UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

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

For the quarterly period ended March 31, 2007

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

For the transition period from                                          to                                         

Commission file number: 0-17363

LIFEWAY FOODS, INC.

(Exact name of small business issuer as specified in it charter)

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

6431 WEST OAKTON, MORTON GROVE, ILLINOIS 60053

(Address of principal executive offices)

(847) 967-1010

(Issuer’s telephone number)

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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 þ No o

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of April 27, 2007, the issuer had 16,889,237 shares of common stock, no par value, outstanding.

Transitional Small Business Disclosure Format (Check one): Yes o No þ

 

 

INDEX

PART I — FINANCIAL INFORMATION			3
ITEM 1. FINANCIAL STATEMENTS			3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION			20
ITEM 3. CONTROLS AND PROCEDURES			23
PART II — OTHER INFORMATION			23
ITEM 5. OTHER INFORMATION			23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K			23
SIGNATURE			24

LIFEWAY FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007 AND 2006

AND DECEMBER 31, 2006

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 2007 and 2006 (Unaudited) and December 31, 2006

		(Unaudited)
		March 31,								December 31,
		2007				2006				2006
ASSETS
Current assets
Cash and cash equivalents		$	1,013,345			$	3,817,745			$	1,547,812
Marketable securities			8,560,756				8,337,907				8,491,363
Inventories			2,883,455				2,024,330				2,522,196
Accounts receivable, net of allowance for doubtful accounts of $39,460 and $45,000 at March 31, 2007 and 2006 and $80,000 at December 31, 2006			4,587,966				3,054,017				3,942,717
Prepaid expenses and other current assets			9,992				15,247				11,983
Other receivables			50,425				55,404				71,050
Deferred income taxes			—				—				32,234
Refundable income taxes			158,553				40,388				267,771
Total current assets			17,264,492				17,345,038				16,887,126
Property and equipment, net			8,554,799				7,774,651				8,580,716
Intangible assets
Goodwill			3,952,425				75,800				3,952,425
Other intangible assets, net of accumulated amortization of $358,985 and $108,958 at March 31, 2007 and 2006 and $278,710 December 31, 2006			3,498,653				333,680				3,578,928
Total intangible assets			7,451,078				409,480				7,531,353
Total assets		$	33,270,369			$	25,529,169			$	32,999,195
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of notes payable			1,129,004			$	528,415			$	1,131,336
Accounts payable			1,239,046				453,022				1,463,014
Accrued expenses			341,189				245,168				480,101
Deferred income tax			31,032				4,251				—
Total current liabilities			2,740,271				1,230,856				3,074,451
Notes payable			5,201,873				2,887,785				5,746,718
Deferred income taxes			454,212				345,709				449,619
Stockholders’ equity
Common stock, no par value; 20,000,000 shares authorized; 17,273,766 shares issued; 16,889,237 shares outstanding at March 31, 2007; 17,273,776 shares issued; 16,793,310 shares outstanding at March 31, 2006; and 17,273,776 shares issued; 16,897,826 shares outstanding at December 31, 2006			6,509,267				6,509,267				6,509,267
Paid-in-capital			1,080,911				98,712				1,080,911
Treasury stock, at cost			(1,411,195	)			(1,015,146	)			(1,334,313	)
Retained earnings			18,454,103				15,317,611				17,318,772
Accumulated other comprehensive income (loss), net of taxes			240,927				154,375				153,770
Total stockholders’ equity			24,874,013				21,064,819				23,728,407
Total liabilities and stockholders’ equity		$	33,270,369			$	25,529,169			$	32,999,195

See accompanying notes to financial statements

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Three Months Ended March 31, 2007 and 2006 (Unaudited)
and The Year Ended December 31, 2006

		(Unaudited)
		Three Months Ended								Year Ended
		March 31,								December 31,
		2007				2006				2006
Sales		$	9,022,244			$	6,003,023			$	27,720,713
Cost of goods sold			5,449,825				3,305,643				17,081,992
Gross profit			3,572,419				2,697,380				10,638,721
Selling Expenses			770,081				582,943				3,065,254
General and Administrative			1,000,848				708,065				3,343,341
Total Operating Expenses			1,770,929				1,291,008				6,408,595
Income from operations			1,801,490				1,406,372				4,230,126
Other income (expense):
Interest and dividend income			65,799				86,235				388,339
Rental Income			8,600								11,401
Interest expense			(109,529	)			(50,226	)			(345,525	)
Gain (loss) on sale of marketable securities, net			14,137				(36,878	)			355,767
Gain on marketable securities classified as trading			608				512				791
Total other income (Expense)			(20,385	)			(357	)			410,773
Income before provision for income taxes			1,781,105				1,406,015				4,640,899
Provision for income taxes			645,774				511,352				1,745,075
Net income		$	1,135,331			$	894,663			$	2,895,824
Basic and diluted earnings per common share			0.07				0.05				0.17
Weighted average number of shares outstanding			16,895,351				16,792,378				16,829,601
COMPREHENSIVE INCOME
Net income		$	1,135,331			$	894,663			$	2,895,824
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on marketable securities (net of tax benefits)			264,952				275,537				(251,021	)
Less reclassification adjustment for gains (losses) included in net income (net of taxes)			(177,795	)			(21,648	)			504,305
Comprehensive income		$	1,222,488			$	1,148,552			$	3,149,108

See accompanying notes to financial statements

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2007 (Unaudited)
and the Year Ended December 31, 2006

		Common Stock, No Par Value																												Accumulated
		20,000,000 Shares								# of Shares																				Other
		Authorized								of																				Comprehensive
		# of Shares				# of Shares				Treasury				Common				Paid In				Treasury				Retained				Income (Loss),
		Issued				Outstanding				Stock				Stock				Capital				Stock				Earnings				Net of Tax				Total
Balances at December 31, 2005			17,273,776				16,790,510				483,266			$	6,509,267			$	90,725			$	(1,024,659	)		$	14,422,948			$	(99,514	)		$	19,898,767
Issuance of treasury stock for compensation			—				4,666				(4,666	)			—				13,311				15,855				—				—				29,166
Issuance of treasury stock for acquisition of Helios			—				202,650				—				—				976,875				323,125				—				—				1,300,000
Redemption of stock			—				(100,000	)			100,000				—				—				(648,634	)			—				—				(648,634	)
Other comprehensive income (loss):
Unrealized losses on securities, net of taxes and reclassification adjustment			—				—				—				—				—				—				—				253,284				253,284
Net income for the year ended December 31, 2006			—				—				—				—				—				—				2,895,824				—				2,895,824
Balances at December 31, 2006			17,273,776				16,897,826				578,600			$	6,509,267			$	1,080,911			$	(1,334,313	)		$	17,318,772			$	153,770			$	23,728,407
Redemption of stock			—				(8,589	)			8,589				—				—				(76,882	)			—				—				(76,882	)
Other comprehensive income (loss):
Unrealized gains on securities, net of taxes and reclassification adjustment			—				—				—				—				—				—				—				87,157				87,157
Net income for the three months ended March 31, 2007			—				—				—				—				—				—				1,135,331				—				1,135,331
Balances at March 31, 2007			17,273,776				16,889,237				587,189			$	6,509,267			$	1,080,911			$	(1,411,195	)		$	18,454,103			$	240,927			$	24,874,013

See accompanying notes to financial statements

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2007 and 2006 (Unaudited)
and the Year Ended December 31, 2006

		(Unaudited)
		Three Months Ended								Years Ended
		March 31,								December 31,
		2007				2006				2006
Cash flows from operating activities:
Net income		$	1,135,331			$	894,663			$	2,895,824
Adjustments to reconcile net income to net cash flows from operating activities, net of acquisition:
Depreciation and amortization			245,568				143,437				758,754
(Gain) Loss on sale of marketable securities, net			(14,137	)			36,878				(355,767	)
Gain on marketable securities classified as trading			(608	)			(512	)			(791	)
Deferred income taxes			6,536				(34,822	)			33,031
Treasury stock issued for services			—				17,500				29,166
Increase (decrease) in allowance for doubtful accounts			(40,540	)			10,000				45,000
(Increase) decrease in operating assets:
Accounts receivable			(604,709	)			(546,402	)			(1,190,448	)
Other receivables			20,625				1,031				(14,615	)
Inventories			(361,259	)			(307,331	)			(585,563	)
Refundable income taxes			109,218				(28,826	)			(256,209	)
Prepaid expenses and other current assets			1,991				(6,103	)			35,032
Increase (decrease) in operating liabilities:
Accounts payable			(223,968	)			26,769				638,999
Accrued expenses			(138,912	)			(109,843	)			125,090
Net cash provided by operating activities			135,136				96,439				2,157,503
Cash flows from investing activities:
Purchases of marketable securities			(802,587	)			(1,423,859	)			(7,509,692	)
Sale of marketable securities			896,419				960,801				7,285,071
Purchases of property and equipment			(139,376	)			(150,114	)			(680,174	)
Acquisition of Helios, net of cash acquired			—				—				(2,551,679	)
Net cash used in investing activities			(45,544	)			(613,172	)			(3,456,474	)
Cash flows from financing activities:
Purchases of treasury stock			(76,882	)			—				(648,634	)
Repayment of notes payable			(547,177	)			(19,603	)			(858,664	)
Net cash provided by (used in) financing activities			(624,059	)			(19,603	)			(1,507,298	)
Net decrease in cash and cash equivalents			(534,467	)			(536,336	)			(2,806,269	)
Cash and cash equivalents at the beginning of the period			1,547,812				4,354,081				4,354,081
Cash and cash equivalents at the end of the period		$	1,013,345			$	3,817,745			$	1,547,812

See accompanying notes to financial statements

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 1 – NATURE OF BUSINESS

Lifeway Foods, Inc. (The “Company”) commenced operations in February 1986 and incorporated under the laws of the state of Illinois on May 19, 1986. The Company’s principal business activity is the production of dairy products. Specifically, the Company produces Kefir, a drinkable product which is similar to but distinct from yogurt, in several flavors sold under the name “Lifeway’s Kefir;” a plain farmer’s cheese sold under the name “Lifeway’s Farmer’s Cheese;” a fruit sugar-flavored product similar in consistency to cream cheese sold under the name of “Sweet Kiss;” and a dairy beverage, similar to Kefir, with increased protein and calcium, sold under the name “Basics Plus.” The Company also produces several soy-based products under the name “Soy Treat” and a vegetable-based seasoning under the name “Golden Zesta.” The Company currently distributes its products throughout the Chicago Metropolitan area and various cities in the East Coast through local food stores. In addition, the products are sold throughout the United States and Ontario, Canada by distributors. The Company also distributes some of its products to Eastern Europe.

On August 3, 2006 the Company executed a Stock Purchase Agreement with George Economy, Amani Holdings, LLC and other shareholders (“the stockholders”) of the capital stock of Helios Nutrition, Ltd. (“Helios”) and Pride Main Street Dairy, L.L.C. pursuant to which the Company purchased all of the issued and outstanding stock of Helios from the Stockholders for a combination of an aggregate amount of 202,650 in shares of the Company’s common stock, no par value, $2,563,000 in cash, and a promissory note issued by the Company in favor of the Stockholders in the principal amount of $4,200,000. The Stock Payment, the Cash Payment and Promissory Note are subject to adjustment under certain circumstances in accordance with the terms of the Stock Purchase Agreement.

The final net purchase price for the assets was $8,063,000 including professional fees related to the acquisition. The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition.

Cash		$	11,321
Accounts Receivable Assumed			279,654
Inventories			219,634
Equipment, Building and Land			721,572
Prepaid Items			37,871
Trade Name — Intangible Asset			1,980,000
Formula — Intangible Asset			438,000
Contractual Backlog — Intangible Asset			12,000
Customer Relationships — Intangible Asset			985,000
Goodwill			3,876,625
Total Assets Acquired			8,561,677
Note Payable and Accounts Payable Assumed			(498,677	)
Net Assets Acquired		$	8,063,000

At closing, $2,563,000 was paid of the total purchase, $1,300,000 was paid in stock, with the balance due as a $4,200,000 note to be paid in sixteen equal installments over sixteen quarters. The goodwill is expected to be deductible for tax purposes.

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 1 – NATURE OF BUSINESS — Continued

The following unaudited proforma information presents the results of operations of the Company as if the acquisition had taken place at the beginning of 2006:

		Quarter ended				Year ended
		March 31, 2007				December 31, 2006
Net Sales		$	7,310,936			$	30,804,309
Net Income		$	897,115			$	2,621,228
EPS		$	0.05			$	0.16

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, LFI Enterprises, Inc., Helios Nutrition, Ltd. and Pride of Main Street, L.L.C. All significant intercompany accounts and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts, the valuation of Goodwill and intangible assets and deferred taxes.

Revenue Recognition

Sales represent sales of Company produced dairy products that are recorded at the time of shipment and the following four criteria have been met: (i) The product has been shipped and the Company has no significant remaining obligations; (ii) Persuasive evidence of an agreement exists; (iii) The price to the buyer is fixed or determinable and (iv) Collection is probable. In addition, shipping costs invoiced to the customers are included in net sales and the related cost in cost of sales.

Cash and cash equivalents

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

The Company maintains cash deposits at several institutions located in the greater Chicago, Illinois and Philadelphia, Pennsylvania metropolitan areas. Deposits at each institution are insured up to $100,000 by the Federal Deposit Insurance Corporation or the Securities Investor Protector Corporation.

Bank balances of amounts reported by financial institutions are categorized as follows:

		March 31,								December 31,
		2007				2006				2006
Amounts insured		$	244,029			$	478,025			$	432,678
Uninsured and uncollateralized amounts			1,045,160				3,823,916				1,412,560
Total bank balances		$	1,289,189			$	4,301,941			$	1,845,238

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

Marketable securities

All investment securities are classified as either as available-for-sale or trading, and are carried at fair value or quoted market prices. Unrealized gains and on available-for-sale securities losses are reported as a separate component of stockholders’ equity. Amortization, accretion, interest and dividends, realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are recorded in other income. Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 59, Accounting for Noncurrent Marketable Equity Securities, and Emerging Issue Task Force Abstract 03-01 the meaning of other-than-temporary impairment and its application to certain investments, provide guidance on determining when an investment is other-than-temporarily impaired. This evaluation depends on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for possible recovery in the market value of the investment.

Accounts receivable

Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral.

Accounts receivable are recorded at invoice amounts, and reduced to their estimated net realizable value by recognition of an allowance for doubtful accounts. The Company’s estimate of the allowance for doubtful accounts is based upon historical experience, its evaluation of the current status of specific receivables, and unusual circumstances, if any. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms. Accounts considered uncollectible are charged against the allowance.

Inventories

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

Property and equipment

Property and equipment are stated at depreciated cost or fair value where depreciated cost is not recoverable. Depreciation is computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized.

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

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

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Intangible assets

The Company accounts for intangible assets at historical cost. Intangible assets acquired in a business combination are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. Goodwill represents the excess purchase price over the fair value of the net tangible and other intangible assets acquired. Goodwill is not amortized and is reviewed for impairment at least annually. The Company amortizes other intangible assets over their estimated useful lives, as disclosed in the table below.

The Company reviews intangible assets and their related useful lives at least once a year to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable. The Company conducts more frequent impairment assessments if certain conditions exist, including: a change in the competitive landscape, any internal decisions to pursue new or different strategies, a loss of a significant customer, or a significant change in the market place including changes in the prices paid for the Company’s products or changes in the size of the market for the Company’s products.

If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life.

Intangible assets are being amortized over the following useful lives:

Category		Years
Recipes			4
Customer lists and other customer related intangibles			15
Lease agreement			7
Trade names			15
Formula			10
Customer relationships			12

Income taxes

Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

The principal sources of temporary differences are different depreciation and amortization methods for financial statement and tax purposes, unrealized gains or losses related to marketable securities, capitalization of indirect costs for tax purposes, and the recognition of an allowance for doubtful accounts for financial statement purposes.

As of January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. Pursuant to FIN 48, the Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal return are the 2003 through 2006 tax years. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. There were no such items during the periods covered in this report.

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Treasury stock

Treasury stock is recorded using the cost method.

Advertising costs

The Company expenses advertising costs as incurred. During the year ended December 31, 2006 and for the three months ended March 31, 2007 and 2006, approximately $1,435,758, $322,636 and $243,258 of such costs respectively, were expensed.

Earning per common share

Earnings per common share were computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. For the three months ended March 31, 2007 and 2006 and the year ended December 31, 2006, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant.

Reclassification

Certain 2006 amounts have been reclassified to conform to the 2007 presentation.

Note 3 – INTANGIBLE ASSETS

Intangible assets, and the related accumulated amortization, consist of the following:

		March 31, 2007								March 31, 2006								December 31, 2006
						Accumulated								Accumulated								Accumulated
		Cost				Amortization				Cost				Amortization				Cost				Amortization
Recipes		$	43,600			$	29,067			$	43,600			$	18,167			$	43,600			$	26,342
Customer lists and other customer related intangibles			305,200				110,453				305,200				69,033				305,200				100,098
Lease acquisition			87,200				33,219				87,200				20,762				87,200				30,105
Goodwill			3,952,425				—				75,800				—				3,952,425				—
Loan acquisition costs			6,638				2,323				6,638				996				6,638				1,991
Customer Relationship			985,000				54,723				—				—				985,000				34,924
Contractual Backlog			12,000				12,000				—				—				12,000				12,000
Trade Names			1,980,000				88,000				—				—				1,980,000				55,000
Formula			438,000				29,200				—				—				438,000				18,250
		$	7,810,063			$	358,985			$	518,438			$	108,958			$	7,810,063			$	278,710

Amortization expense is expected to be as follows for the 12 months ending March 31:

2007		$	323,988
2008			323,325
2009			319,692
2010			314,605
2011			314,605
Thereafter			1,902,438
		$	3,498,653

Amortization expense during the three months ended March 31, 2007 and 2006 and the year ended 2006 was $80,275, $16,526 and $186,278, respectively.

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 4 – MARKETABLE SECURITIES

The cost and fair value of marketable securities classified as available for sale and trading are as follows:

														Loss on
														Marketable
														Securities
						Unrealized				Unrealized				Classified as				Fair
March 31, 2007		Cost				Gains				Losses				Trading				Value
Equities		$	2,810,733			$	507,649			$	(92,378	)			—			$	3,226,004
Mutual Funds			595,823				7,064				(9,323	)			—				593,564
Preferred Securities			1,637,458				5,865				(15,833	)			—				1,627,490
Private Investment LP			600,000				94,507				—				—				694,507
Certificates of Deposit			75,000				—				(2,392	)			—				72,608
Corporate Bonds			2,137,085				2,906				(90,985	)			—				2,049,006
Municipal Bonds			160,757				3,776				(417	)			—				164,116
Government agency Obligations			134,776				—				—				(1,315	)			133,461
Total		$	8,151,632			$	621,767			$	(211,328	)		$	(1,315	)		$	8,560,756

														Loss on
														Marketable
														Securities
						Unrealized				Unrealized				Classified as				Fair
March 31, 2006		Cost				Gains				Losses				Trading				Value
Equities		$	2,565,132			$	470,019			$	(102,220	)		$	—			$	2,932,931
Mutual Funds			584,921				3,269				(38,806	)			—				549,384
Preferred Securities			1,119,577				993				(30,128	)			—				1,090,442
Private Investment LP			600,000				35,864				—				—				635,864
Certificates of Deposit			150,000				—				(1,410	)			—				148,590
Corporate Bonds			2,508,126				10,040				(84,182	)			—				2,433,984
Municipal Bonds, maturing within five years			61,275				839				(1,289	)			—				60,825
Government agency obligations, maturing after five years			488,088				—				—				(2,201	)			485,887
Total		$	8,077,119			$	521,024			$	(258,035	)		$	(2,201	)		$	8,337,907

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 4 – MARKETABLE SECURITIES — Continued

														Loss on
														Marketable
														Securities
						Unrealized				Unrealized				Classified as				Fair
December 31, 2006		Cost				Gains				Losses				Trading				Value
Equities		$	3,048,755			$	359,729			$	(69,950	)			—			$	3,338,534
Mutual Funds			522,492				3,248				(7,675	)			—				518,065
Preferred Securities			1,353,568				6,554				(11,347	)			—				1,348,775
Private Investment LP			600,000				71,632				—				—				671,632
Certificates of Deposit			225,000				2,190				(2,393	)			—				224,797
Corporate Bonds			2,185,982				2,408				(95,075	)			—				2,093,315
Municipal Bonds			160,757				2,937				(303	)			—				163,391
Government agency			134,776				—				—				(1,922	)			132,854
Total		$	8,231,330			$	448,698			$	(186,743	)		$	(1,922	)		$	8,491,363

Proceeds from the sale of marketable securities were $7,285,071, $896,419 and $960,801 during the year ended December 31, 2006 and for the three months ended March 31, 2007 and 2006, respectively.

Gross gains (loss) of $355,767, $14,137 and $(36,878) were realized on these sales during the year ended December 31, 2006 and for the three months ended March 31, 2007 and 2006, respectively.

The following table shows the gross unrealized losses and fair value of Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2007:

		Less Than 12 Months								12 Months or Greater								Total
Description of						Unrealized								Unrealized								Unrealized
Securities		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Equities		$	582,414			$	(81,853	)		$	120,250			$	(10,525	)		$	702,664			$	(92,378	)
Mutual Funds			131,060				(2,073	)			92,750				(7,250	)			223,810				(9,323	)
Preferred Securities			877,700				(12,610	)			106,070				(3,223	)			983,770				(15,833	)
Certificates of Deposit			—				—				72,608				(2,392	)			72,608				(2,392	)
Corporate Bonds			314,270				(7,684	)			1,396,908				(83,301	)			1,711,178				(90,985	)
Municipal Bonds			—				—				19,588				(417	)			19,588				(417	)
		$	1,905,444			$	(104,220	)		$	1,808,174			$	(107,108	)		$	3,713,618			$	(211,328	)

Equities, Mutual Funds and Corporate Bonds — The Company’s investments in equity securities, mutual funds and corporate bonds consist of investments in common stock and debt securities of companies in various industries. The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any material investments to be other-than-temporarily impaired at March 31, 2007.

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 4 – MARKETABLE SECURITIES — Continued

Preferred Securities — The Company’s investments in preferred securities consist of investments in preferred stock of companies in various industries. The Company evaluated the near-term prospects of the security in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any material investments to be other-than-temporarily impaired at March 31, 2007.

Certificates of Deposit — The unrealized losses on the Company’s investments in certificates of deposit were caused by interest rate increases since the date of purchase. The contractual terms of these investments do not permit the issuers to settle the securities at a price less than the face value of the investment. Because the Company has the ability and intent to hold these investments until maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2007.

Municipal Bonds — The unrealized losses on the Company’s investments in mutual bonds were caused by interest rate increases since the date of purchase. Because the Company has the ability and intent to hold these investments until maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2007.

Note 5 – INVENTORIES

Inventories consist of the following:

		March 31,								December 31,
		2007				2006				2006
Finished goods		$	1,084,748			$	753,631			$	952,484
Production supplies			1,134,987				772,311				988,174
Raw materials			663,720				498,388				581,538
Total inventories		$	2,883,455			$	2,024,330			$	2,522,196

Note 6 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

		March 31,								December 31,
		2007				2006				2006
Land		$	969,232			$	909,232			$	969,232
Buildings and improvements			6,713,743				6,488,166				6,713,743
Machinery and equipment			7,274,990				5,911,844				7,143,537
Vehicles			534,365				513,670				534,365
Office equipment			97,115				78,763				89,192
			15,589,445				13,901,675				15,450,069
Less accumulated depreciation			7,034,646				6,127,024				6,869,353
Total property and equipment		$	8,554,799			$	7,774,651			$	8,580,716

Depreciation expense during the year ended December 31, 2006 and for the three months ended March 31, 2007 and 2006 was $572,476, $165,293 and $126,911, respectively.

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 7 – ACCRUED EXPENSES

Accrued expenses consist of the following:

		March 31,								December 31,
		2007				2006				2006
Accrued payroll and payroll taxes		$	93,727			$	57,326			$	139,367
Accrued property tax			206,000				182,341				269,435
Other			41,462				5,501				71,299
		$	341,189			$	245,168			$	480,101

Note 8 – NOTES PAYABLE

Notes payable consist of the following:

		March 31,								December 31,
		2007				2006				2006
Mortgage note payable to a bank, payable in monthly installments of $3,273 including interest at 7%, with a balloon payment of $416,825 due September 25, 2011. Collateralized by real estate		$	451,542			$	460,092			$	453,355
Mortgage note payable to a bank, payable in monthly installments of $19,513 including interest at 5.6%, with a balloon payment of $2,652,143 due July 14, 2010. Collateralized by real estate			2,888,051				2,956,108				2,905,988
Note payable to Amani Holding LLC, payable in quarterly installments of $262,500 plus interest at the floating prime rate per annum (8.25% at December 31, 2006) due September 1, 2010 secured by letter of credit			2,991,284				—				3,518,711
Total notes payable			6,330,877				3,416,200				6,878,054
Less current maturities			1,129,004				528,415				1,131,336
Total long-term portion		$	5,201,873			$	2,887,785			$	5,746,718

     Maturities of notes payables are as follows:

As of March 31,
2007		$	1,129,004
2008			1,144,769
2009			1,146,698
2010			2,475,581
2011			434,825
Total		$	6,330,877

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 9 – PROVISION FOR INCOME TAXES

The provision for income taxes consists of the following:

										For the
		For the Three Months Ended								Year Ended
		March 31,								December 31,
		2007				2006				2006
Current:
Federal		$	537,138			$	443,238			$	1,390,590
State and local			102,100				102,936				321,454
Total current			639,238				546,174				1,712,044
Deferred			6,536				(34,822	)			33,031
Provision for income taxes		$	645,774			$	511,352			$	1,745,075

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

										For the
		For the Three Months Ended								Year Ended
		March 31,								December 31,
		2007				2006				2006
Federal income tax expense computed at the statutory rate		$	605,576			$	478,045			$	1,577,226
State and local tax expense, net			85,493				67,742				222,667
Permanent differences			(45,295	)			(34,435	)			(54,818	)
Provision for income taxes		$	645,774			$	511,352			$	1,745,075

Amounts for deferred tax assets and liabilities are as follows:

		March 31,								December 31,
		2007				2006				2006
Non-current deferred tax liabilities arising from:
Temporary differences - accumulated depreciation and amortization		$	(454,212	)		$	(345,709	)		$	(449,619	)
Current deferred tax assets (liabilities) arising from:
Unrealized losses (gains) on marketable securities			(169,511	)			(108,615	)			(108,188	)
Inventory			122,183				85,779				107,382
Allowance for doubtful accounts			16,296				18,585				33,040
Total current deferred tax assets (liabilities)			(31,032	)			(4,251	)			32,234
Net deferred tax liability		$	(485,244	)		$	(349,960	)		$	(417,385	)

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 10 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes are as follows:

										For The
		For The Three Months Ended								Year Ended
		March 31,								December 31,
		2007				2006				2006
Interest		$	96,908			$	50,226			$	337,768
Income taxes		$	551,386			$	575,000			$	1,556,586

Note 11 – STOCK OPTION PLANS

The Company has a registration statement filed with the Securities and Exchange Commission in connection with a Consulting Service Compensation Plan covering up to 600,000 of the Company’s common stock shares. Pursuant to such Plan, the Company may issue common stock or options to purchase common stock to certain consultants, service providers, and employees of the Company. There were 468,000 shares available for issuance under the Plan at December 31, 2006 and at March 31, 2007 and 2006. The option price, number of shares, grant date, and vesting terms are determined at the discretion of the Company’s Board of Directors.

As of December 31, 2006 and at March 31, 2007 and 2006, there were no stock options outstanding or exercisable.

On February 12, 2004, Lifeway’s Board of Directors approved awards of an aggregate amount of 10,200 shares to be awarded under its Employee and Consulting Services and Compensation Plan to certain employees and consultants for services rendered to the Company. The stock awards were made on April 1, 2004 and have vesting periods that vary from six months to one year, depending upon the individual grantee. During 2005, 550 shares vested for a total expense of $11,512.

On May 23, 2005, Lifeway’s Board of Directors approved awards of an aggregate amount of 11,200 common shares to be awarded under its Employee and Consulting Services and Compensation Plan to certain employees and consultants for services rendered to the Company. The stock awards were made on June 1, 2005 and have vesting periods of one year. The expense for the awards is measured as of June 1, 2005 at $6.25 per share for 11,200 shares, or a total stock award expense of $70,000. This expense will be recognized as the stock awards vest in 12 equal portions of $5,833, or 932 shares per month for one year. During 2005, 7,534 shares vested and the Company recognized a related expense of $40,833. During the year ended December 31, 2006, 4,666 shares vested for an expense of $29,166.

Note 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company’s financial instruments is as follows at:

		March 31,								March 31,								December 31,
		2007								2006								2006
		Carrying				Fair				Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value				Amount				Value
Cash and cash equivalents		$	1,013,345			$	1,013,345			$	3,817,745			$	3,817,745			$	1,547,812			$	1,547,812
Marketable securities		$	8,560,756			$	8,560,756			$	8,337,907			$	8,337,907			$	8,491,363			$	8,491,363
Notes payable		$	6,330,877			$	6,330,877			$	3,416,200			$	3,397,690			$	6,878,054			$	6,878,054

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS — Continued

A summary of the methods and significant assumptions used to estimate the fair values of financial instruments is as follows:

Investments — Investments are recorded at fair value in the accompanying financial statements. Fair value is determined based on quoted market prices.

Long-term Obligations — The fair value of long-term obligations approximates the carrying amounts in the accompanying financial statements. The carrying value of the debt approximates market based on current borrowing rates.

Note 13 – RECENT ACCOUNTING PRONOUNCEMENTS

In March 2006, the Financial Accounting Standards Board issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” an amendment of FASB Statement No. 140. SFAS No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. It requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value. SFAS No. 156 permits an entity to choose either an amortization or fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. It also permits a one-time reclassification of available-for-sale securities to trading securities with recognized servicing rights. Lastly, it requires separate presentation of servicing assets and servicing liabilities. Adoption of the initial measurement provision of this statement is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The adoption of this standard is not expected to have a material impact on the Company’s financial condition, results of operations or liquidity.

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2007 and 2006
and December 31, 2006

Note 13 – RECENT ACCOUNTING PRONOUNCEMENTS — Continued

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. The Statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. The statement emphasizes that fair value is a market-based measurement and not an entity-specific measurement. The statement establishes a fair value hierarchy used in fair value measurements and expands the required disclosures of assets and liabilities measured at fair value. Management will be required to adopt this statement beginning in 2008. The adoption of this standard is not expected to have a material impact on the Company’s financial condition, results of operations or liquidity.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 amends SFAS No. 87, 88, 106, and 123(R). SFAS No. 158 requires employers to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. Secondly, it requires employers to measure the plan assets and obligations that determine its funded status as of the end of the fiscal year. Lastly, employers are required to recognize changes in the funded status of the defined benefit pension or postretirement plan in the year that the changes occur with the changes reported in comprehensive income. The standard is required to be adopted by entities having fiscal years ending after December 15, 2006. The Company is a participant in a multi-employer defined benefit plan, which is not within the scope of this pronouncement. This standard is not expected to have an impact on the Company’s financial condition, results of operations or liquidity.

Note 14 — STOCK SPLIT

On June 8, 2006, the Board of Directors approved a two-for-one split of the Company’s common stock and an amendment to its charter to increase the number of common shares authorized from 10 million to 20 million. As a result of the stock split, each shareholder of record at the close of business on July 19, 2006 received one additional share of common stock for every one share held on such date. Upon completion of the split, the total number of shares of common stock outstanding increased from approximately 8,391,000 to approximately 16,782,000.

The earnings per share calculations as presented on the Consolidated Statements of Income and Comprehensive Income, the number of shares issued and outstanding per the Statement of Changes in Stockholders’ Equity and share amounts referenced throughout the Notes to the Consolidated Financial Statements have been adjusted to reflect split adjusted share amounts.

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

In this report, in reports subsequently filed by Lifeway with the SEC on Form 10-QSB and filed or furnished on Form 8-K, and in related comments by management, our use of the words “believe,” “expect,” “anticipate,” “estimate,” “forecast,” “objective,” “plan,” “goal,” “project,” “explore,” “priorities/targets,” and similar expressions is intended to identify forward-looking statements. While these statements represent our current judgment on what the future may hold, and we believe these judgments are reasonable, actual results may differ materially due to numerous important factors that are described in this report and other factors that may be described in subsequent reports which Lifeway may file with the SEC on Form 10-QSB and filed or furnished on Form 8-K, including but not limited to:

•

Changes in economic conditions, commodity prices;

•

Shortages of and price increase for fuel, labor strikes or work stoppages, market acceptance of the Company’s new products;

•

Significant changes in the competitive environment;

•

Changes in laws, regulations, and tax rates; and

•

Management’s ability to achieve reductions in cost and employment levels, to realize production efficiencies and to implement capital expenditures, all at of the levels and times planned by management.

Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the SEC pursuant to the SEC’s rules, we have no duty to update these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of theses risks and uncertainties, we cannot assure you that the forward-looking information contained in this report will in fact transpire.

Results of Operations for the Three Months Ended March 31, 2007

The following analysis should be read in conjunction with the unaudited financial statements of the Company and related notes included elsewhere in this quarterly report and the audited financial statements and Management’s Discussion and Analysis contained in our Form 10-KSB, for the fiscal year ended December 31, 2006.

Results of Operations

The Company’s sales increased by $3,019,221, (approximately 50%) to $9,022,244 during the three-month period ended March 31, 2007 from $6,003,023 during the same three-month period in 2006. This increase is primarily attributable to increased sales and awareness of Lifeway’s flagship line, Kefir, as well as the acquisition of the Helios Organic Kefir line and the Pride of Main Street milk line. Helios Nutrition and its subsidiary, Pride of Main Street Dairy, which were acquired July 27, 2006, accounted for a total of $1,320,032 in sales, with the Helios kefir brand accounting for $1,138,882 in sales, and the Pride of Main Street line accounting for $181,149 in sales.

Sales for the existing Lifeway Foods line increased by $1,699,189 (approximately 28%) to $7,702,212 during the three-month period ended March 31, 2007 from $6,003,023 during the same three-month period in 2006. This increase is primarily attributable to increased sales and awareness of Lifeway’s existing drinkable dairy products including La Fruta, its flagship line, Kefir, as well as Lifeway’s new kid’s kefir drink, Probugsä.

Cost of goods sold as a percentage of sales for the Lifeway Foods line was approximately 60% during the first quarter 2007, compared to about 55% during the same period in 2006. The increase was primarily attributable to the increased cost of milk, our largest raw material, and the cost of freight, Lifeway’s second largest cost of goods sold component. The cost of milk was approximately 10% higher in the first quarter of 2007 when compared to the same quarter in 2006, and transportation costs increased by approximately 55% in the first quarter of 2007, when compared with the same quarter in 2006. Even though the cost trend for conventional milk is increasing, the cost trend for organic milk is flat and supply even seems to be outpacing demand, so as more and more of our revenues come from organic kefir, which includes the recently acquired Helios brand, we hope the increased cost in conventional milk will have less of an impact going forward.

Operating expenses as a percentage of sales for the Lifeway Food’s line was approximately 20% during the first quarter 2007, compared to about 21% during the same period in 2006. The decrease in the percentage of sales is attributable to the increase in sales during the first quarter of 2007. Total operating expenses increased by $479,921 to $1,770,929 during the three-month period ended March 31, 2007 from $1,291,008 during the same three-month period in 2006. This increase is primarily attributable to the increase in advertising and marketing expenses, which increased approximately 33% in the first quarter of 2007 when compared to the same quarter in 2006.

Total other expenses for the first quarter ended March 31, 2007 were $20,385, compared with $357 during the same period in 2006. This increase is attributable to a $59,303 increase in interest expense, which includes approximately $72,000 in interest related to a $4.2 million note payable issued in connection with the Helios acquisition in August 2006, which was absent in 2006. The $4.2 million note payable is discussed in Note 8 of the Notes to Consolidated Financial Statements.

Provision for income taxes was $645,774, or a 36% tax rate during the first quarter of 2007 compared with $511,352, or a 36% tax rate during the same period in 2006. Income taxes are discussed in Note 9 of the Notes to Consolidated Financial Statements.

Total net income for the group was $1,135,331, or $.07 per split adjusted share for the first quarter ended March 31, 2007, compared with $894,663 or $.05 per split adjusted share in the same period in 2006. This represents a 27% year over year increase.

Liquidity and Capital Resources

Net cash used in investing activities was $45,544 during the three months ended March 31, 2007, which is a decrease of $567,628 compared to the same period in 2006. This decrease is primarily due to the Company’s purchase of marketable securities in 2006, which was $1,423,859, compared with the Company’s purchase of marketable securities in 2007, which was $802,587.

As of March 31, 2007, the Company had $410,439 in unrealized gains net of unrealized losses related to the Company’s investment in marketable securities. The Company intends to realize approximately $300,000 of these unrealized gains in the second quarter of 2007.

Net cash used by financing activities was $624,059 during the three months ended March 31, 2007, which is an increase of $604,456 compared to $19,603 of net cash used by financing activities during the same period in 2006. This increase is primarily attributable to the Company repaying $527,427 of the $4.2 million note issued in connection with the Helios acquisition in August 2006, which was absent in 2006. The Company also purchased 8,589 shares of its treasury stock at a cost of $76,882 in the first three months of 2007. In the first three months of 2006, the Company did not repurchase any of its treasury stock.

Significant portions of our assets are held in marketable securities. The majority of our marketable securities are classified as available-for-sale on our balance sheet, while the mortgage-backed securities are classified as trading. All of these securities are stated thereon at market value as of the end of the applicable period. Gains and losses on the portfolio are determined by the specific identification method.

We anticipate being able to fund the Company’s foreseeable liquidity requirements internally. We continue to explore potential acquisition opportunities in our industry in order to boost sales while leveraging our distribution system to consolidate and lower costs.

Off-balance Sheet Arrangements

We are not party to any off-balance sheet arrangements.

Critical Accounting Policies

Lifeway’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. Lifeway chooses accounting policies within US GAAP that management believes are appropriate to accurately and fairly report Lifeway’s operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions and has discussed the development and selection of critical accounting policies with its audit committee of the Board of Directors. For further information concerning accounting policies, refer to Note 2 — Nature of Business and Significant Accounting Policies in the notes to the consolidated financial statements.

ITEM 3. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) as of March 31, 2007. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

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

PART II — OTHER INFORMATION

ITEM 5. OTHER INFORMATION

On May 14, 2007, the Company announced its financial results for the fiscal quarter ended March 31, 2007 and certain other information. A copy of the Company’s press release announcing these financial results and certain other information is attached as Exhibit 99.1 hereto. The information contained in Exhibit 99.1 hereto is being furnished, and should not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities imposed by that Section. The information contained in Exhibit 99.1 shall not be incorporated by reference into any registration statement or other document or filing under the Securities Act of 1933, as amended, except as may be expressly set forth in a specific filing. The press release filed as an exhibit to this report includes “safe harbor” language pursuant to the Private Securities Litigation Reform Act of 1995, as amended, indicating that certain statements about the Company’s business and other matters contained in the press release are “forward-looking.” The press release also cautions investors that “forward-looking” statements may be different from actual operating results. Finally, the press release states that a more thorough discussion of risks and uncertainties which may affect the Company’s operating results is included in the Company’s reports on file with the Securities and Exchange Commission.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

Exhibit
Number		Description
3.4		Amended and Restated By-laws (incorporated by reference to Exhibit No. 3.5 of Lifeway’s Current Report on Form 8-K dated and filed on December 10, 2002). (File No. 000-17363)
3.5		Articles of Incorporation, as amended and currently in effect (incorporated by reference to Exhibit 3.5 of Lifeway’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000 and filed on August 8, 2000). (File No. 000-17363)
11		Statement re: Computation of per share earnings (incorporated by reference to Note 2 of the Consolidated Financial Statements).
31.1		Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky.
31.2		Rule 13a-14(a)/15d-14(a) Certification of Edward P. Smolyansky.
32.1		Section 1350 Certification of Julie Smolyansky.
32.2		Section 1350 Certification of Edward P. Smolyansky.
99.1		Press Release dated May 14, 2007- “Lifeway Foods Reports Record 1st Quarter 2007 Results.”

(b) Reports on Form 8-K

     Incorporated herein by reference to the Form 8-K filed with the Commission on January 3, 2007 (File No. 000-17363).

SIGNATURE

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

Date: May 15, 2007

		LIFEWAY FOODS, INC.
		By: /s/ Julie Smolyansky
		Julie Smolyansky
		Chief Executive Officer, President, and Director
		/s/ Edward P. Smolyansky
		Chief Financial and Accounting Officer
		and Treasurer

EXHIBITS INDEX

31.1		Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky.
31.2		Rule 13a-14(a)/15d-14(a) Certification of Edward P. Smolyansky.
32.1		Section 1350 Certification of Julie Smolyansky.
32.2		Section 1350 Certification of Edward P. Smolyansky.
99.1		Press Release dated May 14, 2007- “Lifeway Foods Reports Record 1st Quarter 2007 Results.”

(b) Reports on Form 8-K

     Incorporated herein by reference to the Form 8-K filed with the Commission on January 3, 2007 (File No. 000-17363).