INNOVATIVE FOOD HOLDINGS INC - Quarter Report: 2008 September (Form 10-Q)

innsw-10q9302008.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D. C. 20549

FORM 10-Q

r Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934.

For the quarterly period ended September 30, 2008

r Transition report pursuant to Section 13 or 15(d) of the Exchange

Act for the transition period from _________ to _________.

Commission File Number: 0-9376

INNOVATIVE FOOD HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

Florida

(State of or Other Jurisdiction of Incorporation or Organization)

20-1167761

(IRS Employer I.D. No.)

1923 Trade Center Way

Naples, Florida 34109

(Address of Principal Executive Offices)

(239) 596-0204

(Registrant's Telephone Number, Including Area Code)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO r

Indicate by check mark whether the registrant is a shell company (as defined in Regulation 12b-2 of the Exchange Act):

YES r NO þ

State the number of shares outstanding of each of the issuer's classes of Common equity, as of the latest practicable date:

181,787,638 Common Shares outstanding as of October 22, 2008

Transitional Small Business Disclosure Format:

YES r NO þ

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

(Check One):

Large Accelerated filer r	Accelerated filer r
Non-accelerated filer r (Do not check if a smaller reporting company)	Smaller reporting company þ

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INNOVATIVE FOOD HOLDINGS, INC.

INDEX TO FORM 10-Q

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)	3
	Consolidated Balance Sheet	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	Notes to the Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis (including cautionary statement)	23
Item 4T.	Controls and Procedures	27

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Submission of Matters to a Vote of Securities Holders	28
Item 5.	Other Information	28
Item 6.	Exhibits	28
	Signatures	29

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Innovative Food Holdings, Inc.

Consolidated Balance Sheets

	September 30,			December 31,
	2008			2007
	(UNAUDITED)			(AUDITED)
ASSETS
Current assets

Cash and cash equivalents	$	-		$	74,610
Accounts receivable net		264,518			243,148
Interest receivable		-			7,147
Loan receivable, current portion net		49,500			285,000
Other current assets		4,500			7,030

Total current assets		318,518			616,935

Loan receivable, net		111,000			-
Property and equipment, net		58,064			83,823

Total assets	$	487,582		$	700,758

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities

Cash overdraft	$	3,372		$	-
Accounts payable and accrued liabilities		884,983			765,614
Accrued interest, net		410,456			316,058
Accrued interest - related parties, net		165,325			142,621
Notes payable , current portion, net of discount		835,803			927,870
Notes payable - related parties, current portion		243,500			278,000
Warrant liability		1,864,023			580,648
Conversion option liability		1,672,936			612,429
Penalty for late registration of shares		771,956			330,840
Total current liabilities		6,852,354			3,954,080

Note payable		12,113			16,083
Note payable, related party		75,000			-
Total liabilities		6,939,467			3,970,163


Stockholders’ deficiency
Common stock, $0.0001 par value; 500,000,000 shares authorized
181,787,638 shares issued 171,787,638 outstanding at September 30, 2008 and December 31, 2007, respectively		18,179			18,179
Additional paid-in capital		890,264			737,462
Accumulated deficit		(7,360,328	)		(4,025,046	)
Total stockholders’ deficiency		(6,451,885	)		(3,269,405	)

Total liabilities and (deficiency in) stockholders' deficiency	$	487,582		$	700,758

See notes to consolidated financial statements.

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Innovative Food Holdings, Inc.

Consolidated Statements of Operations (Unaudited)

	For the Three			For the Three			For the Nine			For the Nine
	Months Ended			Months Ended			Months Ended			Months Ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
Revenue	$	1,791,302		$	1,556,006		$	5,076,534		$	4,860,414

Cost of goods sold		1,439,641			1,198,981			4,019,275			3,605,093
Gross margin		351,661			357,025			1,057,259			1,255,321

Selling, general and administrative expenses		449,556			449,442			1,314,904			1,277,206
Total operating expenses		449,556			449,442			1,314,904			1,277,206

Operating loss		(97,895	)		(92,417	)		(257,645	)		(21,885	)

Other (income) expense:
Impairment of investment in Pasta Italiana		127,147			-			127,147			-
Interest expense		229,107			80,535			494,732			238,668
Cost of penalty for late registration of shares		-			13,272			-			64,984
Loss from change in fair value of warrant liability		268,724			265,338			1,029,131			237,585
(Gain) loss from change in fair value of conversion option liability		(195,963	)		284,825			985,507			377,569
(Gain) loss from marking to market - registration penalty		(110,280	)		152,040			441,120			113,576
Total other (income) expense		318,735			796,010			3,077,637			1,032,382

Loss before income taxes		(416,630	)		(888,427	)		(3,335,282	)		(1,054,267	)

Income tax expense		-			-			-			-

Net loss	$	(416,630	)	$	(888,427	)	$	(3,335,282	)	$	(1,054,267	)

Net loss per share - basic	$	(0.00	)	$	(0.01	)	$	(0.02	)	$	(0.01	)

Weighted average shares outstanding - basic		181,787,638			148,797,638			181,787,638			148,997,316

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Innovative Food Holdings, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	For the Nine			For the Nine
	Months Ended			Months Ended
	September 30			September 30
	2008			2007
Cash flows from operating activities:
Net loss	$	(3,335,282	)	$	(1,054,267	)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization		30,138			39,399
Stock issued as bonuses to employee and board members		-			8,125
Amortization of discount on notes payable and interest on notes payable		277,307			40,500
Impairment of investment in Pasta Italiana e		127,147			-
Reserve for bad debt		2,500			-
Cost of penalty due to late registration of shares		-			64,984
Change in fair value of warrant liability		1,029,135			377,569
Change in fair value of conversion option liability		985,507			237,585
Loss from marking to market-penalty		441,116			113,576
Changes in assets and liabilities:
Accounts receivable, net		(23,870	)		99,631
Prepaids and other current assets		-			2,699
Accounts payable and accrued expenses - related party		22,704			-
Accounts payable and accrued expenses		369,099			36,031
Net cash used in operating activities		(74,499	)		(34,168	)

Cash flows from investing activities:
Principal payments received on loan		4,500			-
Acquisition of property and equipment		(4,379	)		(40,611	)
Net cash (used in) provided by investing activities		121			(40,611	)

Cash flows from financing activities:
Principal payments on debt		(3,604	)		(5,017	)
Net cash used in financing activities		(3,604	)		(5,017	)

Decrease in cash and cash equivalents		(77,982	)		(79,796	)

Cash and cash equivalents at beginning of period		74,610			118,518

Cash and cash equivalents at end of period	$	(3,372	)	$	38,722

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Innovative Food Holdings, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(Continued)

		For the Nine				For the Nine
		Months Ended				Months Ended
		September 30				September 30
		2008				2007

Supplemental disclosure of cash flow information:

Cash paid during the period for:
Interest	$	-	$	-

Taxes	$	-	$	-

Revaluation of conversion option liability	$	955,511	$	237,585

Revaluation of warrant liability	$	1,029,135	$	377,569

Cost of penalty for late registration of shares	$	-	$	64,984

Revaluation of penalty for late registration of shares	$	441,116	$	113,576

Cancellation of shares of common stock	$	-	$	557

Issuance of warrants for the extension of notes payable	$	254,240	$	-

Common stock issued to employees as bonus	$	-	$	8,125

Common stock issued for conversion of accrued interest	$	-	$	4,000

See notes to consolidated financial statements.

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INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS

Basis of Presentation

The accompanying unaudited consolidated financial statements of Innovative Food Holdings, Inc., and its wholly owned subsidiaries, Food Innovations, Inc. (“FII”) and Food New Media Group, Inc. (“FNM”) (collectively, the “Company, or “IVFH”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. FNM is currently inactive. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete financial statement presentation. U.S. accounting principles also contemplate continuation of the Company as a going concern.

Acquisition and Corporate Restructure

We were initially formed in September 1979 as Alpha Solarco Inc., a Colorado corporation. From September 1979 through February 2004, we were either inactive or involved in discontinued business ventures. In February 2003 we changed our name to Fiber Application Systems Technology, Ltd.

On January 26, 2004, through a share exchange, the shareholders of Food Innovations, Inc. (‘FII”) converted 10,000 shares (post-reverse split) of FII common stock outstanding into 25,000,000 shares (post-reverse split) of IVFH. On January 29, 2004, in a transaction known as a reverse acquisition, the shareholders of Innovative Food Holdings, Inc. (“IVFH”) exchanged 25,000,000 shares (post-reverse split) of IVFH for 25,000,000 shares (post-reverse split) of Fiber Application Systems (formerly known as Alpha Solarco) (“Fiber”), a publicly-traded company. The shareholders of IVFH thus assumed control of Fiber, and Fiber changed its name to IVFH. The 25,000,000 shares (post-reverse split) of IVFH are shown on the Company’s balance sheet at December 31, 2003 as shares outstanding. These shares are shown at their par value of $2,500 as a decrease of additional paid-in capital at the acquisition date of January 29, 2004. There were 157,037 shares (post-reverse split) outstanding in Fiber at the time of the reverse acquisition; the par value of these shares, or $16, was transferred from additional paid-in capital at the time of the reverse acquisition.

2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES

Business Activity

FII is in the business of providing premium white tablecloth restaurants with the freshest origin-specific perishables and specialty products direct from its network of vendors to the end users (restaurants, hotels, country clubs, national chain accounts, casinos, and catering houses) within 24-72 hours, except as stated hereafter, eliminating all wholesalers and distributors. We currently sell the majority of our products through a distributor relationship with Next Day Gourmet, L.P., a subsidiary of US Foodservice, Inc. (“USF”), a $20 Billion broadline distributor.

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INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Interim Financial Information

The accompanying unaudited interim consolidated financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s financial statements and related notes as contained in form 10-KSB for the year ended December 31, 2007. In the opinion of management, the interim consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of the operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the results of operations to be expected for the full year.

Reclassification

Certain reclassifications have been made to conform prior periods' data to the current presentation. These reclassifications had no effect on reported income.

Going Concern

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has reported a net loss of $416,630 and $3,335,282 for the three and nine months ended September 30, 2008. The Company also had an accumulated deficit of $7,360,328 and a working capital deficiency of $6,553,836 as of September 30, 2008.

The Company cannot be certain that anticipated revenues from operations will be sufficient to satisfy its ongoing capital requirements. Management's belief is based on the Company's operating plan, which in turn is based on assumptions that may prove to be incorrect. If the Company's financial resources are insufficient the Company may require additional financing in order to execute its operating plan and continue as a going concern. The Company cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, the Company may be unable to implement its current plans for growth, repay its debt obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations.

Management plans to take the following steps that it believes will be sufficient to provide the Company with the ability to continue as a going concern. Management intends to raise financing through the sale of its stock or debt instruments in private placements to individual investors. Management may raise funds in the public markets, though there currently are no plans to do so. Management believes that with this financing, the Company will be able to generate additional revenues that will allow the Company to continue as a going concern. The company expects this to be accomplished by hiring additional personnel and focusing sales and marketing efforts on the distribution of product through key marketing channels currently being developed by the Company. The Company also intends to pursue the acquisition of certain strategic industry partners where appropriate.

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INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition

The Company recognizes revenue upon shipment of the product from the vendor. Shipping and handling costs incurred by the Company are included in cost of goods sold.

For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which superseded SAB No. 101, "Revenue Recognition in Financial Statements." SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery as occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. SAB No. 104 incorporates Emerging Issues Task Force ("EITF") No. 00-21, "Multiple-Deliverable Revenue Arrangements." EITF No. 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing EITF No. 00-21 on the Company's consolidated financial position and results of operations was not significant. This issue requires determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting. EITF No. 00-21 became effective for revenue arrangements entered into in periods beginning after September 15, 2003. For revenue arrangements occurring on or after August 1, 2003, the Company revised its revenue recognition.

Income Taxes

The Company accounts for income taxes using the liability method. Under the liability method, deferred income taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities. They are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company is required to adjust its deferred tax liabilities in the period when tax rates or the provisions of the income tax laws change. Valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.

Disclosures about Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments, which include accounts receivable and accounts payable, approximate fair value at September 30, 2008.

Inventories

The Company does not currently maintain any material amount of inventory.

Stock-Based Compensation

On January 1, 2006 the company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123 (R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values. SFAS 123 (R) supersedes the company's previous accounting under Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees" for the periods beginning in fiscal 2006.

The company adopted SFAS 123(R) using the modified prospective transition method, which required the application of the accounting standard as of January 1, 2006. The company's Consolidated Financial Statements as of and for the twelve months ended September 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the company's Consolidated Financial Statements for the prior periods have not been restated to reflect, and do not include, the impact of SFAS 123 (R). Stock based compensation expense recognized under SFAS 123(R) for the three and nine months ended September 30, 2008 was $0.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.

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INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

A summary of option activity as of September 30, 2008, and changes during the periods then ended are presented below:

			Weighted
			Average
	Number of		Exercise
	Shares		Price
Options outstanding at December 31, 2007		15,500,000	$	0.0.21
Granted		20,000,000		0.007
Exercised		-		-
Cancelled/Expired		-		-

Options outstanding at March 31, 2008		35,500,000	$	0.013
Exercisable		15,300,000	$	0.015
Not exercisable		20,200,000	$	0.012

Granted		-		-
Exercised		-		-
Cancelled/Expired		-		-

Options outstanding at June 30, 2008		35,500,000	$	0.013
Exercisable		15,400,000	$	0.018
Not exercisable		20,100,000	$	0.009

Granted		-		-
Exercised		-		-
Cancelled/Expired		-		-

Options outstanding at September 30, 2008		35,500,000	$	0.013
Exercisable		15,400,000	$	0.018
Not exercisable		20,100,000	$	0.009

Aggregate intrinsic value of options outstanding and options exercisable at September 30, 2008, was $0. Aggregate intrinsic value represents the difference between the company's closing stock price on the last trading day of the fiscal period, which was $0.007 (post-reverse split) at September 30, 2008, and the exercise price multiplied by the number of options outstanding. As of September 30, 2008 total unrecognized stock-based compensation expense related to non-vested stock options was $163,372. The total fair value of options vested was $0 for the three and nine month periods ended September 30, 2008, and 2007.

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INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

2. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings (Loss) per Common Share

The Company computes earnings per share under SFAS 128. Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the year. Dilutive common stock equivalents consist of shares issuable upon conversion of convertible notes and the exercise of the Company’s stock options and warrants (calculated using the treasury stock method).

Management Estimates

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Comprehensive Income

The Company has no items of other comprehensive income (loss) for the three and nine months ended September 30, 2008.

3. PER SHARE INFORMATION

The Company computes earnings per share under Financial Accounting Standard No.128, "Earnings Per Share" (SFAS 128). Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the year. Dilutive common stock equivalents consist of shares issuable upon conversion of convertible notes and the exercise of the Company’s stock options and warrants (calculated using the treasury stock method).

4. ACCOUNTS RECEIVABLE

At September 30, 2008 and December 31, 2007, accounts receivable consists of:

	September 30, 2008			December 31, 2007
Accounts receivable from customers	$	277,018		$	253,148
Allowance for doubtful accounts		(12,500	)		(10,000	)
Accounts receivable, net	$	264,518		$	243,148

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INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

5. LOAN RECEIVABLE

During the three months ended September 30, 2008, the Company renegotiated the terms of its loan receivable from Pasta Italiana, Inc. (“Pasta”) . The revised agreement (the “Pasta Settlement Agreement”) calls for Pasta to pay to the Company $165,000 of the principal amount of the note . Pasta is to make 36 monthly payments in the amount of $4,500 beginning in September, 2008 and a final payment of $3,000 The first of these 36 payments was received by the Company during the three months ended September 30, 2008. Upon execution of the agreement, Pasta is also to deliver to the Company 10% of its fully diluted common stock. For purposes of the Pasta Settlement Agreement, this stock is deemed to have a value of $200,000 (the “Pasta Stock Deemed Value”); this stock is valued at $0 in the Company’s financial statements for the period ended September 30, 2008. The Company recorded an impairment charge in the amount of $127,147 during the three months ended September 30, 2008, representing the difference between the net book value of the Pasta receivable prior to the Pasta Settlement Agreement and the amount of the new note receivable negotiated in the Pasta Settlement Agreement.

Interest will accrue at a rate of 8% on the unpaid portion of the $165,000. The accrued interest is to be paid semi-annually in shares of common stock of Pasta (the “Pasta Interest Shares”) at a price per share equivalent to the Pasta Stock Deemed Value. The Pasta Interest Shares are valued at $0 in the financial statements of the Company, and no interest income is recorded by the Company for these shares during the three months ended September 30, 2008.

The Company is to issue to two principal shareholders of Pasta Italiana 1,500,000 shares each of common stock of the Company. These shares vest at a rate of 1,000,000 per year, with the first 1,000,000 vesting on September 1, 2009, the next 1,000,000 vesting on September 1, 2010, and the remaining 1,000,000 vesting on September 1, 2011. As of September 30, 2008 these shares have not been issued and have not been recorded on the financial statements of the Company. The Company will record the issuance of these shares as a charge to additional paid-in capital upon issuance, and as a charge to operations for the fair market value of these shares upon each of the vesting dates.

The Company is also required to issue 1,000,000 warrants to purchase additional shares of common stock, 500,000 each, to two of the officers of Pasta. These warrants are convertible into shares of common stock at a rate of $0.012 per share, are exercisable for 5 years, and vest 36 months from the date of the settlement (September 15, 2011) or the date which all of the cash payments of the $165,000 have been made. The Company will charge the fair value of these warrants to operations on the date of vesting, or September 15, 2011.

Pasta is also required to pay an additional $15,000 for the Company’s legal fees, this payment is due when the last payment is made on the $165,000 note receivable.

A principal payment in the amount of $4,500 was received by the Company in September 2008, and the remaining net balance due the Company at September 30, 2008 was $160,500. $49,500 of this amount appears as a current asset, and the balance, or $111,000, appears as a long-term asset in the Company’s balance sheet at September 30, 2008.

6. PROPERTY AND EQUIPMENT

A summary of property and equipment at September 30, 2008 and December 31, 2007, is as follows:

	September 30, 2008			December 31, 2007
Computer equipment	$	292,608		$	288,229
Furniture and fixtures		63,564			63,564
		356,172			351,793
Less accumulated depreciation and amortization		(298,108	)		(267,970	)
Total	$	58,064		$	83,823

Depreciation and amortization expense amounted to $30,138, and $39,399, respectively, for the nine months ended September 30, 2008 and 2007.

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INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

7. ACCRUED INTEREST

At September 30, 2008 and December 31, 2007, the Company has the following accrued interest on its balance sheet:

September 30, 2008:	Gross		Discount		Net
Non-related parties	$	410,456	$	-	$	410,456
Related parties		165,325		-		165,325
Total	$	575,781	$	-	$	575,781

December 31, 2007:	Gross		Discount		Net
Non-related parties	$	410,456	$	-	$	316,058
Related parties		165,325		-		142,621
Total	$	575,781	$	-	$	458,679

Accrued interest on some of the Company’s notes payable is convertible into common stock of the Company at a price of $0.005 per share (post-reverse split) (note 9). There is a beneficial conversion feature embedded in this convertible accrued interest. The Company is amortizing this beneficial conversion feature over the life of the related notes. During the nine months ended September 30, 2008, and 2007 the amounts of $98,802 and $98,376 were credited to additional paid-in capital as a discount on accrued interest.

8. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES

At September 30, 2008, the Company had outstanding notes payable in the aggregate amount of $1,166,416. net of unamortized discount of $105,933.

During the nine months ended September 30, 2008, the Company issued 43,200,000 warrants to purchase additional shares of common stock to two investors for consideration for extending the maturity date of some of the notes payable. The value of the warrants in the amount of $254,240 was taken as a discount to the notes payable. During the nine months ended September 30, 2008, the warrants are amortized on a straight-line basis over the one year extension of the notes maturity date; as a result, interest in the amount of $63,560 and $148,307 was charged to operations during the three and nine months ended September 30, 2008, respectively.

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INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

8. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES (Continued)

During the three months ended September 30, 2008, the Company has agreed to make the $75,000 note outstanding to Michael Ferrone, a related party, a convertible note at a rate of $0.005 per share, as consideration for extending the maturity date of the note payable from February 2, 2005 to December 31, 2009. The Company calculated the fair value of this beneficial conversion feature as $75,000, and charged this amount to discount on the debt. Because this debt is immediately convertible at the option of the lender, the Company charged the entire amount of this discount, or $75,000, to interest expense during the three months ended September 30. 20008.

The renegotiation of the terms of this note was considered a debt extinguishment, and issuance of new debt. The Company determined that the value given up for the new debt (the conversion feature) was equal to the value obtained (the extension of the note) and concluded that there was no gain or loss on this debt extinguishment.

Notes payable and notes payable to related parties at September 30, 2008 and December 31, 2007, consisted of the following:

	September 30, 2008		December 31, 2007
Convertible note payable in the original amount of $350,000 to Alpha Capital Aktiengesselschaft (“Alpha Capital”), dated February 25, 2005. This note consists of $100,000 outstanding under a previous note payable which was cancelled on February 25, 2005, and $250,000 of new borrowings. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note is entered technical default status on May 16, 2005. The note originally carried interest at the rate of 8% per annum, and is due in full on February 24, 2007. Upon default, the note’s interest rate increased to 15% per annum, and the note became immediately due. The note is convertible into common stock of the Company at a conversion price of $0.005 per share. A beneficial conversion feature in the amount of $250,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a conversion price of $0.005 per share. During the twelve months ended December 31, 2006 the note holder converted $5,000 into shares of common stock. During the twelve months ended December 31, 2006 the holder of the note converted $27,865 of accrued interest into common stock. Interest in the amount of $13,043 was accrued on this note during the three months ended September 30, 2008, and 2007. This note is in default at September 30, 2008	$	345,000	$	345,000

Convertible note payable in the original amount of $100,000 to Joel Gold, a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible by the holder into common stock of the Company at a conversion price of $0.005 per share . A beneficial conversion feature in the amount of $100,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share . During the twelve months ended December 31, 2006, $75,000 of the principal amount was converted into common stock. Interest in the amount of $504 was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.		25,000		25,000

Convertible note payable in the amount of $85,000 to Briolette Investments, Ltd, dated March 11, 2004. The note bears interest at the rate of 8% per annum, and is due in Full on March 11, 2006. The note is convertible into common stock of the Company at a conversion of $0.005 per share . A beneficial conversion feature in the amount of $85,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004 Accrued interest is convertible by the holder into common stock of the Company at a price of $0.005 per share . During the twelve months ended December 31, 2005, the note holder converted $44,000 of the note payable into common stock. During the twelve months ended December 31, 2007, the Company made a $3,000 cash payment on the principal amount of the note. Interest in the amount of $766 was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	38,000	38,000

Convertible note payable in the amount of $80,000 to Brown Door, Inc., dated March 11, 2004. The note bears interest at the rate of 8% per annum, and was due in full on March 11, 2006. The note is convertible into common stock of the Company at a conversion of $0.005 per share . A beneficial conversion feature in the amount of $80,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible by the holder into common stock of the Company at maturity of the note at a price of $0.005 per share . Interest in the amount of $1,614 was accrued on this note during each of the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	80,000	80,000

Convertible note payable in the amount of $50,000 to Whalehaven Capital Fund, Ltd. (“Whalehaven Capital”) dated February 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisites numbers of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note is in technical default as of May 16, 2005. The note originally carried interest at the rate of 8% per annum, and was due in Full on February 24, 2007. Upon default, the note’s interest rate increased to 15% per annum, and the note became due immediately. The note is convertible into common stock of the Company at a conversion of $0.005 per share . A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense during the three months ended March 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share . During the twelve months ended December 31, 2006, $10,000 of principal and $589 of accrued interest were converted into shares of common stock. Interest in the amount of $1,513 was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	40,000	40,000

Convertible note payable in the amount of $50,000 to Oppenheimer & Co., / Custodian for Joel Gold IRA, a related party, dated March 14, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.005 per share . A beneficial conversion feature in the amount of $50,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share . Interest in the amount of $1,009 was accrued on this note during each of the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	50,000	50,000

Convertible note payable in the original amount of $30,000 to Huo Hua dated May 9, 2005. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.005 per share . A beneficial conversion feature in the amount of $30,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. During the twelve months ended December 31, 2006, the note holder converted $10,000 of principal into common stock. Interest in the amount of $404 was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	20,000	20,000

Table of Contents

INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

8. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES (Continued)


Convertible note payable in the amount of $25,000 to Joel Gold a board member and related party, dated January 25, 2005. The note bears interest at the rate of 8% per annum, and is due in full on January 25, 2007. The note is convertible into common stock of the Company at a conversion of $0.025 per share. A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.025 per share. Interest in the amount of $504, was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	25,000	25,000

Convertible note payable in the amount of $25,000 to The Jay & Kathleen Morren Trust dated January 25, 2005. The note bears interest at the rate of 6% per annum, and is due in full on January 25, 2007. The note is convertible into common stock of the Company at a conversion of $0.005 per share (post-reverse split). A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share Interest in the amount of $377 was accrued on this note during the three months ended September 30, 2008, and 2007. This note is in default at September 30, 2008.	25,000	25,000

Convertible note payable in the amount of $10,000 to Lauren M. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.01 per share . A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share . Interest in the amount of $202, was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.

10,000

Convertible note payable in the amount of $10,000 to Richard D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.01 per share . A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share . Interest in the amount of $202 was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	10,000	10,000

Convertible note payable in the amount of $10,000 to Christian D. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.01 per share . A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share . Interest in the amount of $202 was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	10,000	10,000

Convertible note payable in the amount of $10,000 to Andrew I. Ferrone, a relative of a board member and related party, dated October 12, 2004. The note bears interest at the rate of 8% per annum, and was originally due in full on October 12, 2005. On February 25, 2005, an amendment to the convertible notes was signed which extended the term, which resulted in a new maturity date of October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.01 per share . A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.01 per share . Interest in the amount of $202 was accrued on this note during the three months ended September 30, 2008, and 2007. This note is in default at September 30, 2008.	10,000	10,000

Table of Contents

INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

8. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES (Continued)


Convertible note payable in the amount of $8,000 to Adrian Neilan dated March 11, 2004. The note bears interest at the rate of 8% per annum, and is due in full on October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.005 per share . A beneficial conversion feature in the amount of $8,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2004. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share . Interest in the amount of $161 was accrued on this note during the each of the three months ended September 30 2008, and 2007. This note is in default at September 30, 2008.	8,000	8,000

Convertible note payable in the amount of $5,000 to Matthias Mueller dated March 11, 2004. The note bears interest at the rate of 8% per annum, and was due in full on October 12, 2006. The note is convertible into common stock of the Company at a conversion of $0.005 per share . A beneficial conversion feature in the amount of $5,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share . Interest in the amount of $101 was accrued on this note during the each of the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	5,000	5,000

Convertible note payable in the amount of $120,000 to Alpha Capital dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note is in technical default as of November 13, 2005. The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company at a conversion of $0.005 per share . A beneficial conversion feature in the amount of $120,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share . Interest in the amount of $4,537 was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	120,000	120,000

Convertible note payable in the amount of $30,000 to Whalehaven Capital dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note was in technical default as of November 13, 2006. The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company at a conversion of $0.005 per share . A beneficial conversion feature in the amount of $30,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share . Interest in the amount of $1,134 was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	30,000	30,000

Convertible note payable in the original amount of $25,000 to Asher Brand, dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note was in technical default as of November 13, 2006. The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due The note is convertible into common stock of the Company at a conversion of $0.005 per share . A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share . During the three months ended March 31, 2007, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock. Interest in the amount of $870 was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	23,000	23,000

Convertible note payable in the original amount of $25,000 to Momona Capital, dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note was in technical default at November 13, 2005. The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due The note is convertible into common stock of the Company at a conversion of $0.005 per share. A beneficial conversion feature in the amount of $25,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share . During the twelve months ended December 31, 2007, the holder of the note converted $2,000 of principal and $3,667 of accrued interest into common stock. Interest in the amount of $870 was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	23,000	23,000

Convertible note payable in the amount of $10,000 to Lane Ventures dated August 25, 2005. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities. This note was in technical default at November 13, 2005. The note originally carried interest at the rate of 8% per annum, and was due in full on August 25, 2007. Upon default, the note’s interest rate increased to 15% per annum and the note became immediately due. The note is convertible into common stock of the Company at a conversion of $0.005 per share . A beneficial conversion feature in the amount of $10,000 was recorded as a discount to the note, and was amortized to interest expense during the twelve months ended December 31, 2005. Accrued interest is convertible into common stock of the Company at a price of $0.005 per share. During the twelve months ended December 31, 2007, the holder of the note converted $4,000 of principal and $1,467 of accrued interest into common stock. Interest in the amount of $226 was accrued on this note during the three months ended September 30, 2008 and 2007. This note is in default at September 30, 2008.	6,000	6,000

Table of Contents

INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

8. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES (Continued)

Note payable in the amount of $120,000 to Alpha Capital, dated February 7, 2006. The originally carried interest at the rate of 15% per annum, and was originally due in full on February 7, 2007. The Company is not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable. During the year ended December 31, 2007, the Company extended the due dates of the notes one month to October 31, 2007, at the same time the Company added a convertibility feature, allowing the note holders to convert the notes and accrued interest into common stock of the company at a rate of $0.005 per share. During the three months ended March 31, 2008, the Company extended the note one year, to March 4, 2009. Interest in the amount of $6,049 was accrued on this note during the three months ended September 30, 2008 and 2007.	120,000	120,000

Note payable in the amount of $30,000 to Whalehaven Capital dated February 7, 2006. The note originally carried interest at the rate of 15% per annum, and was due in full on February 7, 2007. The Company is not in compliance with various terms of this note, including making timely payments of interest, and this note was in technical default at May 8, 2006. At this time, the interest rate increased to 20% and the note became immediately due and payable. During the year ended December 31, 2007, the Company extended the due dates of the notes one month to October 31, 2007, at the same time the Company added a convertibility feature, allowing the note holders to convert the notes and accrued interest into common stock of the company at a rate of $0.005 per share. During the three months ended March 31, 2008, the Company extended the note one year, to March 4, 2009. Interest in the amount of $1,134 was accrued on this note during the three months ended September 30, 2008 and 2007.	30,000	30,000

Note payable in the amount of $75,000 to Michael Ferrone, dated August 2, 2004. The note bears interest at the rate of 8% per annum, and was due in full on February 2, 2005. During the three months ended September 30, 2008, the Company negotiated an extension of the note to December 31, 2009; as consideration for this extension, the Company agreed to make this note convertible at a rate of $0.005 per share. Interest in the amount of $1,513, was accrued on this note during the three months ended September 30, 2008 and 2007.

75,000

Note payable in the amount of $10,000 to Alpha Capital, dated May 19, 2006. The note bears interest at the rate of 15% per annum, and was due in full on November 19, 2006. During the year ended December 31, 2007, the Company extended the due dates of the notes one month to October 31, 2007, at the same time the Company added a convertibility feature, allowing the note holders to convert the notes and accrued interest into common stock of the company at a rate of $0.005 per share. During the three months ended March 31, 2008, the Company extended the due date of the notes for one year to March 4, 2009. Interest in the amount of $504 was accrued on this note during the three months ended September 30, 2008 and 2007.

10,000

Twenty-three convertible notes payable in the amount of $4,500 each (an aggregate amount of $103,500) to Sam Klepfish, the Company’s Chief Executive Officer and a related party, dated the first of every month starting on November 1, 2006. Pursuant to the Company’s employment agreement with Mr. Klepfish, the amount of $4,500 in salary is accrued each month to a note payable. These notes bear interest at a rate of 8% per annum. These notes and accrued interest are convertible into common stock at a rate of $0.005 per share. Interest in the aggregate amount of $1,933 and $880 was accrued on these notes during the three months ended September 30, 2008 and 2007, respectively.	103,500	63,000

Six convertible notes payable in the amount of $1,500 each to a consultant. These notes do not bear interest. The notes are convertible into shares of the Company common stock at a price of $0.005 per share.	13,500	-

Note payable in the original amount of $25,787 to Microsoft Corporation dated May 3, 2006. The note bears interest at the rate of 9.7% per annum, and is payable in 60 monthly payments of $557 beginning October 1, 2006. Payment of principal and interest were made on theses notes in the amount of $1,232 and $441 during the three months ended September 30, 2008 and $3,608 and $1,410 during the nine months ended September 30, 2008.	17,349	20,953

	$	1,272,349		$	1,221,953
Less: discount to note payable		(105,933	)		-
	$	1,166,416		$	1,221,953
Less: Current maturities		(1,185,236	)		(1,205,870	)
Long-term portion	$	87,113		$	16,083

Total Non-related parties	$	847,916		$	943,953
Total related parties		318,500			278,000
	$	1,166,416		$	1,221,953

Table of Contents

INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

8. NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES (Continued)

On March 12, 2008, we executed amendments to restructure an aggregate of $150,000 of senior secured notes which were due February 7, 2007. The amendments extended the due date of the notes to March 4, 2009 and were in consideration of our issuance of an aggregate of: 30 million Class A warrants exercisable at $0.0115 per share, 7.5 million Class B warrants exercisable at $0.011 per share, and 3 million Class C warrants exercisable at $0.005 per share. All of these warrants have essentially similar terms to the warrants we issued to such investors on February 24, 2005, except that the underlying common stock does not have registration rights.

On March 12, 2008, we also extended, to March 4, 2009, the due date of an additional $10,000 note that was due November 19, 2006 in consideration of adding a convertibility feature, at a conversion price of $0.005 per share, to the note and the issuance of 2 million Class A warrants exercisable at $0.0115 per share, 500,000 Class B warrants exercisable at $0.011 per share, and 200,000 Class C warrants exercisable at $0.005 per share. All of these warrants have essentially similar terms to the warrants we issued to such investors on February 24, 2005, except that the underlying common stock does not have registration rights.

Accounting for Conversion Options Embedded in Convertible Notes and Convertible Interest

The Company has certain convertible notes payable which contain embedded beneficial conversion features. Through August 2005, the beneficial conversion features of these convertible notes were accounted for by the equity method, whereby the intrinsic value of the beneficial conversion features were considered discounts to the notes. These discounts were immediately amortized to interest expense. During September 2005, the number of shares of the Company’s common stock issued and issuable exceeded the number of shares of common stock the Company had authorized, and this triggered a change in the manner in which the Company accounts for these beneficial conversion features. In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”), the debt features provision contained in the terms governing the Notes are not clearly and closely related to the characteristics of the Notes. Accordingly, the features qualified as embedded derivative instruments at September 30, 2005 and because they do not qualify for any scope exception within SFAS 133, they were required by SFAS 133 to be accounting for separately from the debt instrument and recorded as derivative financial instruments. In September 2005, the Company valued the beneficial conversion features of its notes payable using the Black-Scholes valuation method, and arrived at an aggregate value of $12,528,662. Pursuant to Emerging Issues Task Force Issue 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”) “If a contract is reclassified from permanent or temporary equity to an asset or a liability, the change in fair value of the contract during the period the contract was classified as equity should be accounted for as an adjustment to stockholders’ equity.” Accordingly, during the year ended December 31, 2005, the Company charged the amount of $12,445,576 to stockholders’ equity. $5,665,290 of this amount was charged to additional paid-in capital, which brought the balance of additional paid-in capital to $0. The remainder, or $6,780,286, was charged to accumulated deficit. During subsequent periods, the conversion option liability will be revalued, and any change in value charged to operations. At September 30, 2008, the conversion option liability was valued at $1,672,936. The revaluation resulted in a (gain) loss during the three and nine months ended September 30, 2008, of $(225,959) and $955,511 , respectively.

The Company valued these embedded conversion options using the Black-Scholes option pricing model with the following assumptions:

Risk Free

Expected

Interest

Dividend

Option

Rate

Yield

Life

Volatility

September 30, 2008

3.50

255.74

9. RELATED PARTY TRANSACTIONS

The Company engaged in the following transactions with related parties:

Nine months ended September 30, 2008:

The Company issued nine convertible notes payable in the amount of $4,500 each (a total of $40,500) for additional salary due to the Company’s Chief Executive Officer.

Table of Contents

INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

10. EQUITY

Common Stock

The Company recorded a discount to the accrued convertible interest on notes payable in the amount of $38,627 during the three months ended March 31, 2008. This amount was credited to additional paid-in capital during the three months ended March 31, 2008.

The company recorded a discount to the convertible notes payable in the amount of $18,000 during the three months ended March 31, 2008. This amount was credited to additional paid-in capital during the three months ended March 31, 2008.

The Company recorded a discount to the accrued convertible interest on notes payable in the amount of $29,801 during the three months ended June 30, 2008. This amount was credited to additional paid-in capital during the three months ended June 30, 2008.

The company recorded a discount to the convertible notes payable in the amount of $18,000 during the three months ended June 30, 2008. This amount was credited to additional paid-in capital during the three months ended June 30, 2008.

The Company recorded a discount to the accrued convertible interest on notes payable in the amount of $30,374 during the three months ended September 30, 2008. This amount was credited to additional paid-in capital during the three months ended September30, 2008.

The company recorded a discount to the convertible notes payable in the amount of $93,000 during the three months ended September 30, 2008. This amount was credited to additional paid-in capital during the three months ended September 30, 2008.

Pursuant to the settlement agreement Pasta is to issue the Company 10% of it’s common stock, on a fully diluted basis. The Company is to issue 1,500,000 shares of common stock to Pasta, these shares vest at a rate of 500,000 per year, with the first 500,000 vested on September 1, 2009, the next 500,000 vesting on September 1, 2010, and the remaining 500,000 vesting on September 1, 2011. As of September 30, 2008, these shares have not been issued

Warrants

Pursuant to the Pasta Settlement Agreement, the Company required to issue warrants to purchase 1,000,000 shares of the Company’s common stock, 500,000 each, to two of the officers of Pasta. These warrants are convertible into shares of common stock at a rate of $0.012 per share, are exercisable for 5 years, and vest 36 months from the date of the settlement (September 2011) or the date which all of the cash payments of the $165,000 have been made.

The following table summarizes the warrants outstanding at September 30, 2008 :

Range of exercise prices		Number of shares		Weighted average remaining contractual life (years)		Weighted average exercise price of outstanding warrants		Number of shares exercisable
$	0.0005		139,700,000		1.49	$	0.005		139,700,000
$	0.0110		18,500,000		2.99	$	0.110		18,500,000
$	0.0120		1,000,000		4.96	$	0.012		-
$	0.0115		74,000,000		2.99	$	0.115		74,000,000
			233,200,000		2.08				232,200,000

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INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

10. EQUITY (Continued)

Transaction involving warrants are summarized as follows:

	Number of Shares		Weighted Average Exercise Price
Warrants outstanding at December 31, 2007		189,000,000	$	0.027

Granted		43,200,000		0.011
Exercised		-
Cancelled / Expired		-		-

Warrants outstanding at March 31, 2008		232,200,000	$	0.024

Granted		-		-
Exercised		-		-
Cancelled/exercised		-		-

Warrants outstanding at June 30, 2008		232,200,000	$	0.024

Granted		1,000,000		0.012
Exercised		-		-
Cancelled/Expired		-		-

Warrants outstanding at September 30, 2008		233,200,000	$	0.024
Warrants vested at September 30, 2008		232,200,000	$	0.024
Warrants non-vested at September 30, 2008		1,000,000	$	0.012

Options

On December 31, 2007, the Company issued 20,000,000 options to purchase additional shares of common stock at a price of $0.007 per share for services to be provided during the year ending December 31, 2008. 5,000,000 options were granted to each of the Company’s three directors, and 5,000,000 to the Company’s president. These shares vest on December 31, 2008.

The following table summarizes the options outstanding at September 30, 2008:

						Weighted				Weighted
				Weighted		average				average
				Average		exercise				exercise
Range of				remaining		price of		Number of		price of
exercise		Number of		contractual		Outstanding		Options		exercisable
prices		Options		life (years)		Options		exercisable		options
$	0.005		15,000,000		3.14	$	0.005		15,000,000	$	0.005
	0.007		20,000,000		4.50		0.007		-		0.007
	0.500		500,000		0.63		0.500		400,000		0.500

			35,500,000		3.87				15,400,000	$	0.018

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INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

10. EQUITY (Continued)

			Weighted
			Average
	Number of		Exercise
	Options		Price
Options outstanding at December 31, 2007		15,500,000	$	0.0.21
Granted		20,000,000		0.007
Exercised		-		-
Cancelled / Expired		-		-

Options outstanding at March 31, 2008		35,500,000	$	0.013
Exercisable		15,300,000	$	0.015
Not exercisable		20,200,000	$	0.012

Granted		-		-
Exercised		-		-
Cancelled/ Expired		-		-

Options outstanding at June 30, 2008		35,500,000	$	0.013
Exercisable		15,400,000	$	0.018
Not exercisable		20,100,000	$	0.009

Granted		-		-
Exercised		-		-
Cancelled/Expired		-		-

Options outstanding at September 30, 2008		35,500,000	$	0.013
Exercisable		15,400,000	$	0.018
Not exercisable		20,100,000	$	0.009

Accounting for Warrants and Freestanding Derivative Financial Instruments

The Company accounts for the issuance of common stock purchase warrants and other freestanding derivative financial instruments in accordance with the provisions of EITF 00-19. Based on the provisions of EITF 00-19, the Company classifies, as equity, any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contract that (i) require net-cash or (ii) give the counterparty a choice of net-cash settlement in shares (physical or net-share settlement).

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INNOVATIVE FOOD HOLDINGS, INC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

10. EQUITY (Continued)

The fair value of these warrants is determined utilizing the Black-Scholes valuation model. Through August 2005, these warrants were accounted for by the equity method, whereby the fair value of the warrants was charged to additional paid-in capital. During September, 2005, the number of shares of the Company’s common stock issued and issuable exceeded the number of shares of common stock the Company had authorized, and this triggered a change in the manner in which the Company accounts for these warrants and the Company began to account for these warrants utilizing the liability method. Pursuant to EITF 00-19, “If a contract is reclassified from permanent or temporary equity to an asset or a liability, the change in fair value of the contract during the period the contract was classified as equity should be accounted for as an adjustment to stockholders’ equity.” Accordingly, during the year ended December 31, 2005, the Company charged the amount of $10,374,536 to stockholders’ equity. At the same time, the Company changed the way in which it accounts for the beneficial conversion feature of convertible notes payable (see note 8).

The accounting guidance shows that the warrants and options which are a derivative liability should be revalued each reporting period. The recorded value of such warrants can fluctuate significantly based on fluctuations in the market value of the underlying securities of the issuer of the warrants and options, as well as in the volatility of the stock price during the term used for observation and the term remaining for warrants and options. During the three and nine months ended September 30, 2008, the Company recognized a loss of $268,724 and $1,029,131, respectively, for the increase in the fair value of the warrant liability and recorded this gain in operations during the three and nine months ended September 30, 2008. The fair value of these instruments was estimated at September 30, 2008, using the Black-Scholes option pricing model with the following assumptions: risk free interest rate: 3.50%; expected dividend yield: 0%; expected option life: 5 years; and volatility: 255.74%.

Insufficient Authorized but Unissued Shares of Common Stock

The Company has a potential obligation to issue 724,807,080 shares of common stock upon the conversion of convertible notes and accrued interest, warrants and penalty shares issuable at September 30, 2008. The Company had 181,787,638 shares of common stock outstanding at September 30, 2008 and 500,000,000 shares of common stock authorized at September 30, 2008. The Company has potentially 406,594,718 exceeded its shares authorized by at September 30, 2008.

11. PENALTY FOR LATE REGISTRATION OF SHARES

At September 30, 2008, the Company had a liability in the amount of $771,956 for the issuance of 110,280,000 shares of the Company’s common stock pursuant to a penalty calculation with regard to the late registration of shares underlying convertible notes payable. The Company reported a (gain) loss of $(110,280) and $152,040 during the three months ended September 30, 2008 and 2007 respectively; and a loss of $441,120 and $113,576 during the nine months ended September 30, 2008 and 2007, respectively, representing the change in the fair value of these shares during the period.

12. SUBSEQUENT EVENTS

On October 17, 2008, we entered into a three-year lease with Grand Cypress Communities, Inc. for new premises consisting of 4,000 square feet in Naples, Florida. The commencement date of the lease is January 1, 2009. The annual rent and fees under the lease is approximately $54,000. The lease provides for a buyout option at the end of the lease with credit towards the purchase price received for the rental payments made during the term of the lease

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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS

FORWARD LOOKING STATEMENTS

Certain information contained in this discussion and elsewhere in this report may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that act. The safe harbor created by the Securities Litigation Reform Act will not apply to certain “forward looking statements” because we issued "penny stock" (as defined in Section 3(a)(51) of the Securities Exchange Act of 1934 and Rule 3a51-1 under the Exchange Act) during the three year period preceding the date(s) on which those forward looking statements were first made, except to the extent otherwise specifically provided by rule, regulation or order of the Securities and Exchange Commission. We caution readers that certain important factors may affect our actual results and could cause such results to differ materially from any forward-looking statements which may be deemed to have been made in this Report or which are otherwise made by or on our behalf. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "believe", "explore", "consider", "anticipate", "intend", "could", "estimate", "plan", "propose" or "continue" or the negative variations of those words or comparable terminology are intended to identify forward-looking statements. Factors that may affect our results include, but are not limited to, the risks and uncertainties associated with:

s	Our ability to raise capital necessary to sustain our anticipated operations and implement our proposed business plan,

s	Our ability to implement our proposed business plan,

s	The ability to successfully integrate the operations of businesses we have acquired, or may acquire in the future, into our operations,

s	Our ability to generate sufficient cash to pay our lenders and other creditors,

s	Our ability to employ and retain qualified management and employees,

s	Our dependence on the efforts and abilities of our current employees and executive officers,

s	Changes in government regulations that are applicable to our current clients or anticipated business,

s	Changes in the demand for our services,

s	The degree and nature of our competition,

s	The lack of diversification in our business plan,

s	The general volatility of the capital markets and the establishment of an active trading market for our shares,

s	Our ability to generate sufficient cash to pay our creditors, and

s	Disruption in the economic and financial conditions from the impact of past terrorist attacks in the United States, threats of future attacks, police and military activities domestically and overseas and other disruptive domestic and worldwide political and economic events and natural disasters.

We are also subject to other risks detailed from time to time in our other Securities and Exchange Commission filings and elsewhere in this report. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

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Critical Accounting Policy and Estimates

Our Management’s Discussion and Analysis section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There are no significant accounting estimates inherent in the preparation of our financial statements.

Background

The following discussion should be read in conjunction with the financial statements of the company and related notes included elsewhere in this Report and in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007.

RESULTS OF OPERATIONS

The following is a discussion of our financial condition and results of operations for the three and nine months ended September 30, 2008 and 2007. This discussion may contain forward looking-statements that involve risks and uncertainties. Our actual results could differ materially from the forward looking-statements discussed in this report. This discussion should be read in conjunction with our consolidated financial statements, the notes thereto and other financial information included elsewhere in the report and our other public filings.

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Revenue

Revenue increased by $235,296 or approximately 15%, to $1,791,302 for the three months ended September 30, 2008 from $1,556,006 during the prior year. Sales decreases in Seafoods, Meat and Game and Produce were offset by sales increases in Poultry, Cheese, and Specialty lines. Sales returns and allowances in 2008 were $2,004 lower than in the comparable quarter in 2007.

Cost of goods sold

Cost of goods sold was $1,439,641 for the three months ended September 30, 2008, an increase of $240,660 or approximately 20% compared to cost of goods sold of $1,198,981 for the three months ended September 30, 2007. The increase in the cost of good sold was due to increased shipping costs due to the introduction of new shipping programs. Gross profit margin for the three months ended September 30, 2008 was approximately 20%, compared to gross profit margin of approximately 23% for the three months ended September 30, 2007. The decrease in the gross margin was due to increased freight costs from fuel surcharges which were not fully passed on to our customers, and the introduction of new saver shipping programs which increased our costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were essentially unchanged at $449,556 for the three months ended September 30, 2008 compared to $449,442 for the three months ended September 30, 2007. The primary components of selling, general, and administrative expenses for the three months ended September 30, 2008 were payroll and related costs of $227,883; consulting and professional fees of $121,287; facilities costs of $39,297; insurance costs of $27,760; amortization and depreciation of $9,741; software expense of $8,423; travel and entertainment of $7,363; public relations expenses of $3,002; and bank fees of $1,094.

Penalty for Late Registration of Shares

The Company has accrued a liability for failure to register certain shares issuable. At September 30, 2008, there were a total of 110,280,000 shares issuable pursuant to this penalty. This penalty has been fully accrued, and no additional accrual was made during the three months ended September 30, 2008. The amount of $13,272 was accrued during the three months ended September 30, 2007. During the three months ended September 30, 2008 and 2007, the Company also marked to market the value of these 110,280,000 shares. This resulted in a (gain) of ($110,280) and a loss of $152,040, for the three months ended September 30, 2008 and 2007, respectively.

Change in Fair value of Warrant Liability

At September 30, 2008, the Company had an accrued liability of $1,864,023 representing the fair value of the warrants issued with the convertible notes. The Company recorded a loss of $268,724 and $265,338, during the three months ended September 30, 2008 and 2007, respectively, representing the change in the fair value of these warrants.

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Change in Fair value of the Conversion Option Liability

At September 30, 2008, the Company had an accrued liability of $1,672,936 representing the fair value of the beneficial conversion feature of convertible notes payable. The Company recorded a (gain) of ($195,963) and a loss of $284,825 , during the three months ended September 30, 2008 and 2007, respectively, representing the change in the fair value of these options.

Interest (Income) expense, net

Interest expense, net of interest income, increased by $148,572, or approximately 184%, from $80,535 during the three months ended September 30, 2007 to $229,107 for the three months ended September 30, 2008. This increase was attributable primarily to the new issuances of convertible notes payable for services performed, and to the amortization of the discount associated with the beneficial conversion features of these notes.

Impairment of Investment in Pasta Italiana

During the three months ended September 30, 2008, the Company renegotiated the terms of its loan receivable from Pasta Italiana, Inc. (“Pasta”) . The revised agreement (the “Pasta Settlement Agreement”) calls for Pasta to pay to the Company $165,000 of the principal amount of the note. Pasta is to make 36 monthly payments in the amount of $4,500 beginning in September, 2008 and a final payment of $3,000 The first of these 36 payments was received by the Company during the three months ended September 30, 2008. Upon execution of the agreement, Pasta is also to deliver to the Company 10% of its fully diluted common stock. For purposes of the Pasta Settlement Agreement, this stock is deemed to have a value of $200,000 (the “Pasta Stock Deemed Value”); this stock is valued at $0 in the Company’s financial statements for the period ended September 30, 2008. The Company recorded an impairment charge in the amount of $127,147 during the three months ended September 30, 2008, representing the difference between the net book value of the Pasta receivable prior to the Pasta Settlement Agreement and the amount of the new note receivable negotiated in the Pasta Settlement Agreement. There was no such charge during the three months period ended September 30, 2007.

Net Loss

For the reasons stated above, net (loss) for the three months ended September 30, 2008 was ($416,630), a decrease of $471,797 or approximately 53% compared to a net (loss) of ($888,427), during the three months ended September 30, 2007. It is important to note that these losses are substantially the result of the application of various accounting rules as they apply to the Company, and that many of the charges made by the Company to value certain liabilities have no impact on our cash flows.

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

Revenue

Revenue increased by $216,120 or approximately 4%, to $5,076,534 for the nine months ended September 30, 2008 from $4,860,414 from the prior year. Sales decreases in seafood, meat and game, and produce were offset by sales increases in Produce, Cheese, and Specialty lines. Sales returns and allowances were $4,229 lower than in the comparable quarter in 2007.

Cost of goods sold

Cost of goods sold was $4,019,275 for the nine months ended September 30, 2008, an increase of $414,182 or approximately 12% compared to cost of goods sold of $3,605,093 for the nine months ended September 30, 2008. The increase in the cost of revenue was due to the introduction of our 3 day saver shipping program which lowered our margin on freight costs. Gross profit margin for the nine months ended September 30, 2008 was approximately 21%, compared to gross profit margin of approximately 26% for the nine months ended September 30, 2007. The decrease in the gross margin was due to increased freight costs from fuel surcharges which were not fuly passed on to our customers and the introduction of new saver shipping programs which increased our costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $37,698 , or approximately 3%, to $1,314,904 during the nine months ended September 30, 2008 compared to $1,277,206 for the nine months ended September 30, 2007. The increase was as a result of increased professional fees and legal fees . The primary components of selling, general, and administrative expenses for the nine months ended September 30, 2008 were payroll and related costs of $663,664; consulting and professional fees of $348,290; facilities costs of $120,278; insurance costs of $76,089; amortization and depreciation of $30,138; travel and entertainment of $21,538; software expense of $19,364; public relations expense of $13,390; and bank fees of $6,184.

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Penalty for Late Registration of Shares

The Company has accrued a liability for failure to register certain shares issuable. At September 30, 2008, there were a total of 110,280,000 shares issuable pursuant to this penalty. This penalty has been fully accrued, and no additional accrual was made during the nine months ended September 30, 2008. The amount of $64,984 was accrued during the nine months ended September 30, 2007. During the nine months ended September 30, 2008 and 2007, the Company also marked to market the value of these 110,280,000 shares. This resulted in a loss of $441,120 and $113,576, respectively, during the nine months ended September 30, 2008 and 2007,.

Change in Fair value of Warrant Liability

At September 30, 2008, the Company had an accrued liability of $1,864,023 representing the fair value of the warrants issued with the convertible notes. The Company recorded a loss of $1,029,131 and $237,585, respectively, during the nine months ended September 30, 2008 and 2007 representing the change in the fair value of these warrants.

Change in Fair value of the Conversion Option Liability

At September 30, 2008, the Company had an accrued liability of $1,672,936 representing the fair value of the beneficial conversion feature of convertible notes payable. The Company recorded a loss of $985,507 and $377,569, respectively, during the nine months ended September 30, 2008 and 2007 representing the change in the fair value of these options.

Interest (Income) expense, net

Interest expense, net of interest income, increased by $256,064 , or approximately 107%, from $238,668 during the nine months ended September 30, 2007 to $494,732 for the nine months ended September 30, 2008. This increase was attributable primarily to the new issuances of convertible notes payable for services performed, and to the amortization of the discount associated with the beneficial conversion features of these notes.

During the nine months ended September 30, 2008, the Company renegotiated the terms of its loan receivable from Pasta Italiana, Inc. (“Pasta”) . The revised agreement (the “Pasta Settlement Agreement”) calls for Pasta to pay to the Company $165,000 of the principal amount of the note . Pasta is to make 36 monthly payments in the amount of $4,500 beginning in September, 2008 and a final payment of $3,000 The first of these 36 payments was received by the Company during the three months ended September 30, 2008. Upon execution of the agreement, Pasta is also to deliver to the Company 10% of its fully diluted common stock. For purposes of the Pasta Settlement Agreement, this stock is deemed to have a value of $200,000 (the “Pasta Stock Deemed Value”); this stock is valued at $0 in the Company’s financial statements for the period ended September 30, 2008. The Company recorded an impairment charge in the amount of $127,147 during the three months ended September 30, 2008, representing the difference between the net book value of the Pasta receivable prior to the Pasta Settlement Agreement and the amount of the new note receivable negotiated in the Pasta Settlement Agreement.

Net Loss

For the reasons stated above, net loss for the nine months ended September 30, 2008 was $3,335,282, an increase of $2,281,015 or approximately 216% compared to a net loss of $1,054,267, during the nine months ended September 30, 2007. It is important to note that these losses are substantially the result of the application of various accounting rules as they apply to the Company, and that many of the charges made by the Company to value certain liabilities have no impact on our cash flows.

Liquidity and Capital Resources

As of September 30, 2008, the Company had cash overdraft of $3,372, which represents a decrease in cash in the amount of $77,982 from December 31, 2007. During the nine months ended September 30, 2008, cash used by operating activities was $74,499, consisting primarily of the net loss of $3,335,282 offset by depreciation and amortization of $30,138, amortization of the discount on notes payable and accrued interest of $277,307; reserve for loan receivable of $127,147; reserve for bad debt of $2,500; Impairment of investment in Pasta Italiana of $127,147; change in fair value of warrant liability of $1,029,135; change in fair value of conversion option liability of $985,507; loss from marking to market shares issuable due to penalty on late registration of shares of $441,116; and changes in the components of working capital in the net amount of $367,933. Cash provided by investing activities was $121 , consisting of principal payments received on a loan in the amount of $4,500 offset by the purchase of property and equipment in the amount of $4,379. Cash used by financing activities was $3,604, consisting of principal payments on notes payable.

Historically, our primary cash requirements have been used to fund the cost of operations, with additional funds having been used in promotion and advertising and in connection with the exploration of new business lines. Under current operating plans and assumptions, management believes that projected cash flows from operations and available cash resources may be insufficient to satisfy our anticipated cash requirements for at least the next twelve months. As we seek to increase our sales of perishables, as well as identify new and other consumer oriented products and services, we may use existing cash reserves, long-term financing, or other means to finance such diversification.

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Critical Accounting Policy and Accounting Estimate Discussion

In accordance with the Securities and Exchange Commission's (the "Commission") Release Nos. 33-8040; 34-45149; and FR-60 issued in December 2001, referencing the Commission's statement "regarding the selection and disclosure by public companies of critical accounting policies and practices", we have set forth in Note 2 of the Notes to Consolidated Financial Statements what we believe to be the most pervasive accounting policies and estimates that could have a material effect on our results of operations and cash flows if general business conditions or individual customer financial circumstances change in an adverse way relative to the policies and estimates used in the attached financial statements or in any "forward looking" statements contained herein.

The Company’s cash on hand may be insufficient to fund its planned operating needs. We continue to seek funding for working capital requirements, necessary equipment purchases, marketing costs, and other operations for the next year and foreseeable future by raising capital through the sale of equity and/or debt securities, issuing common stock in lieu of cash for services and by advances from shareholders.

We expect that any sale of additional equity securities or convertible debt will result in additional dilution to our stockholders. The Company can give no assurance that it will be able to generate adequate funds from operations, that funds will be available to us from debt or equity financing, or that if available, the company will be able to obtain such funds on favorable terms and conditions. If the company cannot secure additional funds it may have to reduce its operations to be able to continue as a going concern. The Company currently has no definitive arrangements with respect to additional financing.

While we have raised capital to meet our working capital and financing needs in the past, additional financing may be required in order to meet our current and projected cash flow deficits from operations and development. We are seeking financing in the form of equity or debt in order to provide the necessary working capital. We currently have no commitments for financing. There is no guarantee that we will be successful in raising the funds required.

By adjusting our operations and development to the level of capitalization, management believes we may have sufficient capital resources to meet projected cash flow deficits through the next twelve months. However, if thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.

The independent auditors report on our December 31, 2007 financial statements states that our recurring losses raise substantial doubts about our ability to continue as a going concern.

INFLATION

The impact of inflation on the costs of the Company, and the ability to pass on cost increases to its customers over time is dependent upon market conditions. The Company is not aware of any inflationary pressures that have had any significant impact on the Company’s operations over the past quarter, and the Company does not anticipate that inflationary factors will have a significant impact on future operations.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not maintain off-balance sheet arrangements nor does it participate in non-exchange traded contracts requiring fair value accounting treatment.

RISK FACTORS

The Company’s business and success is subject to numerous risk factors as detailed in its Annual Report on Form 10-KSB for the year ended December 31, 2007 which is available at no cost at www.sec.gov.

ITEM 4T - CONTROLS AND PROCEDURES

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit pursuant to the requirements of the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

(a) Evaluation of disclosure controls and procedures

Our Principal Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report, have concluded that as of that date, our disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed by us in the reports we file or submit with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The conclusions notwithstanding, you are advised that no system is foolproof.

(b) Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15 that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s reports in this annual report.

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PART II. - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, 2008, the Company has issued three convertible notes payable to the Company's CEO in the amount of $4,500 each for a total of $13,500 issued this quarter.

During the three months ended September 30, 2008, the Company has issued three convertible notes payable to a consultant in the amount of $1,500 each, for a total of $4,500 issued this quarter.

Item 3. Defaults Upon Senior Securities

We are in default of $903,000 of our outstanding notes payable. We did not meet certain of our obligations under the loan documents relating to this issuance. These lapses include not reserving the requisite number of treasury shares, selling subsequent securities without offering a right of first refusal, not complying with reporting obligations, not having our common shares quoted on the OTC:BB and not timely registering certain securities.

Item 4. Submission of Matters to a Vote of Securities Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

31.1 Section 302 Certification

31.2 Section 302 Certification

32.1 Section 906 Certification

32.2 Section 906 Certification

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURE	TITLE	DATE

/s/ Sam Klepfish Sam Klepfish	Chief Executive Officer	November 10, 2008

/s/ John McDonald John McDonald	Principal Financial Officer	November 10, 2008

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