Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our condensed financial statements and notes to condensed financial statements included elsewhere in this report. This report, and our condensed financial statements and notes to our condensed financial statements, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. Forward-looking statements are based on current expectations or beliefs. For this purpose, statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as "continue," "efforts," "expects," "anticipates," "intends," "plans," "believes," "estimates," "projects," "forecasts," "strategy," "will," "may," "goal," "target," "prospects," "optimistic," "confident" or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), on-going business strategies or prospects, and possible future company actions, which may be provided by management, are also forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, and actual results may differ materially depending on a variety of important factors, including, among others:

· the uncertainty of the domestic economic outlook;

· the impact of competitive product and pricing;

· market conditions that may affect the costs and/or availability of raw materials, fuels, energy, logistics and labor as well as the market for our products, including our customers' ability to pay and consumer demand;

· the impact of rising fuel pricing and surcharges;

· commodity prices and fulfillment by suppliers of existing raw materials contracts;

· natural disasters that can impact, among other things, costs of fuel and raw materials;

· changes in our business environment, including actions of competitors and changes in customer preferences, as well as disruptions to our customers' businesses;

· seasonality in the retail category;

· loss of key customers due to competitive environment or production being self-manufactured by customers with such capabilities;

· the occurrence of acts of terrorism or acts of war;

· changes in governmental laws and regulations, including income taxes;

· change in control due to takeover or other significant changes in ownership;

· financial viability and resulting effect on revenues and collectability of accounts receivable of our customers during the on-going economic uncertainty and any future deep recessionary periods;

· ability to obtain additional financing as and when needed, and rising costs of credit that may be associated with new borrowings;

· ability to remain in compliance with the amended covenant requirements of the Bank of America facility;

· voluntary or government-mandated food recalls;

· effects of legal proceedings or labor disputes in which we are or may become involved from time to time; and

· other factors discussed in this report and other reports we file with the Securities and Exchange Commission ("Commission"), including those described in Item 1A of Part I of our annual report on Form 10-K for the fiscal year ended October 2, 2011 and any updates to that report.

We do not undertake to update, revise or correct any forward-looking statements, except as otherwise required by law.

Overview

We are a value-added manufacturer of high quality, prepared frozen food products for branded retail, private label, foodservice and airline customers. Our product line includes entrées, plated meals, bulk-packed meal components, pastas, soups, sauces, poultry, meat and fish specialties, and organic and vegetarian offerings. Our extensive research and development efforts, combined with our extensive catalogue of recipes and flexible manufacturing capabilities, provide customers with a one-stop solution for new product ideas, formulations and product manufacturing, as well as precise replication of existing recipes. Our capabilities allow customers to outsource product development, product manufacturing and packaging, thereby avoiding significant fixed-cost and variable investments in resources and equipment. Our customers include prominent nationally recognized names such as Panda Restaurant Group, Inc., Jenny Craig, Inc., Safeway Inc., Target Corporation, Pinnacle Foods Group LLC, and American Airlines, Inc. We also sell frozen foods under the Boston Market brand, under exclusive license with Boston Market Corporation.

Our goal is to continue as a leading developer and manufacturer of value-added food products and provider of custom prepared frozen foods. We intend to continue to execute our growth and operating strategies, including:

· diversifying and expanding our customer base by focusing on sectors we believe have attractive growth characteristics, such as foodservice and retail;

· investing in and operating efficient production facilities;

· providing value-added ancillary support services to customers;

· offering a broad range of products to customers in multiple channels of distribution; and

· exploring strategic acquisitions and investments and other shareholder value enhancement initiatives.

Despite some seasonality as consumers purchase fewer frozen meals during warmer summer months, we were profitable with significant improvements in gross margin and net revenues in our third quarter of fiscal year 2012, which ended on July 1, 2012 compared to our third quarter of fiscal year 2011. The improved financial results for our third quarter of fiscal year 2012 as compared our third quarter of fiscal year 2011 was largely due to the addition of the Boston Market frozen food line during fiscal year 2012. While we are pleased with the progress of this significant and profitable line we have not, as of our third quarter for the fiscal year 2012, reached the targeted profit potential for this important part of our business.

The initial launch of the Boston Market frozen food line was impacted by both higher than normal commodity prices and fuel costs. Since our launch, we have taken a number of actions to improve profitability and are implementing additional cost saving initiatives, which we anticipate will have a positive impact in the near term. For the long term, we are reviewing several distribution model alternatives to mitigate the significant freight costs of moving the products we produce to retailers who sell the Boston Market frozen food line (which are mostly located in the eastern half of the United States). For the third quarter of fiscal year 2012, the freight cost of shipping and warehousing Boston Market products from our facility to customers was $1.4 million.

Gross profit, both in dollars and as a percentage of revenues (gross margin), was higher due to increased production efficiencies and yields as a result of higher production runs during our third quarter of fiscal year 2012. These were partially offset by higher freight costs driven by higher fuel and energy cost.

Net revenues of $50.4 million for the third quarter of fiscal year 2012 reflected an increase of $10.7 million or 27.0% compared to the third quarter of fiscal year 2011. The retail category increased $5.8 million due primarily to $8.4 million in sales of our portion of Boston Market products (sold to numerous retail accounts, including some major national chains) partially offset by reduced sales to Jenny Craig, Inc. of $2.4 million. The foodservice category increased $5.5 million or 47.4% due primarily to increased sales to the Panda Restaurant Group, Inc. ("Panda Restaurant Group"). The airline category decreased by $661,000 or 33.1%. We continue to be optimistic and anticipate further growth in net revenues as we continue to improve sales of the Boston Market brand products, increase foodservice sales, introduce new initiatives and benefit from any improvement in the economy.

Gross profit was $4.1 million for the third quarter of fiscal year 2012, compared to $2.0 million for the third quarter of fiscal year 2011. Gross margin (gross profit as a percentage of net revenues) increased to 8.1% for the third quarter of fiscal year 2012, from 5.0% for the third quarter of fiscal year 2011. Increases in gross profit dollars and margin are due largely to increased production efficiencies and yields as a result of higher volume production runs. These were partially offset by increased freight and storage expense of $1.3 million due primarily to shipments for Boston Market products in the third quarter of fiscal year 2012 (there were no similar freight and storage costs in the third quarter of fiscal year 2011 as we did not commence manufacturing of Boston Market products until the fourth quarter of fiscal year 2011). We anticipate continued increased freight and storage expenses as sales volumes for Boston Market products increase and if fuel prices remain at their current levels or increase.

Operating income for the third quarter of fiscal year 2012 was $1.2 million (2.4% of net revenues), up $1.7 million compared to an operating loss of $546,000 (1.4% of net revenues) for the third quarter of fiscal year 2011, due primarily to higher gross margin as noted above partially offset by higher selling, general and administrative ("SG&A") expenses, although SG&A did decrease as a percentage of net revenues. SG&A increased $409,000 to $2.9 million (5.8% of net revenues) for the third quarter of fiscal year 2012, from $2.5 million (6.3% of net revenues) for the third quarter of fiscal year 2011, primarily due to higher brokerage and royalty expenses of $486,000 and $352,000, respectively. These increases were offset by decreases of $175,000 for start up brokerage and management fees paid to Bellisio Foods and $134,000 associated with one-time start up marketing expenses incurred in the third quarter of fiscal year 2011 in relation with the launch of the Boston Market product line. In addition, we had decreases in our license fee amortization expense and travel expense of $65,000 and $36,000 respectively. We expect SG&A expenses to remain at or near the current rate as we incur additional brokerage and selling expenses, including royalty expenses related to the Boston Market brand.

Net income for the third quarter of fiscal year 2012 was $698,000 (1.4% of net revenues), compared to net loss of $332,000 million (0.8% of net revenues) for the third quarter of fiscal year 2011, due to higher operating income partially offset by an increase in income tax expense.

For the first nine months of fiscal year 2012, net revenues of $148.1 million reflected a 18.5% increase compared to the first nine months of fiscal year 2011. Retail net revenues increased $14.6 million primarily due to $23.6 million in our portion of sales of Boston Market products (sold to numerous accounts, including some major national chains) partially offset by reduced sales to Jenny Craig, Inc. of $7.7 million. Foodservice net revenues increased $9.7 million or 26.4% due to increased sales to Panda Restaurant Group. These increases were partially offset by a decrease in airline net revenues of $1.2 million or 19.7%.

Gross profit was $13.5 million for the first nine months of fiscal year 2012, compared to $11.5 million for the first nine months of fiscal year 2011. Gross margin remained relatively unchanged at 9.1% for the first nine months of fiscal years 2012 compared to gross margin of 9.2% for the first nine months of fiscal year 2011. The increase in gross profit dollars was driven largely by increased sales volume plus production efficiencies as a result of higher volume production runs and more favorable commodity pricing. These were partially offset by increased freight and storage expense of $3.6 million, which reduced the gross margin, due primarily to shipments for Boston Market products in the first nine months of fiscal year 2012 (there were no similar storage costs in the first nine months of fiscal year 2011 as we did not commence manufacturing of Boston Market products until the fourth quarter of fiscal year 2011).

Operating income for the first nine months of fiscal year 2012 was $4.7 million (3.2% of net revenues), compared to $4.6 million (3.7% of net revenues) for the first nine months of fiscal year 2011, due primarily to higher gross profit dollars as described above partially offset by higher SG&A expenses. SG&A expenses for the first nine months of fiscal year 2012 increased by $2.0 million compared to the first nine months of fiscal year 2011 due primarily to higher brokerage and royalty expenses of $1.2 million and $1.0 million, respectively, related to the Boston Market brand. These increases were partially offset by a decrease to our license fee amortization expense of $201,000. We expect SG&A expense to remain at or near the current rate as we incur additional brokerage and selling expenses, including royalty expenses related to the Boston Market brand.

Net income for the first nine months of fiscal years 2012 and 2011 was $2.8 million in each such period, or 1.9% of net revenues for fiscal year 2012 compared to 2.2% of net revenues for fiscal year 2011.

Critical Accounting Policies

Management's discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. See Note 2 to the financial statements contained in our annual report on Form 10-K for the year ended October 2, 2011 for a summary of our significant accounting policies. Management believes the following critical accounting policies are related to our more significant estimates and assumptions used in the preparation of our financial statements.

Inventories. Inventories, which include material, labor and manufacturing overhead, are stated at the lower of cost, which approximates the first-in, first-out ("FIFO") method, or market. We use a standard costing system to estimate our FIFO cost of inventory at the end of each reporting period. Historically, standard costs have been materially consistent with actual costs. We periodically review our inventory for excess items, and write it down based upon the age of specific items in inventory and the expected recovery from the disposition of the items.

We write down our inventory for the estimated aged surplus, spoiled or damaged products and discontinued items and components. We determine the amount of the write-down by analyzing inventory composition, expected usage, historical and projected sales information and other factors. Changes in sales volume due to unexpected economic or competitive conditions are among the factors that could result in material increases in the write-down of our inventory.

Property and Equipment. The cost of property and equipment is depreciated over the estimated useful lives of the related assets, which range from three to ten years. Leasehold improvements to our Plant No. 1 in Vernon, California are amortized over the lesser of the initial lease term plus one lease extension period, initially totaling 15 years, or the estimated useful lives of the assets. Other leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets. Depreciation is generally computed using the straight-line method.

We assess property and equipment for impairment whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable.

Expenditures for maintenance and repairs are charged to expense as incurred. The cost of materials purchased and labor expended in betterments and major renewals are capitalized. Costs and related accumulated depreciation of properties sold or otherwise retired are eliminated from the accounts, and gains or losses on disposals are included in operating income.

Goodwill. We evaluate goodwill at least annually for impairment. We have one reporting unit and estimate fair value based on a variety of market factors, including discounted cash flow analysis, market capitalization, and other market-based data. As of July 1, 2012, we had goodwill of $12.2 million. A deterioration of our operating results and the related cash flow effect could decrease the estimated fair value of our business and, thus, cause our goodwill to become impaired and cause us to record a charge against operations in an amount representing the impairment.

Income Taxes. We evaluate the need for a valuation allowance on our deferred tax assets based on whether we believe that it is more likely than not that all deferred tax assets will be realized. We consider future taxable income and on-going prudent and feasible tax planning strategies in assessing the need for valuation allowances. In the event we determine that we would not be able to realize all or part of our deferred tax assets, we would record an adjustment to the deferred tax asset and a charge to income at that time.

We account for uncertainty in income taxes based on a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The balance of unrecognized tax benefits was zero as of July 1, 2012 and October 2, 2011.

We recognize interest and penalties as part of income taxes. No interest and penalties were recognized in the statement of income for the first nine months of fiscal year 2012.

Concentrations of Credit Risk

Cash used primarily for working capital purposes is maintained in two accounts with a major financial institution. The account balances as of July 1, 2012 exceeded the Federal Deposit Insurance Corporation insurance limits. If the financial banking markets experience disruption, we may need to temporarily rely on other forms of liquidity, including borrowing under our credit facility.

Our financial instruments that are exposed to concentrations of credit risk consist primarily of trade receivables. We perform on-going credit evaluations of each customer's financial condition and generally require no collateral from our customers. We charge off uncollectible accounts at the point in time when no recovery is expected.

A significant portion of our total net revenues during the first nine months of fiscal years 2012 and 2011 were derived from three customers as described below:

                    Net Revenues
                    (unaudited)
                                 July 1,   July 3,
            Customer              2012      2011
  Panda Restaurant Group, Inc.     29%       26%
  Jenny Craig, Inc.                21%       31%
  Safeway Inc.                     15%       15%

A significant portion of our total receivables as of July 1, 2012 and July 3, 2011 were derived from four customers as described below:

                                  Receivables
                                  (unaudited)
                                                             July 1,   July 3,
                          Customer                            2012      2011
  Panda Restaurant Group, Inc. (through its distributors)      36%       32%
  Jenny Craig, Inc.                                            16%       27%
  Bellisio Foods, Inc. (for various third party customers)     18%       0%
  Safeway Inc.                                                 12%       12%

Results of Operations

While we operate as a single business unit, manufacturing various products on common production lines, revenues from similar customers are grouped into the following natural categories: retail, foodservice and airlines.

Quarter Ended July 1, 2012 Compared to Quarter Ended July 3, 2011

The quarters ended July 1, 2012 and July 3, 2011were both 13-week periods.

Net Revenues. Net revenues for the third quarter of fiscal year 2012 increased $10.7 million (27.0%) to $50.4 million from $39.7 million for the third quarter of fiscal year 2011 due to higher sales volume in retail and foodservice categories partially offset by decreases in airline net revenues.

Retail net revenues increased $5.8 million (22.2%) to $31.9 million for the third quarter of fiscal year 2012 from $26.1 million for the third quarter of fiscal year 2011. The increase in retail net revenues was primarily due to sales of our portion of Boston Market branded products (sold to various third party customers) of $8.4 million partially offset by reduced sales to Jenny Craig, Inc. of $2.4 million. The decrease in sales to Jenny Craig, Inc. was due to their inventory management plans and the slow economic recovery.

Foodservice net revenues increased $5.5 million (47.4%) to $17.1 million for the third quarter of fiscal year 2012 from $11.6 million for the third quarter of fiscal year 2011 due primarily to increased sales volume to Panda Restaurant Group of $5.5 million. We continue to increase our sales efforts in this category and believe that foodservice represents a significant opportunity for us in 2012 and beyond, through increased sales to a major existing account and new initiatives.

Airline net revenues decreased $661,000 (33.1%) to $1.4 million for the third quarter of fiscal year 2012 from $2.0 million for the third quarter of fiscal year 2011 due to decreased sales to an existing customer stemming from continuing airline industry initiatives to cut costs.

Gross Profit. Gross profit for the third quarter of fiscal year 2012 increased by $2.1 million (105.0%) to $4.1 million for the third quarter of fiscal year 2012 from $2.0 million for the third quarter of fiscal year 2011. Gross margin increased to 8.1% of net sales for the third quarter of fiscal year 2012 from 5.0% for the third quarter of fiscal year 2011. Increases to gross profit dollars and margin are due largely to increased sales volume and production efficiencies and yields as a result of higher volume production runs. These were partially offset by increased freight and storage expense of $1.3 million due primarily to shipments for Boston Market products in the third quarter of fiscal year 2012 (there were no similar freight and storage costs in the third quarter of fiscal year 2011 as we did not commence manufacturing of Boston Market products until the fourth quarter of fiscal year 2011). We anticipate continued increased freight and storage expenses as sales volumes for Boston Market products increase and if fuel prices remain at their current levels or increase.

Selling, General and Administrative Expenses. SG&A expenses increased $409,000 (16.4%) to $2.9 million (5.8% of net revenues) for the third quarter of fiscal year 2012 from $2.5 million (6.3% of net revenues) for the third quarter of fiscal year 2011 but decreased as a percentage of net revenues. SG&A expenses increased during the third quarter of fiscal year 2012 compared to the third quarter of fiscal year 2011 due to higher brokerage and royalty expenses primarily related to the Boston Market brand of $486,000 and $352,000, respectively. These increases were partially offset by decreases of $175,000 for start up brokerage and management fees paid to Bellisio Foods and $134,000 associated with one-time start up marketing expenses incurred in the third quarter of fiscal year 2011 in relation with the launch of the Boston Market product line. In addition, we had a decrease in our license fee amortization expense of $65,000 due to the write-off of the Better Living Brands tm Alliance ("Alliance") license fee intangible asset during the fourth quarter of fiscal year 2011. We expect SG&A expenses to remain at or near the current rate as we incur additional brokerage and selling expenses, including royalty expenses related to the Boston Market brand.

Operating Income. Operating income increased $1.7 million to $1.2 million (2.4% of net revenues) for the third quarter of fiscal year 2012 from an operating loss of $546,000 (1.4% of net revenues) for the third quarter of fiscal year 2011. The increase in operating income was the result of higher gross margin slightly offset by higher SG&A expenses as noted above.

Total Interest Expense. Total interest expense for the third quarter of fiscal year 2012 was $81,000, compared to $79,000 for the third quarter of fiscal year 2011.

Income Tax Provision (benefit). Income tax expense was $406,000 for the third quarter of fiscal year 2012, compared to an income tax benefit of $293,000 for the third quarter of fiscal year 2011. The difference was a result of income before taxes increasing $1.7 million from a loss of $625,000 for the third quarter of fiscal year 2011 to income before taxes of $1.1 million for the third quarter of fiscal year 2012. The effective tax rate was 36.8% for the third quarter of fiscal year 2012 compared to a tax benefit of 46.9% for the third quarter of fiscal year 2011.

Net Income. Net income for the third quarter of fiscal year 2012 was $698,000 or $0.04 per basic and diluted share, compared to a net loss of $332,000, or $(0.02) per basic and diluted share, for the third quarter of fiscal year 2011.

Nine Months Ended July 1, 2012 Compared to Nine Months Ended July 3, 2011

The nine month period ended July 1, 2012 was a 39 week period compared to the nine month period ended July 3, 2011 which was a 40 week period.

Net Revenues. Net revenues increased $23.1 million (18.5%) to $148.1 million for the first nine months of fiscal year 2012 from $125.0 million for the first nine months of fiscal year 2011, despite there being one fewer week in the period, due to increases in retail and foodservice net revenues partially offset by decrease in airline net revenues.

Retail net revenues increased $14.6 million (17.8%) to $96.7 million for the first nine months of fiscal year 2012 from $82.1 million for the first nine months of fiscal year 2011. The increase in retail net revenues was largely due to $23.6 million in sales of our portion of Boston Market products (sold to numerous accounts, including some major national chains) partially offset by reduced sales to Jenny Craig, Inc. of $7.7 million. The decrease to Jenny Craig, Inc. was due to their inventory management plans and a slow economic recovery.

Foodservice net revenues increased $9.7 million (26.4%) to $46.5 million for the first nine months of fiscal year 2012 from $36.8 million for the first nine months of fiscal year 2011. The increase was attributable primarily to increased sales volume to Panda Restaurant Group of $9.4 million. We continue our sales efforts in this category and continue to believe that foodservice represents a significant opportunity for us through increased sales to a major existing account and new initiatives.

Airline net revenues decreased $1.2 million (19.7%) to $4.9 million for the first nine months of fiscal year 2012 from $6.1 million for the first nine . . .