##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

SECURITIES EXCHANGE ACT OF 1934

For The Quarter Ended September 30, 2007

Commission File Number 001-33595



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Smart Balance, Inc.

(Exact name of registrant as specified in its charter)



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|                                                  |  |                                     
|------------------------------------------------- |  | ------------------------------------
|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, or a
non-accelerated filer. See definitions of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ̈Accelerated
Filer  x            Non-Accelerated Filer ̈

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 1, 2007, the registrant had 30,361,238 shares of common stock outstanding.



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##### Table of Contents

SMART BALANCE, INC.

INDEX



|         |  |                                                                                       |  |     
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                       |  | Page
|Part I.  |  | Financial Information                                                                 |  | 1   
|         |  |                                                                                      
|Item 1.  |  | Financial Statements                                                                  |  | 1   
|         |  |                                                                                      
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 23  
|         |  |                                                                                      
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 31  
|         |  |                                                                                      
|Item 4.  |  | Controls and Procedures                                                               |  | 32  
|         |  |                                                                                      
|Part II. |  | Other Information                                                                     |  | 33  
|         |  |                                                                                      
|Item 1.  |  | Legal Proceedings                                                                     |  | 33  
|         |  |                                                                                      
|Item 1A. |  | Risk Factors                                                                          |  | 33  
|         |  |                                                                                      
|Item 3.  |  | Defaults Upon Senior Securities                                                       |  | 33  
|         |  |                                                                                      
|Item 5.  |  | Other Information                                                                     |  |     
|         |  |                                                                                      
|Item 6.  |  | Exhibits                                                                              |  | 34  



i



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##### Table of Contents

Part I. Financial Information



|Item 1. | Financial Statements
|------- | --------------------

SMART BALANCE, INC. AND
SUBSIDIARY

Condensed Consolidated Balance Sheets



|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                         |  | September 30,2007 |             |   | December 31,2006 |  
|                                                                                                                                                                         |  | (Unaudited)       |             |   |                  |  
|Assets                                                                                                                                                                   |  |                   |             |   |                  |   |             |  
|Current assets:                                                                                                                                                          |  |                   |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                |  | $                 | 1,043,487   |   |                  | $ | 569,142     |  
|Investments held in trust  restricted                                                                                                                                   |  |                   |            |   |                  |   | 101,073,611 |  
|Accounts receivable, net of allowance of $271,621                                                                                                                        |  |                   | 9,899,997   |   |                  |   |            |  
|Accounts receivable - other                                                                                                                                              |  |                   | 555,451     |   |                  |   | 141,260     |  
|Inventories                                                                                                                                                              |  |                   | 6,867,623   |   |                  |   |            |  
|Prepaid expenses and other assets                                                                                                                                        |  |                   | 13,648,827  |   |                  |   | 354,077     |  
|Deferred tax asset                                                                                                                                                       |  |                   | 276,025     |   |                  |   | 555,283     |  
|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total current assets                                                                                                                                                     |  |                   | 32,291,410  |   |                  |   | 102,693,373 |  
|Property and equipment, net                                                                                                                                              |  |                   | 620,214     |   |                  |   |            |  
|Other assets:                                                                                                                                                            |  |                   |             |   |                  |   |             |  
|Goodwill                                                                                                                                                                 |  |                   | 384,509,382 |   |                  |   |            |  
|Other intangibles, net                                                                                                                                                   |  |                   | 159,518,174 |   |                  |   |            |  
|Deferred costs                                                                                                                                                           |  |                   | 4,821,045   |   |                  |   | 3,589,990   |  
|Other assets                                                                                                                                                             |  |                   | 74,975      |   |                  |   | 800         |  
|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total other assets                                                                                                                                                       |  |                   | 548,923,576 |   |                  |   | 3,590,790   |  
|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total assets                                                                                                                                                             |  | $                 | 581,835,200 |   |                  | $ | 106,284,163 |  
|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  
|Liabilities and Stockholders Equity                                                                                                                                     |  |                   |             |   |                  |   |             |  
|Current liabilities                                                                                                                                                      |  |                   |             |   |                  |   |             |  
|Accounts payable and accrued expenses                                                                                                                                    |  |                   | 15,312,841  |   |                  | $ | 4,798,884   |  
|Current maturities - long term debt                                                                                                                                      |  |                   | 1,200,000   |   |                  |   |            |  
|Advances from stockholders                                                                                                                                               |  |                   |            |   |                  |   | 206,276     |  
|Deferred underwriting fees                                                                                                                                               |  |                   |            |   |                  |   | 3,573,035   |  
|Derivative liability                                                                                                                                                     |  |                   | 82,817,851  |   |                  |   | 32,284,925  |  
|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                |  |                   | 99,330,692  |   |                  |   | 40,863,120  |  
|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  
|Deferred interest income                                                                                                                                                 |  |                   |            |   |                  |   | 432,623     |  
|Long term debt                                                                                                                                                           |  |                   | 158,200,000 |   |                  |   |            |  
|Deferred tax liability                                                                                                                                                   |  |                   | 71,227,593  |   |                  |   |            |  
|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total liabilities                                                                                                                                                        |  |                   | 328,758,285 |   |                  |   | 41,295,743  |  
|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  
|Commitment and contingencies:                                                                                                                                            |  |                   |             |   |                  |   |             |  
|Common stock, subject to possible conversion, 2,550,892 shares at conversion value                                                                                       |  |                   |            |   |                  |   | 19,661,116  |  
|Series A convertible preferred stock, liquidation preference, $142,539,496, 15,388,889 shares                                                                            |  |                   | 138,498,462 |   |                  |   |             |  
|Stockholders equity                                                                                                                                                     |  |                   |             |   |                  |   |             |  
|Series A Preferred stock, $.0001 par value, 50,000,000 shares authorized; 15,388,889 issued and outstanding                                                              |  |                   | 1,539       |   |                  |   |            |  
|Common stock, $.0001 par value, 250,000,000 shares authorized; 30,361,238 issued and outstanding (including 2,550,892 shares subject to
conversion at December 31, 2006) |  |                   | 3,036       |   |                  |   | 1,595       |  
|Additional paid in capital                                                                                                                                               |  |                   | 178,111,592 |   |                  |   | 59,741,972  |  
|Retained deficit                                                                                                                                                         |  |                   | (63,537,714 | ) |                  |   | (14,416,263 | )
|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                               |  |                   | 114,578,453 |   |                  |   | 45,327,304  |  
|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                                                               |  | $                 | 581,835,200 |   |                  | $ | 106,284,163 |  
|                                                                                                                                                                         |  |                   |             |   |                  |   |             |  

See accompanying notes to the condensed consolidated financial statements



1



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##### Table of Contents

SMART BALANCE, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations

(Unaudited)



|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|------------------------------------------------------- |  | ---------------------------------- | ----------- | - | ---------------------------------- | - | ---------- | --------------------------------- |  | - | --------------------------------- | - |  | - | ---------- | -
|                                                        |  | Three monthsendedSeptember 30,2007 |             |   | Three monthsendedSeptember 30,2006 |   |            | Nine monthsendedSeptember 30,2007 |  |   | Nine monthsendedSeptember 30,2006 |  
|Net sales                                               |  | $                                  | 41,625,392  |   |                                    | $ |           |                                   |  | $ | 60,372,654                        |   |  | $ |           |  
|Cost of goods sold                                      |  |                                    | 21,575,694  |   |                                    |   |           |                                   |  |   | 31,482,785                        |   |  |   |           |  
|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Gross profit                                            |  |                                    | 20,049,698  |   |                                    |   |           |                                   |  |   | 28,889,869                        |   |  |   |           |  
|Operating expenses:                                     |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Selling, general and administrative                     |  |                                    | 14,719,877  |   |                                    |   |           |                                   |  |   | 22,953,210                        |   |  |   |           |  
|Formation and operating costs                           |  |                                    |            |   |                                    |   | 367,225    |                                   |  |   |                                  |   |  |   | 1,097,559  |  
|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Total operating expenses                                |  |                                    | 14,719,877  |   |                                    |   | 367,225    |                                   |  |   | 22,953,210                        |   |  |   | 1,097,559  |  
|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Operating income (loss)                                 |  |                                    | 5,329,821   |   |                                    |   | (367,225   | )                                 |  |   | 5,936,659                         |   |  |   | (1,097,559 | )
|Other income (expense):                                 |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Interest income                                         |  |                                    | 20,143      |   |                                    |   | 1,112,353  |                                   |  |   | 2,305,710                         |   |  |   | 3,121,257  |  
|Interest expense                                        |  |                                    | (3,922,834  | ) |                                    |   |           |                                   |  |   | (6,022,416                        | ) |  |   |           |  
|Loss on derivative liability                            |  |                                    | (29,646,232 | ) |                                    |   | (6,252,812 | )                                 |  |   | (50,532,926                       | ) |  |   | (4,036,906 | )
|Other income, net                                       |  |                                    | 15,982      |   |                                    |   |           |                                   |  |   | 140,373                           |   |  |   |           |  
|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Total other income (expense)                            |  |                                    | (33,532,941 | ) |                                    |   | (5,140,459 | )                                 |  |   | (54,109,259                       | ) |  |   | (915,649   | )
|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Loss before income taxes                                |  |                                    | (28,203,120 | ) |                                    |   | (5,507,684 | )                                 |  |   | (48,172,600                       | ) |  |   | (2,013,208 | )
|Provision for income taxes                              |  |                                    | 407,129     |   |                                    |   | 278,414    |                                   |  |   | 948,851                           |   |  |   | 710,529    |  
|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Net loss                                                |  | $                                  | (28,610,249 | ) |                                    | $ | (5,786,098 | )                                 |  | $ | (49,121,451                       | ) |  | $ | (2,723,737 | )
|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Less: Unpaid dividends on cumulative preferred stock    |  | $                                  | 2,817,868   |   |                                    |   |           |                                   |  | $ | 4,062,467                         |   |  |   |           |  
|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Net loss available for common shares                    |  | $                                  | (31,428,117 | ) |                                    | $ | (5,786,098 | )                                 |  | $ | (53,183,918                       | ) |  | $ | (2,723,737 | )
|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Net loss per share - basic and diluted                  |  | $                                  | (1.09       | ) |                                    | $ | (0.40      | )                                 |  | $ | (2.49                             | ) |  | $ | (0.19      | )
|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  
|Weighted average shares outstanding - basic and diluted |  |                                    | 28,766,133  |   |                                    |   | 14,355,945 |                                   |  |   | 21,376,293                        |   |  |   | 14,355,945 |  
|                                                        |  |                                    |             |   |                                    |   |            |                                   |  |   |                                   |   |  |   |            |  

See accompanying notes to the condensed consolidated financial statements



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SMART BALANCE, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                  |  |                                 |              |   |                                 |   |              |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------------ | - | ------------------------------- | - | ------------ | -
|                                                                                  |  | Nine monthsended Sept. 30, 2007 |              |   | Nine monthsended Sept. 30, 2006 |  
|Cash flows from operating activities                                              |  |                                 |              |   |                                 |   |              |  
|Net (loss)                                                                        |  | $                               | (49,121,451  | ) |                                 | $ | (2,723,737   | )
|Adjustments to reconcile net (loss) to net cash provided by operating activities: |  |                                 |              |   |                                 |   |              |  
|Depreciation and amortization                                                     |  |                                 | 1,653,807    |   |                                 |   |             |  
|Deferred income taxes                                                             |  |                                 | 616,926      |   |                                 |   | (295,080     | )
|Accrued interest receivable in trust                                              |  |                                 |             |   |                                 |   | (13,214      | )
|Stock based compensation                                                          |  |                                 | 4,777,450    |   |                                 |   |             |  
|Increase in derivative liabilities                                                |  |                                 | 50,532,926   |   |                                 |   | 4,036,906    |  
|Deferred interest income                                                          |  |                                 | (432,623     | ) |                                 |   | 276,104      |  
|Changes in assets and liabilities:                                                |  |                                 |              |   |                                 |   |              |  
|Accounts receivable                                                               |  |                                 | 1,213,126    |   |                                 |   |             |  
|Inventories                                                                       |  |                                 | (2,082,500   | ) |                                 |   |             |  
|Prepaid expenses and other current assets                                         |  |                                 | (3,786,588   | ) |                                 |   | 263,612      |  
|Accounts payable and accrued expenses                                             |  |                                 | (5,193,738   | ) |                                 |   | 26,174       |  
|                                                                                  |  |                                 |              |   |                                 |   |              |  
|Net cash (used in) provided by operating activities                               |  |                                 | (1,822,665   | ) |                                 |   | 1,570,765    |  
|                                                                                  |  |                                 |              |   |                                 |   |              |  
|Cash flows from investing activities                                              |  |                                 |              |   |                                 |   |              |  
|Purchase of GFA                                                                   |  |                                 | (486,251,453 | ) |                                 |   |             |  
|Purchase of property and equipment                                                |  |                                 | (515,833     | ) |                                 |   |             |  
|Proceeds from maturity of treasury bills - held in trust                          |  |                                 |             |   |                                 |   | 397,777,523  |  
|Purchase of treasury bills - held in trust                                        |  |                                 |             |   |                                 |   | (399,357,144 | )
|(Increase) decrease in cash held in trust                                         |  |                                 |             |   |                                 |   | 141          |  
|                                                                                  |  |                                 |              |   |                                 |   |              |  
|Net cash (used in) investing activities                                           |  |                                 | (486,767,286 | ) |                                 |   | (1,579,480   | )
|                                                                                  |  |                                 |              |   |                                 |   |              |  
|Cash flows from financing activities                                              |  |                                 |              |   |                                 |   |              |  
|Proceeds from issuance of long term debt                                          |  |                                 | 160,000,000  |   |                                 |   |             |  
|Repayment of debt                                                                 |  |                                 | (600,000     | ) |                                 |   |             |  
|Proceeds from issuance of common stock                                            |  |                                 | 107,500,000  |   |                                 |   |             |  
|Proceeds from issuance of preferred stock                                         |  |                                 | 138,500,001  |   |                                 |   |             |  
|Payments for costs of equity issuance                                             |  |                                 | (12,667,046  | ) |                                 |   | (17,550      | )
|Payment for costs in acquiring long term debt facility                            |  |                                 | (4,535,994   | ) |                                 |   |             |  
|Proceeds from (repayment of) advances from stockholders                           |  |                                 | (206,276     | ) |                                 |   | 81,140       |  
|Payments for offering costs                                                       |  |                                 |             |   |                                 |   | (385,079     | )
|                                                                                  |  |                                 |              |   |                                 |   |              |  
|Net cash provided by (used in) financing activities                               |  |                                 | 387,990,685  |   |                                 |   | (321,489     | )
|                                                                                  |  |                                 |              |   |                                 |   |              |  
|Net (decrease) in cash for the period                                             |  |                                 | (100,599,266 | ) |                                 |   | (330,204     | )
|Cash - Beginning of period                                                        |  |                                 | 101,642,753  |   |                                 |   | 1,548,609    |  
|                                                                                  |  |                                 |              |   |                                 |   |              |  
|Cash - End of period                                                              |  | $                               | 1,043,487    |   |                                 | $ | 1,218,405    |  
|                                                                                  |  |                                 |              |   |                                 |   |              |  
|Supplemental disclosure of cash flow information:                                 |  |                                 |              |   |                                 |   |              |  
|Accrual of deferred acquisition costs                                             |  | $                               |             |   |                                 | $ | 2,483,054    |  
|                                                                                  |  |                                 |              |   |                                 |   |              |  
|Cash paid during the year for:                                                    |  |                                 |              |   |                                 |   |              |  
|Income taxes                                                                      |  | $                               | 3,809,606    |   |                                 | $ |             |  
|                                                                                  |  |                                 |              |   |                                 |   |              |  
|Interest                                                                          |  | $                               | 5,707,512    |   |                                 | $ |             |  
|                                                                                  |  |                                 |              |   |                                 |   |              |  

See accompanying notes to the condensed consolidated financial statements



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##### Table of Contents

SMART BALANCE, INC. AND SUBSIDIARY

Notes to Consolidated Condensed 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 2006 Annual Report on Form 10-K and 10-K/A. The reported results for the three and nine month periods ended September 30, 2007 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 note 2: Merger with GFA). 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.



|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 foods products
primarily under the Smart Balance® brand name. Concurrent with this acquisition, the Company changed its name to Smart Balance, Inc. The cost of the acquisition was approximately $491
million.



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##### Table of Contents

Under the GFA merger agreement, stockholders of GFA Holdings were paid an aggregate of $491 million in
cash which included the assumption of post-closing bonus payments, net of tax benefits. The acquisition cost was paid with: (i) $101 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 note 16: Stockholders Equity) of $246 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 a secured debt financing (see note 8: Long-Term Debt) of $160 million.

The purchase price consists
of the following:



|                                                 |  |   |            
|------------------------------------------------ |  | - | -----------
|Cash purchase price (excluding bonus assumption) |  | $ | 466,802,920
|Acquisition costs                                |  |   | 9,623,306  
|                                                 |  |   |            
|Total purchase price                             |  | $ | 476,426,226
|                                                 |  |   |            

The Companys purchase price allocation, subject to final adjustment, for the net assets
acquired is as follows:



|                                                         |  |   |            
|-------------------------------------------------------- |  | - | -----------
|Cash                                                     |  | $ | 16,675,065 
|Accounts receivable                                      |  |   | 11,362,729 
|Inventories                                              |  |   | 4,785,123  
|Prepaid assets                                           |  |   | 9,431,609  
|Other assets                                             |  |   | 148,599    
|Intangible assets                                        |  |   | 161,000,000
|Goodwill                                                 |  |   | 384,509,382
|                                                         |  |   |            
|Total assets                                             |  |   | 587,912,507
|                                                         |  |   |            
|Accounts payable, accrued expenses and other liabilities |  |   | 40,338,932 
|Deferred taxes and other                                 |  |   | 71,147,349 
|                                                         |  |   |            
|Total liabilities assumed                                |  |   | 111,486,281
|                                                         |  |   |            
|Net assets acquired                                      |  | $ | 476,426,226
|                                                         |  |   |            

During the quarter ending September 30, 2007, the Company completed its initial assessment of
the differences between the book basis and tax basis of intangible assets acquired as part of the GFA merger. Based on that assessment, the Company increased deferred tax liabilities by approximately $64 million with a corresponding increase in
goodwill.

Selected Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations of the Company for the three months and
nine months ended September 30, 2007 and 2006, as though the GFA merger had occurred as of the beginning of each applicable fiscal year. Net sales reflect the reclassification of certain trade and consumer promotion expenditures that had
previously been classified as selling, general and administrative expenses. 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 at the beginning of the period presented, or that may result in the future.



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|                                                     |  |                                              |             |   |                                              |   |            |                                             |  |   |                                             |   |  |   |             |  
|---------------------------------------------------- |  | -------------------------------------------- | ----------- | - | -------------------------------------------- | - | ---------- | ------------------------------------------- |  | - | ------------------------------------------- | - |  | - | ----------- | -
|                                                     |  | Three
MonthsEndedSeptember 30,2007 Pro forma |             |   | Three
MonthsEndedSeptember 30,2006 Pro forma |   |            | Nine
MonthsEndedSeptember 30,2007 Pro forma |  |   | Nine
MonthsEndedSeptember 30,2006 Pro forma |  
|Net sales                                            |  | $                                            | 41,625,392  |   |                                              | $ | 31,312,591 |                                             |  | $ | 124,896,380                                 |   |  | $ | 97,286,390  |  
|Operating income                                     |  |                                              | 5,329,821   |   |                                              |   | 6,206,428  |                                             |  |   | 17,720,632                                  |   |  |   | 13,682,346  |  
|Net (loss)                                           |  |                                              | (29,127,644 | ) |                                              |   | (5,026,850 | )                                           |  |   | (48,719,668                                 | ) |  |   | (4,138,010  | )
|Less: Unpaid dividends on cumulative preferred stock |  |                                              | (2,770,000  | ) |                                              |   | (2,770,000 | )                                           |  |   | (8,310,000                                  | ) |  |   | (8,310,000  | )
|                                                     |  |                                              |             |   |                                              |   |            |                                             |  |   |                                             |   |  |   |             |  
|Net (loss) available for EPS                         |  |                                              | (31,897,644 | ) |                                              |   | (7,796,850 | )                                           |  |   | (57,029,668                                 | ) |  |   | (12,448,010 | )
|(Loss) per share                                     |  | $                                            | (1.11       | ) |                                              | $ | (0.27      | )                                           |  | $ | (1.98                                       | ) |  | $ | (0.43       | )
|                                                     |  |                                              |             |   |                                              |   |            |                                             |  |   |                                             |   |  |   |             |  
|Weighted average shares outstanding                  |  |                                              | 28,766,133  |   |                                              |   | 28,766,133 |                                             |  |   | 28,766,133                                  |   |  |   | 28,766,133  |  
|                                                     |  |                                              |             |   |                                              |   |            |                                             |  |   |                                             |   |  |   |             |  



|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.

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.

Goodwill

Goodwill will be tested annually for impairment or more frequently if events or changes in circumstances indicate that impairment may have occurred. The impairment analysis for goodwill will include 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



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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.

Other intangibles

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.

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 Smart Beat trademarks have an indefinite life 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.

Deferred costs

Costs related to the acquisition of GFA were deferred through the date of acquisition. These costs included,
principally, accounting fees, legal fees and other fees, which were allocated to the purchase price; private placement fees and deferred offering costs. Deferred offering costs related to the private placement were recorded as a reduction of equity
upon the completion of the merger transaction. Deferred loan costs associated with the secured debt financing are being amortized over the life of debt.

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. The Company offers its
customers a variety of sales and incentive programs, including discounts, allowances, coupons, slotting fees, and co-op advertising; 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.



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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 consists of one share of common stock and one redeemable common stock purchase warrant. Each warrant entitles 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.

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 warrants issued in the initial public offering to purchase common stock are separately accounted for as liabilities and the 1,000,000 warrants issued to initial shareholders to
purchase common stock 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 warrants to purchase the additional 12,760,840 shares are indexed to the Companys common stock, the fact that the shares underlying the warrants require that they are
settled in registered shares requires the Company to classify these instruments as a liability in accordance with EITF 00-19 paragraph 14. This derivative liability is adjusted to fair value, and any changes are recorded as non-operating gains or
losses.

The warrants sold as part of the units in the Companys initial public offering began trading separately from the units in
January 2006 and are listed on the NASDAQ Global Market effective August 1, 2007. Consequently, the fair value of these warrants is estimated as the market price of a warrant at each period end. To the extent that the market price increases or
decreases, the Companys derivative liabilities also increase or decrease, with a corresponding effect on the Companys consolidated statement of operations. The fair value at September 30, 2007 was calculated to be $82,817,851 or
approximately $6.49 per warrant. This compares to a valuation of $32,284,925, or approximately $2.53 per warrant, when valued at December 31, 2006. The net change in the valuation from December 31, 2006 through September 30, 2007 of
$50,532,926 was recorded as a non-operating loss for the nine months ended September 30, 2007.



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Prior to January 2006, the Company performed a valuation of the warrants to purchase 12,760,840 shares.
The pricing model the Company used for determining fair value of the warrants was the Black-Scholes Pricing Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model used market-sourced
inputs such as interest rates, market prices and volatilities. Selection of these inputs involves managements judgment and may impact net income. The Company used volatility rates based upon a peer group of ten publicly traded food products
companies in the Dow Jones U.S. Small Cap Index. The volatility factor used in Black-Scholes had a significant effect on the resulting valuation of the derivative liabilities on the Companys balance sheet. The volatility as calculated at
December 31, 2005 approximated 17.65%. The Company used a risk-free interest rate, which is the rate on U.S. Treasury instruments, for a security with a maturity that approximated the estimated remaining contractual life of the derivative.

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 of shares of common stock and 15,388,889 of Series A convertible preferred stock along with an equal
number of investor warrants (the Series A Warrants). The Series A Warrants were determined to have a de minimis value as the Company believes the probability very low that the warrants will ever be exercisable. The net proceeds of
approximately $246 million received by the Company were used to fund a portion of the acquisition costs of GFA.

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 conversion rights issued with preferred stock to be designated as an equity instrument, asset or a liability. Under the provisions of EITF 00-19, 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 Company has made a determination that the conversion feature and the anti-dilution rights were not derivatives and therefore no fair value measurement was required.

Loss per Share of Common Stock

Loss per share is
computed by dividing net loss applicable to common stockholders by the weighted average shares of common stock outstanding for the period. No effect has been given to 1,595,105 common shares that had been placed in escrow and could not be released
from escrow until the last sales price of the Companys common stock thereafter equals or exceeds $11.50 per share for any 20 trading days within any 30 day trading period. On October 11, 2007, 1,595,105 shares of the Companys common
stock in



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escrow met the required performance conditions and were released from escrow. See footnote 17, Subsequent Events, for additional information relating to the
release of the 1,595,105 shares. Such shares are considered contingently issuable shares under Statement of Financial Accounting Standards (SFAS) No. 128 and are not considered outstanding for purposes of computing loss per share of
common stock. In addition, no effect has been given to potential issuances of common stock from warrants or the Series A Convertible Preferred stock in the diluted computation as their effect would not be dilutive due to net losses. Accumulated but
unpaid dividends on Series A convertible preferred stock are deducted from net income or added to net loss.

Derivative Instrument

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, no interest rate swaps were outstanding as of September 30, 2007.

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, 2007, no valuation allowances were recorded. For the three and nine months ended September 30, 2007 and 2006, 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.

In January 2007, the Company adopted FIN 48,
Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109, which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an
uncertain position may be recognized only if it is more likely than not that the position is sustainable based on its technical merits. The adoption of FIN 48 did not have a material effect on the Companys results of operations or
financial condition.

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.

Recently Issued Accounting Pronouncements

In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities 
Including an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 provides for an election to expand the use of fair value accounting but does not



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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 and may be adopted by the Company in the first quarter of fiscal year 2008. The Company is
determining whether fair value accounting is appropriate for any of its eligible items and cannot estimate the impact, if any, which SFAS No. 159 will have on its results of operations and financial condition.

In December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration Payment Arrangements (FSP EITF 00-19-2). The FSP
specifies the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement,
should be recognized and measured separately in accordance with FASB SFAS No. 5, Accounting for Contingencies and related literature. FSP EITF 00-19-2 further clarifies that a financial instrument subject to a registration payment
arrangement should be accounted for in accordance with other applicable generally accepted accounting principles without regard to the contingent obligation to transfer consideration. The FSP applies immediately to registration payment arrangements
and the financial instruments subject to those arrangements that are entered into or modified subsequent to December 21, 2006. Whereas, for registration payment arrangements and the financial instruments subject to those arrangements entered
into prior to its issuance, the FSP applies to the Companys financial statements for the fiscal year beginning in 2007. The Company adopted the provisions of FSP EITF 00-19-2 beginning in January 2007 with no impact on our Consolidated
Financial Statements.



|4. | Property and equipment
|-- | ----------------------

Property and
equipment consist of the following at September 30, 2007:



|                               |  |   |         |  
|------------------------------ |  | - | ------- | -
|Machinery and equipment        |  | $ | 105,733 |  
|Furniture and fixtures         |  |   | 472,805 |  
|Leasehold improvements         |  |   | 47,485  |  
|                               |  |   |         |  
|Gross assets                   |  |   | 626,023 |  
|Less: Accumulated depreciation |  |   | (5,809  | )
|                               |  |   |         |  
|Property and equipment, net    |  | $ | 620,214 |  
|                               |  |   |         |  



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|5. | Accounts payable and accrued expenses
|-- | -------------------------------------

Accounts payable and accrued expenses consist of the following:



|                                                  |  |                    |            |                   |   |          
|------------------------------------------------- |  | ------------------ | ---------- | ----------------- | - | ---------
|                                                  |  | September 30, 2007 |            | December 31, 2006
|Accounts payable                                  |  | $                  | 11,703,523 |                   | $ |         
|Accrued expenses                                  |  |                    | 1,969,006  |                   |   |         
|Coupons payable                                   |  |                    | 1,084,588  |                   |   |         
|Accrued bonus                                     |  |                    | 524,830    |                   |   |         
|Deferred acquisition costs payable                |  |                    |           |                   |   | 3,163,628
|Principal payments on financed insurance premiums |  |                    | 30,894     |                   |   | 331,239  
|Income taxes payable                              |  |                    |           |                   |   | 343,423  
|Delaware franchise tax payable                    |  |                    |           |                   |   | 70,462   
|Rating agency fees payable                        |  |                    |           |                   |   | 234,100  
|Other                                             |  |                    |           |                   |   | 656,032  
|                                                  |  |                    |            |                   |   |          
|Total                                             |  | $                  | 15,312,841 |                   | $ | 4,798,884
|                                                  |  |                    |            |                   |   |          



|6. | Major customer
|-- | --------------

The Company has one major
customer that accounted for approximately 17.7% of sales for the three months ended September 30, 2007 and 17.3% of sales for the nine months ended September 30, 2007. The aggregate accounts receivable from this customer amounted to
approximately $1,275,000 of the total accounts receivable at September 30, 2007.



|7. | Intangible assets
|-- | -----------------

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



|                    |  |                      |             |                         |   |                   |  |   |            
|------------------- |  | -------------------- | ----------- | ----------------------- | - | ----------------- |  | - | -----------
|                    |  | Gross CarryingAmount |             | AccumulatedAmortization |   | Net CarryingValue
|Patent technology   |  | $                    | 40,000,000  |                         | $ | 1,457,534         |  | $ | 38,542,466 
|Supply relationship |  |                      | 1,000,000   |                         |   | 24,292            |  |   | 975,708    
|Trademarks          |  |                      | 120,000,000 |                         |   |                  |  |   | 120,000,000
|Goodwill            |  |                      | 384,509,382 |                         |   |                  |  |   | 384,509,382
|                    |  |                      |             |                         |   |                   |  |   |            
|                    |  | $                    | 545,509,382 |                         | $ | 1,481,826         |  | $ | 544,027,556
|                    |  |                      |             |                         |   |                   |  |   |            



|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. On September 28, 2007, the Company made a $300,000 principal payment on its first lien term loan. Through September 30, 2007, the Company has paid
$600,000 in principal on its first lien term loan.



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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 the option of the Company, 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 of 2.25% per annum. This applicable margin is in effect for the first six months following May 21, 2007. Thereafter, the applicable margin will be 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, which resulted in an interest rate of 8.61% at
September 30, 2007. 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, 2007 of 11.36%.

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. Mandatory prepayments
under the first lien facility 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. After the first lien facility is re-paid in full, the
second lien facility requires mandatory prepayments, which 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.
| | - |  | ---------------------



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The first lien credit facility requires that the Company:



| |  |  | maintain a ratio of consolidated EBITDA to consolidated cash interest charges of at least 1.75 to 1 increasing over the term of the facility to 3.00 to 1;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a leverage ratio for all Companys debt which restricts the Company from allowing its total debt to be greater than 6.25 times its consolidated EBITDA,
stepping down to 2.25 to 1 over the term of the facility; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a leverage ratio which restricts the Company from allowing its first lien debt to be greater than 4.5 times its consolidated EBITDA, stepping down to 1.25 to 1 over
the 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 6.75 times its consolidated EBITDA, stepping down to 2.75 to 1 over the term of the facility. The Company was in compliance with all of its debt covenants at
September 30, 2007.

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

Long term debt as of September 30, 2007 is as follows:



|                         |  |   |            
|------------------------ |  | - | -----------
|First lien term loan     |  | $ | 119,400,000
|Second lien term loan    |  |   | 40,000,000 
|                         |  |   |            
|Total Debt:              |  |   | 159,400,000
|Less: Current maturities |  |   | 1,200,000  
|                         |  |   |            
|Total long term debt     |  | $ | 158,200,000
|                         |  |   |            



|9. | Stock-based compensation
|-- | ------------------------

On
October 19, 2006, the compensation committee of the board of directors unanimously approved a stock plan and directed it be submitted to the stockholders for approval. During a special meeting of stockholders 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. During the second and third quarters of 2007, the Company granted options to
purchase 8,512,500 shares of stock.

The Company has two types of stock options, traditional service-based with a four year graded (25%
vest each year) vesting and two market condition-based stock options which vest when the underlying stock prices reach $16.75 and $20.25, respectively, and remain there for 20 out of 30 consecutive days. Stock options are granted to employees at
exercise prices equal to the fair market value of the Companys stock at the dates of grant. 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.

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.



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



|                          |  |                                      |           |                                     |   |          
|------------------------- |  | ------------------------------------ | --------- | ----------------------------------- | - | ---------
|                          |  | Three months endedSeptember 30, 2007 |           | Nine months endedSeptember 30, 2007
|Service period-based      |  | $                                    | 1,956,728 |                                     | $ | 2,509,552
|Market price-based $16.75 |  |                                      | 1,001,312 |                                     |   | 1,302,715
|Market price-based $20.25 |  |                                      | 742,132   |                                     |   | 965,184  
|                          |  |                                      |           |                                     |   |          
|Total                     |  | $                                    | 3,700,172 |                                     | $ | 4,777,451
|                          |  |                                      |           |                                     |   |          

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: expected life 10 years, no dividends and volatility of 35.9%. The cost of the service-based stock option is being amortized over a four year vesting period. No
forfeitures were assumed for any of the options. In the case of the market-condition-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-condition based options over the vesting period, which has been determined to be 2.76 years and 3.68 years for the $16.75 and $20.25 awards, respectively.



|10. | Liquidity and capital resources
|--- | -------------------------------

The
Companys current cash position is $1,043,487. The Company currently has outstanding payables, accrued expenses and liabilities other than derivative liabilities of $15,312,841. The Companys short term liabilities, other than derivative
liabilities exceed our available cash position by $14,269,354. As noted in the long-term debt note (footnote 8), the Company has a revolving credit facility of $20 million, which it can use to augment cash requirements.



|11. | Notes payable to stockholders and related party transactions
|--- | ------------------------------------------------------------

On February 15, 2007, Stephen B. Hughes, our founder and chief executive officer, agreed to lend the Company up to $500,000 to cover operating expenses, to be drawn as needed by the Company. The loan had interest
at a rate equal to the lowest applicable federal short term rate in effect pursuant to Section 1274(d) of the Internal Revenue Code of 1986, as amended, as the same may be adjusted from time to time. The total amount owed on the loan and
accrued interest of $4,000 were repaid in full on June 19, 2007.

In June 2007, amounts owed to three Initial Stockholders for
advances to the Company to cover expenditures for approximately $256,000 were repaid, without interest.

The Company previously paid
approximately $10,000 a month for office space and general and administrative services to affiliates of two of the Initial Stockholders. This arrangement terminated on May 21, 2007.



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Certain stockholders, five of whom are directors and one senior advisor, purchased an aggregate of
1,000,000 warrants concurrently with the closing of the Companys initial public offering at a price of $1.70 per warrant from the Company.



|12. | 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 it designated as fair value hedges of the fixed-rate debt. Under these swaps, the Company receives
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, 2007, the Company paid 5.05% and received 5.36% with the benefit reducing interest expense by $26,866.



|13. | 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 licensed technology. The agreement for each country expires at the end of the term of each patent in such country 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, 2007 were $188,325.



|14. | Income taxes
|--- | ------------

The Companys effective
tax rate for the year is dependent on many factors including the Companys ability to use various tax credits, the impact of enacted tax laws in jurisdictions in which the Company operates and the amount of taxable income it earns. Based on the
above factors the Companys effective tax rate for the year is expected to be 40% excluding the impact of the losses related to derivative liabilities, which is not deductible for tax purposes. The deferred tax liability of $71,227,593
represents primarily the difference between the tax and accounting basis of intangible assets acquired in the GFA merger (see footnote 2).



|15. | Commitment and contingencies
|--- | ----------------------------

In June 2007,
GFA entered into a lease agreement for the lease of a new corporate office facility located in Paramus, NJ. The lease has an approximate five year life with the option to extend the lease for two additional five year terms. The annual rental expense
is approximately $300,000 for the first five years.

In July, 2007, GFA entered into three lease agreements for the lease of a new
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.



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The Company uses interest rate swaps to cover exposure to changes in interest rates on its secured debt
financing; no interest rate swaps were outstanding as of September 30, 2007.

The Company enters into forward purchase commitments for
a portion of its 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 $19.7 million as of September 30, 2007. The commitments are expected to be liquidated by June 30, 2008. The Company has made a determination that these agreements qualify as normal
purchases and sales in the normal course of business and, therefore, do not qualify as derivatives as defined under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities.

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 significant adverse effect on the Companys financial position, results of operations or cash flows.



|16. | Stockholders equity
|--- | --------------------

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 warrants. The net proceeds of approximately $246 million
received by the Company were used to fund a portion of the GFA merger acquisition costs.

Dividends

Dividends on the Series A convertible preferred stock are cumulative and compound from May 21, 2007, which we sometimes refer to as the date of
original issuance, at the annual rate of 8% (multiplied times the $9.00 per share purchase price). Beginning five years after the date of original issuance and at the end of each calendar quarter thereafter, the dividend rate will increase at the
rate of 0.25% until the dividend rate equals 11%. Beginning seven years after the date of issuance:



| |  |  | the annual dividend rate will increase to 15% for each quarter thereafter for which we fail to declare and pay dividends in full in cash, and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the annual dividend rate will be fixed at 15% if we fail thereafter to declare and pay dividends in cash for three consecutive quarters.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------

No dividends may be declared or paid on any common stock, nor may the Company redeem any common stock, subject to
limited exceptions, until the Company has paid all accrued dividends on the Series A convertible preferred stock in cash. If the Company pays any dividend or distribution on the common stock, the holders of the Series A convertible preferred stock
also will be entitled to receive such dividend or distribution on an as-converted basis.



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Liquidation Preference

Holders of the Series A convertible preferred stock have a liquidation preference in the amount of $9.00 per share plus accrued but unpaid dividends. If
an event defined as a Liquidation occurs before the fifth anniversary of the date of original issuance of the Series A convertible preferred stock, the liquidation preference will include a premium calculated assuming that the
Liquidation occurred on the last day of the quarterly dividend period on or after the fifth anniversary. If the Company assets are not sufficient to pay the liquidation preference of the Series A convertible preferred stock in full, the holders of
the Series A convertible preferred stock will share pro rata in any distribution based on the relative amounts of their respective liquidation preferences, and no distributions will be made to the holders of common stock. However, the holders of
Series A convertible preferred stock will participate in liquidating distributions on an as-converted basis, if by so doing the amount they receive would be greater than their liquidation preference.

A liquidation also includes the sale or merger of the Company with another entity in which stockholders of the Company control less than 50 percent of
the voting power of the surviving company. Under Emerging Issues Task Force Topic No. D-98, such a provision requires the preferred stock to be accounted for outside of permanent equity. The Company accounts for the preferred stock as temporary
equity in the mezzanine section of the balance sheet.

Optional Conversion at Holders Election

The Series A convertible preferred stock will be convertible at any time, at the option of the holder, into the number of shares of common stock arrived
at by dividing $9.00 per share (which is the initial conversion price) into the per share liquidation preference of $9.00 per share, plus accrued but unpaid dividends. To the extent that dividends accrue but are not paid, the number of shares of
common stock issuable upon conversion of the Series A convertible preferred stock will increase.

Adjustments to Conversion Rate

The conversion price will decrease, and the number of shares of common stock issuable upon conversion will therefore increase, if the
Company becomes subject to penalties for delays in taking actions required by the investors relating to the registration of the shares of common stock issued in connection with the private placement. If we do not cause the registration statement to
remain effective for the period required by the registration rights agreement, or if investors are not permitted to utilize the registration statement to resell shares for 45 consecutive days or for more than an aggregate of 90 days during any
12-month period, then the conversion price will be reduced by 1% on each 90th day anniversary of the default, if the default has not been cured, subject to a maximum total reduction of 9%.

In no event will a holder of Series A convertible preferred stock be entitled to a cash adjustment in lieu of these adjustments to the conversion price.



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The conversion price will also be reduced if and to the extent that the shares of common stock issuable
upon conversion of the Series A convertible preferred stock represent less than 22.2508% of the Companys common stock on a fully diluted basis immediately after the closing of the private placement, based upon the Companys
representations and warranties to the investors as to the Companys capitalization at that time. The Company does not believe that this particular adjustment will be required. The conversion price also will be subject to typical anti-dilution
adjustments in the event of stock splits, stock dividends and similar events, and will be entitled to anti-dilution protection, subject to limited exceptions (including an exception for up to 9,650,000 options issued to employees, directors or
consultants under a board-approved option plan), for issuances of common stock at a price below the conversion price then in effect or the average closing price of the common stock over the 30-day period ending three days before the date of
determination. The anti-dilution adjustments will be made on a weighted average basis, which means that the number of shares sold at such price and the number of shares outstanding before such sale will be taken into account in adjusting the
conversion price.

Mandatory Conversion

Conversion of all, or a portion of (but not less than 20% of the then outstanding) Series A convertible preferred stock will be mandatory, at the conversion price then in effect, upon the first to occur of:

(1) the election to convert by holders of at least a majority of the Series A convertible preferred stock, or

(2) the Companys election to force a conversion if (i) a registration statement for the resale of the common stock issuable upon conversion of
the Series A convertible preferred stock is effective, (ii) the Company has also elected to redeem all the public warrants that we sold in the Companys initial public offering, and (iii) the last sales price of the Companys
common stock has been at least $11.50 per share, if before three years after the date of original issuance of the Series A convertible preferred stock, or at least $12.50 per share on each of 20 trading days within any 30-trading day period ending
on the third business day before we provide notice of the Companys election to force the conversion of the Series A convertible preferred stock, if more than three years after the date of original issuance.

If the Company elects to exercise its right to force conversion within three years of the date of original issuance, the number of shares of common stock
issued on conversion will be calculated assuming that the redemption occurs on the last date of the dividend period to occur on or after such third-year anniversary.

Redemption

The Company will have the right to redeem all or a portion of (but not less than 20% of
the then outstanding) Series A convertible preferred stock at any time after issuance, out of funds legally available for that purpose and subject to compliance with restrictions on redemptions imposed by our lenders, for a cash amount equal to the
liquidation preference of $9.00 per share, plus accrued but unpaid dividends. However, if the redemption occurs prior to five years after the date of original issuance of the Series A convertible preferred stock, the redemption price will include a
premium calculated assuming that the redemption occurs on the last day of the quarterly dividend period to occur on or after such fifth-year anniversary.



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Voting Rights

Holders of the Series A convertible preferred stock are entitled to vote on an as-converted basis together with the holders of common stock (without regard to any 4.99% to 9.99% limitation on conversion described
above to which investors may elect to be subject), and not separately as a class except as required by law or by the restated certificate of incorporation. So long as the number of outstanding shares of Series A convertible preferred stock is at
least 12.5% of the total number of shares of Series A convertible preferred stock issued at the closing of the private placement, without the consent of the holders of a majority of such shares then outstanding, we may not undertake various
corporate actions, including the following:

(1) incur or refinance any debt (with limited exceptions, including debt permitted at the time
of the closing of the private placement) or modify any agreements relating to permitted debt;

(2) issue any equity securities (with
limited exceptions, including up to 9,650,000 options issued to employees, directors or consultants under a board-approved option plan);

(3) enter into, amend or terminate the material terms of any contract with any related party;

(4) take any action that could
result in a Liquidation, as that term is defined above (other than a chapter 11 proceeding);

(5) make acquisitions or investments or
dispositions of assets that exceed threshold amounts;

(6) change the certificate of incorporation in a manner that adversely affects the
Series A convertible preferred stock or take any action that impairs our ability to honor the rights and preferences of the Series A convertible preferred stock; or

(7) make any change in accounting methods or policies (other than as required by GAAP), or any change in auditors.

On June 4, 2007, the Company filed a registration statement with the Securities and Exchange Commission requesting that 74,410,188 shares of its common stock related to the private placement noted above be registered so that the
selling shareholders would be able to sell their shares in the public market. The registration statement includes enough shares to cover the number of shares issuable upon conversion or exercise because of potential reductions of the initial $9.00
conversion price or investor warrant exercise price for reasons that include penalties and anti-dilution measures and increases to the initial $9.00 Series A convertible preferred stock liquidation preference from accrued but prepaid dividends.



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Common Stock in Escrow

All of the shares of the Companys common stock outstanding prior to the date of its initial public offering have been placed in escrow with an
escrow agent. The shares of common stock are subject to release from escrow in two equal increments: (1) 1,595,105 shares on December 16, 2008; and (2) 1,595,105 shares when the last sale price of the Companys common stock
equals or exceeds $11.50 per share for any 20 trading days within any 30 trading day period. On October 11, 2007, 1,595,105 shares of the Companys common stock in escrow met the performance conditions and were released from escrow. See
footnote 17, Subsequent Events, for additional information relating to the release of the 1,595,105 shares.

Because the shares placed in
escrow are to be released to the existing stockholders (all of whom are officers and/or directors or are a related party to an officer and director) upon meeting the conditions set forth above, the Company will be required to recognize a charge
based on the fair value of the shares at the time the shares are released from the escrow. The amount of such charge could be equal to the number of shares times the market value at such date. Based on the $12.31 per share price of the common shares
at the date the above conditions were met, a charge of $19,635,743 will be recorded in October 2007.

Common Stock-Public Warrants

On December 21, 2005, the Company consummated its initial public offering of 12,760,840 units. Each unit consists of one share of
common stock and one redeemable common stock purchase warrant (public warrants). Each warrant entitles 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 (founders warrants) for $1.70 per warrant with an exercise price of $6.00 per share. Each redeemable common stock purchase warrant is redeemable by the Company when the common
stock price equals or exceeds $11.50 per share for twenty out of thirty trading days ending on the third business day prior to the notice of redemption. On October 30, 2007, the Company called for redemption all of the outstanding public
warrants effective at 5:00 p.m., Eastern Time, on December 3, 2007. For additional information relating to the redemption, see footnote 17, Subsequent Events.



|17. | Subsequent Events
|--- | -----------------

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 October 25, 2007. On October 30, 2007, the Company called for redemption all of its outstanding public
warrants to purchase common stock. Each public warrant entitles the holder to purchase one share of common stock of the Company at a price of $6.00 per public warrant share exercised. However, at 5:00 p.m. Eastern Time on Monday, December 3,
2007, and thereafter, holders of the public warrants will no longer be entitled to exercise their warrants for common stock and will have no rights, except to receive the redemption price of $.01 per public warrant (unless the holder has properly
extended the time and date set for redemption in order to complete a filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended). There were 12,760,840 public warrants outstanding as of October 30, 2007 and, assuming that
all of the public warrants are exercised, will



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result in the Company receiving proceeds from the exercise of the public warrants of approximately $76.6 million. Under the terms of the secured bank
financing with Banc of America Securities LLC and Bank of America, N.A., the Company is required to use one-half of the proceeds of the public warrant redemption to pay off a portion of its first lien term loan. If all of the public warrants are
exercised, the Company will have approximately 43.1 million shares of common stock issued and outstanding.

The redemption of the
public warrants is required as a first step which will allow the Company to force the conversion of the Series A convertible preferred stock into common stock. The forced conversion of the Series A convertible preferred stock is also subject to the
condition that the last sales price of the Companys common stock be at least $11.50 per share for 20 out of 30 trading days. Although the Company is currently able to force conversion of the Series A preferred stock, no decision to do so has
been made at this time. Assuming the Company forces conversion prior to May 21, 2010, the additional common shares that would be issued would be approximately 19.5 million shares, which would include approximately 4.1 million shares
issued as dividends.

Separately, 1,595,105 of the shares of common stock held in escrow were released on October 11, 2007. The
1,595,105 shares were also subject to the condition that the last sales price of the Companys common stock be at least $11.50 per share for 20 out of 30 trading days. Accordingly, these common shares were released from escrow on
October 11, 2007. As noted above, the Company will record a charge to earnings in the fourth quarter of 2007 of $19,635,743.



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|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 fiscal year ended December 31, 2006 as well as the Risks Relating to Our Acquisition of GFA section included in Item 2.01 of our Form
8-K filed with the SEC on May 25, 2007.

GFA Merger

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 from Boulder to Smart
Balance, Inc. (herein called the Company). The Company is headquartered in Paramus, New Jersey and is believed to be one of the largest, focused marketers of functional food products in the U.S. (under the trade names Smart Balance® and Earth Balance®).



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As consideration for the merger, the Company paid GFA an aggregate of $491 million in cash (which
included post-closing bonus payments net of tax benefits). The cash consideration for the merger was funded with cash held in the Companys trust account established in connection with its initial public offering as well as the net proceeds of
the private placement and the secured debt financing, both of which closed on May 21, 2007. None of Boulders stockholders who owned shares of the Companys common stock issued in its initial public offering exercised their right to
vote against the GFA merger at the special meeting and convert their shares into a pro rata portion of the trust account.

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.

Company Overview

Smart Balance, Inc., through its wholly-owned subsidiary, GFA, is a growing marketer of functional
food products in the U.S. (under the trade names Smart Balance® and Earth Balance®). 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. GFAs signature margarine products utilize a proprietary licensed, patented technology that is free of
trans fats and enhances good-to-bad cholesterol ratios. Recently, GFA has expanded its product offering beyond margarine by utilizing its heart healthy positioning and brand leverage in other product categories including milk, cream cheese, a butter
blend, peanut butter, popcorn, mayonnaise and cooking oils. GFA sells its products in mass merchandise, grocery, natural foods and convenience stores. In the natural food channel, GFA sells similar organic products under the trade name Earth
Balance®. GFA continues to pursue new growth opportunities and has several products targeted for introduction in the near future. Additional products are being considered for future
launches, particularly in the refrigerated foods/dairy segment.

GFAs primary
growth strategy is to continue to drive consumer and trade awareness of its brands, increase distribution of its existing products, and continue to launch additional line extensions and new products. GFA has consistently made substantial investments
in advertising and has found the Smart Balance® brand to be responsive to advertising. GFA actively advertises via network and cable TV, radio, free standing inserts, and in-store
promotions. GFA has 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.

The retail branded food industry is highly competitive, and numerous multinational, regional and local firms currently compete, or are
capable of competing, with GFA. GFA is subject to competitive conditions in all aspects of its business. GFA competes primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising, patent protections
and price. Substantial advertising and promotional expenditures are required to maintain or improve a brands market position or to introduce a new product. GFAs largest principal competitors are Unilever, Kraft 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 GFA.



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GFA does not own or operate any manufacturing facilities and sources its products through third-party
manufacturers. Outsourcing is designed to allow GFA to enhance production flexibility and capacity, leverage working capital, transfer risk, and focus its energy and resources on marketing and sales, while substantially reducing capital expenditures
and avoiding the costs of managing a production work force. Most of GFAs products have multiple third-party manufacturers. However, some of GFAs newer products are supplied by a sole source.

Except in unusual circumstances, GFA provides no raw materials to co-packers. However, it works with its manufacturers to source high quality ingredients
at attractive pricing. The prices paid for raw materials used in the products of GFA 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, GFA believes such raw materials to be in adequate supply and generally available from numerous sources.

GFA uses third party distributors and a network of public warehouses to deliver product from its manufacturers to its customers. It relies primarily on
one third party distributor to deliver all of its margarine and other refrigerated products. All freight costs associated with shipping finished products are borne by GFA.

GFAs signature margarine and popcorn products, which currently account for a majority of GFAs sales, 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. GFAs agreement with Brandeis provides GFA with an exclusive license to a number of patents. The agreement for each country expires at
the end of the term of each patent in such country and contains no minimum commitments. In addition, GFA has proprietary trade secrets, technology, know-how processes, and other intellectual property rights that are not registered.

GFA is subject to extensive regulation by agencies of the U.S. government and state regulatory authorities. The manufacturing, packaging, labeling,
advertising, distribution and sale of GFAs products are subject to regulation by various government agencies, principally the FDA. GFAs advertising is subject to regulation by the FTC, pursuant to the Federal Trade Commission Act, which
prohibits unfair or deceptive acts or practices including the dissemination of false or misleading advertising. GFAs activities are also regulated by various agencies of the states, localities, and foreign countries in which GFAs
products are sold.

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 do
not provide a meaningful comparison with the prior periods. Information for the three and nine months ended September 30, 2007 includes GFA beginning May 21, 2007. Information for the three and nine months ended September 30, 2006
relates solely to the Company as a shell company that had no operations.



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The following discussion should be read in conjunction with our unaudited condensed consolidated
financial statements and related notes thereto included elsewhere in this Form 10-Q.

Results of Operations for Three Months Ended September 30,
2007 Compared to the Three Months Ended September 30, 2006

Net Sales:

Net sales for the three months ended September 30, 2007 was $41.6 million, which represents sales after the acquisition of GFA on May 21, 2007.

Cost of Goods Sold:

The cost of goods sold in the three months ended September 30, 2007 was $21.6 million, resulting in a gross profit of $20.0 million, or 48.2% of net sales.

Selling, General and Administrative:

Total operating expenses for three months ended
September 30, 2007 was $14.7 million compared to $0.4 million for the corresponding period in 2006. The operating expenses for the second quarter of 2006 included the operating costs of the Company in its development stage, while the expenses
for the second quarter of 2007 included the selling, general and administrative expenses of the post-merger Company. In addition, the cost of stock-based compensation of $3.7 million, which was issued in conjunction with the GFA merger, was included
as part of SG&A for the third quarter of 2007.

Operating Income (Loss):

The Company had an operating profit of $5.3 million for three months ended September 30, 2007 compared with an operating (loss) of $0.4 million in
the corresponding period in 2006.

Other Income (Expense):

The Company incurred other expenses of $33.5 million in the three months ended September 30, 2007 compared to expense of $5.1 million in the
corresponding period in 2006. Included in the third quarter results for 2007 is a $29.6 million loss from derivative liabilities compared to a loss in the corresponding period in 2006 of $6.3 million. In addition, the third quarter results for 2007
included net interest expense of $3.9 million compared with interest income of $1.1 million in the corresponding period in 2006. The increase in interest expense in the third quarter of 2007 is due to the borrowings for the acquisition of GFA
whereas the Company had interest income from the investment of the IPO proceeds held in trust during the third quarter of 2006.



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Income Taxes:

The provision for income taxes for the third quarter of 2007 was $0.4 million compared with $0.3 million in the third quarter in 2006. The provision is based on taxable income, which excludes the losses for
derivatives, which are not deductible for tax purposes.

Net Income (Loss):

Net loss for the third quarter of 2007 was $28.6 million, or $1.09 per common share for both basic and diluted shares outstanding, compared to a loss of
$5.8 million, or $0.40 per common share, in the corresponding period in 2006.

Results of Operations for the Nine Months Ended September 30, 2007
Compared to the Nine Months Ended September 30, 2006

Net Sales:

Net sales for the nine months ended September 30, 2007 was $60.4 million, which represents sales after the acquisition of GFA on May 21, 2007.

Cost of Goods Sold:

The cost of goods sold in the nine months ended September 30, 2007 was $31.5 million, which resulted in a gross profit of $28.9 million, or 47.9% of net sales.

Selling, General and Administrative (SG&A):

Total operating expenses for the nine months ended September 30, 2007 was $23.0 million compared to $1.1 million for the corresponding period in 2006. The operating expenses for the first nine months of 2006
included the operating costs of the Company during its development stage, while the expenses for the first nine months of 2007 includes the selling, general and administrative expenses of the post-merger company as well as the cost of stock-based
compensation of $4.3 million, which was issued in conjunction with the merger.

Operating Income (Loss):

The Company had an operating profit of $5.9 million for the nine months ended September 30, 2007 compared with operating (loss) of $1.1 million for
the corresponding period in 2006.

Other Income (Expense):

The Company incurred other expenses of $54.1 million in the nine months ended September 30, 2007 compared to expenses of $.9 million in the
corresponding period in 2006. Included in the results for the nine months ended September 30, 2007 was a $50.5 million loss from derivative liabilities compared to a loss of $4.0 million from derivatives in the corresponding period in 2006. In
addition, the results for the first nine months of 2007 includes interest expense of $6.0 million and interest income of $2.3 million compared to $3.1 million of interest income during the corresponding period in 2006 from the investment of the IPO
proceeds held in trust. The increase in interest expense in the first nine months of 2007 is due to the borrowings for the GFA merger.



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Income Taxes:

The provision for income taxes for the nine months ended September 30, 2007 was $0.9 million compared with $.7 million in the corresponding period in 2006. The provision is based on taxable income, which excludes
the gains or losses for derivatives, which are not deductible for tax purposes. The effective tax rate, excluding the gains or losses for changes in derivative liabilities, was approximately 40%.

Net Income (Loss):

Net loss for the
nine months ended September 30, 2007 was $49.1 million, or a loss of $2.49 per common share for both basic and diluted shares outstanding, compared to net loss of $2.7 million, or $0.19 per common share, in the corresponding period in 2006.

Cash Flows

The following
discussion includes the cash flows of GFA, the Companys wholly-owned subsidiary, from May 21, 2007 through September 30, 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.

The following discussion should be read in conjunction with our
unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q.

Nine Months Ended
September 30, 2007 Compared to Nine Months Ended September 30, 2006

Cash used in operating activities was $1.8 million for
the nine months ended September 30, 2007 compared to cash provided by operating activities of $1.6 million in the corresponding period in 2006. In the nine months ended September 30, 2007, the Company had a loss of $49.1 million, which
consisted of a non-cash charge for derivative losses of $50.5 million. Excluding the non-cash charge for derivative losses, a higher working capital accounted for most of the increase in the 2007. The higher working capital resulted from increased
inventory levels, higher prepaid expenses due to increase in estimated tax payments, and capitalized commercial development costs. The lower accounts payable and accrued expenses related mostly to the payment of deferred acquisition costs. In the
first nine months of 2006, the Company had net loss of $2.7 million, which was largely offset by the non-cash derivative gain of $4.0 million.

Cash used in investing activities totaled $486.8 million during the first nine months of 2007, which was primarily related to the acquisition of GFA on May 21, 2007. In the first nine months of 2006, the Company had the net use of $1.6
million, which resulted from the purchase of treasury bills in excess of the proceeds received.



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Cash provided by financing activities was $388.0 million for the nine months ended September 30,
2007 compared to a use of $0.3 million for the nine months ended September 30, 2006. The first nine months of 2007 included the proceeds from the issuance of common and preferred stock of $107.5 million and $138.5 million, respectively, and the
issuance of debt of $160.0 million, all of which was issued in conjunction with the GFA acquisition which was completed on May 21, 2007. In the first nine months of 2006, the payment of offering costs accounted for the use of cash.

Liquidity and Capital Resources

Liquidity:

GFAs 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 its major products. While changes in key operating costs, such as outsourced production, advertising, promotion and distribution, may adversely affect cash flows, GFA generates
significant cash flows as demand for its products grows. GFAs principal liquidity requirements are to finance current operations, pay down existing indebtedness and fund future expansion. Currently, GFAs primary sources of liquidity
requirements to meet these needs are cash generated by its operations.

We believe that cash flows generated from operations, existing cash
and cash equivalents, and borrowing capacity under the revolving credit facility should be sufficient to finance capital requirements for GFAs core business for the foreseeable future. As of September 30, 2007, $20 million was available
for borrowing under our revolving credit facility. Developing and bringing to market other new brands and business opportunities may require additional outside funding, which may require the Company to seek out additional borrowing arrangements. The
Company currently has no plans for making acquisitions.

Secured Debt Financing:

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. On September 28, 2007, the Company
made a $300,000 principal payment on its first lien term loan. Through September 30, 2007, the Company has paid $600,000 in principal on its first lien term loan.

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 the option of the Company, 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 of 2.25% per annum. This applicable margin is in effect for the first six months following
May 21, 2007. Thereafter, the applicable margin will be determined in accordance with a pricing grid based on the Companys leverage ratio. The Company opted to elect conversion of the



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first lien facility to an interest rate based on LIBOR plus an applicable margin of 3.25% per annum beginning July 1, 2007, which resulted in an
interest rate of 8.61% at September 30, 2007. 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, 2007 of 11.36%.

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. Mandatory prepayments under the first lien facility 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. After the first lien
facility is re-paid in full, the second lien facility requires mandatory prepayments, which 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 1.75 to 1 increasing over the term of the facility to 3.00 to 1;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a leverage ratio for all Companys debt which restricts the Company from allowing its total debt to be greater than 6.25 times its consolidated EBITDA,
stepping down to 2.25 to 1 over the term of the facility; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a leverage ratio which restricts the Company from allowing its first lien net debt to be greater than 4.5 times its consolidated EBITDA, stepping down to 1.25 to 1
over the 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 6.75 times its consolidated EBITDA, stepping down to 2.75 to 1 over the term of the facility. The Company was in compliance with all of its debt covenants
at September 30, 2007.



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Long term debt as of September 30, 2007 is as follows:



|                         |  |   |            
|------------------------ |  | - | -----------
|First lien term loan     |  | $ | 119,400,000
|Second lien term loan    |  |   | 40,000,000 
|                         |  |   |            
|Total Debt:              |  |   | 159,400,000
|Less: Current maturities |  |   | 1,200,000  
|                         |  |   |            
|Total long term debt     |  | $ | 158,200,000
|                         |  |   |            

Off-Balance Sheet Arrangements; Commitments and Contractual Obligations

As of September 30, 2007, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
In addition to the preferred stock mentioned in note 15 to the financial statements, the Company had the following commitments and contractual obligations:



| |  |  | A lease agreement for the lease of a new corporate office facility located in Paramus, NJ. The lease has an approximate five year life with the option to extend the
lease for two additional five year terms. The annual rental expense is approximately $300,000 for the first five years.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Three lease agreements for the lease of a new 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 $19.7 million as of September 30, 2007. The commitments are
expected to be liquidated by June 30, 2008.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company uses interest rate swaps to cover exposure to changes in interest rates on its secured debt financing; no interest rate swaps were outstanding as of
September 30, 2007.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

GFA is exposed to financial market risks due primarily to changes in interest rates, which we manage primarily by managing the maturities of its financial instruments. GFA does not use derivatives to alter the interest characteristics of
its financial instruments.

GFA purchases significant amounts of soy, palm and canola oil products to support the needs of its 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. GFA does not engage in any hedging activities since it enters into agreements that qualify as
normal purchases and sales in the normal course of business.



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The Company uses interest rate swaps to cover exposure to changes in interest rates on its secured debt
financing; no interest rate swaps were outstanding as of September 30, 2007.

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 and Accounting Officers, 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, 2007. 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 and Accounting Officers, 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, 2007, our Chief Executive Officer and
Principal Financial and Accounting Officers 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.During the fiscal quarter ended September 30, 2007, there was no change in our internal control over financial reporting that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.



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Part II. Other Information



|Item 1. | Legal Proceedings.
|------- | ------------------

We are not a party to any legal
proceeding that we believe would have a material adverse effect on our business, results of operations or financial condition.

Earlier
this year, three parties filed Oppositions to European Patent No. 820,307. We believe that these claims are without merit and that neither this proceeding, nor its outcome, will have any material adverse effect on our business.

On April 4, 2007 Kellogg North America Company filed a Notice of Opposition before the Trademark Trial and Appeal Board opposing our registration
application for the Smart Balance Omega mark for use with cereal, cereal based snack foods, oatmeal and processed oats. On July 10, 2007, we filed an Answer to the Notice of Opposition. At this time, we do not believe that this
administrative proceeding, nor its outcome, will have any material adverse effect on our business.

On September 7, 2007 HP Hood LLC
filed a lawsuit against the Company, GFA and Fitness Foods, Inc. (the plaintiff has indicated it will voluntarily dismiss Fitness Foods, Inc. from the lawsuit) in the U.S. District Court for the District of Massachusetts located in Boston
challenging the right of the Company and GFA to use their Smart Balance trademark on milk products. Among other things, HP Hood LLC sought a preliminary injunction preventing the Company and GFA from using the word smart in connection
with the sale of milk products. HP Hood LLC also sought unspecified damages. The Company and GFA filed an answer denying the principal allegations of the complaint. A trial date was set for October 29, 2007. On October 5, 2007, the parties
entered into a Settlement Agreement which resulted in the above action being dismissed with prejudice with no admission of liability by either side.



|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 fiscal year ended December 31, 2006 other than those risks set forth
in the section entitled Risks Relating to Our Acquisition of GFA, located on page 3 of our Form 8-K filed with the SEC on May 25, 2007.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

Dividends on the
Series A convertible preferred stock are cumulative and compound from May 21, 2007 at the annual rate of 8% (multiplied by the $9.00 per share purchase price) and will be payable quarterly when and as declared by our board of directors.
However, under the terms of our secured debt financing, we are prohibited from paying cash dividends. On September 30, 2007, $4,062,467 of dividends had accrued on our cumulative Series A convertible preferred stock. As of November 8,
2007, the total accrued dividends on our Series A convertible preferred stock was $5,281,083.



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|Item 6. | Exhibits.
|------- | ---------

See Exhibit Index located elsewhere in
this quarterly report on Form 10-Q.



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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 9, 2007 |  |  |  | SMART BALANCE, INC. (Registrant)                                                                                 
|                 |  | 
|                 |  |  |  | /s/ Robert S. Gluck                                                                                              
|                 |  |  |  | Robert S. Gluck Vice Chairman and Chief Financial
Officer (Authorized officer of Registrant)                     
|                 |  | 
|                 |  |  |  | /s/ John F. Konzelmann                                                                                           
|                 |  |  |  | John F. Konzelmann Vice President,
Controller (Authorized officer of Registrant and principal accounting officer)



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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 2002
|     | 
|31.2 |  | 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 2002
|     | 
|32.1 |  | 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 2002                    
|     | 
|32.2 |  | 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                    



36