was
      automatically converted into approximately 1.268 shares of common stock and
      all
      of the issued and outstanding shares of Series A convertible preferred stock
      ceased to exist. As a result of this conversion, the investor warrants will
      never be exercisable.




The
      Company exercised its right to force the conversion of the shares of Series
      A
      convertible preferred stock into common stock pursuant to the terms of the
      Company’s Restated Certificate of Incorporation, governing the terms of the
      preferred shares. Pursuant to the Restated Certificate of Incorporation, the
      Company had the right to force the conversion of all of the outstanding shares
      of Series A convertible preferred stock if: (i) the last sales price of the
      Company’s common stock equaled or exceeded $11.50 per share on each of 20
      trading days within any 30 day trading period ending on the third business
      day
      prior to the date on which notice of conversion is given and (ii) the Company
      had elected to redeem all of the outstanding public warrants pursuant to the
      public warrant agreement. The last sales price of the Company’s common stock was
      at least $11.50 per share on each of 20 trading days within the 30 day trading
      period ending on December 28, 2007 (which is the third business day prior to
      the
      date of the notice letter). The Company redeemed all of its outstanding public
      warrants on December 3, 2007.




12


Loss
      per Share of Common Stock




Basic
      earnings (loss) per share is computed by dividing net income or loss applicable
      to common stockholders by the weighted-average shares of common stock
      outstanding for the period. Diluted earnings (loss) per share is computed by
      dividing net income (loss) by the weighted-average shares outstanding adjusted
      for any additional common shares that would have been outstanding if all of
      the
      potential dilutive common shares had been issued. Potential dilutive common
      shares outstanding would include primarily stock options and founders’ warrants.
      The following table summarizes stock options not included in the computation
      of
      diluted EPS:




**Three Months**
              **Ended**
              **September 30,**
            
            **Nine Months**
              **Ended**
              **September 30,****2008****(1)**
            
            **2007****(1)**
            
            **2008****(1)**
            
            **2007****(1)**Excluded
                due to option price being greater than market value
            
            
            11,510,000
            
            
            855,000
            
            
            10,957,500
            
            
            855,000Excluded
                due to anti-dilution
            
            
            32,500
            
            
            7,632,500
            
            
            585,000
            
            
            7,632,500





**(1)**  None
      of
      the 1,000,000 outstanding founders’ warrants were included because their
      inclusion would have been anti-dilutive.




Segments




SFAS
      131,
“Disclosures about Segments of an Enterprise and Related Information” requires
      segment information to be prepared using the “management” approach. The
      management approach is based on the method that management organizes the
      segments within the Company for making operating decisions and assessing
      performance. The Company evaluates all products, makes operating decisions
      and
      performance assessments based on a total company approach and therefore
      considers itself as having only one segment.




Fair
      Value of Financial Instruments




The
      Company’s financial instruments consist of cash and cash equivalents, short term
      trade receivables, payables and note payables. The carrying values of cash
      and
      cash equivalents and short term receivables and payables approximate fair value
      because of their short maturities. The Company’s note payable is determined by
      quoted market prices that are reset every three months and, therefore,
      approximates fair value.




Research
      and Development **




Research
      and development expenses are charged to operations when incurred and amounted
      to
      $70,625 for the three months September 30, 2008 and $162,913  for
      the
      nine months ended September 30, 2008. Research and development expenses amounted
      to $41,399 for the three months ended September 30, 2007 and, on a pro forma
      basis, $78,677 for the nine months ended September 30, 2007.




13


Derivative
      Instruments




The
      Company recognizes derivatives as either assets or liabilities and measures
      those instruments at fair value. The accounting for changes in fair value is
      included in earnings when the hedged exposure affects earnings. The Company
      uses
      interest rate swaps to cover exposure to changes in interest rates.




At
      September 30, 2008, the Company used the income approach to determine the fair
      value of the interest rate swap utilizing the present value techniques and
      recorded $2,582,524 as a non-current liability with an offset to interest
      expense. The fair value measurement used to determine this amount was based
      on
      SFAS 157, “Fair Value Measurements”, which requires a three-tier fair value
      hierarchy that prioritizes inputs to measure fair value. These tiers include:
      Level 1, defined as inputs, such as unadjusted quoted prices in an active market
      for identical assets or liabilities; Level 2, defined as inputs other than
      quoted market prices in active markets that are either directly or indirectly
      observable; or Level 3, defined as unobservable inputs for use when little
      or no
      market value exists therefore requiring an entity to develop its own
      assumptions. The Company used Level 2 inputs to measure fair value at September
      30, 2008.




Income
      Taxes




Deferred
      income taxes are provided for the differences between the basis of assets and
      liabilities for financial reporting and income tax purposes. A valuation
      allowance is established when necessary to reduce deferred tax assets to the
      amount expected to be realized. As of September 30, 2008, no valuation
      allowances were recorded. For the three months and nine months ended September
      30, 2007, the effective tax rate was higher than the statutory tax rate
      primarily due to the effect of the change in derivative liabilities since such
      losses are not deductible for income tax purposes.




Advertising




Advertising
      costs are charged to operations (classified as marketing expenses) and amounted
      to $5,794,676 and $15,433,356 for the three months and nine months ended
      September 30, 2008, respectively. Advertising costs for the three months and,
      on
      a pro forma basis, nine months ended September 30, 2007 amounted to $5,137,514
      and $15,585,319, respectively.




Use
      of
      Estimates




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States 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 the reported amounts of revenue and expenses during the reporting
      period. Actual results could differ from those estimates.


14


Concentration
      of Credit Risk




Financial
      instruments which potentially subject the Company to concentrations of credit
      risk consist principally of cash, cash equivalents, short term investments
      and
      trade receivables. The Company maintains the majority of its cash and cash
      equivalents in the form of demand deposits with financial institutions that
      management believes are creditworthy. At September 30, 2008, the cash balances
      in these institutions exceeded federally insured amounts. Concentrations of
      credit risk relative to trade receivables are limited due to our diverse client
      base. The Company does have one customer that accounted for approximately 19%
      of
      sales during the three and nine months ended September 30, 2008. The aggregate
      accounts receivable from this customer amounted to approximately 14% of the
      accounts receivable balance outstanding at September 30, 2008. The Company
      also
      has one product, “spreads,” which, accounted for approximately 69% of total
      revenue during the three and nine months ended September 30, 2008. Approximately 71 %
      of the
      Company’s revenues during the first nine months of 2008 came from products
      utilizing a license from Brandeis University.




Recently
      Issued Accounting Pronouncements




In
      March
      2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards (“SFAS”) No. 161, “Disclosure about Derivative
      Instruments and Hedging Activities,” an amendment of FASB No. 133, “Accounting
      for Derivative Instruments and Hedging Activities.” SFAS No. 161 requires
      increased qualitative, quantitative and credit risk disclosures, but does not
      change the scope or accounting requirements of FASB No. 133. SFAS No. 161 is
      effective for financial statements issued after November 15, 2008. The Company
      is evaluating the potential impact, if any, of the adoption of SFAS No. 161
      on
      the Company’s financial statements.




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS 141R”), which replaces FASB Statement No. 141. SFAS 141R
      establishes principles and requirements for how an acquirer recognizes and
      measures in its financial statements the identifiable assets acquired, the
      liabilities assumed, any non controlling interest in the acquiree and the
      goodwill acquired, and establishes that acquisition costs will be generally
      expensed as incurred. This statement also establishes disclosure requirements
      which will enable users to evaluate the nature and financial effects of the
      business combination. SFAS 141R is effective as of the beginning of an entity’s
      fiscal year that begins after December 15, 2008. The adoption of SFAS 141R
      will
      not have an impact on the Company’s financial statements.




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statement—amendments of ARB No. 51.” SFAS No. 160 states
      that accounting and reporting for minority interests will be recharacterized
      as
      noncontrolling interests and classified as a component of equity. The SFAS
      No.
      160 also establishes reporting requirements that 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 as
      of
      the beginning of an entity’s first fiscal year beginning after December 15,
      2008. The adoption of SFAS No. 160 will not have an impact on the Company’s
      financial statements.


15


In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment of FASB Statement No. 115.* ”
SFAS
      No. 159 provides for an election to expand the use of fair value accounting
      but
      does not affect existing standards which require assets or liabilities to be
      carried at fair value. Under SFAS No. 159, a company may elect to use fair
      value
      to measure accounts and loans receivable, available-for-sale and
      held-to-maturity securities, equity method investments, accounts payable,
      guarantees and issued debt. Other eligible items include firm commitments for
      financial instruments that otherwise would not be recognized at inception and
      non-cash warranty obligations where a warrantor is permitted to pay a third
      party to provide the warranty goods or services. If the use of fair value is
      elected, any upfront costs and fees related to the item must be recognized
      in
      earnings and cannot be deferred, e.g., debt issue costs. The fair value election
      is irrevocable and generally made on an instrument-by-instrument basis, even
      if
      a company has similar instruments that it elects not to measure based on fair
      value. At the adoption date, unrealized gains and losses on existing items
      for
      which fair value has been elected are reported as a cumulative adjustment to
      beginning retained earnings. Subsequent to the adoption of SFAS No. 159, changes
      in fair value are recognized in earnings. SFAS No. 159 is effective for fiscal
      years beginning after November 15, 2007. The Company has elected to adopt
      SFAS No. 159 on an instrument-by-instrument basis effective January 1, 2008.
      The
      Company had no assets or liabilities it was treating under the fair value basis
      at the adoption date and does not currently have any assets accounted for under
      the provisions of SFAS No. 159.




**4.**
            **Property
                and equipment**




Property
      and equipment consist of the following:




**September 30,**
              **2008**
            
            **December 31,**
              **2007**Software
                development costs
            
            $
            2,844,293
            
            
            701,249Equipment
            
            
            333,156
            
            $
            227,474Furniture
                and fixtures
            
            
            828,198
            
            
            653,932Leasehold
                improvements
            
            
            331,072
            
            
            270,245Gross
                assets
            
            
            4,336,719
            
            
            1,852,900Less:
                accumulated depreciation
            
            
            (322,962
            )
            
            (47,569
            )Property
                and equipment, net
            
            $
            4,013,757
            
            $
            1,805,331




Depreciation
      expense was $275,393 for the nine months ended September 30, 2008 and $47,569
      for the year ended December 31, 2007.




**5.**
            **Accounts
                payable and accrued
                expenses**




Accounts
      payable and accrued expenses consist of the following:




**September 30,**
              **2008**
            
            **December 31,**
              **2007**Accounts
                payable
            
            $
            14,542,004
            
            $
            17,866,526Accrued
                expenses
            
            
            7,008,169
            
            
            2,488,893Total
            
            $
            21,550,173
            
            $
            20,355,419




16




**6.**
            **Major
                customer**




The
      Company has one customer that accounted for approximately 19% of sales during
      the three and nine months ended September 30, 2008. The aggregate accounts
      receivable from this customer amounted to approximately 14% of the total
      accounts receivable at September 30, 2008.




**7.**
            **Intangible
                assets**




The
      following is a summary of intangible assets and goodwill as of December 31,
      2007 and September 30, 2008:




**Net Balance,**
              **December 31,**
              **2007**
            
            **Amortization**
            
            **Adjustments**
            
            **Net Balance,**
              **September 30,**
              **2008**Patent
                technology
            
            $
            37,534,247
            
            $
            (3,000,000
            )
            $
            -
            
            $
            34,534,247Supply
                relationship
            
            
            958,904
            
            
            (55,173
            )
            
            -
            
            
            903,731Trademarks
            
            
            121,152,483
            
            
            -
            
            
            (350,552
            )
            
            120,801,931Goodwill
            
            
            374,885,923
            
            
            -
            
            
            -
            
            
            374,885,923$
            534,531,557
            
            $
            (3,055,173
            )
            $
            (350,552
            )
            $
            531,125,832




Adjustments
      to trademarks relate to a legal settlement received of $367,215 and serve to
      reduce related costs previously capitalized. Additional spending of $16,663
      during the period accounted for the difference.





**8.**
            **Long
                term debt**




In
      conjunction with the GFA merger, on May 21, 2007, the Company entered into
      a
      loan arrangement with Banc of America Securities LLC and Bank of America, N.A.
      for $180 million in secured debt financing consisting of: (1) a $140
      million first lien facility comprised of a $120 million term loan and a
      $20 million revolver and (2) a second lien facility comprised of a
      $40 million term loan. The first lien facility is secured by a first lien
      on all of the Company’s assets and the second lien facility is secured by a
      second lien on all of the Company’s assets.




Through
      September 30, 2007, the Company paid $600,000 in principal on its first lien
      term loan. In the fourth quarter of 2007, the Company used $39.9 million of
      $76.5 million received from the exercise of public warrants to prepay the next
      eight quarterly principal payment requirements of $300,000 and applied the
      balance against principal on the first lien term loan. On March 5, 2008, the
      Company prepaid $30.0 million of its second lien facility, reducing the
      principal amount to $10.0 million. As a result of the prepayment, the Company
      wrote off approximately $866,000 of deferred financing costs, which is included
      in other income, net for the nine months ended September 30, 2008. On September
      29, 2008, the Company prepaid $5.0 million of its first lien facility, reducing
      the principal to $74.5 million. As a result of the prepayment, the Company
      wrote
      off approximately $150,000 of deferred financing costs, which is included in
      other income, net for the three and nine months ended September 30, 2008.




17


The
      term
      loan of the first lien facility will mature on May 21, 2014 and the revolving
      loan under the first lien facility will mature on May 21, 2013. The term loan
      of
      the second lien facility will mature on November 18, 2014.




At
      our
      option, the interest rate on the first lien facility is LIBOR plus 3.25% per
      annum or the higher of (i) the Bank of America prime rate or (ii) the
      federal funds rate plus 0.50%, in either case plus an applicable margin. The
      applicable margin on the first and second lien facilities is determined in
      accordance with a pricing grid based on the Company’s leverage ratio. The
      Company opted to elect conversion of the first lien facility to an interest
      rate
      based on LIBOR plus an applicable margin of 3.25% per annum beginning July
      1,
      2007. In accordance with a pricing grid based on the Company's leverage ratio,
      the applicable margin was reduced to 3.00% per annum beginning March 28,
      2008, which resulted in an interest rate of 6.76% at September 30, 2008. At
      the
      Company’s option, the interest rate on the second lien facility is LIBOR plus an
      applicable margin of 6.00% per annum or the higher of (i) the Bank of
      America prime rate or (ii) the federal funds rate plus 0.50%, in either
      case plus a margin of 5.00% per annum. The Company opted to elect
      conversion of a second lien facility to an interest rate based on LIBOR plus
      an
      applicable margin of 6.00% per annum, beginning July 1, 2007, which
      resulted in an interest rate at September 30, 2008 of 9.76%.




There
      is
      no prepayment penalty for optional prepayments of the first lien facility and
      the following penalties for optional prepayments on the second lien facility:
      2.00% premium if prepaid the first year; 1.00% premium if prepaid the second
      year; and no prepayment penalty thereafter. As a result of prepaying $30.0
      million of the second lien facility the Company paid a $0.6 million prepayment
      penalty, which is included in interest expense for the nine months ended
      September 30, 2008. Mandatory prepayments under both facilities include 50%
      of
      excess cash flow (as defined in the loan documentation) and 50% of all net
      cash
      proceeds from the issuance of additional equity interests by us. In addition,
      the term loan of the first lien facility is subject to quarterly amortization
      of
      principal with 1.00% of the initial aggregate advances under such loan to be
      payable in each of the first six years and the remainder of the initial
      aggregate advance to be payable in a balloon payment at maturity.




The
      first
      and second lien credit facilities can be accelerated upon the occurrence of
      certain events, including:




·
            nonpayment
                of debt including interest and
                fees;




·
            failure
                to perform or observe covenants;




·
            cross
                defaults to other indebtedness exceeding $5.0
                million;




·
            bankruptcy
                and insolvency; and




·
            certain
                other events.




The
      first
      lien credit facility requires that the Company:




·
            maintain
                a ratio of consolidated EBITDA to consolidated cash interest charges
                of at
                least 2.00 to 1 increasing to 3.00 to 1 beginning December 31, 2008;




18




·
            a
                leverage ratio for all Company’s debt which restricts the Company from
                allowing its total debt to be greater than 4.5 times its consolidated
                EBITDA, stepping down to 3.25 at December 31, 2008 and eventually
                stepping
                down to 2.25 to 1 over the remaining term of the facility; and




·
            a
                leverage ratio which restricts the Company from allowing its consolidated
                first lien credit facility indebtedness to be greater than 3.25 times
                its
                consolidated EBITDA, stepping down to 2.25 to 1 at December 31, 2008
                and
                eventually stepping down to 1.25 to 1 over the remaining term of
                the
                facility.




The
      second lien credit facility contains one financial covenant consisting of a
      leverage ratio for all debt which restricts the Company from allowing its total
      debt to be greater than 5.0 times its consolidated EBITDA, stepping down at
      December 31, 2009 to 2.75 to 1 over the remaining term of the facility. The
      Company was in compliance with all of its debt covenants at September 30,
      2008.




Under
      the
      terms of the lien credit facilities, the Company is precluded from reacquiring
      its own shares.




Long
      term
      debt is as follows:




**September 30,**
              **2008**
            
            **December 31,**
              **2007**First
                lien term loan
            
            $
            74,504,174
            
            $
            79,504,174Second
                lien term loan
            
            
            10,000,000
            
            
            40,000,000Total
                Debt:
            
            
            84,504,174
            
            
            119,504,174Less:
                Current maturities
            
            
            -
            
            
            -Total
                long term debt
            
            $
            84,504,174
            
            $
            119,504,174





**9.**
            **Stock-based
                compensation**




On
      October 19, 2006, the compensation committee of the board of directors
      unanimously approved the Company’s Stock and Awards Plan, which we refer to as
      the stock plan, and directed it be submitted to the stockholders for approval.
      During a special stockholders meeting on May 17, 2007, the stock plan was
      approved, pursuant to which the Company reserved up to 9,650,000 shares of
      common stock for issuance to its officers, directors, employees and consultants
      and on May 21, 2008, the Company, after a shareholder vote, amended the stock
      plan to increase the number of shares available for award to a total of
      12,150,000.  During 2007, the Company granted options to purchase
      8,797,500 shares of stock under the stock plan. During the nine months ended
      September 30, 2008, the Company granted options to purchase 1,660,000 shares
      of
      stock under the stock plan.




During
      the first quarter of 2008, the compensation committee and a sub-committee of
      the
      compensation committee approved the issuance of up to 1,375,000 inducement
      stock
      options grants to new employees outside of the Company’s stock plan pursuant to
      NASDAQ Marketplace Rule 4350. During the nine months ended September 30, 2008,
      the Company issued 1,375,000 inducement grant stock options to new
      employees.




19


The
      Company has two types of stock options, traditional service-based options with
      a
      four year graded (25% vest each year) vesting and market condition-based stock
      options which vest when the underlying stock prices reaches either $16.75 or
      $20.25, respectively, and remains there for 20 out of 30 consecutive trading
      days. Stock options are granted to recipients at exercise prices equal to the
      fair market value of the Company's stock at the dates of grant and can consist
      solely of the service-based options or market conditions-based options or a
      can
      consist of a combination of both types of options. Stock options granted to
      employees have a term of 10 years. The Company recognizes stock-based
      compensation expense over the requisite service period of the individual grants,
      which generally equals the vesting period, or as determined by the Monte Carlo
      valuation model.




**Number of**
              **Outstanding**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise Price**
            
            **Weighted**
              **Average**
              **Remaining Life**
              **(Years)**Balance
                at December 31, 2007
            
            
            8,797,500
            
            $
            9.88
            
            
            7.79Granted
            
            
            3,035,000
            
            
            8.68
            
            
            7.78Forfeited
            
            
            (290,000
            )
            
            9.97
            
            
            6.87Exercised
            
            
            -
            
            
            -
            
            
            -Balance
                at September 30, 2008
            
            
            11,542,500
            
            $
            9.58
            
            
            7.24





The
      Company accounts for its stock-based compensation awards under SFAS No. 123R, *Share-Based
      Payment* , ** which
      requires companies to recognize compensation expense for all equity-based
      compensation awards issued to employees that are expected to vest. Compensation
      cost is based on the fair value of awards as of the grant date.




Pre-tax
      stock-based compensation expense included in reported net loss is as
      follows:




**Three Months Ended**
              **September 30, 2008**
            
            **Nine Months Ended**
              **September 30, 2008**Service
                period-based
            
            $
            1,736,384
            
            $
            4,997,374Market
                price-based $16.75
            
            
            1,143,330
            
            
            3,404,755Market
                price-based $20.25
            
            
            848,428
            
            
            2,523,390Total
            
            $
            3,728,142
            
            $
            10,925,519




For
      the
      traditional service-based stock options, the Company estimated the fair value,
      as of the date of grant, using a lattice option pricing model with the following
      assumptions: risk-free interest rate of 4.10%-4.67%, expected life 7 years
      for
      the service-based options and 10 years for the market price-based options,
      no
      dividends and volatility of 35.9%-36.9%. The cost of the service-based stock
      options is being amortized over a four year estimated vesting period. No
      forfeitures were assumed for any of the options. In the case of the market
      price-based stock options, the Company used the Monte Carlo valuation model
      and
      the same assumptions noted above. The Company recognizes compensation expense
      for the market price-based options over the estimated vesting period, which
      has
      been determined to be 2.75-3.37 years and 3.68-4.20 years for the $16.75 and
      $20.25 awards, respectively.




20


**10.**
            **Liquidity
                and capital resources**




The
      Company’s current cash position at September 30, 2008 was $7,384,472. At
      September 30, 2008, the Company had outstanding payables, accrued expenses
      and
      liabilities of $24,866,350. The Company’s short term liabilities exceed its
      available cash position by $17,501,878. As noted in footnote 8, the Company
      has
      a revolving credit facility of $20 million, which it can use to augment cash
      requirements.




**11.**
            **Interest
                rate derivatives**




In
      conjunction with the fixed-rate debt arrangements noted above, the Company
      entered into notional $80,000,000 of interest rate swaps on August 16, 2007,
      which are designed to provide a constant interest rate on the variable rate
      debt. Under these swaps, the Company receives or pays the difference between
      its
      fixed-rate interest payments and floating-rate payments based on LIBOR. The
      effect of this is to convert floating-rate interest expense based on LIBOR
      into
      fixed-rate interest expense. The arrangements settle on the last day of each
      calendar quarter. For the quarter ended September 30, 2008, the Company paid
      5.05% and received 2.80% with the difference increasing interest expense by
      $459,871.




**12.**
            **License**




A
      substantial portion of the Company’s business is dependent on its exclusive
      license of certain technology from Brandeis University. This license agreement,
      dated June 1996, imposes certain obligations upon the Company, such as
      diligently pursuing the development of commercial products under the license
      products. The agreement expires at the end of each patent period of seventeen
      years after the agreement execution date for products which do not have patents
      and contains no minimum commitments. The amount of royalties due is based on
      a
      formula of the percentage of oil and/or fat utilized in the licensed products.
      Should Brandeis believe that the Company has failed to meet its obligations
      under the license agreement, Brandeis could seek to limit or terminate the
      Company’s license rights. Royalties earned by Brandeis for the quarterly period
      ended September 30, 2008 were $202,950 and $609,635 for the nine month period
      ended September 30, 2008.




**13.**
            **Income
                taxes**




The
      Company’s effective tax rate for the year is dependent on many factors,
      including the impact of enacted tax laws in jurisdictions in which it operates
      and the amount of taxable income it earns. The Company’s effective tax rate for
      2008 is expected to be 39%. The deferred tax liability represents primarily
      the
      difference between the tax and accounting basis of intangible assets acquired
      in
      the GFA merger.




The
      Company is currently being audited for the 2007 tax year.




**14.**
            **Commitment
                and contingencies**




As
      of
      September 30, 2008, the Company had the following commitments and contractual
      obligations:




21


·
            A
                lease agreement for the lease of a corporate office facility located
                in
                Paramus, NJ. The lease has an approximate seven-year life with the
                option
                to extend the lease for two additional five-year terms. The annual
                rental
                expense is approximately $468,000 for the first seven
                years.




·
            Three
                lease agreements for the lease of a corporate office facility located
                in
                Niwot, Colorado. The leases have an approximate five-year life with
                the
                option to extend each lease for 36 months. The annual rental expense
                is
                approximately $120,000 for the first five
                years.




·
            Forward
                purchase commitments for a portion of the Company's projected requirement
                for peanuts and for palm, soy and canola oil. These commitments may
                be
                stated at a firm price, or as a discount or premium from a future
                commodity market price. Based on the most recent prices the Company
                realized, these commitments would total approximately $29.5 million
                as of
                September 30, 2008. The commitments are expected to be liquidated
                by June
                2009.




·
            The
                Company uses interest rate swaps to cover exposure to changes in
                interest
                rates on its secured debt financing; the notional $80 million of
                interest
                rate swaps were outstanding as of September 30, 2008.




The
      Company is party to various legal proceedings arising in the ordinary course
      of
      business. Management believes that the resolution of these matters will not
      have
      a material adverse affect on the Company’s financial position, results of
      operations or cash flow.




**15.**
            **Stockholders’
                equity**




*Private
      Placement*




In
      connection with the GFA merger, the Company entered into a private placement
      transaction for common stock and Series A convertible preferred stock together
      with investor warrants, pursuant to a Securities Purchase Agreement dated,
      September 25, 2006, as amended by letter agreement, dated February 15, 2007.
      The
      Agreement included 14,410,188 of shares of common stock and 15,388,889 of Series
      A convertible preferred stock along with related investor warrants. The net
      proceeds of approximately $246 million received by the Company were used to
      fund
      a portion of the GFA merger acquisition costs.




*Series
      A Convertible Preferred Stock*




On
      January 3, 2008, the Company announced that it was forcing the conversion of
      all
      of its issued and outstanding shares of Series A convertible preferred stock
      into common stock. Each share of Series A convertible preferred stock was
      automatically converted into 1.268 shares of common stock and all of the issued
      and outstanding shares of Series A convertible preferred ceased to exist.


22




The
      Company exercised its right to force the conversion of the shares of Series
      A
      convertible preferred stock into common stock pursuant to the terms of the
      Company’s Restated Certificate of Incorporation, governing the terms of the
      preferred shares. Pursuant to the Restated Certificate of Incorporation, the
      Company had the right to force the conversion of all of the outstanding shares
      of Series A convertible preferred stock if: (i) the last sales price of the
      Company’s common stock equaled or exceeded $11.50 per share on each of 20
      trading days within any 30 day trading period ending on the third business
      day
      prior to the date on which notice of conversion is given and (ii) the
      Company had elected to redeem all of the outstanding public warrants pursuant
      to
      the public warrant agreement. The last sales price of the Company’s common stock
      was at least $11.50 per share on each of 20 trading days within the 30 day
      trading period ending on December 28, 2007 (which is the third business day
      prior to the date of the notice letter) and, on December 3, 2007, the
      Company redeemed all of its outstanding public warrants.




*Common
      Stock in Escrow*




All
      of
      the shares of the Company’s common stock outstanding prior to December 16,
      2005, the date of its initial public offering, were placed in escrow, as
      required by the Company’s IPO underwriters, with Continental Stock Transfer
& Trust Company, as escrow agent. The shares, when purchased in June 2005 by
      the Company’s officers, directors and related parties, were freely transferable
      and not subject to a substantial risk of forfeiture. The shares were only to
      be
      released from escrow on December 16, 2008 in the event that the Company was
      able
      to complete an initial business combination, but one-half of the escrowed shares
      could be released after an initial business combination if the Company’s stock
      closed at $11.50 or above for a specified period of time. Of the 3,190,210
      shares initially held in escrow, 1,595,105 were released on October 11, 2007
      because the last sales price of the Company’s common stock was at least $11.50
      per share for 20 out of 30 trading days. The Company recorded a charge to
      earnings in the fourth quarter of 2007 of $18,455,815 (excluding amounts
      previously expensed), as all of the shares were held by officers, directors
      and
      related parties. The charges were based on the price of common stock of $12.31
      on the date the above conditions were met. The remaining 1,595,105 shares in
      escrow are subject to release on December 16, 2008. As these shares are not
      performance based, no charge to earnings will be required to be made upon their
      release.




*Redemption
      of Public Warrants*




In
      December 2007, the Company received approximately $76.5 million from the
      exercise of its public warrants. The Company paid down approximately $40.0
      million of its first lien debt, as it was required to use one-half of the
      proceeds of the public warrant redemption to pay off a portion of its term
      loan.
      In March 2008, the Company paid an additional $30.0 million of its second lien
      debt with the funds received from the exercise of public
      warrants.


23


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




**Forward
      Looking Statements**




Certain
      information included in this “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations,” contains forward-looking statements made
      in reliance upon the safe harbor provisions of Section 27A of the
      Securities Act of 1933, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended. These statements may be identified by the
      use
      of words, such as “anticipate,” “estimates,” “should,” “expect,” “guidance,”
“project,” “intend,” “plan,” “believe” and other words and terms of similar
      meaning, in connection with any discussion of our future business, results
      of
      operations, liquidity and operating or financial performance. Such
      forward-looking statements involve significant material known and unknown risks,
      uncertainties and other factors which may cause the actual results, performance
      or achievements to be materially different from any future results, performance
      or achievements expressed or implied by such forward-looking statements. These
      risks should be considered in connection with any written or oral
      forward-looking statement that we or any person acting on our behalf may issue
      in this document or otherwise, now or in the future. Further, certain
      information contained in this document is a reflection of our intention as
      of
      the date of this filing and is based upon, among other things, the existing
      regulatory environment, industry conditions, market conditions and prices,
      the
      economy in general and our assumptions as of such date. We may change our
      intentions based upon any changes in such factors, in our assumptions or
      otherwise.




We
      undertake no obligation to publicly update or revise any forward-looking
      statement, whether as a result of new information, future events or otherwise.
      We cannot assure you that any future results, performance or achievements will
      be achieved. For a discussion of these risks, uncertainties and other factors,
      see the “Risk Factors” and “Cautionary Note Regarding Forward-Looking
      Statements” sections included in our annual report on Form 10-K for the year
      ended December 31, 2007.




**GFA
      Merger**




We
      were
      incorporated in Delaware on May 31, 2005 under the name Boulder Specialty
      Brands, Inc. On May 21, 2007, we completed a merger with GFA Brands, Inc.
      (“GFA”), which owns and markets the Smart Balance ® line of
      products, among others. GFA is our wholly-owned subsidiary. After the merger,
      the corporate name was changed from Boulder Specialty Brands, Inc. to Smart
      Balance, Inc. (“Smart Balance” or the “Company”). Pursuant to the merger
      agreement with GFA, we paid an aggregate of $491 million in cash (which included
      post-closing bonus payments net of tax benefits) as merger consideration. The
      cash consideration for the merger was funded with cash held in the trust account
      established in connection with our initial public offering, the proceeds of
      a
      private placement and a secured debt financing.




Prior
      to
      the merger, the Company was a blank check company with no operations, formed
      as
      a vehicle for an acquisition of an operating business in the consumer food
      and
      beverage industry whose net assets constituted at least 80% of our net assets.
      The following information is provided about us, our business and securities,
      reflecting the consummation of the GFA merger.


24




**Company
      Overview**




We
      are a
      consumer food products company that competes primarily in the retail branded
      food products industry and focuses on providing value-added, functional food
      products to consumers. Functional food is defined as a food or a food ingredient
      that has been shown to affect specific functions or systems in the body and
      may
      play an important role in disease prevention. We market buttery spreads,
      popcorn, peanut butter, cooking oil, mayonnaise and other products primarily
      under the Smart Balance ® trademark. In the natural food channel, we sell similar natural and organic
      spreads products under the Earth Balance ® trademark. Our trademarks are of material importance to our business and are
      protected by registration or other means in the United States and a number
      of
      international markets. Our buttery spreads business, marketed under Smart
      Balance ® ,
      Earth
      Balance ® ,
      Smart
      Beat ® and
      Nucoa ® ,
      is by
      far the most developed product segment and accounted for approximately 69%
      of
      sales during the three and nine months ended September 30, 2008,
      respectively.




Our
      products are sold in all 50 states, with little international sales presence.
      We
      sell our products in mass merchandise, grocery, natural food and club stores
      throughout the U.S, with a majority of products sold through supermarket chains
      and food wholesalers. We utilize regional sales managers who are full-time
      employees and work with food brokers to sell our products. In September 2007,
      we
      entered into an agreement with Acosta, Inc. to become our national sales agency.
      Additionally, we sell a small portion of our products through independent food
      distributors. Our largest customer, Wal-Mart Stores, Inc. and its affiliates,
      accounted for approximately 19% of consolidated net sales during the three
      and
      nine months ended September 30, 2008, respectively.




Our
      signature buttery spreads and popcorn products utilize a proprietary licensed,
      patented technology that is free of trans fats and enhances good-to-bad
      cholesterol ratios. In 1996, Brandeis University licensed to GFA certain
      technology relating to the use of a balanced proportion of saturated and
      polyunsaturated fatty acids from one or more vegetable oil sources for
      incorporation in food products to increase HDL and HDL/LDL cholesterol ratio.
      Our agreement with Brandeis provides us with an exclusive license to a number
      of
      patents until April 7, 2015, at which time the patents will expire. In addition,
      we have proprietary trade secrets, technology, know-how processes and other
      intellectual property rights that are not registered.




Our
      primary growth strategy is to continue to drive consumer and trade awareness
      of
      our brands, increase distribution of our existing products, and continue to
      launch additional line extensions and new products. We actively advertise via
      network and cable TV, radio, coupons, and in-store promotions. We have also
      benefited from favorable trends in the food industry regarding the required
      labeling of trans fats levels in food products and increased consumer awareness
      of the negative health implications of trans fats in foods.




We
      outsource finished goods through third-party manufacturers. We do not own or
      operate any manufacturing facilities. Outsourcing is designed to allow us to
      enhance production flexibility and capacity, leverage working capital, and
      focus
      our energy and resources on marketing and sales, while substantially reducing
      capital expenditures and avoiding the complication of managing a production
      work
      force. Our buttery spreads are produced by two manufacturers with multiple
      locations. Most of our other products are each supplied by a separate sole
      source. In the event of an interruption in supply, we believe we could arrange
      for additional suppliers to provide the affected products. While we believe
      our
      manufacturers have the capacity to fulfill our current production needs and
      are
      willing to increase capacity as we grow, we will monitor capacity, service
      and
      costs and will qualify alternative sources of supply as needed.


25




Our
      manufacturers supply our products at a price equal to the cost of ingredients
      and certain packaging plus a fixed toll charge. Except in unusual circumstances,
      we provide no raw materials to our manufacturers. However, we work with our
      manufacturers to source high quality ingredients at attractive pricing. The
      prices paid for raw materials used in our products generally reflect factors
      such as weather, commodity market fluctuations, currency fluctuations, tariffs,
      and the effects of governmental agricultural programs. Although the prices
      of
      raw materials can be expected to fluctuate as a result of these factors, we
      believe such raw materials to be in adequate supply and generally available
      from
      numerous sources. We also negotiate certain commodities and packaging costs
      directly with the suppliers. Manufacturers are required by contract to announce
      changes in ingredient prices in advance. Toll charges cannot be unilaterally
      increased by the manufacturers, however, some manufacturers are able to increase
      toll charges after giving us notice of the increase at least six months in
      advance. We bear all freight costs associated with shipping finished products.




We
      use
      third party distributors and a network of public warehouses to deliver product
      from our manufacturers to our customers. We rely primarily on two third party
      distributors to deliver all of our spreads and other refrigerated products.
      All
      freight costs associated with shipping finished products are borne by us.




The
      food
      industry is highly competitive and numerous multinational, regional and local
      firms currently compete, or are capable of competing, with us. Our products
      compete with branded products as well as generic and private-label products
      of
      food retailers, wholesalers and cooperatives. We compete primarily on the basis
      of product quality, brand recognition, brand loyalty, service, marketing,
      advertising, patent protections and price. Some competitors may have different
      profit or strategic objectives than we do. Substantial advertising and
      promotional expenditures are required to maintain or improve a brand’s market
      position or to introduce a new product. Our largest principal competitors are
      Unilever, Kraft Foods, and ConAgra Foods, each of whom have substantially
      greater market presence, longer operating histories, better distribution, more
      significant customer bases and greater financial, marketing, capital and other
      resources than us.




**Results
      of Operations**




The
      following discussion includes the operating results of GFA, the Company’s
      wholly-owned subsidiary. Prior to the completion of the merger, we were a blank
      check company with no operations. Accordingly, the results of operations for
      the
      nine month periods ended September 30, 2008 and 2007 do not provide a meaningful
      comparison as the merger occurred on May 21, 2007. The information for the
      three
      month periods ended September 30, 2008 and 2007 compares the operations of
      Smart
      Balance after the GFA merger. Information for the three months and nine months
      ended September 30, 2008 includes the operations of GFA. Information for the
      nine months ended September 30, 2007 relates mostly to the Company as a blank
      check company that had no operations until it acquired GFA on May 21,
      2007.


26




The
      following discussion should be read in conjunction with our unaudited
      consolidated financial statements and related notes thereto included elsewhere
      in this Form 10-Q. Also, the reported results for the period from May 21, 2007
      have been adjusted to give effect to a change in accounting principle. For
      more
      information on the change in accounting principle, see note 1 to the financial
      statements included elsewhere in this quarterly report.




*Results
      of Operations for the Three Months and Nine Months Ended September 30, 2008
      Compared to the Three Months and Nine Months Ended September 30, 2007*




(in millions except per share)
            
            **Three Months Ended**
              **September 30,**
            
            **Nine Months Ended**
              **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                Sales
            
            $
            57,531,521
            
            $
            41,502,575
            
            $
            156,311,306
            
            $
            60,151,818Cost
                of Goods Sold
            
            
            32,344,738
            
            
            21,591,160
            
            
            88,397,643
            
            
            31,499,243Gross
                Profit
            
            
            25,186,783
            
            
            19,911,415
            
            
            67,913,663
            
            
            28,652,575Operating
                Expenses
            
            
            22,611,454
            
            
            18,996,189
            
            
            63,878,803
            
            
            27,480,091Operating
                Income
            
            
            2,575,329
            
            
            915,226
            
            
            4,034,860
            
            
            1,172,484Other
                (Expenses), Net
            
            
            (4,962,213
            )
            
            (33,515,672
            )
            
            (10,897,350
            )
            
            (54,082,372
            )(Loss)
                before Income Taxes
            
            
            (2,386,884
            )
            
            (32,600,446
            )
            
            (6,862,490
            )
            
            (52,909,888
            )Provision
                (Benefit) for Income Taxes
            
            
            (772,811
            )
            
            407,129
            
            
            (2,535,633
            )
            
            948,851Net
                (Loss)
            
            $
            (1,614,073
            )
            $
            (33,007,575
            )
            $
            (4,326,857
            )
            $
            (53,858,739
            )Unpaid
                dividends on cumulative preferred stock
            
            
            -
            
            
            2,817,8668
            
            
            -
            
            
            4,062,467Net
                (Loss) available to common stock
            
            $
            (1,614,073
            )
            $
            (35,825,443
            )
            $
            (4,326,857
            )
            $
            (57,921,206
            )Net
                (Loss) Per Common Share
            
            $
            (0.03
            )
            $
            (1.25
            )
            $
            (0.07
            )
            $
            (2.71
            )





*Net
      Sales:*




Our
      net
      sales for the three months and nine months ended September 30, 2008 was $57.5
      million and $156.3 million, respectively, compared to $41.5 million and $60.2
      million for the three months and nine months ended September 30, 2007,
      respectively. Net sales for the three months ended September 30, 2008 were
      38.7%
      higher than the comparable quarter in 2007 due to higher selling prices and
      a
      15% increase in volumes.




*Cost
      of Goods Sold:*




Cost
      of
      goods sold for the three months and nine months ended September 30, 2008 was
      $32.4 million and $88.4 million, respectively, resulting in a gross profit
      of
      $25.2 million and $67.9 million, respectively, or 43.8% and 43.4% of net sales,
      respectively. For the three and nine months ended September 30, 2007, the gross
      profit was $19.9 million, or 48.0%. The lower gross profit margin in the three
      months ended September 30, 2008 compared to the same period last year was due
      to
      higher commodity costs.


27




*Operating
      Expenses:*




Total
      operating expenses for the three months and nine months ended September 30,
      2008
      was $22.6 million and $63.9 million, respectively. This compares to $19.0
      million and $27.5 million, respectively, in the comparable periods in 2007.
      The
      operating expenses for the first nine months of 2008 included selling, marketing
      and general and administrative expenses. Also included in operating expenses
      were approximately $10.9 million of stock-based compensation expense, as
      determined under Statement of Financial Accounting Standard (SFAS) No. 123R.
      Operating expenses incurred during the first nine months of 2007 consist of
      formation and operating costs of the parent company for the period through
      the
      date of acquisition and the combined operating expenses of GFA and the parent
      through September 30, 2007.




*Operating
      Income (Loss):*




We
      had
      operating income of $2.6  million
      and $4.0 million for the three months and nine months ended September 30, 2008,
      respectively, compared with operating income of $0.9 million and $1.2 million,
      respectively, for the corresponding periods in 2007. Operating income for the
      three months ended September 30, 2008, as a percentage of net sales, was 4.5%
      compared to 2.2% for the comparable period last year. The increase was due
      to
      lower operating expenses (as a percentage of net sales).




*Other
      Income (Expense):*




We
      incurred other expenses of $5.0  million
      for the three months ended September 30, 2008 compared to expenses of $33.5
      million in the corresponding period in 2007. The results for 2008 included
      net
      interest expense of $4.5  million
      compared with interest expense of $3.5 million in the corresponding period
      in
      2007. Of the $4.5 million, $2.6 million resulted from a change in fair value
      of
      our interest rate swap. Also, included in the results for the third quarter
      of
      2007 was a $29.6 million loss from derivative liabilities. For the nine months
      ended September 30, 2008, we had other expenses of $10.9 million, which
      consisted primarily of $9.7 million in net interest expense, compared with
      $54.1
      million in the prior year period, which consisted primarily of derivative losses
      of $50.5 million.




*Income
      Taxes:*




The
      provision for income taxes for the three months and nine months ended September
      30, 2008 was a benefit of $0.8 million and $2.5 million, respectively. This
      compares with a provision of $0.4 million and $0.9 million, respectively, for
      the corresponding periods in 2007. The provision in 2007 was based on taxable
      income, which excluded the losses for derivatives which are not deductible
      for
      tax purposes.




*Net
      (Loss):*




Our
      net
      loss for the three months ended September 30, 2008 was $1.6 million compared
      with a loss of $33.0 million for the corresponding period in 2007. For the
      nine
      months ended September 30, 2008, our net loss was $4.3 million compared with
      a
      loss of $53.9 million in the comparable period of 2007.


28




*Net
      (Loss) Per Common Share:*




Our
      net
      loss per share in the second quarter of 2008 was $(0.03) compared to a net
      loss
      of $(1.25) in the corresponding period in 2007 based on the weighted average
      shares outstanding of 62.6 million in the third quarter of 2008 compared to
      28.8
      million in the third quarter of 2007. For the nine month period ended September
      30, 2008, our net loss per share was $(0.07) compared with $(2.71) in the
      corresponding period in 2007. The weighted average shares outstanding was 62.5
      million for 2008 and 21.4 million for 2007.




Cash
      Flows




The
      discussion of cash flows for the first three quarters of 2008 includes the
      consolidated results of GFA, the Company’s wholly-owned subsidiary which was
      acquired on May 21, 2007. Prior to the completion of the merger, we were a
      blank
      check company with no operations. Accordingly, the cash flows do not provide
      a
      meaningful comparison with the prior periods.




*Nine
      Months Ended September 30, 2008 Compared to the Nine Months Ended September
      30,
      2007*




Cash
      from
      operating activities was $4.7  million
      for the nine months ended September 30, 2008 compared to cash used in operating
      activities of $1.8 million in the corresponding period in 2007. For the first
      nine months of 2008, we had a net loss of $4.3 million, which included $10.9
      million of stock-based compensation expenses and $3.6 million of depreciation
      and amortization. Higher working capital needs in the first nine months of
      2008
      partially offset the benefit of these non-cash charges. For the nine months
      ended September 30, 2007, the cash flow used in operating activities, excluding
      the increase in derivative liabilities of $50.5 million, resulted from higher
      working capital due to a reduction of accounts payable and accrued expenses.




Cash
      used
      in investing activities was $2.1  million
      during the nine months ended September 30, 2008 which resulted from software
      development costs of $2.5 million and other fixed assets offset by recovery
      of
      certain legal costs related to protecting our intangible assets of $0.4 million.
      In 2007, we had a net use of $486.8 million, which resulted from the purchase
      of
      GFA on May 21, 2007.




Cash
      used
      in financing activities was $32.8  million
      for the nine months ended September 30, 2008, resulting from the prepayment
      of
      our first and second lien debt of $5.0 million and $30.0 million, respectively,
      compared to cash provided from financing activities of $388.0 million for the
      corresponding period in 2007. For 2007, the net proceeds from the issuance
      of
      debt and equity required for the purchase of GFA accounted for most of net
      cash
      provided from financing activities.




In
      July
      2008, we settled a lawsuit with one of our shareholders from an
      alleged violation of Section 16(b) of the Securities Exchange Act of 1934,
      as
      amended, by the shareholder. As part of the settlement, we received $2.3
      million. The settlement funds were reported as additional paid-in-capital
      and had no effect on our statement of operations


29




Liquidity
      and Capital Resources




*Liquidity:*




Our
      liquidity and capital resource planning is largely dependent on the generation
      of operating cash flows, which is highly sensitive to changes in demand and
      to a
      lesser extent, pricing, for our major products. While changes in key operating
      costs, such as outsourced production, advertising, promotion and distribution,
      may adversely affect cash flows, we generate significant cash flows as demand
      for our products grows. Our principal liquidity requirements are to finance
      current operations, pay down existing indebtedness and fund future expansion.
      Currently, our primary source of liquidity requirements to meet these needs
      is
      cash generated by operations.




We
      believe that cash flows generated from operations, existing cash and cash
      equivalents, and borrowing capacity under the revolving credit facility will
      be
      sufficient to finance working capital requirements for our business for the
      foreseeable future. As of September 30, 2008, $20 million was available for
      borrowing under our revolving credit facility, subject to certain covenant
      limitations. Developing and bringing to the market other new brands and business
      opportunities may require additional outside funding, which may require us
      to
      seek out additional borrowing arrangements.




*Secured
      Debt Financing:*




In
      conjunction with the GFA merger, on May 21, 2007, we entered into a loan
      arrangement with Banc of America Securities LLC and Bank of America, N.A. for
      $180 million in secured debt financing consisting of: (1) a $140
      million first lien facility comprised of a $120 million term loan and a
      $20 million revolver and (2) a second lien facility comprised of a
      $40 million term loan. The first lien facility is secured by a first lien
      on all of our assets and the second lien facility is secured by a second lien
      on
      all of our assets. Through September 30, 2007, we paid $0.6 million in principal
      payments on its first lien facility. In December 2007, we made a $39.9 million
      principal pre-payment on its first lien facility as a result of the proceeds
      derived from the exercise of the public warrants. In March 2008, we prepaid
      $30
      million on our second lien facility, reducing the outstanding principal balance
      to $10 million. As a result of the prepayment, the Company wrote off
      approximately $0.9 million of deferred financing costs, which is included in
      other income, net for the nine months ended September 30, 2008. On September
      29,
      2008, the Company prepaid $5.0 million of its first lien facility, reducing
      the
      principal to $74.5 million. As a result of the prepayment, the Company wrote
      off
      approximately $0.15 million of deferred financing costs, which is included
      in
      other income, net for the three months ended September 30, 2008.




The
      term
      loan of the first lien facility will mature on May 21, 2014 and the revolving
      loan under the first lien facility will mature on May 21, 2013. The term loan
      of
      the second lien facility will mature on November 18, 2014.


30




At
      our
      option, the interest rate on the first lien facility is LIBOR plus 3.25% per
      annum or the higher of (i) the Bank of America prime rate or (ii) the
      federal funds rate plus 0.50%, in either case plus an applicable margin. The
      applicable margin on the first and second lien facilities is determined in
      accordance with a pricing grid based on the Company’s leverage ratio. The
      Company opted to elect conversion of the first lien facility to an interest
      rate
      based on LIBOR plus an applicable margin of 3.25% per annum beginning July
      1,
      2007 in accordance with a pricing grid based on the Company's leverage ratio.
      The applicable margin was reduced to 3.00% per annum beginning March 28,
      2008, which resulted in an interest rate of 6.76% at September 30, 2008. At
      the
      Company’s option, the interest rate on the second lien facility is LIBOR plus an
      applicable margin of 6.00% per annum or the higher of (i) the Bank of
      America prime rate or (ii) the federal funds rate plus 0.50%, in either
      case plus a margin of 5.00% per annum. The Company opted to elect
      conversion of a second lien facility to an interest rate based on LIBOR plus
      an
      applicable margin of 6.00% per annum, beginning July 1, 2007, which
      resulted in an interest rate at September 30, 2008 of 9.76%.




There
      is
      no prepayment penalty for optional prepayments of the first lien facility and
      the following penalties for optional prepayments on the second lien facility:
      2.00% premium if prepaid the first year; 1.00% premium if prepaid the second
      year; and no prepayment penalty thereafter. As a result of prepaying $30.0
      million of the second lien facility the Company paid a $0.6 million prepayment
      penalty, which is included in interest expense for the nine months ended
      September 30, 2008. Mandatory prepayments under both facilities include 50%
      of
      excess cash flow (as defined in the loan documentation) and 50% of all net
      cash
      proceeds from the issuance of additional equity interests by us. In addition,
      the term loan of the first lien facility is subject to quarterly amortization
      of
      principal with 1.00% of the initial aggregate advances under such loan to be
      payable in each of the first six years and the remainder of the initial
      aggregate advance to be payable in a balloon payment at maturity.




The
      first
      and second lien credit facilities can be accelerated upon the occurrence of
      certain events, including:




·
            nonpayment
                of debt including interest and
                fees;




·
            failure
                to perform or observe covenants;




·
            cross
                defaults to other indebtedness exceeding $5.0
                million;




·
            bankruptcy
                and insolvency; and




·
            certain
                other events.




The
      first
      lien credit facility requires that the Company:




·
            maintain
                a ratio of consolidated EBITDA to consolidated cash interest charges
                of at
                least 2.00 to 1, increasing to 3.00 to 1 at December 31, 2008;




·
            a
                leverage ratio for all of our debt which restricts us from allowing
                our
                total debt to be greater than 4.5 times our consolidated EBITDA,
                stepping
                down to 3.25 at December 31, 2008 and eventually stepping down to
                2.25 to
                1 over the remaining term of the facility; and




31




·
            a
                leverage ratio which restricts us from allowing our consolidated
                first
                lien credit facility indebtedness to be greater than 3.25 times our
                consolidated EBITDA, stepping down to 2.25 to 1 at December 31, 2008
                and
                eventually stepping down to 1.25 to 1 over the remaining term of
                the
                facility.




The
      second lien credit facility contains one financial covenant consisting of a
      leverage ratio for all debt which restricts us from allowing our total debt
      to
      be greater than 5.0 times our consolidated EBITDA, stepping down at December
      31,
      2009 to 2.75 to 1 over the remaining term of the facility. We were in compliance
      with all of our debt covenants at September 30, 2008.




Long
      term
      debt as of September 30, 2008 is as follows:




First
                lien term loan
            
            $
            74,504,174Second
                lien term loan
            
            
            10,000,000Total
                Debt:
            
            
            84,504,174Less:
                Current maturities
            
            
            -Total
                long term debt
            
            $
            84,504,174





Off
      Balance Sheet Arrangements




We
      do not
      have off-balance sheet arrangements, financings, or other relationships with
      unconsolidated entities or other persons, also known as “variable interest
      entities.”




Discussion
      of Results on an Operating Basis




Our
      GAAP
      financial information includes the results of GFA from the date of the
      acquisition (May 21, 2007) and, therefore, the periods ended September 30,
      2008
      and 2007 are not necessarily comparable. Accordingly, the information below
      presents historical periods on an “operating basis.” The accompanying table
      reconciles those results to GAAP results. We believe that this presentation
      allows investors more useful information because it more closely reflects the
      performance and expenses of the operating entity in both the current and prior
      periods presented. Also, the results for 2007 have been adjusted for a
      retrospective change in accounting principle. For more information on the change
      in accounting principle, see note 1 to the financial statements included
      elsewhere in this quarterly report.




For
      the
      nine months ended September 30, 2008, the GAAP operating loss includes certain
      expenses (non-cash) related to SFAS 123R stock option expense and amortization
      that did not exist for GFA in prior periods. In order to provide a more
      meaningful comparison of operating performance with prior periods, we have
      removed those items from the operating basis results set forth below for the
      nine months ended September 30, 2008. Furthermore, we have added the operating
      expenses of the parent company back to the operating basis results below for
      the
      nine months ended September 30, 2007, prior to May 21, 2007, as GFA incurred
      its
      own operating expenses prior to the date of acquisition and the inclusion of
      the
      parent company’s expenses prior to the date of acquisition would make it
      difficult to compare the operating results period to period. With the
      information as set forth below, we believe management and stockholders are
      better able to determine whether or not sales, gross profit or operating income
      of the acquired business have improved in the first nine months of 2008 compared
      with the first nine months in 2007. The operating basis results provided below
      are intended to assist the reader in comparing the operating performance of
      the
      GFA business we acquired, for the periods before and after the acquisition.
      However, they do not indicate what actual consolidated results would have been
      had we acquired GFA on January 1, 2007.


32




The
      operating basis results should not be viewed in isolation or as a substitution
      for GAAP results.





**($ in millions)**
            
            
            
            **Add GFA****(unaudited)**
            
            **As reported**
            
            **Results prior**
            
            
            
            **Operating****Form 10-Q****(1)**
            
            **To Acquisition**
            
            **Adjustments****(2)**
            
            **Basis****Three
                Months Ended September 30, 2008**Net
                Sales
            
            $
            57.5
            
            $
            
            
            $
            
            
            $
            57.5Gross
                Profit
            
            
            25.2
            
            
            
            
            
            
            
            
            25.2%
                of Net Sales
            
            
            43.8
            %
            
            
            
            
            
            
            
            43.8
            %Operating
                Income
            
            
            2.6
            
            
            
            
            
            
            
            
            2.6Incremental
                expenses included in Operating Income :FAS
                123R Stock Option Expense
            
            
            
            
            
            
            
            
            3.7
            
            
            3.7Amortization
                and Depreciation
            
            
            
            
            
            
            
            
            1.2
            
            
            1.2Operating
                Income excluding Non-cash expenses and parent company pre- acquisition
                expenses
            
            $
            2.6
            
            $
            
            
            $
            4.9
            
            $
            7.5%
                of Net Sales
            
            
            
            
            
            
            
            
            
            
            
            13.0
            %**Three
                Months Ended September 30, 2007**Net
                Sales
            
            $
            41.5
            
            $
            0.1
            
            $
            
            
            $
            41.6Gross
                Profit
            
            
            19.9
            
            
            0.1
            
            
            
            
            
            20.0%
                of Net Sales
            
            
            48.0
            %
            
            
            
            
            
            
            
            48.1
            %Operating
                Income
            
            
            0.9
            
            
            (0.1
            )
            
            
            
            
            0.8Incremental
                expenses included in Operating Income :FAS
                123R Stock Option Expense
            
            
            
            
            
            
            
            
            3.7
            
            
            3.7Amortization
                and Depreciation
            
            
            
            
            
            
            
            
            1.0
            
            
            1.0Operating
                Income (Loss) excluding non- cash expenses and parent company pre-
                acquisition expenses
            
            $
            0.9
            
            $
            (0.1
            )
            $
            4.7
            
            $
            5.5%
                of Net Sales
            
            
            
            
            
            
            
            
            
            
            
            13.2
            %**Nine
                Months Ended September 30, 2008**Net
                Sales
            
            $
            156.3
            
            $
            
            
            $
            
            
            $
            156.3Gross
                Profit
            
            
            67.9
            
            
            
            
            
            
            
            
            67.9%
                of Net Sales
            
            
            43.4
            %
            
            
            
            
            
            
            
            43.4
            %Operating
                Income
            
            
            4.0
            
            
            
            
            
            
            
            
            4.0Incremental
                expenses included in Operating Income :FAS
                123R Stock Option Expense
            
            
            
            
            
            
            
            
            10.9
            
            
            10.9Amortization
                and Depreciation
            
            
            
            
            
            
            
            
            3.3
            
            
            3.3Operating
                Income excluding Non-cash expenses and parent company pre- acquisition
                expenses
            
            $
            4.0
            
            $
            
            
            $
            14.2
            
            $
            18.2%
                of Net Sales
            
            
            
            
            
            
            
            
            
            
            
            11.6
            %**Nine
                Months Ended September 30, 2007**Net
                Sales
            
            $
            60.2
            
            $
            64.4
            
            $
            
            
            $
            124.6Gross
                Profit
            
            
            28.7
            
            
            31.7
            
            
            (0.1
            )
            
            60.3%
                of Net Sales
            
            
            47.7
            %
            
            49.2
            %
            
            
            
            
            48.4
            %Operating
                Income
            
            
            1.2
            
            
            12.5
            
            
            1.5
            
            
            15.2Incremental
                expenses included in Operating Income :FAS
                123R Stock Option Expense
            
            
            
            
            
            
            
            
            4.8
            
            
            4.8Amortization
                and Depreciation
            
            
            
            
            
            
            
            
            1.5
            
            
            1.5Operating
                Income (Loss) excluding non- cash expenses and parent company pre-
                acquisition expenses
            
            $
            1.2
            
            $
            12.5
            
            $
            7.8
            
            $
            21.5%
                of Net Sales
            
            
            
            
            
            
            
            
            
            
            
            17.3
            %


33







(1)  The
      retrospective application of the change in accounting principle resulted in
      adjustments to previously reported amounts of $(0.2) million and $(4.4) million
      to net sales and operating income, respectively, for the third quarter of 2007
      and $(0.2) million and $(4.7) million to net sales and operating income,
      respectively, for the nine month period ended September 30, 2007.




(2)  To
      remove
      parent company pre-acquisition expenses from results prior to the acquisition
      date and to add back certain non-cash expenses included in 2008 which did not
      exist in 2007. Parent company expenses incurred beginning May 21, 2007 remain
      included in operating basis results.




*Results
      of Operations for the Three Months and Nine Months Ended September 30, 2008
      Compared to Three Months and Nine Months Ended September 30, 2007*




*Net
      Sales* :




Net
      sales
      for the third quarter increased 38.2% to $57.5 million in 2008, from $41.6
      million in 2007, primarily due to higher prices and a 15% increase in cases
      shipped. The Company increased prices on its products in August to cover rising
      costs, following similar pricing actions in February and June. In addition,
      reduced sizes of its largest volume spreads products were shipped to all
      customers during the third quarter, bringing Smart Balance in line with the
      rest
      of the industry.




The
      increase in cases shipped was due primarily to the success of new products
      (extra virgin olive oil spreads, omega-3 enhanced spreads, 50/50 butter blend,
      and milk) and higher sales of cooking oil. The Company’s ‘Plus Six’ distribution
      drive achieved improved placement of Smart Balance products, facilitating the
      gain in cases shipped.




Market
      share for Smart Balance® family of spreads increased versus the prior year for
      the 27th consecutive quarter. The spreads category continued to experience
      higher prices to cover rising costs together with promotional activity in the
      last six weeks of the quarter to attract increasingly price sensitive consumers.
      Market share for cooking oil increased in the quarter while shares for peanut
      butter and microwave popcorn declined.


34




For
      the
      nine months ended September 30, 2008, net sales increased to $156.3 million
      from
      $124.6 million in 2007, or 25.4%, which was driven primarily by higher pricing
      and an 8% increase in case shipments.




*Gross
      Profit:.*




Gross
      profit for the third quarter of 2008 increased $5.2 million to $25.2 million
      in
      2008 from $20.0 million in 2007 as the growth in case shipments and the impact
      of higher pricing were greater than increases in input costs, primarily in
      commodity raw materials, and higher coupon redemption costs. Gross profit as
      a
      percent of net sales decreased to 43.8% in 2008 from 48.1% in the third quarter
      of 2007, due to the timing lag in selling price increases versus input cost
      increases, and higher coupon redemption costs.




For
      the
      nine months ended September 30, 2008, gross profit was $67.9 million or 43.4%
      of
      net sales compared to $60.3 million or 48.4% of net sales for the corresponding
      period in 2007.




*Operating
      Income less Non-Cash Items* :




Operating
      income for the third quarter of 2008 increased $1.8 million to $2.6 million
      in
      2008 from $0.8 million income in 2007 due primarily to the increase in gross
      profit partially offset by higher marketing costs of $2.3 million and an
      increase in selling and distribution costs of $1.0 million. The increases in
      market, selling and distribution costs were in line with the net sales growth
      versus prior year. General and administrative expenses increased less than
      $0.1
      million in 2008 versus 2007 as higher costs from the expansion of the Company’s
      infrastructure were offset by lower legal expenses in the current period.
      Company headcount on September 30, 2008 was 54.




For
      the
      nine months ended September 30, 2008, operating income less non-cash charges
      decreased $3.3 million to $18.2 million from $21.5 million in 2007.




**Item 3.**  **Quantitative
      and Qualitative Disclosures About Market Risk**




We
      are
      exposed to financial market risks due primarily to changes in interest rates,
      which we manage through the use of an interest rate swap. This derivative alters
      the interest characteristics of our debt by changing it from a variable to
      a
      fixed-rate instrument.




We
      purchase significant amounts of soy, palm and canola oil products to support
      the
      needs of our brands. The price and availability of these commodities directly
      impacts the results of operations and can be expected to impact the future
      results of operations. We do not engage in any hedging activities; however,
      the
      Company may consider hedging oil products in the near future. The agreements
      we
      enter into qualify as normal purchases and sales in the normal course of
      business. Accordingly, the agreements do not qualify as derivatives under SFAS
      No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Based
      on the most recent prices for soy, palm and canola oil products, we would have
      commitments of $29.5 million.


35




In
      conjunction with the fixed-rate debt arrangements discussed elsewhere in this
      report, we entered into $80,000,000 of interest rate swaps on August 16, 2007,
      which are designed to fix the interest rate of the variable rate debt. Under
      these swaps, we receive or pay the difference between our fixed-rate interest
      payments and floating-rate payments based on LIBOR. The effect of this is to
      convert floating-rate interest expense based on LIBOR into fixed-rate interest
      expense. The arrangements settle on the last day of each calendar quarter.
      For
      the quarter ended September 30, 2008, the Company paid $1,032,444 and received
      $572,573 with the difference increasing interest expense by
      $459,871.




We
      are
      exposed to market risk from changes in interest rates charged on our debt.
      The
      impact on earnings is subject to change as a result of movements in market
      rates. A hypothetical increase in interest rates of 100 basis points would
      result in potential reduction of future pre-tax earnings of approximately $0.1
      million per year for every $10.0 million outstanding under our first lien credit
      facility and approximately $0.1 million per year under our second lien credit
      facility. Our ability to meet our debt service obligations will be dependent
      upon our future performance which, in turn, is subject to future economic
      conditions and to financial, business and other factors.




**Item 4.**  **Controls
      and Procedures**




*Conclusion
      regarding the effectiveness of disclosure controls and
      procedures* .
      Our
      management, with the participation of our Chief Executive Officer and Principal
      Financial Officer, evaluated the effectiveness of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act) as of September 30, 2008. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed by the Company in the reports that we file or submit
      under the Exchange Act is accumulated and communicated to our management,
      including our Principal Executive Officer and Principal Financial Officer,
      as
      appropriate, to allow timely decisions regarding required disclosure. Management
      recognizes that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving their objectives
      and management necessarily applies its judgment in evaluating the cost-benefit
      relationship of possible controls and procedures. Based on management’s
      evaluation of our disclosure controls and procedures as of September 30, 2008,
      our Chief Executive Officer and Principal Financial Officer concluded that,
      as
      of such date, our disclosure controls and procedures were effective at the
      reasonable assurance level.




*Changes
      in internal control over financial reporting.* There
      were no changes in our internal control over financial reporting that have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.


36


**Part
      II.**  **Other
      Information** ****




**Item 1.**  **Legal
      Proceedings.**




There
      have been no material changes to the litigation we previously reported under
      Item 3 in our annual report on Form 10-K for the year ended December 31, 2007
      and under this section of our quarterly report on Form 10-Q for the quarter
      ended June 30, 2008.




**Item 1A.**  **Risk
      Factors.**




An
      investment in our securities involves a high degree of risk. There have been
      no
      material changes to the risk factors previously reported under Item 1A of
      our annual report on Form 10-K for the year ended December 31, 2007.




**Item 6.****Exhibits.**




See
      the
      exhibit index located elsewhere in this quarterly report on Form 10-Q.


37


**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned,
      Registrant’s principal financial officer, thereunto duly authorized.




November
                6, 2008
            **SMART
                BALANCE, INC.**(Registrant)/s/
                Stephen B. HughesStephen
                B. Hughes
              Chairman
                and Chief Executive Officer
              (Authorized
                officer of Registrant)/s/
                Alan S. GeverAlan
                S. Gever
              Executive
                Vice President and
              Chief
                Financial Officer
              (Principal
                financial officer of
                Registrant)


38


**Exhibit
      Index:**




31.1
            Certification
                of Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a)
                and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200231.2
            Certification
                of Principal Financial Officer Pursuant to Exchange Act Rules 13a-14(a)
                and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232.1
            Certification
                of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            Certification
                of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002




39