This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the June 30, 2011 Consolidated Financial Statements and the related Notes contained in this quarterly report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2010. Forward-looking statements in this section are qualified by the cautionary statements included under the heading "Cautionary Note Regarding Forward Looking Information," above.

Company Overview

We are a consumer food products company that competes primarily in the retail branded food products industry and focuses on providing value-added, functional food products to consumers. Functional food is defined as a food or a food ingredient that has been shown to support normal, healthy structures, functions and systems in the body. We market buttery spreads, enhanced milk, cooking oil, peanut butter, mayonnaise dressing, microwave popcorn and other products primarily under the Smart Balance® trademark. In the natural food channel, we sell similar natural and organic products under the Earth Balance® trademark. For the value consumer, we sell buttery spreads and sticks under the Bestlife™ trademark. Our trademarks are of material importance to our business and are protected by registration or other means in the United States and a number of international markets. Our buttery spreads category, marketed under our Smart Balance®, Earth Balance®, Bestlife™, Nucoa® and SmartBeat® brands, is by far our most developed and accounted for approximately 70% and 71% of sales for the three and six months ended June 30, 2011, respectively. Our products are sold throughout the U.S. The majority of our products are sold through supermarket chains and food wholesalers.

We outsource production of finished goods to third-party manufacturers. We currently do not own or operate any manufacturing facilities. Outsourcing allows us to focus our energy and resources on marketing and sales, while substantially reducing capital expenditures and avoiding the complication of managing a production work force. Most of our manufacturers supply our products at a price equal to the cost of ingredients and certain packaging plus a contracted toll charge. We use third party distributors and a network of public warehouses to deliver products from our manufacturers to our customers.

Our goal is to become a recognized leader in providing more nutritious and great tasting products for a wide variety of consumer needs. We believe the Smart Balance® brand has the potential to become a broad functional foods platform across multiple food categories. Our primary growth strategy is two-fold: (1) to drive consumer and trade awareness of our brands and (2) to increase purchase frequency by expanding product offerings and distribution in our core category of spreads and into other categories. In order to drive consumer and trade awareness of our brands and add more households that prefer our products, we will continue to use marketing and promotional programs to drive trial and encourage brand loyalty.

In 2008 we launched a successful distribution initiative to increase shelf presence in retailers. The effort substantially increased the average number of our products that retailers have on the shelf, especially in the spreads category. In 2009 we created a foundation necessary to support growth over the next several years. We increased our market share and profitability in the core spreads category and established our dairy initiative, led by our enhanced milk products. In 2010, we launched our three-tier spreads initiative, with products in all segments of the category. We also began national expansion of milk distribution in 2010.

We are the number two marketer of spreads in the U.S., based on data from The Nielsen Company, on a dollar basis. For the year ending December 31, 2010, our market share in dollars was 15.3%, an increase of 10 basis points from the same period in the prior year. Our unit share increased to 10.1% in 2010, from 10.0% in 2009. Our strategy for Smart Balance® spreads has been to maintain price and product positioning as a premium brand. In 2011, we are marketing our spreads and enhanced milk products together to increase efficiency of our spending and drive trial via cross promotion. In the first half of 2011, our spreads share of market in dollars was 15.0%, a decrease of 70 basis points from the same period in the prior year.

To continue to grow our presence in the spreads category, we have continued our three-tier strategy, which we believe allows us to compete in multiple segments in the spreads category, with our Earth Balance® brand in the super premium segment, our Smart Balance® brand in the healthy premium segment and our Bestlife™ brand in the value segment. We expect pressure in the spreads category to continue due to the economic conditions and competitive promotional activity that started mid-year in 2009.

Commodity costs have been rising across the food industry since mid-2010. Our competitors increased prices in the spreads category in 2011 and we followed with price increases as well. Due to the continued economic conditions affecting our industry and the price sensitive consumer, there may be volume implications to the pricing actions.

Our current dairy aisle initiative is an important part of our growth plan. Centered on the high purchase frequency of the milk category, we believe success in expanding in the dairy aisle will be a key driver toward our growth goals. For our dairy initiative in 2009, we expanded distribution of milk to the Northeast, beyond the initial Florida market. In 2010, we expanded milk nationally and are using advertising and other marketing to drive trial. However, our ability to build trial for milk continues to be slowed by the current economic environment. In 2010, the market share of our milk was 0.3% of the total milk category for the food channel, compared to 0.2% in 2009, according to Nielsen data. Our market share in the first half of 2011 continues at 0.3%.

In 2009, we signed an exclusive license agreement to use the Bestlife™ brand across virtually all food and beverage categories. The Best Life® program was developed by Bob Greene, Oprah's trainer and nutritional advisor. We believe that this relationship provides us with a significant opportunity to use a targeted marketing approach to penetrate the value segment of the spreads category and other categories where the Smart Balance® brand does not participate. We began distribution of Bestlife™ spreads in March 2010. In the fourth quarter of 2010 we strengthened our control of the Bestlife™ brand by acquiring full rights for the branded food products as well as ownership of the Best Life website. We believe the brand and the website are unique assets that will provide an effective platform for expansion in the coming years as we broaden the scope of our products beyond our heart health focus.

In the third quarter of 2010, we announced the launch of Earth Balance® organic soymilk into Whole Foods markets nationwide. This marks a strategic expansion of the Earth Balance® brand beyond spreads into a higher velocity category and other categories over time. We have broadened distribution of Earth Balance® organic soymilk to other natural food customers in 2011. We have announced two new products for Earth Balance®; Organic Coconut Spread and Mindful Mayo™, a refrigerated spread available in the natural foods channel.

We entered into an amendment of our existing credit agreement in March 2011 to give the Company greater flexibility in strategic areas such as acquisitions and capital structure with higher available credit and less restrictive financial covenants than our previous facility. See "Liquidity and Capital Resources" included elsewhere in this report. As of June 30, 2011, our debt was $49.0 million, a reduction of $111.0 or 69% from May 2007, the date of the acquisition of GFA Brands, Inc.

In the fourth quarter of 2009 our board authorized a two-year, $25 million stock repurchase program, which became effective starting in March 2010. As of June 30, 2011, approximately $15.6 million was used to repurchase the Company's shares.

As required under ASC Topic 350 "Goodwill and Other Intangible Assets", in connection with the preparation of the June 30, 2011 financial statements, the Company performed its annual impairment test of goodwill and made a determination that there was no indication of impairment. During the second quarter of 2010, our revenue and earnings expectations and longer term outlook were not materializing as previously projected. The main contributors to this change in our outlook were the persistent softness in U.S. consumer confidence and the resulting intensified competitive environment for the Company's premium products. This change in outlook for the rest of 2010 resulted in a significant reduction in the Company's share price and related market capitalization. Given this decline, in connection with the preparation of the June 30, 2010 financial statements, we performed an impairment test of goodwill which resulted in a goodwill impairment loss of $130.0 million at June 30, 2010. See footnote 5 of our unaudited consolidated financial statements included elsewhere in this report.

As part of continuing efforts to right-size and realign our staff to increase efficiency and effectiveness and position the Company for success in 2011 and beyond, the Company undertook two organizational restructurings in 2010. The Company reduced its total number of employees by approximately 12%. The one-time cost of the combined actions in the second quarter and the fourth quarter totaled approximately $4 million, with corresponding expected ongoing annualized savings in excess of $4 million. Due primarily to the 2010 restructurings, stock options for certain former employees were forfeited, resulting in a charge to reduce related deferred tax assets (future tax benefits previously recorded). The full year amount in 2010 was $3.2 million of which $3.1 million was applied to the second quarter of 2010. Second quarter results were revised to a net loss of $(133.1) million and a loss per share of $(2.13). In 2011, there have been additional forfeitures related to the 2010 restructurings. In the first and second quarters of 2011, the Company recognized additional tax charges of $1.0 million and $0.6 million, respectively.

On August 3, 2011, the Company acquired 100% of the equity interest of Importations DE-RO-MA ,which owns Glutino Food Group ("Glutino"), for $66.3 million, from Claridge, a Montreal-based investment firm. Based in Laval, Quebec, Glutino is a leading manufacturer and marketer of innovative, premium-priced, gluten-free foods sold under the Glutino and Gluten-Free Pantry brands. Glutino offers a wide range of shelf-stable and frozen gluten free products, including snack foods, frozen baked goods, frozen entrees and baking mixes throughout North America. Glutino reported annual sales of $53.9 million during its fiscal year ended March 31, 2011.

Results of Operations

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

Results of Operations for the Three and Six Months Ended June 30, 2011 and 2010

                                       Three Months Ended         Six Months Ended
                                            June 30,                  June 30,
  (In millions except share data)      2011          2010        2011         2010
Net sales                           $   59.0      $   55.6     $ 118.7     $  119.3
Cost of goods sold                      30.8          28.7        62.2         59.1
Gross profit                            28.2          26.9        56.5         60.2
Operating expenses                      20.8         155.7        41.5        183.2
Operating income (loss)                  7.4        (128.8 )      15.0       (123.0 )
Other expenses, net                     (0.9 )        (1.0 )      (1.0 )       (2.3 )
Income (loss) before income taxes        6.5        (129.8 )      14.0       (125.3 )
Provision for income taxes               3.2           3.3         7.1          4.8
Net income (loss)                   $    3.3      $ (133.1 )   $   6.9     $ (130.1 )
Net income (loss) per common share:
   Basic                            $   0.06      $  (2.13 )   $  0.12     $  (2.08 )
   Diluted                          $   0.06      $  (2.13 )   $  0.11     $  (2.08 )

Results of Operations for the Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010

Net Sales:

Our net sales for the three months ended June 30, 2011 increased by 6.1% to $59.0 million from $55.6 million for the same period in 2010. This performance primarily reflected higher selling prices and volumes, offset somewhat by higher promotional spending, and changes in product mix. In the spreads category, sales growth from all three-tier brands, Smart Balance®, Earth Balance® and Bestlife™ brands, resulted in an overall spreads sales increase of 5.4%. The timing of Easter and the modest impact of pricing activity in the spreads category were positive factors in the performance of our Smart Balance® brand spreads in the second quarter. Smart Balance® enhanced milk sales increased 32.5% in the quarter, as we continue to benefit from the 2010 expansion of our distribution beyond the established markets of Florida and the Northeast. Our grocery products portfolio registered a 1.5% decline in sales versus the year-ago second quarter, largely reflecting lower volume of mayonnaise and peanut butter, modestly offset by higher volumes in cooking oil. The Company's Earth Balance® portfolio continued to perform well, registering a sales growth of 25.6% versus year-ago in the second quarter. This gain was primarily driven by growth of Earth Balance® spreads and soymilks in the natural foods channel, as well as new distribution of Earth Balance® products in the grocery channel.

Cost of Goods Sold:

Cost of goods sold for the three months ended June 30, 2011 was $30.8 million, a 7.3% increase from the same period in 2010. The increase is primarily due to increased commodity costs, including vegetable oils and milk.

Gross Profit:

Our gross profit increased $1.3 million to $28.2 million for the three months ended June 30, 2011 from $26.9 million for the same period in 2010, due to higher selling prices offset by higher promotional spending, the impact of rising commodity costs and a product mix shift to lower margin products.

Gross profit as a percentage of net sales was 47.8% for the three months ended June 30, 2011 compared to 48.4% during the same period in 2010, reflecting the impact of rising commodity costs, a product mix shift to lower margin products and higher promotional spending. Partially offsetting these factors were higher selling prices.

Operating Expenses:

Operating expenses, which includes selling, marketing and general and administrative expenses, for the three months ended June 30, 2011 were $20.8 million compared to $155.7 million for the corresponding period in 2010. Included in the 2010 amount are a goodwill impairment charge of $130.0 million, a restructuring charge of $3.2 million and a one-time benefit in the change in stock-based compensation expense of $1.3 million. Excluding these items, total operating expenses for the three months ended June 30, 2011 decreased $3.0 million from 2010. The decrease primarily resulted from lower non-promotional marketing expenses due to a planned shift in marketing mix to trade promotions and coupons (promotional expenses) to support recent pricing actions, as well as lower stock-based compensation expenses associated with restructuring actions in 2010.

Operating Income:

Our operating income was $7.4 million for the three months ended June 30, 2011 compared with an operating loss of $(128.8) million for the corresponding period in 2010. Included in the 2010 amount are a goodwill impairment charge of $130.0 million, a restructuring charge of $3.2 million and a one-time benefit in the change in stock-based compensation expense of $1.3 million. Excluding these items, our operating income for the three months ended June 30, 2011 increased $4.3 million from 2010. The increase was primarily due to lower operating expenses and higher gross profits.

Other Income (Expense):

We had other expenses of $(0.9) million for the three months ended June 30, 2011 and $(1.0) million in the corresponding period in 2010. The results for 2011 and 2010 included net interest expense of $(0.7) million and $(0.8) million, respectively. Also included in the 2011 other expense was a $(0.1) million loss on commodity hedging derivatives versus a loss of $(0.3) million in 2010.

Income Taxes:

The provision for income taxes for the three months ended June 30, 2011 was $3.2 million compared with $3.3 million for the corresponding period in 2010. The effective tax rate for the three months ended June 30, 2011 was 49.1%, primarily as the result of a $0.6 million adjustment to reduce deferred tax assets resulting from the forfeiture of certain non-qualified stock options. Excluding this adjustment, the effective tax rate for the three months ended June 30, 2011 was 40.5%. The effective tax rate for the three months ended June 30, 2010 was (2.6%), primarily as a result of a pre-tax goodwill impairment charge, which had no tax benefit, offset by an adjustment to reduce deferred tax assets resulting from the forfeiture of certain non-qualified stock options. Excluding the impairment charge and the adjustment to deferred taxes, the effective tax rate for the three months ended June 30, 2010 was 36.7%, which benefited from resolution of prior years' tax issues.

Net Income:

Our net income for the three months ended June 30, 2011 was $3.3 million, versus a net loss of $(133.1) million in the corresponding period in 2010. Included in the 2011 net income is a $(0.6) million reduction of deferred tax assets resulting from the forfeiture of certain non-qualified stock options. Included in the 2010 net loss are a goodwill impairment charge of $(130.0) million (which derived no tax benefit), a $(3.1) million reduction of deferred tax assets resulting from the forfeiture of certain non-qualified stock options, a restructuring charge of $(2.0) million (after tax) and a one-time benefit in the change in stock-based compensation expense of $0.8 million (after tax). Excluding these items, net income for 2011 was $3.9 million, compared to $1.2 million in 2010. The increase of $2.7 million was due primarily to higher operating income.

Net Income Per Common Share:

Our basic and diluted net income per share for three months ended ended June 30, 2011 was $0.06 compared to a net loss per share of $(2.13) in the corresponding period in 2010, based on the basic and diluted weighted average shares outstanding of 59.7 million in 2011 and 62.5 million in 2010. Included in the 2011 net income is a reduction of deferred tax assets resulting from the forfeiture of certain non-qualified stock options of $(0.01). Included in the 2010 net loss are a goodwill impairment charge of $(2.08), a reduction of deferred tax assets resulting from the forfeiture of certain non-qualified stock options of $(0.05), a restructuring charge of $(0.03) and a one-time benefit in the change in stock-based compensation expense of $0.01. Excluding these items, net income per common share for the three months ended June 30, 2011 was $0.07, compared to $0.02 in 2010.

Results of Operations for the Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010

Net Sales:

Our net sales for the six months ended June 30, 2011 decreased by 0.5% to $118.7 million from $119.3 million for the same period in 2010. This performance primarily reflected changes in product mix and a planned shift to higher promotional spending. Partially offsetting these factors were higher selling prices in spreads. The sales performance of the Company's spreads products reflected declines in Smart Balance® spreads, due to continued consumer price sensitivity and overall category weakness, offset by growth of Bestlife™ and Earth Balance® brands, driven by distribution gains and increased case shipments, and the national expansion of the Smart Balance® enhanced milk.

Cost of Goods Sold:

Cost of goods sold for the six months ended June 30, 2011 was $62.2 million, a 5.2% increase from the same period in 2010. The increase is primarily due to increased commodity costs, including vegetable oils and dairy ingredients.

Gross Profit:

Our gross profit decreased $3.7 million to $56.5 million for the six months ended June 30, 2011 from $60.2 million for the same period in 2010, due to a product mix shift to lower margin products, the impact of rising commodity costs and higher promotional spending. Partially offsetting these factors were higher selling prices.

Gross profit as a percentage of net sales was 47.6% for the six months ended June 30, 2011 compared to 50.5% during the same period in 2010, reflecting a product mix shift to lower margin products, the impact of rising commodity costs and higher promotional spending. Partially offsetting these factors were higher selling prices.

Operating Expenses:

Operating expenses, which includes selling, marketing and general and administrative expenses, for the six months ended June 30, 2011 were $41.5 million compared to $183.2 million for the corresponding period in 2010. Included in the 2011 amount is a one-time benefit in the change in stock-based compensation expense of $0.4 million. Included in the 2010 amount are a goodwill impairment charge of $130.0 million, a restructuring charge of $3.2 million and a one-time benefit in the change in stock-based compensation expense of $1.3 million. Excluding these items, total operating expenses for the six months ended June 30, 2011 were $41.9 million, a decrease of $9.4 million from 2010. The decrease primarily resulted from lower non-promotional marketing expenses due to a planned shift in our overall marketing mix to trade promotions and coupons (promotional expenses) to support recent pricing actions, as well as lower stock-based compensation expenses associated with restructuring actions in 2010.

Operating Income:

Our operating income was $15.0 million for the six months ended June 30, 2011 compared with an operating loss of $(123.0) million for the corresponding period in 2010. Included in the 2011 amount is a one-time benefit in the change in stock-based compensation expense of $0.4 million. Included in the 2010 amount are a goodwill impairment charge of $130.0 million, a restructuring charge of $3.2 million and a one-time benefit in the change in stock-based compensation expense of $1.3 million. Excluding these items, total operating income for the six months ended June 30, 2011 was $14.6 million, an increase of $5.7 million from 2010. The increase was due primarily to lower operating expenses, partially offset by lower gross profits.

Other Income (Expense):

We had other expenses of $(1.0) million for the six months ended June 30, 2011 and $(2.3) million in the corresponding period in 2010. The results for 2011 and 2010 included net interest expense of $(1.5) million and $(1.7) million, respectively. Also included in 2011 was a $0.7 million gain on commodity hedging derivatives versus a loss of $(0.3) million in 2010.

Income Taxes:

The provision for income taxes for the six months ended June 30, 2011 was $7.1 million compared with $4.8 million for the corresponding period in 2010. The effective tax rate for the six months ended June 30, 2011 was 50.9%, primarily as

the result of a $1.5 million adjustment to reduce deferred tax assets resulting from the forfeiture of certain non-qualified stock options. Excluding this adjustment, the effective tax rate for the six months ended June 30, 2011 was 40.1%. The effective tax rate for income taxes for the six months ended June 30, 2010 was (3.8%), primarily as a result of a pre-tax goodwill impairment charge, which had no tax benefit, offset by an adjustment to reduce deferred tax assets resulting from the forfeiture of certain non-qualified stock options. Excluding the impairment charge and the adjustment to deferred taxes, the effective tax rate for the six months ended June 30, 2010 was 33.5%, which benefited from resolution of prior years' tax issues.

Net Income:

Our net income for the six months ended June 30, 2011 was $6.9 million compared to a net loss of $(130.2) million in the corresponding period in 2010. Included in 2011 net income are a $1.5 million reduction of deferred tax assets resulting from the forfeiture of certain non-qualified stock options and a one-time benefit in the change in stock-based compensation expense of $0.3 million (after taxes). Included in the 2010 net loss are a goodwill impairment charge of $130.0 million (which derived no tax benefit), a $3.1 million reduction of deferred tax assets resulting from the forfeiture of certain non-qualified stock options, a realignment charge of $2.1 million (after taxes) and a one-time benefit in the change in stock-based compensation expense of $0.8 million (after taxes). Excluding these items, net income for the six months ended June 30, 2011 was $8.1 million, an increase of $3.9 million from 2010. This increase was due primarily to lower operating expenses, coupled with a $0.8 million gain on commodities hedging, partially offset by lower gross profit.

Net Income Per Common Share:

Our basic and diluted net income per share for the six months ended June 30, 2011 was $0.12 and $0.11, respectively, based on the basic and diluted weighted average shares outstanding of 59.6 million and 60.0 million, respectively. Our basic and diluted net loss per share for the six months ended June 30, 2010 was $(2.08), based on the basic and diluted weighted average shares outstanding of 62.5 million. Included in 2011 net income are a reduction of deferred tax assets resulting from the forfeiture of certain non-qualified stock options of $(0.03).
Included in the 2010 net loss are a goodwill impairment charge of $(2.08), a reduction of deferred tax assets resulting from the forfeiture of certain non-qualified stock options of $(0.05), a restructuring charge of $(0.03) and a one-time benefit in the change in stock-based compensation expense of $0.00. Excluding these items, net earnings per common share for the six months ended June 30, 2011 was $0.14, an increase of $0.07 from 2010.

Cash Flows

Cash provided by operating activities was $12.8 million for the six months ended June 30, 2011 compared to $5.5 million in the corresponding period in 2010. For the first half of 2011, we had net income of $6.9 million, which included $3.1 million of non-cash stock-based compensation expenses, $3.4 million of depreciation and amortization expense and changes in deferred income taxes of $0.8 million. This was partially offset by an increase in working capital of $1.4 million. For the first six months of 2010, we had a net loss of $(130.2) million, which included a goodwill impairment charge of $130.0 million, $5.5 million of non-cash stock-based compensation, and $3.0 million of depreciation and amortization expense, offset by an increase in working capital of $3.0 million.

Cash used in investing activities totaled $1.6 million for the six months ended June 30, 2011 and $0.9 million for the six months ended 2010, and primarily includes additional software development costs.

Cash used in financing activities for the six months ended June 30, 2011 was . . .