|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington,
 D.C. 20549           
|FORM
 10-K                        

|                                                        |  |                                                                                          
|------------------------------------------------------- |  | -----------------------------------------------------------------------------------------
|(Mark One)                                              | 
|x                                                       |  | ANNUAL REPORT PURSUANT TO SECTION
 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934     
|                                                        |  |                                                                                          
|                                                        |  | For the fiscal year ended December 31, 2008                                              
|                                                        |  |                                                                                          
|                                                        |  | OR                                                                                       
|                                                        |  |                                                                                          
|o                                                       |  | TRANSITION REPORT PURSUANT TO
 SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                        |  | For the
 transition period from_________to                                               
|                                                        |  |                                                                                          
|Commission file number 001-33446                       
|                                                        |  |                                                                                          
|VAUGHAN
 FOODS, INC.                                   
|                                                       
|(Exact
 name of registrant as specified in its charter)

|                                                            |  |                     
|----------------------------------------------------------- |  | --------------------
|Oklahoma                                                    |  | 73-1342046          
|(State
 or other jurisdiction of                            |  | (I.R.S.
 Employer   
|incorporation
 or organization)                             |  | Identification
 No.)
|                                                            |  |                     
|216 N.E. 12th Street, Moore, OK                             |  | 73160               
|(Address
 of principal executive offices)                   |  | (Zip
 Code)         
|                                                            |  |                     
|(405) 794-2530                                             
|                                                            |  |                     
|(Registrants
 telephone number, including area code)      
|                                                            |  |                     
|Securities registered pursuant to Section 12(b) of the Act:

|                                                            |  |                                          
|----------------------------------------------------------- |  | -----------------------------------------
|Title of each class                                         |  | Name of each exchange on which registered
|                                                            |  |                                          
|Common
 Stock, $0.001 par value per share                   |  | NASDAQ
 Capital Market                   
|Class
 A Common Stock Purchase Warrants                     |  | NASDAQ
 Capital Market                   
|Class
 B Common Stock Purchase Warrants                     |  | NASDAQ Capital Market                    
|                                                            |  |                                          
|                                                            |  |                                          
|Securities registered pursuant to Section 12(g) of the Act:
|                                                            |  |                                          
|None                                                       

|                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                        
|Indicate by check mark if
 the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
 Securities Act. Yes o No x                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                        
|Indicate by check mark if
 the registrant is not required to file reports pursuant to Section 13 or
 Section 15(d) of the Act. Yes o No x                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                        
|Indicate by check mark
 whether the registrant (1) has filed all reports required to be filed by
 Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
 preceding 12 months (or for such shorter period that the registrant was
 required to file such reports), and (2) has been subject to such filing
 requirements for the past 90 days. Yes x No o
|                                                                                                                                                                                                                                                                                                                                                                        
|Indicate by check mark if
 disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
 contained herein, and will not be contained, to the best of registrants
 knowledge, in definitive proxy or information statements incorporated by
 reference in Part III of this Form 10-K or any amendment to this Form 10-K. x                             
|                                                                                                                                                                                                                                                                                                                                                                        
|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.                                                                 

| |                           |  |                            
| | ------------------------- |  | ---------------------------
| | Large accelerated filer o |  | Accelerated filer o        
| |                           |  |                            
| | Non-accelerated filer o   |  | Smaller reporting company x

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

As of June 30, 2008, the
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $4.7 million, based on the
closing price on such date of the registrants common stock on the Nasdaq
Capital Market.

|                                                                                      |  |                   
|------------------------------------------------------------------------------------- |  | ------------------
|Number of shares
 outstanding of the registrants common stock, as of April 15, 2009:
|                                                                                      |  |                   
|Class                                                                                 |  | Shares Outstanding
|                                                                                      |  |                   
|                                                                                      |  |                   
|Common Stock, $0.001 par
 value per share                                             |  | 4,623,077         

---



|                                           
|-------------------------------------------
|VAUGHAN FOODS, INC.                        
|Form 10-K                                  
|For the fiscal year ended December 31, 2008
|TABLE OF CONTENTS                          

|                                                  |    |                                                                                                                |   
|------------------------------------------------- | -- | -------------------------------------------------------------------------------------------------------------- | --
|PART I                                            |    |                                                                                                                |   
|                                                  |    |                                                                                                                |   
|Item 1.                                           |    | Business                                                                                                       | 1 
|                                                  |    |                                                                                                                |   
|Item 1A.                                          |    | Risk Factors                                                                                                   | 4 
|                                                  |    |                                                                                                                |   
|Item 1B.                                          |    | Unresolved
 Staff Comments                                                                                     | 12
|                                                  |    |                                                                                                                |   
|Item 2.                                           |    | Properties                                                                                                     | 12
|                                                  |    |                                                                                                                |   
|Item 3.                                           |    | Legal
 Proceedings                                                                                             | 12
|                                                  |    |                                                                                                                |   
|Item 4.                                           |    | Submission
 of Matters to a Vote of Security Holders                                                           | 12
|                                                  |    |                                                                                                                |   
|PART II                                           |    |                                                                                                                |   
|                                                  |    |                                                                                                                |   
|Item 5.                                           |    | Market for
 Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
 of Equity Securities | 12
|                                                  |    |                                                                                                                |   
|Item 6.                                           |    | Selected
 Financial Data                                                                                       | 15
|                                                  |    |                                                                                                                |   
|Item 7.                                           |    | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                         | 16
|                                                  |    |                                                                                                                |   
|Item 7A.                                          |    | Quantitative
 and Qualitative Disclosures About Market Risk                                                    | 21
|                                                  |    |                                                                                                                |   
|Item 8.                                           |    | Financial
 Statements and Supplementary Data                                                                   | 23
|                                                  |    |                                                                                                                |   
|Item 9.                                           |    | Changes In
 and Disagreements with Accountants on Accounting and Financial Disclosure                          | 45
|                                                  |    |                                                                                                                |   
|Item 9A.                                          |    | Controls
 and Procedures                                                                                       | 45
|                                                  |    |                                                                                                                |   
|Item 9B.                                          |    | Other
 Information                                                                                             | 46
|                                                  |    |                                                                                                                |   
|PART III                                          |    |                                                                                                                |   
|                                                  |    |                                                                                                                |   
|Item 10.                                          |    | Directors,
 Executive Officers and Corporate Governance                                                        | 46
|                                                  |    |                                                                                                                |   
|Item 11.                                          |    | Executive
 Compensation                                                                                        | 48
|                                                  |    |                                                                                                                |   
|Item 12.                                          |    | Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 Matters               | 50
|                                                  |    |                                                                                                                |   
|Item 13.                                          |    | Certain
 Relationships and Related Transactions, and Director Independence                                     | 53
|                                                  |    |                                                                                                                |   
|Item 14.                                          |    | Principal
 Accountant Fees and Services                                                                        | 55
|                                                  |    |                                                                                                                |   
|PART IV                                           |    |                                                                                                                |   
|                                                  |    |                                                                                                                |   
|Item 15.                                          |    | Exhibits
 and Financial Statement Schedules                                                                    | 56
|                                                  |    |                                                                                                                |   
|SIGNATURES                                        | 58
|                                                  |    |                                                                                                                |   
|EXHIBIT
 INDEX                                    | 59
|                                                  |    |                                                                                                                |   
|Certification
 Pursuant to 18 U.S.C. Section 1350

---



PART I

ITEM 1  BUSINESS

Overview

We
are an integrated processor and distributor of value-added, refrigerated
foods. We are uniquely able to distribute fresh-cut produce items along with a
full array of value-added refrigerated prepared foods multiple times per week.

We
sell to both food service and retail sectors. Our products consist of fresh-cut
vegetables, fresh-cut fruits, salad kits, prepared salads, dips, spreads,
soups, sauces and side dishes.

Our
primary processing facility is in Moore, Oklahoma. Our soups and sauces are
processed in our facility in Fort Worth, Texas.

History

We
were organized in 1989 under the laws of the state of Oklahoma as a successor
to a family business that commenced operations in 1961. In March 2003, three of
our officers, together with our current Chairman and Chief Executive Officer,
Herb Grimes, founded Allisons Gourmet Kitchens, LP (Allisons), to
manufacture a line of refrigerated, prepared salads for retail outlets, our
historical food service customers and restaurant chains. In June 2006,
Allisons acquired Wild About Foods, Inc. (Wild), a processor of soups,
stews, sauces and side dishes, located in Fort Worth, Texas. Allisons was
acquired and merged into the company in connection with the successful
completion of our initial public offering in July 2007.

Segment Reporting

The
Company operates in a single reportable operating segment that consists of
selling various refrigerated ready-to-eat products manufactured and distributed
in a vertically integrated manner through its own distribution network.

Processing, Packaging and Delivery

Our
full array of products are processed and packaged in refrigerated production
facilities. Finished products are packed in sizes that fit customers needs,
and boxed to insure that delicate items arrive at the customers door in good
condition. Most items are made to order daily for maximum freshness, shelf-life
and quality. Orders are pulled and palletized in a finished goods cooler, with
each pallet tagged by customer and contents to assure delivery to the proper
destination.

The
degree of freshness of our products is dependent upon distance to market and
delivery schedules of our customers. In order to ensure freshness of product,
we maintain a fleet of 35 trucks and 42 fifty-three foot refrigerated trailers,
running 99 outbound routes per week. Trucks are pre-cooled before being loaded
from our refrigerated loading dock. We deliver cut-to-order products three or
more times a week, and up to six times a week to foodservice distributors.
While our frequent delivery schedule is expensive, we believe that it helps our
marketing efforts by emphasizing the freshness, quality and full array of our
refrigerated product lines.

We
observe Good Manufacturing Practices, as established by the U.S. Food and
Drug Administration and the U.S. Department of Agriculture, and are audited by
several independent inspection groups to assure that production operations meet
or exceed safety standards. We believe these controls assure our customers of
safe and consistently high quality products.

Delivery System and Hauling Services

We
have invested heavily in our delivery system because it is the key element that
ties our product lines together. Our products are perishable and have average
shelf lives of 15 days for our fresh-cut fruits and vegetables and 45 days for
our fresh prepared salads. To ensure the freshness and quality of our products
we distribute them three times per week, or for some large customers, daily, in
our own fleet of 35 trucks and 42 fifty-three foot refrigerated trailers. Our
delivery system is flexible and responsive to our customers needs and meets
the current consumer demand for high quality, fresh food items. Our pattern of
frequent delivery also builds strong customer loyalty.

1

---



We
reduce the costs of our delivery system and also generate revenue from our
transportation assets by backhauling product for others. In backhauling we find
freight for our empty trucks at or near the termination points of our own
routes, then transport that freight back to the vicinity of our facility.

Agricultural and Other Supplies

We
purchase fresh produce from approximately 50 suppliers in five growing regions
of California, Arizona, Colorado, Florida and Mexico. We believe that sourcing
produce from a number of different growing regions is cost efficient and
provides a degree of protection of our supply chain against adverse growing
factors and seasonal variability in production. However, lettuce in particular,
can be grown in very few parts of the United States during any one season of
the year. Accordingly, we are highly dependent on the sources of supply from
these various regions, and our supplies can be adversely affected by weather
conditions at any time of year. Lettuce purchases comprise 11 percent of our
total cost of sales. Beginning in the third quarter of 2007, we began
contracting directly with farmers for a portion of our lettuce supply thereby
eliminating the use of brokers for these raw materials. We believe that this
gives us greater flexibility and provides greater assurance of continuity of supply. See also Item 1A  Risk
Factors.

We
purchase other ingredients and packaging material for our prepared food
products from a limited number of suppliers, but believe that all of these
ingredients and other supplies are generally available in the marketplace at
competitive prices. To keep costs down and maintain quality we have long-term
established relationships with many of our suppliers and purchase an important
part of our fresh produce pursuant to seasonal buying contracts.

Our
quality assurance department inspects each incoming delivery of raw materials
to insure that the product meets our standards. All raw product is stored in
our temperature monitored, refrigerated warehouse prior to use. We track all
items from the field to the customer and adhere to a first-in, first-out
inventory control system.

Marketing and Sales

Our
products are primarily marketed and sold to food service distributors, regional
and national restaurant chains, and retail grocers. Our products are currently
provided to end-user recurring revenue accounts throughout much of the United
States, but primarily the Plains States, Midwest, Southwest, and Southeast.
Consistent demand enables us to enter into regular supply contracts with our
suppliers, helping to insure consistent sourcing.

We
offer our customers a wide range of ready-to-order quality products in
convenient packaging types and sizes. We also provide added value by creating
custom vegetable mixes and custom sized produce cuts to fill special needs of
large volume customers. Unlike some of our larger national competitors, we can
generally produce and deliver these customized products to our customers in
less than two days. Our wide product mix enables our customers to differentiate
our products from those of our competitors.

We
emphasize freshness and quality in marketing our products. We also highlight
our ability to package products in a wide variety of styles and sizes to meet
customer demand. We can quickly satisfy private labeling or recipe
requirements, special packaging needs, frequent delivery schedules and can
tailor pricing and promotional programs in coordination with customer programs.

Competition

Our
business is highly competitive. In our fresh-cut produce business we compete
against large national processors, including Dole, Del Monte, Taylor Farms and
the Fresh Express Division of Chiquita Brands International, regional
processors and local store based or local processors, commonly referred to in
our industry as chop shops. The national processors typically have production
facilities on the West Coast near the farms that grow much of the produce that
they process. We believe that the national processors may enjoy cost advantages
in buying produce. They have significantly greater financial and human
resources and, in some cases have established, or are seeking to establish,
regional processing facilities outside the West Coast to move closer to their
customers. We compete successfully with these processors based upon the quality
and freshness of our product, our ability to have speedy delivery within our
primary market area and our ability and willingness to configure and package
our product to meet the needs of our customers. We compete with our regional
processor competitors on the same basis, but also on price. Price and quality
are also particularly important in our competition with chop shops. If we and
other regional competitors increase our market share, the major national
processors may offer special pricing promotions aimed at retaining business or
seek to acquire regional processors in order to supply a fresher product to
local markets and gain the other advantages of a local presence. We believe
that we can successfully compete with all categories of competition.

2

---



In
our refrigerated prepared salad business we compete with Resers, which we believe
to be the largest company in the deli salad business, and Orval Kent Food
Company. We believe we compete successfully on the basis of the quality of our
products, customer service and record for frequent, on-time, delivery.

We
believe that we have a number of competitive strengths that in combination
contribute to our ability to compete with major national and regional
processors of fresh-cut produce and refrigerated prepared salads, particularly:

|                       |   |                                                                                                                                                                                                                                                                                                               
|---------------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |  | Frequent
 deliveries. We deliver
 our perishable and short shelf life products three or more times per week.
 Our frequent deliveries coupled with our assistance to customers on how to
 handle our products on a first in  first out basis insure the freshness of
 our product to the ultimate consumer.
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |  | Distribution
 capability. We
 maintain a fleet of 35 trucks and 42 refrigerated trailers giving us rapid
 delivery capability and strong logistical control.                                                                                                                                                  
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |  | Diverse
 and customized products. We offer a diverse range of ready-to-eat quality products in
 convenient packaging types and sizes. We can also deliver customized
 cut-to-order fresh-cut produce to distributors in less than two days.                                                                 
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |  | Single
 source supplier. As
 a single source supplier of both packaged fresh-cut salads, refrigerated
 prepared salads and soups, we allow customers the opportunity to consolidate
 their sources of supply.                                                                                                 
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |  | Diverse
 sources of supply.
 We purchase raw materials from multiple suppliers in multiple geographic
 growing regions. In 2007, we started a program to contract directly with
 growers of lettuce to further ensure our supply of raw materials.                                                            
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |  | Broad
 customer base. No
 individual customer (or discrete purchasing unit of a consolidated national
 distributor) accounts for greater than 10 percent of our gross sales.                                                                                                                                  
|                       |   |                                                                                                                                                                                                                                                                                                               
|Intellectual
 Property
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |   | We claim rights to the
 following brand names and United States trademarks:                                                                                                                                                                                                                                   
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |  | Fresh Fixins                                                                                                                                                                                                                                                                                                 
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |  | Allisons Gourmet Kitchens
 and Design                                                                                                                                                                                                                                                                       
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |  | Vaughan Foods                                                                                                                                                                                                                                                                                                
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |  | Serve Fresh Kits                                                                                                                                                                                                                                                                                             
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |  | Wild About Food and Design
                                                                                                                                                                                                                                                                                  
|                       |   |                                                                                                                                                                                                                                                                                                               
|                       |  | Greenlight                                                                                                                                                                                                                                                                                                   

We
believe that brand name recognition and the product quality associated with our
brands are key factors in our ability to compete in the marketplace. We rely on
a combination of trademark and, with respect to our proprietary recipes, trade
secret law to protect our intellectual property rights. We are not currently
aware of any material challenge to our ownership of our major trademarks.

Government Regulation

We
are subject to extensive regulation by the U.S. Food and Drug Administration,
the U.S. Department of Agriculture, the U.S. Environmental Protection Agency,
the U.S. Department of Transportation and state and local authorities in
jurisdictions where our products are processed or sold. Among other things,
these regulations govern the processing, packaging, storage, distribution and
labeling of our products. Our processing facility and products are also subject
to periodic compliance inspections by federal, state and local authorities. We
are also subject to environmental regulations governing the discharge of air
emissions, water and food waste, and the generation, handling, storage,
transportation, treatment and disposal of waste materials. Amendments to
existing statutes and regulations, adoption of new statutes and regulations,
increased production at our facility as well as our expansion into new
operations and jurisdictions may require us to obtain additional licenses and
permits and could require us to adapt or alter methods of operations at costs
that could be substantial. Compliance with applicable laws and regulations may
adversely affect our business. Failure to comply with applicable laws and
regulations could subject us to civil remedies, including fines, injunctions,
recalls or seizures, as well as possible criminal sanctions, which could have a
material adverse effect on our business.

3

---



In
March 2007 the FDA issued draft final guidance containing non-binding
recommendations for the operation of fresh-cut fruit and vegetable processing
facilities. The guidance addresses worker health, hygiene and training,
sanitary facility design and maintenance, building and equipment design,
processing techniques, recall procedures and other matters. We participated in
the comment process leading to the final draft guidelines and believe we are
already in substantial compliance with these suggested guidelines as a result
of our investment in quality assurance programs and the food safety aspects of
our business.

In
2007, in response to elevated consumer concern over food safety involving fresh
produce, we initiated a pre-harvest program that focuses on the safety and
quality of produce before purchase and shipment into our facilities. Since its
inception, our Greenlight program has proven its value and has expanded
considerably. This program focuses on the safety and quality of produce in the
field during the growing cycle up to and including harvest and shipping. We
conduct onsite surveys assessing potential sources of contamination, including
well and irrigation water, animal intrusion, drainage and field condition. The
program then culminates in the testing of the crop itself, prior to harvest,
for disease-causing organisms. We have recently augmented the program with new,
more accurate testing methodology and a broader scope of testing. To help
offset costs, we are conducting the testing for other firms. The Greenlight
program has been well received by customers as adding value and protecting
brand equity.

We
are licensed under the Federal Perishable Agricultural Commodities Act, or
PACA, which specifies standards for the sale, shipment, inspection and
rejection of agricultural products, and governs our relationships with our
fresh food suppliers with respect to the grading and commercial acceptance of
product shipments. As a licensed commodity supplier under PACA, we are treated
as a priority creditor in the event of the bankruptcy of our customers and are
entitled to be paid out of PACA trust assets (produce inventory, products
derived from that produce and cash and receivables generated from the sale of
produce) prior to payments to other general creditors. We are also subject to
regulation by state authorities for the accuracy of our weighing and measuring
devices.

The
Surface Transportation Board and the Federal Highway Administration regulate
our trucking operations. In addition, interstate motor carrier operations are
subject to safety requirements prescribed by the U.S. Department of
Transportation and other relevant federal and state agencies. Such matters as weight
and dimension of equipment are also subject to federal and state regulations.
We believe that we are in substantial compliance with applicable regulatory
requirements relating to our motor carrier operations. Failure to comply with
the applicable motor carrier regulations could result in substantial fines or
revocation of our operating permits.

Employees

As
of December 31, 2008, we employed 452 individuals at our Moore, Oklahoma and
Fort Worth, Texas facilities, of which 9 were corporate employees. None of our
employees are unionized, and we do not have collective bargaining agreements
with respect to any of our employees. From time-to-time, we employ additional
personnel on a part-time basis in processing and manufacturing operations. We have experienced
difficulties in attracting and maintaining employees and believe that our
difficulties are a result of general labor shortages in Oklahoma, which we
believe are exacerbated by Oklahoma State House Bill 1804, which essentially
had major provisions relating to, in summary, (1) identity theft; (2)
terminating public assistance benefits to undocumented residents (3) empowering
state and local police to enforce federal immigration laws; and (4) punishing
employers who knowingly hire illegal aliens. See Item 1A - Risk Factors.

ITEM 1A  RISK FACTORS

In
addition to the factors discussed elsewhere in the Report, the following risks
and uncertainties could materially and adversely affect the Companys business,
financial condition and results of operations. Additional risks and
uncertainties not presently known to the Company also may impair the Companys
business operations and financial condition.

4

---



Our current financial condition could  in the future - raise
substantial doubt regarding our ability to continue as a going concern.

The
Company incurred a loss of $3.4 million in 2008, and used cash of $2.7 million
and has experienced a decrease in working capital. As a result, the Company was
in technical default of certain covenants contained in its revolving loan
agreement with its primary lender.

We
have taken several actions to ensure that the Company will continue as a going
concern through December 31, 2009, including reductions in non-core personnel
costs and discretionary expenditures. Further, the Company entered into a new
revolving credit agreement subsequent to December 31, 2008. We believe that
these actions will enable the Company to continue as a going concern through
December 31, 2009, although there can be no assurance that these actions will
be sufficient to enable us to mitigate the effects of a continued weakening
economy and other external market conditions which are beyond our control.

Although
subsequent to December 31, 2008, we were able to secure a short-term revolving,
asset-based loan to replace our previous revolving credit agreement, this new
facility was obtained on terms that were significantly more expensive than
would be expected during times of less restrictive credit conditions. Economic
conditions during this period are also exceedingly dire for most industries and
most countries and economies. Therefore, there can be no assurance that we will
be able to replace the new revolving credit facility when it matures in the
first quarter of 2010, nor any assurance that we will be able to meet the
financial covenants of the new facility. If we are unable to meet the financial
covenants of the new revolving credit facility, the lender may declare the full
amount outstanding immediately due and payable, and we may be unable to replace
the facility, which would severely impair our liquidity and ability to meet our
obligations as they become due. Furthermore, an uncured event of default could
allow our lenders to sell our assets to satisfy our debt obligations and
therefore create substantial doubt about the ability of the Company to continue
as a going concern.

During
the second half of 2008, management committed to undertake certain actions to
improve its operating results. We increased prices to our customers during 2008
following the rapid escalation of food and transportation costs in the United
States of America. However, we were unable to adjust prices quickly enough to
mitigate the increases in raw material and transportation costs, which resulted
in a severe adverse effect on the Companys financial condition. During 2009,
the Company will benefit from the full-year effects of its 2008 price increases
and will continue to evaluate the need for additional pricing adjustments.

Beginning
in the second quarter of 2008, and accelerating into the third and fourth
quarters, we experienced increased labor costs due to excessive overtime,
increased turnover and higher hourly rates due primarily to the effects of a
reduced labor supply in the geographic area of our primary production plant
which, we believe, was exacerbated by new legislation in the State of Oklahoma
regarding immigration enforcement. We undertook several different steps to
mitigate the effects of the reduced labor supply, including employing a labor
services firm to staff our operations, reduce employee turnover; re-evaluate
our hiring standards; engage an outside firm to assist us in recruiting and
onboarding new employees, and various other initiatives. We believe that labor
costs will remain higher than our recent experience due to the effects of
changes in the availability of labor and in our hiring standards.

Our capital structure includes long-term indebtedness, which
could limit financing and other options. Our ability to fund our operations for
the next twelve months may be dependent on access to capital markets and our
ability to improve our operating results.

As
of December 31, 2008, we had total debt and capital lease obligations of $9.3
million. Our debt instruments contain certain financial covenants and if we
fail to comply with these requirements, our ability to obtain additional or
alternative financing may be adversely affected. Our level of indebtedness
limits our ability to obtain financing because substantially all of our assets
are now pledged as collateral for our existing debt. Also, our level of
indebtedness may limit our ability to obtain additional financing for working
capital, capital expenditures and acquisitions, and may also limit our
flexibility to adjust to changing business and market conditions which could
make us more vulnerable to a downturn in general economic conditions, including
market conditions which include a severe contraction in the availability of
credit generally, as is being experienced in the world markets, and in the
United States specifically, in 2008 and 2009. Credit conditions during the last
3-4 months of 2008 and during 2009 through the issuance of this report and
expected to continue for an undetermined time thereafter are, in the opinion of
management, as restrictive as any time in at least the last 50 years. The
credit crisis, coupled with tumbling home and stock prices, has produced a
paralyzing fear that has engulfed the United States. A freefall in business
activity has occurred and is continuing. The United States  and much of the
world  is currently trapped in a vicious negative-feedback cycle. Fear has led
to business contraction, which has led to even greater fear. And the cycle
continues. These conditions affect substantially all businesses, but are most
impactful on small businesses with limited capital.

5

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The
adequacy of our liquidity depends not only on our access to capital but also on
our ability to achieve improvements in our operating results by effectively
implementing price adjustments to our customers, controlling our input costs in
a challenging economy and staffing our operations with employees at labor rates
that will fit our business model.

Our
inability to improve our operating results, adjust pricing to our customers and
gain access to capital markets could have an adverse effect on our liquidity
and operations and could require us to consider further measures, including,
among other things, selling additional equity capital, which could be dilutive
to existing stockholders, selling or factoring accounts receivable, or certain
other actions to maintain the proper amount of liquidity in the business.

A further worsening of the economy in the United States of
America could materially, adversely affect our business.

Our
revenues and performance depend significantly on consumer confidence and
spending, which have recently deteriorated due to current worldwide economic
weaknesses. This economic downturn and decrease in consumer spending may
adversely affect our revenues, ability to market our products, or otherwise
implement our business strategy. Although our food products are sold to a
variety of users from upscale restaurants to quick service restaurants to
grocery stores, changes in consumer spending as a result of the economic
downturn could have an effect on the sales of our products. If legislative actions
recently taken to enhance the economy by the government of the United States of
America fail, or if the current economic situation deteriorates further, our
business could be negatively impacted.

The
economic factors present in the United States of America have caused some
customers to be less profitable and increased our exposure to credit risk.
Current credit markets are highly volatile, and some of our customers may be
highly leveraged. A significant adverse change in the financial and/or credit
position of a customer could require us to assume greater credit risk relating
to that customer and could limit our ability to collect receivables. This could
have an adverse impact on our results of operations and financial condition, including
our liquidity.

Financial difficulties of foodservice and retail customers
due to the economic downturn may adversely affect our revenues, costs and
collections.

As
the economic malaise continues and possibly deepens, collectibility of
receivables from our customers may be adversely affected, causing an increase
in aged receivables and/or a reduced collection rate. Our margins and cash flow
could be adversely affected if we are unable to collect our account receivable.
In addition, the economic downturn could adversely affect the financial
condition of our customers or impair their ability to continue to operate
during a recessionary period, which would decrease our revenues, earnings and
cash flows unless we are able to replace any lost business.

If our products become contaminated or are mislabeled, we may
be subject to product liability claims, product recalls and increased scrutiny
by regulators, any of which could adversly affect our business.

Refrigerated
products are vulnerable to contamination by organisms producing food-borne
illnesses. These organisms are generally found in the environment, and, as a
result, there is a risk that, as a result of food processing, they could be
found in our products. Once contaminated products have been shipped for
distribution, illness and death may result if the disease causing organisms are
not eliminated by processing at the foodservice or consumer level. Also,
products purchased from others for packing or distribution may contain
contaminants that we are unable to identify. The risk can be controlled, but
not eliminated, by use of good manufacturing practices and finished product
testing. We may also encounter the same risks if a third party tampers with our
products or if our products are inadvertently mislabeled. Shipment of
adulterated products, even if inadvertant, is a violation of law and may lead
to product liability claims, product recalls and increased scrutiny by federal
and state regulatory agencies, any of which could have a material adverse
effect on our reputation, business, prospects, results of operations and
financial condition. Typically, when we purchase certain products or critical
raw materials that we use in production, we require a certificate of analysis
from the vendor showing that the product is free of certain bacteria.

Volatile agricultural commodity costs could increase faster
than we can recover them, which could adversly affect our financial condition
and operating results.

Our
ability to process and distribute our products depends, in large part, on the
availability and affordability of fresh produce. The prices for high quality
fresh produce can be volatile and supplies may be restricted due to weather,
plant disease and changes in agricultural production levels. The amount and
quality of available produce can vary greatly from season to season, or within
a season, and our suppliers may not be able to meet their contractual
obligations, particularly during periods of severe shortages. Limitations of
supply, or the poor quality of produce available under our

6

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season-long contracts, could
force us to buy produce on the open market during periods of rapid price
increases, thus significantly increasing our costs. We can sometimes pass these
higher costs on to customers, but a number of factors, including price
increases that are faster or more severe than we anticipate may result in cost
increases that we are not able to fully recover. We were particularly adversely
affected during the second quarter of 2006 when adverse growing conditions in
Southern California reduced the supply of lettuce at a time when alternative
supplies from other growing regions were not yet available and forced us to buy
lettuce on the open market during a period of rapidly rising prices. We
maintained customer goodwill by continuing to supply them with lettuce under
our sale and supply contracts, though at a cost of significantly reduced gross
profit and overall losses. We experienced adverse market conditions again in
October 2007 for a period of three weeks, when our cost to purchase lettuce
increased approximately $392,000. We were able to pass a portion of the
increased cost on to our customers, partially offsetting the increased cost by
$234,000. During 2008, our cost of raw materials increased dramatically due to
increased commodity cost of corn, wheat and soybean oil driven by demand for
these commodities for their use as alternative fuels. We also experienced
higher costs related to our lettuce raw materials, primarily due to the quality
of lettuce during the last quarter of 2008. Poor quality of raw materials
causes excessive trimming of the product and lower yields resulting in higher
labor and raw material costs. Although we adjusted our pricing to our
customers, we were unable to implement the price adjustments timely and at
levels required to protect our margins. We expect that such conditions will
recur from time to time and may have an adverse effect on our operating results
when and if they do occur. Since pricing is driven primarily by market
conditions, we can provide no assurance that we will be able to implement
timely price increases to our customers to maintain our historical margins.

Increases in input costs, such as packaging materials and
fuel costs, could adversely affect our financial condition and operating
results.

The
costs of fuel and packaging materials have varied widely in recent years and
most significantly during 2008. Rapid spikes in fuel costs, coupled with our
inability to timely pass the costs on to our customers caused an adverse affect
on our financial position and the results of our operations during 2008. Future
increases in these costs may cause additional adverse affects on our results of
operations and financial condition.

A material disruption at our processing plant could seriously
harm our financial condition and operating results.

We
process a majority of our products at our Moore, Oklahoma plant. Since we do not
have operations elsewhere which could support our current volume of processed
products, a material disruption at this plant would seriously limit our ability
to deliver products to our customers. Such disruption could be caused by a
number of different events, including: maintenance outages; prolonged power
failures; equipment failure; a chemical spill or release; widespread
contamination of our equipment; fires, floods, tornadoes, ice storms,
earthquakes or other natural disasters; or other operational problems. Any of
these events would adversely affect our business, results of operations and
financial condition. In April 2006 we had to shut down the plant for 2 1⁄2 days
due to an ammonia leak. We estimate that this occurrence cost us $200,000 in
expenses and lost earnings.

A material decline in the demand for fresh-cut salads, or in
the consumption of refrigerated prepared foods, would have a material adverse
effect on our business, financial condition and operating results.

The
food industry is subject to changing consumer trends, demands and preferences.
Medical studies detailing the healthy attributes of particular foods affect the
purchase patterns, dietary trends and consumption preferences of consumers.
From time to time, weight loss and control plans that emphasize particular food
groups have been popular and have affected consumer preferences. Adverse
publicity relating to health concerns and the nutritional or dietary value of
our products could adversely affect consumption and, consequently, demand for
our products. In addition, since a substantial portion of our operations
consist of the production and distribution of processed food products, a change
in consumer preferences relating to processed food products or in consumer
perceptions regarding the nutritional value of processed food products could
significantly reduce our sales volume. A reduction in demand for our products
caused by these factors would have a material adverse effect on our business,
results of operations and financial condition.

Competition in our industry is intense and we may not be able
to compete successfully. The inability to compete successfully could lead to
the failure of our business.

The
food processing industry is intensely competitive. In the fresh-cut produce
business we compete against large national processors, many with production
facilities near farms that grow much of the produce supplying the United States
markets, regional processors and chop shops. Many of the national processors
have substantially greater financial and other resources than we do and some
may enjoy cost advantages in buying raw materials. If we and other regional
competitors increase our market share, the major national processors could
respond by offering special pricing promotions aimed at retaining business or
seek to acquire or build regional processing capacities, any of which could
hamper our existing business and market share, adversely affecting our results
of operations and financial condition.

7

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In
the refrigerated prepared salad business we compete against the largest company
in this business and smaller regional processors. We believe that our principal
competitor has substantially greater financial and other resources than we do.
We expect similar competition in other markets in which we may seek to expand.
If we cannot compete successfully against our competitors we will not be able
to grow and expand our business and may not, if our competitive failures are
severe enough, be able to continue in operation.

Managing our growth may be difficult and our growth rate may
decline, which may expose us to the risk that we cannot meet our obligations or
service our indebtedness. If we cannot compete successfully against our competitors
we will not be able to grow and expand our business and may not, if our
competitive failures are severe enough, be able to continue in operation.

We
have rapidly expanded our operations since 2000. This growth has placed, and
continued growth will continue to place, significant demands on our
administrative, operational and financial resources. There can be no assurance
that this growth or the current rate of growth will continue. However, to the
extent that our growth continues at a high rate, we expect it to place a
significant demand on our managerial, administrative, operational and financial
resources. Our future performance, results of operations and financial
condition will partially depend on our ability to successfully implement
enhancements to our business management systems and to adapt those systems as
necessary to respond to changes in our business. Similarly, our growth has
created a need for expansion of our facilities and processing capacity. If our
growth exceeds previous rates and we near maximum utilization of our facility
or maximize our processing capacity, operations may be constrained, which could
adversely affect our operating results, unless the facility is expanded, volume
is shifted to another facility, or additional processing capacity is added.
Conversely, as we add additional facilities or expand existing operations or
facilities, excess capacity may be created. Any excess capacity would add to
our overhead burden and also create inefficiencies which would adversely affect
our operating results. We can provide no assurance that we will be able to
successfully implement our growth plan. If our plan is not successful, we will
have incurred significant obligations and ongoing expenses, which we may not be
able to service from our existing cash flow. If we cannot service our debt from
our then-existing cash flow and if we cannot obtain additional financing to
service that debt we would be forced to curtail or terminate operations.

Force majeure events, such as terrorist attacks, other acts
of violence or war, political instability and health epidemics may adversely
affect us.

Terrorist
attacks, war, and political instability, along with health epidemics, may
disrupt our ability to generate revenues. These events may negatively affect
our ability to maintain revenue, develop new business relationships, disrupt
our supply chain, or impair our ability to deliver our products, which could
materially adversely affect our net revenues or results of operations. Any of
these events may also disrupt financial markets and precipitate a decline in
the price of our common stock.

Our business operations could be disrupted if our information
technology systems fail to perform adequately.

The
efficient operation of our business depends on our information technology
systems. We rely on our information technology systems to effectively manage
our business data, communications, supply chain, order entry and fulfillment,
and other business processes. The failure of our information technology systems
to perform as we anticipate could disrupt our business and could result in
transaction errors, processing inefficiencies, and the loss of sales and
customers, causing our business and results of operations to suffer. In
addition, our information technology systems may be vulnerable to damage or
interruption from circumstances beyond our control, including fire, natural
disasters, systems failures, security breaches, viruses and similar catastrophes.
Any such damage or interruption could have a material adverse effect on our
results of operations and financial condition.

The company may not properly execute, or realize anticipated
cost savings or benefits from, its Enterprise Resource Planning (ERP) or
other initiatives.

The
Company is currently in the process of implementing a company-wide Enterprise
Resource Planning (ERP) system. The Companys success, and perhaps very
survival in 2009, is going to be substantially dependent upon properly
executing, and realizing cost savings or other benefits from, its ERP
initiative. This initiative is primarily intended to make the Company more
efficient in the manufacture and distribution of its products, which is
necessary in the Companys highly competitive industry, as well as enhance the
Companys internal accounting and operating controls. This initiative is
complex, and a failure to implement it properly may, in addition to not meeting
projected cost savings or benefits, result in an interruption to the Companys
sales, manufacturing, logistics, customer service or accounting functions. Any
of these results could have a material adverse effect on the business and
financial results of the Company.

8

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Government regulation could increase our costs of production
and increase our legal and regulatory expenditures.

We
are subject to extensive regulation by the U.S. Food and Drug Administration,
the U.S. Department of Agriculture, the U.S. Environmental Protection Agency,
the U.S. Department of Transportation and state and local authorities in
jurisdictions where our products are processed or sold. Among other things,
these regulations govern the processing, packaging, storage, distribution and
labeling of our products. Our processing facility and products are subject to
periodic compliance inspections by federal, state and local authorities. We are
also subject to environmental regulations governing the discharge of air
emissions, water and food waste, and the generation, handling, storage,
transportation, treatment and disposal of waste materials. Amendments to
existing statutes and regulations, adoption of new statutes and regulations,
increased production at our facility as well as our expansion into new operations
and jurisdictions may require us to obtain additional licenses and permits and
could require us to adapt or alter methods of operations at costs that could be
substantial. Compliance with applicable laws and regulations may adversely
affect our business. Failure to comply with applicable laws and regulations
could subject us to civil remedies, including fines, injunctions, recalls or
seizures, as well as possible criminal sanctions, which could have a material
adverse effect on our business, which may expose us to the risk that we cannot
pay obligations or service debt incurred in attempting to expand. Many of the
fines and penalties can be assessed on the basis of the number of occurrences
of a particular violation and, therefore, are not possible to meaningfully
predict. We estimate that the expense of compliance with existing regulations
of the U.S. Food and Drug Administration, U.S. Department of Agriculture, U.S.
Environmental Protection Agency and U.S. Department of Transportation and
related state and local authorities exceeds $100,000, annually.

Seizure of our workers, strikes, changes in immigration law
or increased labor costs could adversely affect our business.

As
of December 31, 2008, we had 452 employees, none of whom are unionized. We
believe that a substantial number of our production employees are immigrants.
Though we require all employees to provide documentation showing that they can
be legally employed in the United States of America, some of our employees may
have, without our knowledge, provided improper documentation. Improperly
documented employees can be subject to seizure and deportation. Various
immigration reform bills have been introduced to the U.S. Congress within the
last few years, and we cannot accurately predict the effect, if any, on our
work force of any immigration reform actions that may become law. Effective
November 1, 2007, Oklahoma State House Bill 1804 (HB 1804) became law making
it illegal for any person or organization to knowingly harbor or transport
undocumented immigrants. HB 1804 contains major provisions relating to, in
summary, (1) identity theft, (2) terminating public assistance benefits to
undocumented residents, (3) empowering state and local police to enforce
federal immigration laws, and (4) punishing employers who knowingly hire
undocumented immigrants. Our responsibilities under this bill increased on July
1, 2008, as we were required to utilize an electronic verification process,
commonly referred to as E-Verify, provided by the Department of Homeland
Security in partnership with the Social Security Administration, that enables
us to electronically verify the employment eligibility of prospective
employees. E-Verify substantially reduces the risks of hiring undocumented
immigrants. Several challenges have been made to the requirement for employers
to use E-Verify and we are unable to predict the ultimate outcome of these
challenges and what legislation or court rulings may ultimately prevail.
However, in anticipation that E-Verify will ultimately be required for
employers, and to provide assurance to us that we are not hiring undocumented
immigrants, we continue to utilize E-Verify for all new employees.

Beginning
in the second quarter of 2008, and accelerating into the third and fourth
quarters, we experienced significant difficulties in maintaining an adequate
workforce to run our operations and produce our products. We frequently failed
to fulfill our customer orders and deliver our customer orders timely. We believe
that our difficulties were a result of general labor shortages in Oklahoma,
which were exacerbated by new legislation in the State of Oklahoma regarding
immigration enforcement. Although we have undertaken several different steps to
mitigate the effects of the reduced labor supply, including employing a labor
services firm to staff our operations, reduce employee turnover and lower the
labor costs; re-evaluate our hiring standards; engage an outside firm to assist
us in recruiting and onboarding new employees, and various other initiatives to
mitigate the labor issues experienced in 2008, we cannot provide any assurance
that we will be able to maintain a stable workforce or that we be able to avoid
any of the types of labor issues that we experienced in 2008, whether due to
economic conditions, law or other external factors. Any material labor
disruption, as a result of seizure of our workers, strikes, changes in
immigration law, other external factors, or significantly increased labor costs
resulting from any of these factors, could have a material adverse effect on
our results of operations and financial condition.

We depend upon the continued services of certain members of
our senior management team, without whom our business operations would be significantly
disrupted.

Our
success depends, in part, on the continued contributions of our executive
officers and other key employees. Our management team has significant industry
experience and would be difficult to replace. We believe that the expertise and
knowledge of these individuals in our industry, and in their respective fields,
is a critical factor to our

9

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continued growth and
success. The loss of the services of any of these individuals could have a
material adverse effect on our results of operations, financial condition and
prospects if we are unable to identify a suitable candidate to replace any such
individual.

Our insurance and indemnification agreements may be
inadequate to cover all the liabilities we may incur.

We
face the risk of exposure to product liability claims and adverse public
relations in the event that the consumption of our products causes injury, illness
or death. If a product liability claim is successful, our insurance contracts
may not be adequate to cover all liabilities we may incur, including harm to
our reputation, and we may not be able to continue to maintain such insurance,
or obtain comparable insurance at a reasonable cost, or at all. We generally
seek contractual indemnification and insurance coverage from our suppliers, but
this indemnification or insurance coverage is limited by the creditworthiness
of the indemnifying party and their insurance carriers, if any, as well as the
insured limits of any insurance provided by those suppliers. If we do not have
adequate insurance coverage or contractual indemnification available, product
liability claims relating to defective products could have a material adverse
effect on our financial condition and operating results.

The consolidation of and market strength among our retail and
food-service customers may put pressure on our operating margins.

In
recent years, the trend among our retail and foodservice customers, such as
foodservice distributors, has been toward consolidation. These factors have
resulted in increased negotiating strength among many of our customers, which
has and may continue to allow them to exert pressure on us with respect to
pricing terms, product quality and the introduction of new products. To the
extent our customer base continues to consolidate, competition for the business
of fewer customers may intensify. If we cannot continue to negotiate favorable
contracts, whether upon renewal or otherwise with these customers, implement
appropriate pricing and introduce new product offerings acceptable to our
customers, or if we lose our existing large customers, we could experience a
material adverse effect on our results of operations and financial condition.

The loss of a major customer could adversely impact our
business.

We
have supply arrangements with two certain distributors, representing 12 percent
and 10 percent of our revenues. Both distributors are composed of numerous
discrete purchasing units, such that no individual purchasing unit of either
distributor represents greater than 4 percent of revenues. However, a change in
either of these customer relationships could adversely affect our consolidated
financial position, results of operations and cash flows.

Our growth may depend on our ability to complete acquisitions
and integrate operations of acquired businesses.

Our
growth strategy includes acquisitions of other businesses. We may not be able
to make acquisitions in the future and any acquisitions we do make may not be
successful. Furthermore, future acquisitions may have a material adverse effect
upon our operating results, particularly in periods immediately following the
consummation of those transactions when the operations of the acquired
businesses are being integrated into our operations.

Achieving
the benefits of acquisitions depends on the timely, efficient and successful
execution of a number of post-acquisition events, including integrating the
business of the acquired company into our purchasing programs, distribution
network, marketing programs and reporting and information systems. We may not
be able to successfully integrate the acquired companys operations or
personnel or realize the anticipated benefits of the acquisition. Our ability
to integrate acquisitions may be adversely affected by many factors, including
the relatively large size of a business and the allocation of our limited
management resources among various integration efforts. The integration of
acquisitions may also require a disproportionate amount of our managements
time and attention and distract our management from running our historical
businesses.

In
connection with the acquisitions of businesses in the future, we may decide to
consolidate the operations of any acquired business with our existing
operations or make other changes with respect to the acquired business, which
could result in special charges or other expenses. Our results of operations
also may be adversely affected by expenses we incur in making acquisitions, by
amortization of acquisition-related intangible assets with definite lives and
by additional depreciation expense attributable to acquired assets. Any of the
businesses we acquire may also have liabilities or adverse operating issues,
including some that we fail to discover before the acquisition, and our
indemnity for such liabilities may be limited. Additionally, our ability to
make any future acquisitions may depend upon obtaining additional financing. We
may not be able to obtain additional financing on acceptable terms or at all.
To the extent that we seek to acquire other businesses in exchange for our
Common Stock, fluctuations in our stock price could have a material adverse
effect on our ability to complete acquisitions.

10

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Due
to changes in certain accounting principles in the United States of America,
acquisitions of other business would require us to charge acquisition-related
expenses against our earnings as those expenses are incurred and no longer
capitalized as part of the acquisition price. Accordingly, our earnings would
be reduced for a period of time prior to and at the time of the acquisition,
possibly materially, merely by virtue of having acquired another business,
regardless of how the acquired business performs.

If we fail to establish and maintain effective disclosure
controls and procedures and internal control over financial reporting, we may
have material misstatements in our financial statements and we may not be able
to report our financial results in a timely manner. Additionally, failure to
maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business
and stock price.

As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 (SOX), the SEC
adopted rules requiring us, as a public company, to include a report of
management on our internal controls over financial reporting in our annual
report on Form 10-K and quarterly reports on Form 10-Q that contains an
assessment by management of the effectiveness of our internal controls over
financial reporting. In addition, our independent auditors must attest to and
report on managements assessment of the effectiveness of our internal controls
over financial reporting as of the end of 2009. If, during any year, our
independent auditors are not satisfied with our internal controls over
financial reporting or the level at which these controls are documented,
designed, operated, tested or assessed, or if the independent auditors
interpret the requirements, rules or regulations differently than we do, then
they may decline to attest to managements assessment or may issue a report
that is qualified. In addition, if we fail to maintain the adequacy of our
internal controls, as such standards are modified, supplemented or amended from
time to time, we may not be able to ensure that we can conclude on an ongoing
basis that we have effective internal controls over financial reporting in
accordance with SOX Section 404. Failure to maintain an effective internal
control environment could have a material adverse effect on our stock price. In
addition, there can be no assurance that we will be able to remediate material
weaknesses, if any, that may be identified in future periods.

The market price of our common stock may fluctuate
significantly for reasons beyond our control and potentially unrelated to our
performance.

The
market price and marketability of our common stock may from time to time be
significantly affected by numerous factors, including many over which we have
no control and that may not be directly related to us. These factors include
the following, among other things:

| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | price and volume
 fluctuations in the equity markets from time to time, which are often
 unrelated to the operating performance of particular companies;                      
| |   |                                                                                                                                                                               
| |  | significant volatility in
 the market price and trading volume of shares of food companies, which is not
 necessarily related to the operating performance of these companies;
| |   |                                                                                                                                                                               
| |  | changes in regulatory
 policies;                                                                                                                                              
| |   |                                                                                                                                                                               
| |  | changes in our earnings or
 variations in our operating results;                                                                                                              
| |   |                                                                                                                                                                               
| |  | operating performance of
 companies comparable to us;                                                                                                                         
| |   |                                                                                                                                                                               
| |  | general economic trends
 and other external factors;                                                                                                                          

Our Shares are Thinly Traded and May Not be Readily
Marketable

Our
shares are not widely traded, and daily trading volume is generally very low
compared with most publicly-traded companies. As a result, you may not be able
to readily resell your shares in the Company.

We May Not Continue to Meet the Requirement for Listing on
NASDAQ or on any Established Exchange

We
may not continue to meet the minimum requirements for listing on NASDAQ or on
any established exchange and, as a result, you may not be able to readily
resell your shares in the Company. The Company maintains no obligation to seek
or to obtain a listing on a national market.

11

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A significant percent of our outstanding voting stock is held
by a concentrated number of investors.

A
majority of our outstanding voting stock is held by a limited number of
investors. As a result, the decision of relatively small number of stockholders
could have a substantial impact on the trading price of our stock.

Our
Chairman and Chief Executive Officer and our President and Chief Operating
Officer together control approximately 42 percent of our outstanding common
stock. As a result, these stockholders, if they act together, are able to exert
significant influence, as a practical matter, on all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. These individuals serve on our board of
directors. As a result, this concentration of ownership and representation on
our board of directors and management may delay, prevent or deter a change in
control, could deprive our stockholders of an opportunity to receive a premium
for their common stock as part of a sale of us or our assets and might reduce
the market price of our common stock.

ITEM 1B  UNRESOLVED STAFF COMMENTS

None.

ITEM 2  PROPERTIES

Our
principal executive office is located at 216 N.E. 12th Street,
Moore, Oklahoma in a 156,238 square foot office, plant and cold storage
facility which we own. We also own and operate a processing facility in Fort
Worth, Texas and lease refrigerated warehouse space near our Moore, Oklahoma
facility.

ITEM 3  LEGAL PROCEEDINGS

We
are involved in various claims, lawsuits and proceedings arising in the
ordinary course of business. There are uncertainties inherent in the ultimate
outcome of such matters and it is difficult to determine the ultimate costs
that we may incur. We believe the resolution of such uncertainties and the
incurrence of such costs will not have a material adverse effect on our
consolidated financial position, results of operations or cash flows.

ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5  MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our
common stock began trading on the NASDAQ Capital Market with the ticker symbol
FOOD on July 30, 2007 with an opening price of $5.00 per share. Prior to July
30, 2007, and following effectiveness of our registration statement for our
initial public offering on June 27, 2007, our common stock traded as a
component of a unit (FOODU) combined with two warrants which became
seperately tradable on July 30, 2007 under the symbols FOODW and FOODZ.
Additional information on the Companys warrants may be found in our S-1/A
filing with the Securities and Exchange Commission, filed June 6, 2007, and
made effective on June 27, 2007. The following table sets forth for the periods
indicated the high and low sales prices of our common stock on the Nasdaq
Capital Market:

12

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|                               |  |      |      |     |   |      | 
|------------------------------ |  | ---- | ---- | --- | - | ---- | 
|                               |  | High |      | Low |  
|                               |  |      |      |     |  
|Year Ended
 December 31, 2008: |  |      |      |     |   |      | 
|Fourth Quarter                 |  | $    | 1.40 |     | $ | 0.39 | 
|Third Quarter                  |  |      | 2.50 |     |   | 0.90 | 
|Second Quarter                 |  |      | 2.65 |     |   | 1.90 | 
|First Quarter                  |  |      | 3.84 |     |   | 1.80 | 
|                               |  |      |      |     |   |      | 
|Year Ended
 December 31, 2007: |  |      |      |     |   |      | 
|Fourth Quarter                 |  | $    | 4.62 |     | $ | 2.50 | 
|Third Quarter                  |  |      | 6.05 |     |   | 3.75 | 

The following
table sets forth for the periods indicated the high and low sales prices of our
Class A warrant on the Nasdaq Capital Market:

|                               |  |      |      |     |   |      | 
|------------------------------ |  | ---- | ---- | --- | - | ---- | 
|                               |  | High |      | Low |  
|                               |  |      |      |     |  
|Year Ended
 December 31, 2008: |  |      |      |     |   |      | 
|Fourth Quarter                 |  | $    | 0.50 |     | $ | 0.10 | 
|Third Quarter                  |  |      | 0.15 |     |   | 0.10 | 
|Second Quarter                 |  |      | 0.48 |     |   | 0.12 | 
|First Quarter                  |  |      | 0.40 |     |   | 0.10 | 
|                               |  |      |      |     |   |      | 
|Year Ended
 December 31, 2007: |  |      |      |     |   |      | 
|Fourth Quarter                 |  | $    | 0.72 |     | $ | 0.11 | 
|Third Quarter                  |  |      | 0.79 |     |   | 0.05 | 

The following table sets
forth for the periods indicated the high and low sales prices of our Class B
warrant on the Nasdaq Capital Market:

|                               |  |      |      |     |   |      | 
|------------------------------ |  | ---- | ---- | --- | - | ---- | 
|                               |  | High |      | Low |  
|                               |  |      |      |     |  
|Year Ended
 December 31, 2008: |  |      |      |     |   |      | 
|Fourth Quarter                 |  | $    | 0.20 |     | $ | 0.03 | 
|Third Quarter                  |  |      | 0.20 |     |   | 0.03 | 
|Second Quarter                 |  |      | 0.75 |     |   | 0.07 | 
|First Quarter                  |  |      | 0.50 |     |   | 0.13 | 
|                               |  |      |      |     |   |      | 
|Year Ended
 December 31, 2007: |  |      |      |     |   |      | 
|Fourth Quarter                 |  | $    | 0.75 |     | $ | 0.16 | 
|Third Quarter                  |  |      | 0.65 |     |   | 0.40 | 

As
of February 17, 2009, we had 26 holders of record of our common stock, although
we believe that there are a larger number of beneficial owners. Information
regarding securities authorized for issuance under our equity compensation plan
will be included under Item 12 (See Part III).

Our
transfer agent as of December 31, 2008 was Continental Stock Transfer &
Trust Company.

The
Company has not paid a cash dividend on its common stock since becoming
publicly traded. Management anticipates that, for the foreseeable future, any
earnings will be retained for use in the business. Accordingly, management does
not anticipate the payment of cash dividends in the forseeable future.

Recent Sales of Unregistered Securities

In
the last three years, we sold the following unregistered securities:

13

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| |   |                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In September
 2006 we sold $2.0 million aggregate principal amount of our 10% secured
 subordinated promissory notes due June 30, 2007. The 18 accredited investors
 also received, in the aggregate, the right to receive $1.125 million of units
 in our public offering based on the initial public offering price per unit.
| |   |                                                                                                                                                                                                                                                                                                                                
| |  | In August
 2006 we issued to Paulson Investment Company, an unsecured promissory note in
 the aggregate principal amount of $1.0 million, bearing interest at 10% per
 annum. The original principal amount and accrued interest was repaid on
 January 24, 2008.                                                              

The
foregoing securities were issued in reliance upon the exemptions from the
registration requirements of the Securities Act of 1933, as amended, provided
in Sections 4(2), 4(6) and Regulation D thereof, as a transaction by an issuer
not involving a public offering. The registrant reasonably believed that each
purchaser had such knowledge and experience in financial and business matters
to be capable of valuating the merits and risks of the investment, each
purchaser represented an intention to acquire the securities for investment
only and not with a view to distribution thereof and appropriate legends were
affixed to the secured and unsecured notes and will be added to the shares and
warrants when issued.

Stock Option Awards

The
Company intends to file a registration statement on Form S-8 with the
Securities and Exchange Commission registering the Common Stock issuable under
the terms of the Vaughan Foods, Inc. 2006 Equity Incentive Plan, as amended
(the Plan) before any options issued under the Plan are exercisable.
Information regarding securities authorized for issuance under our equity
compensation plan will be included under Item 12 (See Part III).

Use of Proceeds from Registered Securities

Use
of Proceeds from Public Offering of Common Stock

On
June 27, 2007, our registration statement (No. 333-137861) on Form S-1 was
declared effective for our initial public offering, pursuant to which we
registered the offering and sale of an aggregate of 2,150,000 units, each
consisting of one share of common stock, one Class A Warrant, and one Class B
Warrant, at a public offering price of $6.50 per unit.

The
offering, which closed on July 3, 2007, did not terminate until after the sale
of all of the shares registered on the registration statement. The managing
underwriters were Paulson Investment Company, Inc., Capital Growth Financial,
LLC, I-Bankers Securities, Inc., and Capital West Securities, Inc. As a result
of the offering, we received net proceeds of $11.2 million, after deducting
underwriting discounts and commissions of $1.0 million and additional offering-related
expenses of $1.7 million. No payments for such expenses were made directly or
indirectly to (i) any of our officers or directors or their associates, (ii)
any persons owning 10 percent or more of any class of our equity securities, or
(iii) any of our affiliates.

We
have used the proceeds of our initial public offering as follows:

|                                                                                                 |  |        |            |            |  |       |  
|------------------------------------------------------------------------------------------------ |  | ------ | ---------- | ---------- |  | ----- | -
|Use of Proceeds                                                                                  |  | Amount |            | Percentage | 
|                                                                                                 |  |        |            |            | 
|Acquisition of Allisons                                                                         |  | $      | 1,500,000  |            |  | 13.4  | %
|Payment of short-term borrowings incurred
 in connection with expansion of the existing facility |  |        | 2,000,000  |            |  | 17.9  | %
|Repayment of debt, excluding accrued
 interest                                                   |  |        | 2,821,304  |            |  | 25.3  | %
|Repayment of non-secured promissory note                                                         |  |        | 1,000,000  |            |  | 8.9   | %
|Working capital                                                                                  |  |        | 3,858,457  |            |  | 34.5  | %
|                                                                                                 |  |        |            |            |  |       |  
|Total                                                                                            |  | $      | 11,179,761 |            |  | 100.0 | %

On
January 24, 2008, we repaid the $1.0 million 10 percent non-secured promissory
note and accrued interest with amounts held as temporary investments on
December 31, 2007.

14

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ITEM
6  SELECTED FINANICAL DATA

The
selected financial data set forth below should be read together with
Managements Discussion and Analysis of Financial Condition and Results of
Operations as presented in Item 7. The consolidated statements of operations
data for each of the five-year periods and the consolidated balance sheet data
dated December 31, 2008 and 2007 are derived from our financial statements
which have been audited by Cole & Reed, P.C., certified public accountants.
Historical results are not necessarily indicative of future results.

|                                                                   |  |      |        |      |                         |        |   |      |        |      |   |        |   |   |        |  
|------------------------------------------------------------------ |  | ---- | ------ | ---- | ----------------------- | ------ | - | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                   |  |      |        |      | Year Ended December 31, |        |   |      |       
|                                                                   |  |      |        |      |                         |        |   |      |       
|Consolidated statements of operations data:(in thousands)          |  | 2008 |        | 2007 |                         | 2006   |   | 2005 |        | 2004 |  
|                                                                   |  |      |        |      |                         |        |   |      |        |      |  
|Net Sales                                                          |  | $    | 91,852 |      | $                       | 67,173 |   | $    | 51,277 |      | $ | 44,730 |   | $ | 36,133 |  
|Cost of Sales                                                      |  |      | 86,778 |      |                         | 60,491 |   |      | 47,557 |      |   | 40,203 |   |   | 31,614 |  
|                                                                   |  |      |        |      |                         |        |   |      |        |      |   |        |   |   |        |  
|Gross profit                                                       |  |      | 5,074  |      |                         | 6,682  |   |      | 3,720  |      |   | 4,527  |   |   | 4,519  |  
|Selling, General and administrative
 expenses                      |  |      | 9,761  |      |                         | 6,213  |   |      | 4,005  |      |   | 4,206  |   |   | 3,697  |  
|                                                                   |  |      |        |      |                         |        |   |      |        |      |   |        |   |   |        |  
|Income (loss) from operations                                      |  |      | (4,687 | )    |                         | 469    |   |      | (285   | )    |   | 321    |   |   | 822    |  
|Interest expense                                                   |  |      | (833   | )    |                         | (2,072 | ) |      | (1,617 | )    |   | (1,106 | ) |   | (496   | )
|Other income (expense)                                             |  |      | (20    | )    |                         | 490    |   |      | 390    |      |   | 384    |   |   | 208    |  
|                                                                   |  |      |        |      |                         |        |   |      |        |      |   |        |   |   |        |  
|Income (loss) before provisions for taxes                          |  |      | (5,540 | )    |                         | (1,113 | ) |      | (1,512 | )    |   | (401   | ) |   | 534    |  
|Income tax expense (benefit)                                       |  |      | (2,177 | )    |                         | (207   | ) |      | (307   | )    |   | (160   | ) |   | 192    |  
|                                                                   |  |      |        |      |                         |        |   |      |        |      |   |        |   |   |        |  
|Net income (loss)                                                  |  | $    | (3,363 | )    | $                       | (906   | ) | $    | (1,205 | )    | $ | (241   | ) | $ | 342    |  
|                                                                   |  |      |        |      |                         |        |   |      |        |      |   |        |   |   |        |  
|                                                                   |  |      |        |      |                         |        |   |      |        |      |   |        |   |   |        |  
|Net income (loss) per share                                        |  | $    | (0.73  | )    | $                       | (0.26  | ) | $    | (0.52  | )    | $ | (0.10  | ) | $ | 0.15   |  
|Weighted average number of shares
 outstanding - basic and diluted |  |      | 4,623  |      |                         | 3,462  |   |      | 2,300  |      |   | 2,300  |   |   | 2,300  |  

|                                               |  |                   |   |                   |   |  |  |   |        |  | 
|---------------------------------------------- |  | ----------------- | - | ----------------- | - |  |  | - | ------ |  | 
|Consolidated balance sheet data:(in thousands) |  | December 31, 2008 |   | December 31, 2007 |  
|                                               |  |                   |   |                   |  
|                                              
|Current
 assets                                |  |                   | $ | 9,086             |   |  |  | $ | 11,684 |  | 
|Working
 capital (deficit)                     |  |                   |   | (5,062            | ) |  |  |   | 1,578  |  | 
|Total assets                                   |  |                   |   | 29,484            |   |  |  |   | 30,447 |  | 
|Total
 current liabilities                     |  |                   |   | 14,148            |   |  |  |   | 10,106 |  | 
|Total
 long-term liabilities                   |  |                   |   | 8,124             |   |  |  |   | 9,693  |  | 
|Stockholders
 equity (deficiency)             |  |                   |   | 7,212             |   |  |  |   | 10,648 |  | 

15

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ITEM 7
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Forward-looking Statements

Certain
written and oral statements set forth below or made by the Company with the
approval of an authorized executive officer constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. The words believe, expect, intend, anticipate, project,
will and similar expressions identify forward-looking statements, which
convey the uncertainty of future events and generally are not historical in
nature. All statements which address operating performance, events or
developments that we expect or anticipate will occur in the future, including
statements relating to the business, expansion and marketing strategies of the
Company, industry projections or forecasts, the impact on our financial
statements of inflation, legal action, future debt levels, sufficiency of cash
flow from operations and borrowings and statements expressing general optimism
about future operating results, are forward-looking statements. Such statements
are based upon our managements current estimates, assumptions and
expectations, which are based on information available at the time of the
disclosure, and are subject to a number of factors and uncertainties,
including, but not limited to:

| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our future
 operating results and the future value of our common stock;                                                                               
| |   |                                                                                                                                                       
| |  | our ability
 to obtain financing to fund our operations;                                                                                              
| |   |                                                                                                                                                       
| |  | whether our
 assumptions turn out to be materially correct;                                                                                           
| |   |                                                                                                                                                       
| |  | our ability
 to attain such estimates and expectations;                                                                                               
| |   |                                                                                                                                                       
| |  | our ability
 to execute our strategy;                                                                                                                 
| |   |                                                                                                                                                       
| |  | further
 material changes in market conditions in any industry, including the economic
 state of the food industry;                                   
| |   |                                                                                                                                                       
| |  | the effects
 of, or further material changes in, economic and political conditions in the
 United States of America and the markets in which we serve;

16

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| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | our ability
 to reasonably forecast prices of the commodities we purchase;                                      
| |   |                                                                                                                 
| |  | our ability
 to timely forecast and meet customer demand for fresh-cut salads and
 refrigerated prepared salads;
| |   |                                                                                                                 
| |  | our ability
 to respond to changing consumer spending patterns; and                                             
| |   |                                                                                                                 
| |  | our ability
 to attract and retain quality employees and control our labor costs.                               

Any
of the foregoing factors and uncertainties, as well as others, could cause
actual results to differ materially from those described herein. We undertake
no obligation to affirm, publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.

The
following discussion should be read in conjunction with the consolidated
financial statements of the Company and the related notes thereto appearing
elsewhere in this report.

General

We
are an integrated processor and distributor of value-added, refrigerated
foods. We are uniquely able to distribute fresh-cut produce items along with a
full array of value-added refrigerated prepared foods multiple times per week.
We sell to both food service and retail sectors. Our products consist of
fresh-cut vegetables, fresh-cut fruits, salad kits, prepared salads, dips,
spreads, soups, sauces and side dishes.

Critical Accounting Policies

The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect
the amounts reported in the Companys consolidated financial statements and
accompanying notes. We base our estimates and judgments on historical
experience and on various other assumptions that we believe are reasonable
under the circumstances. However, future events are subject to change and our
estimates, assumptions and judgments routinely require adjustment. The amounts
of our assumptions regarding assets and liabilities reported in our
consolidated balance sheets and the amounts of revenues and expenses reported
for each of our fiscal periods are affected by the critical estimates and
assumptions which are used for, but not limited to, the accounting for
inventory, rebates, impairment of long-lived assets, and allowance for credit
losses. Actual results could differ from these estimates and such differences
could be material.

Inventory. Inventory purchases and purchase
commitments are based upon forecasts of demand. Our inventory is stated at the
lower of average cost (which approximates first-in, first-out) or market.
Inventory turns rapidly due to the nature of our fresh products and,
accordingly, we do not generally experience material inventory valuation
issues. However, in the instance where we may believe that demand no longer
allows us to sell certain inventory above cost or at all, then we revalue that
particular inventory to market or charge-off excess inventory levels. If
customer demand subsequently differs from our forecasts, requirements for
inventory revaluations and charge-offs could differ from our estimates. We have
not historically experienced any material inventory revaluations or charge-offs
and manage inventory levels of both perishable and non-perishable supplies to
minimize the effects of any revaluations.

Customer Rebates. Estimates and reserves for rebates are
based on specific rebate programs, expected usage and historical experience.
Actual results could differ from these estimates. With respect to some
programs, we make a provision for rebates based on anticipated purchase volume.
Greater than anticipated volume under a program would result in an additional
charge to earnings. We have not historically experienced any material charges
to earnings under our rebate programs; however, we could experience such
charges in the future.

Allowance for Credit
Losses. The
allowance for credit losses is based on various factors including among other
things, (a) our assessment of the collectibility of specific customer accounts,
(b) our macro assessment of political and economic risks, (c) the overall aging
of our accounts receivable portfolio, and (d) the effects each of these and
other factors have on the consolidated portfolio. If there is a change in a
customers creditworthiness or actual defaults differ from our historical
experience, our estimates of recoverability of amounts due us will be affected.
We continually monitor customer accounts for indications of a customers
inability to pay. Our recent losses on charged-off accounts have not been
material.

Long-lived Assets.
Long-lived assets such as property and equipment are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of such assets may not ultimately be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its ultimate disposition. Cash flow
estimates used in evaluating for impairment represent managements best
estimates using appropriate assumptions and projections at the time. We have
not experienced any write downs due to impairment for equipment in use. The
depreciation lives of these assets are short (generally 5 to 7 years),
resulting in relatively low net book values. Equipment not in use is
depreciated in full or held for sale at its estimated recovery value.

Intangible Assets. We
evaluate the recoverability of intangible assets annually or more frequently if
impairment indicators arise. Under SFAS No. 144, Accounting for the Impairment
and Disposal of Long-Lived Assets, intangible

17

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assets are
evaluated whenever events or changes in circumstances indicate that the
carrying value exceeds its fair value, which is determined based upon the
estimated undiscounted future cash flows expected to result from the use of the
asset, including disposition. Cash flow estimates used in evaluating for
impairment represent managements best estimates using appropriate assumptions
and projections at the time. We believe that accounting for intangible assets
is a critical accounting policy due to the requirement to estimate the value in
accordance with SFAS No. 144. Our intangible assets consist primarily of
customer relationship intangibles of purchased entities.

Income taxes. We account for income taxes
under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. In
assessing the realizability of the net deferred tax assets, management
considers whether it is more likely than not that some or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon either (a) the generation of future taxable income
during the periods in which those temporary differences become deductible, or
(b) the carryback of losses to recover income taxes previously paid during the
carryback period. As of December 31, 2008, we have net operating loss carryforwards
of $8.0 million, representing a deferred tax asset of $3.0 million which, if
unused, will commence expiring in 2023 and state new jobs/investment credit
carryforwards totaling $867,000 of which we have elected to provide a
realizability allowance of $779,000, resulting in a net carrying amount of
$88,000. If unused, the credits will commence expiring on December 31, 2021.

Stock-Based Compensation. We account for stock
based compensation in accordance with SFAS No. 123R. Under the fair value recognition
provisions of SFAS 123R, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense
ratably over the requisite service period, net of estimated forfeitures. We use
the Black-Scholes option-pricing model to determine the fair-value of stock
option awards. We have awarded stock options to employees, executive officers,
directors and certain consultants.

Comparison of 2008
and 2007

We recorded
a net loss of $3.4 million, or $0.73 per share during 2008, compared to a net
loss of $906,000 or $0.26 per share during 2007. Increases in the price of
crude oil over the last two years caused an increase in consumption of
alternative fuels derived from grains during 2008. Demand for alternative fuels
caused higher demand for grains such as corn and wheat. Also affected by the
shift to alternative fuels due to the demand for farmland and feed for cattle
were dairy prices and other commodities such as soybeans. With wheat, corn and
soybeans at or near historical highs, the move by farmers to convert available
acreage to grain production over vegetables was a significant factor affecting
the price of our input commodities in 2008. The result of the increased demand
on these commodities combined with the higher fuel cost of inbound freight of
raw materials and outbound freight of finished goods, significantly increased
the cost of food products in the United States of America, but particularly in
our business. Our operating results were directly and adversely affected by
these increasing costs as commodity food products constitute raw materials used
in our products.

Net sales.Net sales increased $24.7 million in
2008 to $91.9 million from $67.2 million in 2007. We shipped 13.5 million
greater pounds of product during 2008 compared to 2007. The increased poundage
shipped represented $10.3 million in higher revenue from sales to new customers
and increased sales to existing customers. The acquisition of Allisons in 2007
increased comparable 2008 sales by $10.6 million. We also increased prices to
our customers in 2008 to mitigate the effects of increased raw material and
transportation costs resulting in $3.8 million in additional revenue. Price
increases to our customers were not adequate for us to mitigate the
aforementioned cost increases and did not enable us to protect our margins.
Pricing adjustments cannot always be made timely to compensate for cost
changes, due to contractual arrangements, logistical issues, market forces and
for other reasons. We had also assumed that commodity cost spikes were going to
be mild in severity and short term in nature. We also believed that our
customers would not readily accept large price increases due to what was
expected to be mild, temporary changes in input costs. For these reasons, most
of our price increases were not implemented in time to mitigate the significant
and rapid increases in raw material and transportation costs. In summary, we
did not react to the changing market conditions and protect margins, which
resulted in a punishing effect on our results of operations and our financial
condition. During 2009, we expect that our average revenue per pound of product
sold will benefit from the full-year effects of our 2008 pricing adjustments.

Gross profit.Our gross
profit percentage was 5.5 percent in 2008 or $5.1 million compared to 9.9
percent or $6.7 million in 2007. We paid $13.9 million more for raw material
food products and $4.2 million more for packaging materials in 2008. The year
2008 was almost a perfect storm, as far as input costs were concerned,
adversely affecting our gross margins and our profitability. All major costs
went the wrong direction  due almost entirely to external factors outside our
control. We also did not react as well as we could have to these factors.
Higher than expected inbound freight costs  caused primarily by much higher
diesel fuel prices  also increased the cost of our raw materials.

18

---



Our
prepared foods business experienced cost of food increases during 2008 as the cost
of basic food commodities such as wheat, corn and soybeans experienced much
higher than anticipated levels of demand due, we believe, to the diversion of
their use from foodstuffs to alternative sources of fuel.

Our
fresh-cut vegetable business also experienced higher raw material input costs
due primarily to poor growing conditions for lettuce, which resulted in high
instances of inferior quality raw materials. The substandard lettuce required
additional labor for trimming and also reduced our raw material yields, which
resulted in a higher costs per pound of finished product.

We paid
$3.2 million more for production labor in our facilities. The State of Oklahoma
enacted immigration enforcement legislation with passage of House
Bill 1804. Beginning in the second quarter of 2008, and accelerating
into the third and fourth quarters, we experienced difficulties in maintaining
an adequate workforce to run our operations and produce our products. At times,
we failed to meet expectations in order fulfillment and deliveries. We believe
that our difficulties were a result of general labor shortages in Oklahoma,
which were exacerbated by new legislation in the State of Oklahoma regarding
immigration enforcement. Although we have undertaken several different steps to
mitigate the effects of the reduced labor supply, including employing a labor
services firm to staff our operations, reduce employee turnover and lower the
labor costs; re-evaluate our hiring standards; engage an outside firm to assist
us in recruiting and onboarding new employees, and various other initiatives to
mitigate the labor issues experienced in 2008, we cannot provide any assurance
that we will be able to maintain a stable workforce or that we will be able to
avoid any of the types of labor issues that we experienced in 2008, whether due
to economic conditions, law or other external factors.

Selling, general and
administrative expenses.Our selling, general and
administrative expenses increased to $9.8 million in 2008 compared to $6.2
million in 2007. The acquisition of Allisons represents $1.8 million of the
increase. We increased our administrative salaries by $0.8 million with
personnel additions aimed at strengthening our management team. We increased
our sales salaries and commissions by $0.3 million in connection with
strengthening our sales efforts to support continued growth in the markets we
serve. We incurred an increase in auditing, legal and consulting expenses of
$0.4 million, primarily in connection with operating as a public company for an
entire year in 2008, compared to a partial year in 2007. We increased general
expenses including office and computer supplies, travel and meals and
entertainment by $0.3 million.

Other income and
expense.Other income and expense amounted to a net expense
of $853,000 in 2008 compared to a net expense of $1,582,000 in 2007. Prior to
our acquisition of Allisons we collected rents from Allisons for use of our
manufacturing facility. Rents collected prior to June 30, 2007 are recognized
as rent income; subsequent to the acquisition, those rents are eliminated in
our consolidated statements of operations. We had a net loss on sale of
assets in 2008 of $57,000 compared to a net gain on sale of assets in 2007 of
$102,000. The loss in 2008 was due primarily to the sale of transportation
equipment compared to a gain on sale of the company airplane of $123,000,
partially offset by a loss on the sale of property in 2007. Interest income
decreased $131,000 in 2008 compared to 2007 due to our consumption of cash to
fund losses in our operations.

Interest
expense decreased to $0.8 million in 2008 compared to $2.1 million in 2007. The
decrease in interest expense is due to our retirement of indebtedness of $4.8
million with use of proceeds from the initial public offering during the third
quarter of 2007. In the first quarter of 2008 we retired a $1.0 million note
payable to the lead underwriter for the Companys initial public offering.

Income tax expense
(benefit).We recognized an income tax benefit of $2.2 million
in 2008 attributable to an operating loss. We recognized an income tax benefit
of $207,000 in 2007 attributable to an operating loss partially offset
by amortization of equity transactions, which represents a permanent difference
in tax and book income amounts.

Comparison of 2007
and 2006

We recorded
a net loss for 2007 of $906,000 or $0.26 per share compared to a net loss of
$1,205,000 or $0.52 per share in 2006. In 2007, we successfully completed our
initial public offering and acquisition of Allisons. We incurred additional
administrative expenses as a result of operating as a public company, most of
which are recurring. Operating results were adversely affected by a settlement
with a supplier of $200,000 in the second quarter and by excessive raw material
costs of $158,000 related to production of our lettuce products in the fourth
quarter.

Net sales.Net sales increased $15.9 million in
2007 to $67.2 million from $51.3 million in 2006. Our acquisition of Allisons
represented $12.9 million or 81 percent of the increase. The amount of credit
memos processed for returns of lettuce decreased in 2007 compared to 2006 due
primarily to higher quality raw materials available in 2007. Our fresh-cut
vegetable business shipped 4.4 million fewer pounds of product in 2007 compared
to 2006. The decline in pounds shipped was substantially all in the
lettuce category, as demand for lettuce decreased in 2007 as a result of public
concern over lettuce-borne pathogens.

Gross profit.Our gross
profit percentage was $6.7 million or 9.9 percent in 2007 compared to $3.7
million or 7.3 percent in 2006. The inclusion of Allisons due to acquisition
increased our gross margin from 8.8 percent to 9.9 percent in the 2007. The
increase in gross margin excluding Allisons was due to overall higher prices
resulting primarily from changes in product mix, and production efficiencies in
both labor and raw material costs resulting from higher quality

19

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raw
materials. Labor cost efficiencies resulted from higher quality raw material
due to less time required to handle and trim the raw materials. Fuel costs
during 2007 and 2006, related to our inbound delivery of raw
materials and outbound delivery of finished goods to our customers, were at
higher levels than experienced historically.

Selling, general and
administrative expenses.Our selling, general and
administrative expenses amounted to $6.2 million or 9.2 percent of net sales in
2007 compared to $4.0 million or 7.8 percent of net sales in 2006. The
acquisition of Allisons represented $1.4 million of the increase. General and
administrative expenses including administrative salaries, legal and consulting
fees, directors and officers insurance and travel expenses increased due to
operating as a public company by $1.0 million. These increased expenses will be
recurring as we continue to operate as a public company. We experienced a
decrease in salesperson salaries and commissions of $0.2 million in 2007 due to
a reduction in commission rates and the addition of noncommissioned customers.

Other income and
expense.Other income and expense amounted to a net expense
of $1,582,000 in 2007 compared to a net expense of $1,227,000 in 2006. The
increase was due to an increase in interest expense of $455,000, a decrease in
rent expense of $119,000, partially offset by an increase in interest income of
$114,000 and a gain on sale of the company airplane of $123,000, partially
offset by a loss on the sale of property. Prior to our acquisition of Allisons
we collected rents for use of our manufacturing facility. Subsequent to the
acquisition, those rents were eliminated in our consolidated statements of
operations. Our initial public offering provided cash balances which were held
in short-term investments, earning interest income.

Interest
expense totaled $2,072,000 in 2007 compared to $1,617,000 in
2006. The higher interest costs were primarily attributable to higher levels of
indebtedness resulting from bridge loans outstanding, which were retired during
the third quarter of 2007 with use of proceeds from the initial public
offering.

Income tax expense
(benefit).We recognized an income tax benefit of $207,000 in
2007 attributable to an operating loss partially offset by amortization
of equity transactions, which represents a permanent difference in tax and book
income amounts. In 2006, we recognized an income tax benefit of $307,000 due
primarily to an operating loss, and utilization of net operating loss
carryforwards.

Liquidity and Capital
Resources

Historically,
we have financed our liquidity requirements through internally generated funds,
senior bank borrowings, and the issuance of other indebtedness. On July 3, 2007
we completed our initial public offering, which improved our working capital
position and allowed us to retire certain indebtedness. On December 31, 2007 we
completed a $5.0 million
secured bank line of credit (the prior revolving line of credit), due on
March 31, 2010, containing loan covenants which we have not been in
compliance with since June 30, 2008.

The
Company incurred a loss of $3.4 million in 2008, and used cash of $2.7 million
and has experienced a decrease in working capital of $6.6 million.

We obtained
a waiver of non-compliance with the agreement from our lender and subsequent to
the execution of that waiver, availability under the prior revolving line of
credit was tied to certain benchmarks of performance, such that the Companys
availability was limited to $1.0 million through December 31, 2008. The
interest rate on the prior revolving line of credit was the prime rate plus 1.0
percent. There were short-term borrowings under the prior line of credit of
$1.0 million and zero at December 31, 2008 and December 31, 2007, respectively.

As of
December 31, 2008, we had total debt and capital lease obligations of $9.3
million. Our debt instruments contain certain financial covenants and if we
fail to comply with these requirements, our ability to obtain additional or
alternative financing may be adversely affected. Our level of indebtedness
limits our ability to obtain financing because substantially all of our assets
are now pledged as collateral for our existing debt. Also, our level of
indebtedness may limit our ability to obtain additional financing for working
capital, capital expenditures and acquisitions, and may also limit our
flexibility to adjust to changing business and market conditions which could
make us more vulnerable to a downturn in general economic conditions, including
market conditions which include a severe contraction in the availability of
credit generally, as is being experienced in the world markets, and in the
United States specifically, in 2008 and 2009.

Credit
conditions during the last half of 2008 and during the first quarter of 2009,
and expected to continue for an undetermined time thereafter, are as
restrictive as any time in at least the last 50 years. The credit crisis,
coupled with tumbling home and stock prices, has produced a paralyzing fear
that has engulfed the United States. A freefall in business activity has
occurred and is continuing. The United States  and much of the world  is
currently trapped in a vicious negative-feedback cycle. Fear has led to
business contraction, which has led to even greater fear - and the cycle
continues. These conditions affect substantially all businesses, but are most
impactful on small businesses with limited capital, such as the Company.

Despite the
dreadful economic conditions we are facing, subsequent to December 31, 2008, we
were able to secure an asset-based line of credit of up to $3.0 million,
secured by accounts receivable and inventories (the new revolving

20

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line of credit). The new revolving line of credit bears interest,
floating at the Wall Street Journal Prime Rate plus 4.5 percent, and is subject
to certain financial covenants, including minimum cash position and net income,
measured on a monthly and quarterly basis, respectively. The new revolving line
of credit matures one year from origination time. We issued 252,454 warrants to
purchase common stock of the Company in connection with this financing. The
252,454 warrants represent 4.6 percent of the Companys diluted shares
outstanding. $1.0 million of the proceeds of the new revolving line of credit was
used to retire the prior line of credit. Although there are no guarantees that
the Company will be able to obtain additional short-term debt financing on
acceptable terms or on any terms, we have taken several actions to ensure that
the Company will continue as a going concern through December 31, 2009,
including reductions in non-core personnel costs and discretionary
expenditures.

Although
subsequent to December 31, 2008, we were able to secure a new revolving line of
credit to replace the prior revolving line of credit, this new facility was
obtained on terms that were significantly more expensive than would be expected
during times of less restrictive credit conditions. Economic conditions during
this period are exceedingly dire for most industries and most countries and
economies. Therefore, there can be no assurance that we will be able to replace
the new revolving credit facility when it matures in the first quarter of 2010,
nor any assurance that we will be able to meet the financial covenants of the
new facility. If we are unable to meet the financial covenants of the new
revolving credit facility, the lender may declare the full amount outstanding
immediately due and payable, and we may be unable to replace the facility,
which would severely impair our liquidity and ability to meet our obligations
as they become due. Furthermore, an uncured event of default could allow our
lenders to sell our assets to satisfy our debt obligations, and therefore
create substantial doubt about the ability of the Company to continue as a
going concern.

Our working
capital was negative $5.1 million at December 31, 2008, compared to $1.6
million at December 31, 2007. Cash provided by operating activities was $0.7
million in 2008, primarily resulting from aggressive balance sheet and working
capital management. Cash used in investing activities was $2.0 million used for
purchases of manufacturing equipment, upgrades to our facilities and
information systems, partially offset by proceeds from a sale and leaseback of
certain transportation equipment. Cash used in financing activities was $1.4
million, which consisted of repayment of long term debt and capital leases, and
$1.0 million of short term borrowings. As of December 31, 2008, our current
liabilities exceed our current assets, resulting in negative working captial of
$5.1 million. We can provide no assurances that our actual cash requirements
will not be greater than we currently anticipate.

Our plans
for 2009 to enhance and conserve our liquidity and capital resources include,
among other things, (a) aggressive cost and cash management, including a
moratorium on hiring of non-core personnel, compensation adjustments, and
non-essential capital expenditures, (b) increased operational discipline,
including the completion of the implementation of an ERP system designed to
strenghten internal accounting and operational controls, and provide
considerably more transparency and visibility into the business, (c) timely and
adequate pricing adjustments to mitigate changes in input costs, (d)
undertaking steps to mitigate the effects of spikes on certain input and
commodity costs, (e) continued aggressive management of our balance sheet,
capital structure and working capital, and (f) continuing to seek longer-term
sources of capital, such as consideration of sales and leasebacks of real
estate assets. Not all of these actions will be undertaken with equal
importance, and some may not be implemented at all. Those that are implemented
may not be successful in achieving our objectives.

ITEM
7A  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss to future earnings or future cash flows
that may result from changes in economic factors. In the normal course of
business, we are exposed to market risks related to changes in interest rates
and prices of our raw materials

Interest Rate Risk. We are subject to market
risk from exposure to fluctuations in interest rates. Some of our debt
instruments contain variable interest rates adjusted quarterly and upon date of
change, and indexed by different published rates. At December 31, 2008 our
revolving line of credit variable interest rate was 4.25 percent, or the prime
rate plus 1.0 percent. As of December 31, 2008 there were borrowings of $1.0
million, with an additional $0.4 million reserved for issuance of standby
letters of credit, for the purpose of collateralizing our self-insured workers
compensation program and certain utility accounts. Other long-term debt, totaling
$3.4 million, secured by real estate and other assets also have variable rates
indexed by LIBOR and other lending institution Base Rates. A change in interest
rates of 1.0 percent on our total debt outstanding at December 31, 2008, of
$11.1 million would cause an increase in interest expense of $0.1 million.

Commodity Price
Risks. The
supply and price of fresh vegetables, fruits and other food commodities is
subject to volatility due to growing seasons, the risk of crop failure,
catastrophic or abnormal weather events, and other factors beyond our control.
We enter into agreements (which are specific as to price and quantity within a
range and are cancelable by us and the supplier upon 60 or 90 days notice,
depending on the term of the agreement and which contain Act of God or Force
Majeure clauses) for supply at fixed prices to provide a limited amount of
ability to maintain an

21

---



adequate
supply of raw materials, so that we may service our customers in the event of a
market shortage. Our purchase agreements may cause our purchase costs to be
higher than prevailing market conditions in the event of a low market with
excessive supply. In contrast, our purchase agreements may cause our purchase
costs to be lower than prevailing market conditions in the event of a high
market with limited supply. There can be no assurance that our suppliers will
be able to fulfill our contracts or will not invoke Force Majeure clauses in
our agreements in the event of a limited supply market. We may also make
purchase commitments for more product than we will require over a period of
time, and may have to pay our suppliers for that product for which we have made
a commitment, but that we do not require.

Packaging Cost Risk. Our packaging costs are subject to market
risk due to the cost of petroleum products in plastics and the paper products
in our corrugated boxes. Significant increases in petroleum and paper products
could increase our packaging costs.

Fuel Cost.Our
business is highly dependent upon timely delivery of our products by our fleet
of delivery equipment. Increases in diesel fuel prices increased our delivery
costs during the last three years and more significantly during 2008. Material
increases in fuel costs put us at a competitive disadvantage compared to
suppliers located closer to their customers. Our diesel fuel purchases for use
in our delivery equipment represent 4 percent of our total cost of sales for
the year ended December 31, 2008. An increase of $1.00 per gallon of diesel
fuel purchased would cause an increase in our total cost of sales of
approximately $850,000 annually, or 1 percent of our net sales at our 2008
rate. Increases in diesel fuel costs included increased raw material costs for
inbound freight, and our cost to deliver products to our customers.

22

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ITEM
8  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting
Firm

To the Board of Directors
and Stockholders
Vaughan Foods, Inc.

We have audited the consolidated balance sheets of Vaughan Foods, Inc.
and subsidiary as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders equity and cash flows for each of the
three years in the period ended December 31, 2008. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
    to above present fairly, in all material respects, the financial position
    of Vaughan Foods, Inc. and subsidiary as of December 31, 2008 and 2007, and
    the results of their operations and their cash flows for each of the three
    years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.

We were not engaged to examine managements assessment of the effectiveness of Vaughan Foods, Inc.s internal control over financial reporting as of December 31, 2008, included
in the accompanying Managements Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.

Oklahoma City,
OklahomaMarch 18, 2009

/s/ Cole & Reed, P.C.


23

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Vaughan Foods, Inc.
Consolidated Balance Sheets
December 31, 2008 and 2007

|                                                                                                                                     |  |             |            |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ---------- | ---- | - | ---------- | -
|                                                                                                                                     |  | December 31 |           
|                                                                                                                                     |  |             |           
|                                                                                                                                     |  | 2008        |            | 2007 |  
|                                                                                                                                     |  |             |            |      |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Assets                                                                                                                               |  |             |            |      |   |            |  
|Current assets:                                                                                                                      |  |             |            |      |   |            |  
|Cash and cash equivalents                                                                                                            |  | $           |           |      | $ | 2,698,474  |  
|Accounts receivable, net of allowance for credit losses of
 $140,870 at December 31, 2008 and $173,561 at December 31, 2007          |  |             | 5,323,125  |      |   | 5,980,293  |  
|Inventories                                                                                                                          |  |             | 3,376,180  |      |   | 2,846,054  |  
|Prepaid expenses and other assets                                                                                                    |  |             | 76,880     |      |   | 119,049    |  
|Deferred tax assets                                                                                                                  |  |             | 310,266    |      |   | 40,264     |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Total current assets                                                                                                                 |  |             | 9,086,451  |      |   | 11,684,134 |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Restricted assets:                                                                                                                   |  |             |            |      |   |            |  
|Cash                                                                                                                                 |  |             | 287        |      |   | 283        |  
|Investments                                                                                                                          |  |             | 561,715    |      |   | 708,298    |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Total restricted assets                                                                                                              |  |             | 562,002    |      |   | 708,581    |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Property and equipment, net                                                                                                          |  |             | 17,058,691 |      |   | 16,569,195 |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Other assets:                                                                                                                        |  |             |            |      |   |            |  
|Loan origination fees, net of amortization                                                                                           |  |             | 368,192    |      |   | 377,045    |  
|Intangible assets                                                                                                                    |  |             | 107,938    |      |   | 714,921    |  
|Deferred tax assets, noncurrent                                                                                                      |  |             | 2,300,701  |      |   | 393,193    |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Total other assets                                                                                                                   |  |             | 2,776,831  |      |   | 1,485,159  |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Total assets                                                                                                                         |  | $           | 29,483,975 |      | $ | 30,447,069 |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Liabilities and Stockholders
 Equity                                                                                                |  |             |            |      |   |            |  
|Current liabilities:                                                                                                                 |  |             |            |      |   |            |  
|Accounts payable                                                                                                                     |  | $           | 7,960,982  |      | $ | 4,940,968  |  
|Disbursements in transit                                                                                                             |  |             | 1,236,264  |      |   |           |  
|Line of credit                                                                                                                       |  |             | 1,000,000  |      |   |           |  
|Short-term borrowings                                                                                                                |  |             |           |      |   | 1,000,000  |  
|Note payable to former owners of Allisons Gourmet
 Kitchens, LP                                                                      |  |             | 802,500    |      |   | 1,000,000  |  
|Accrued liabilities                                                                                                                  |  |             | 1,850,705  |      |   | 1,889,346  |  
|Current portion of long-term debt                                                                                                    |  |             | 1,093,974  |      |   | 865,062    |  
|Current portion of capital lease obligation                                                                                          |  |             | 203,672    |      |   | 189,364    |  
|Amounts payable to former owners of Wild About
Food                                                                                  |  |             |           |      |   | 221,370    |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Total current liabilities                                                                                                            |  |             | 14,148,097 |      |   | 10,106,110 |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Long term liabilities:                                                                                                               |  |             |            |      |   |            |  
|Long-term debt, net of current portion                                                                                               |  |             | 7,949,941  |      |   | 9,146,110  |  
|Capital lease obligation, net of current portion                                                                                     |  |             | 94,479     |      |   | 297,062    |  
|Deferred gain on sale of assets                                                                                                      |  |             | 79,467     |      |   |           |  
|Amounts payable to former owners of Wild About Food, net
 of current portion                                                         |  |             |           |      |   | 250,000    |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Total long-term liabilities                                                                                                          |  |             | 8,123,887  |      |   | 9,693,172  |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Stockholders equity:                                                                                                                |  |             |            |      |   |            |  
|Common stock, $0.001 par value; authorized 50,000,000
 shares; 4,623,077 shares issued and outstanding at December 31, 2008 and 2007 |  |             | 4,623      |      |   | 4,623      |  
|Preferred stock, $0.001 par value; authorized 5,000,000
 shares; 0 shares issued and outstanding at December 31, 2008 and 2007       |  |             |           |      |   |           |  
|Paid in Capital                                                                                                                      |  |             | 12,571,302 |      |   | 12,563,803 |  
|Member Capital                                                                                                                       |  |             |           |      |   | 80,167     |  
|Retained Earnings (deficit)                                                                                                          |  |             | (5,363,934 | )    |   | (2,000,806 | )
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Total stockholders equity                                                                                                           |  |             | 7,211,991  |      |   | 10,647,787 |  
|                                                                                                                                     |  |             |            |      |   |            |  
|                                                                                                                                     |  |             |            |      |   |            |  
|Total liabilities and stockholders equity                                                                                           |  | $           | 29,483,975 |      | $ | 30,447,069 |  
|                                                                                                                                     |  |             |            |      |   |            |  

The accompanying notes are an integral part of these
consolidated financial statements.

24

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Vaughan Foods, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2008, 2007 and 2006

|                                                         |  |      |            |      |   |            |   |   |            |  
|-------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                         |  | 2008 |            | 2007 |   | 2006       |  
|                                                         |  |      |            |      |   |            |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|Net sales                                                |  | $    | 91,852,339 |      | $ | 67,173,174 |   | $ | 51,277,371 |  
|Cost of sales                                            |  |      | 86,778,313 |      |   | 60,491,310 |   |   | 47,557,067 |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|Gross profit                                             |  |      | 5,074,026  |      |   | 6,681,864  |   |   | 3,720,304  |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|Selling, general and administrative
 expenses            |  |      | 9,761,213  |      |   | 6,212,845  |   |   | 4,005,029  |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|Operating income (loss)                                  |  |      | (4,687,187 | )    |   | 469,019    |   |   | (284,725   | )
|                                                         |  |      |            |      |   |            |   |   |            |  
|Rent income                                              |  |      |           |      |   | 219,805    |   |   | 339,222    |  
|Interest expense                                         |  |      | (833,008   | )    |   | (2,071,903 | ) |   | (1,616,980 | )
|Gain (loss) on sale of asset                             |  |      | (57,498    | )    |   | 101,839    |   |   | (3,931     | )
|Interest income                                          |  |      | 37,055     |      |   | 168,543    |   |   | 54,263     |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|Other income and expense, net                            |  |      | (853,451   | )    |   | (1,581,716 | ) |   | (1,227,426 | )
|                                                         |  |      |            |      |   |            |   |   |            |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|Net income (loss) before income taxes                    |  |      | (5,540,638 | )    |   | (1,112,697 | ) |   | (1,512,151 | )
|                                                         |  |      |            |      |   |            |   |   |            |  
|Income tax expense (benefit)                             |  |      | (2,177,510 | )    |   | (206,621   | ) |   | (307,643   | )
|                                                         |  |      |            |      |   |            |   |   |            |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|Net income (loss)                                        |  | $    | (3,363,128 | )    | $ | (906,076   | ) | $ | (1,204,508 | )
|                                                         |  |      |            |      |   |            |   |   |            |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|Weighted average shares outstanding - basic
 and diluted |  |      | 4,623,077  |      |   | 3,461,539  |   |   | 2,300,000  |  
|                                                         |  |      |            |      |   |            |   |   |            |  
|Net income (loss) per share - basic and
 diluted         |  | $    | (0.73      | )    | $ | (0.26      | ) | $ | (0.52      | )
|                                                         |  |      |            |      |   |            |   |   |            |  

The accompanying notes are an integral part
of these consolidated financial statements.

25

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Vaughan Foods, Inc.
Consolidated Statements of Stockholders Equity
For the Year Ended December 31, 2008

|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|-------------------------------------------------------------------------------- |  | ------------- | --------- | ----------------- | - | -------------------------- |  | ----------------------------- | ---------- | ------------------------------------------ | - | ------- | - | - | ---------- | - | - | ---------- | -
|                                                                                 |  |               |           |                   |   |                            |  |                               |            | Total
 Stockholders
 Equity
 (Deficiency) |  
|                                                                                 |  | Common Stock  |           | Paid in 
 Capital |   | Member
 Capital
 (Deficit) |  | Retained
 Earnings
 (Deficit) |            |                                           
|                                                                                 |  |               |           |                   |   |                            | 
|                                                                                 |  | Shares issued |           | Amount            |   |                            |  |                               |           
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|Balance at January 1, 2006                                                       |  |               | 2,300,000 |                   | $ | 2,300                      |  | $                             | 413,693    |                                            | $ | (12,839 | ) | $ | 202,784    |   | $ | 605,938    |  
|Net income (loss)                                                                |  |               |          |                   |   |                           |  |                               |           |                                            |   | (10,082 | ) |   | (1,194,426 | ) |   | (1,204,508 | )
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|Balance at December 31, 2006                                                     |  |               | 2,300,000 |                   | $ | 2,300                      |  | $                             | 413,693    |                                            | $ | (22,921 | ) | $ | (991,642   | ) | $ | (598,570   | )
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|Issuance of common stock in connection with intitial public offering             |  |               | 2,150,000 |                   |   | 2,150                      |  |                               | 11,025,283 |                                            |   |        |   |   |           |   |   | 11,027,433 |  
|Issuance of common stock in connection with bridge funding liability             |  |               | 173,077   |                   |   | 173                        |  |                               | 1,124,827  |                                            |   |        |   |   |           |   |   | 1,125,000  |  
|Net income (loss)                                                                |  |               |          |                   |   |                           |  |                               |           |                                            |   | 103,088 |   |   | (1,009,164 | ) |   | (906,076   | )
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|Balance at December 31, 2007                                                     |  |               | 4,623,077 |                   |   | 4,623                      |  |                               | 12,563,803 |                                            |   | 80,167  |   |   | (2,000,806 | ) |   | 10,647,787 |  
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|Exclusion of previously consolidated variable interest entity (See Note 18)      |  |               |          |                   |   |                           |  |                               |           |                                            |   | (80,167 | ) |   |           |   |   | (80,167    | )
|Issuance of stock options in connection with Equity Incentive Plan (see Note 14) |  |               |          |                   |   |                           |  |                               | 7,499      |                                            |   |        |   |   |           |   |   | 7,499      |  
|Net (loss)                                                                       |  |               |          |                   |   |                           |  |                               |           |                                            |   |        |   |   | (3,363,128 | ) |   | (3,363,128 | )
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  
|Balance at December 31, 2008                                                     |  |               | 4,623,077 |                   | $ | 4,623                      |  | $                             | 12,571,302 |                                            | $ |        |   | $ | (5,363,934 | ) | $ | 7,211,991  |  
|                                                                                 |  |               |           |                   |   |                            |  |                               |            |                                            |   |         |   |   |            |   |   |            |  

The accompanying notes are an integral part
of these consolidated financial statements.

26

---



Vaughan Foods, Inc.
Consolidated Statements of Cash FlowsFor the Years Ended December 31,
2008, 2007 and 2006

|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                                                                               |  | 2008 |            | 2007 |   | 2006       |  
|                                                                                                                               |  |      |            |      |   |            |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Cash flows from operating activities:                                                                                          |  |      |            |      |   |            |   |   |            |  
|Net (loss)                                                                                                                     |  | $    | (3,363,128 | )    | $ | (906,076   | ) | $ | (1,204,508 | )
|Adjustments to reconcile net (loss) to
net cash provided
 by (used in) operating activities:                                   |  |      |            |      |   |            |   |   |            |  
|Depreciation and amortization                                                                                                  |  |      | 1,821,218  |      |   | 2,230,089  |   |   | 1,724,816  |  
|Provision for credit losses                                                                                                    |  |      | (32,691    | )    |   | 108,516    |   |   | 63,966     |  
|Loss (gain) on sale of asset                                                                                                   |  |      | 57,498     |      |   | (101,839   | ) |   | 3,931      |  
|Stock option expense                                                                                                           |  |      | 7,499      |      |   |           |   |   |           |  
|Deferred income taxes                                                                                                          |  |      | (2,177,510 | )    |   | (206,621   | ) |   | (307,643   | )
|Changes in operating assets and
liabilities, net of
 amounts in connection with the acquisition of Allisons Gourmet Kitchens: |  |      |            |      |   |            |   |   |            |  
|Accounts receivable                                                                                                            |  |      | 689,859    |      |   | (265,124   | ) |   | (310,235   | )
|Accounts receivable - related
party                                                                                            |  |      |           |      |   | 181,042    |   |   | 191,423    |  
|Inventories                                                                                                                    |  |      | (530,126   | )    |   | (489,440   | ) |   | 93,903     |  
|Disbursements in transit                                                                                                       |  |      | 1,236,264  |      |   |           |   |   |           |  
|Prepaid expenses and other assets                                                                                              |  |      | 42,169     |      |   | (14,212    | ) |   | (12,093    | )
|Accounts payable                                                                                                               |  |      | 3,020,014  |      |   | (1,695,183 | ) |   | 1,514,968  |  
|Accounts payable, related party                                                                                                |  |      |           |      |   | (423,830   | ) |   | 69,502     |  
|Accrued liabilities                                                                                                            |  |      | (38,641    | )    |   | 345,397    |   |   | 21,554     |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Net cash provided by (used in) operating
activities                                                                            |  |      | 732,425    |      |   | (1,237,281 | ) |   | 1,849,584  |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Cash flows from investing activities:                                                                                          |  |      |            |      |   |            |   |   |            |  
|Purchases of property and
equipment                                                                                            |  |      | (2,777,230 | )    |   | (1,691,354 | ) |   | (4,371,223 | )
|Investments in Restricted
assets                                                                                               |  |      | 146,579    |      |   | (111,130   | ) |   | (15,893    | )
|Proceeds from sale of assets                                                                                                   |  |      | 711,600    |      |   | 318,089    |   |   | 34,604     |  
|Distributions from restricted
assets                                                                                           |  |      |           |      |   | 250,000    |   |   | 1,451,564  |  
|Cash paid for acquisition of
Allisons Gourmet Kitchens,
 net of cash acquired                                                 |  |      |           |      |   | (1,277,589 | ) |   |           |  
|Deconsolidation of variable interest
entity                                                                                    |  |      | (80,167    | )    |   |           |   |   |           |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Net cash (used in) investing
activities                                                                                        |  |      | (1,999,218 | )    |   | (2,511,984 | ) |   | (2,900,948 | )
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Cash flows from financing activities:                                                                                          |  |      |            |      |   |            |   |   |            |  
|Cash paid for deferred public offering
expense                                                                                 |  |      |           |      |   |           |   |   | (566,955   | )
|Proceeds from initial public
offering                                                                                          |  |      |           |      |   | 11,594,388 |   |   |           |  
|Proceeds from line of credit                                                                                                   |  |      | 1,000,000  |      |   | 1,150,000  |   |   | 500,000    |  
|Repayments on line of credit                                                                                                   |  |      |           |      |   | (3,876,578 | ) |   | (87,716    | )
|Payments of loan origination
fees                                                                                              |  |      | (33,649    | )    |   | (4,548     | ) |   | (176,300   | )
|Proceeds from long-term debt                                                                                                   |  |      |           |      |   |           |   |   | 90,140     |  
|Repayment of long-term debt and capital
leases                                                                                 |  |      | (1,155,532 | )    |   | (1,165,902 | ) |   | (875,591   | )
|Repayments of notes payable to former
owners of Allisons
 Gourmet Kitchens, LP                                                |  |      | (197,500   | )    |   |           |   |   |           |  
|Cash paid to former owners of Wild About
Food                                                                                  |  |      | (45,000    | )    |   | (117,998   | ) |   |           |  
|Repayments of short-term
borrowings                                                                                            |  |      | (1,000,000 | )    |   | (2,000,000 | ) |   |           |  
|Proceeds from short-term
borrowings                                                                                            |  |      |           |      |   |           |   |   | 3,000,000  |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Net cash provided by (used in) financing
activities                                                                            |  |      | (1,431,681 | )    |   | 5,579,362  |   |   | 1,883,578  |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Net increase (decrease) in cash and cash
equivalents                                                                           |  |      | (2,698,474 | )    |   | 1,830,097  |   |   | 832,214    |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Cash and cash equivalents at beginning of period                                                                               |  |      | 2,698,474  |      |   | 868,377    |   |   | 36,163     |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Cash and cash equivalents at end of period                                                                                     |  | $    |           |      | $ | 2,698,474  |   | $ | 868,377    |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Supplemental disclosures of cash flow
information:                                                                             |  |      |            |      |   |            |   |   |            |  
|Cash paid during the period
for:                                                                                               |  |      |            |      |   |            |   |   |            |  
|Interest paid, net of capitalized
interest                                                                                     |  | $    | 904,562    |      | $ | 1,222,152  |   | $ | 1,055,446  |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Supplemental disclosures of noncash financing and
 investing activities:                                                       |  |      |            |      |   |            |   |   |            |  
|Fair value of assets acquired and
liabilities assumed in
 acquisition:                                                         |  |      |            |      |   |            |   |   |            |  
|Accounts receivable                                                                                                            |  |      |           |      |   | 2,054,514  |   |   |           |  
|Inventories                                                                                                                    |  |      |           |      |   | 1,724,940  |   |   |           |  
|Prepaids                                                                                                                       |  |      |           |      |   | 25,044     |   |   |           |  
|Property and equipment                                                                                                         |  |      |           |      |   | 3,354,543  |   |   |           |  
|Intangible assets                                                                                                              |  |      |           |      |   | 872,569    |   |   |           |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Total assets acquired                                                                                                          |  |      |           |      |   | 8,031,610  |   |   |           |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Accounts payable and accrued
expenses                                                                                          |  |      |           |      |   | 3,770,987  |   |   |           |  
|Long-term debt and capital
leases                                                                                              |  |      |           |      |   | 1,983,034  |   |   |           |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Total liabilities assumed                                                                                                      |  |      |           |      |   | 5,754,021  |   |   |           |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Bridge funding liability retired thru
issuance of common
 stock                                                                |  |      |           |      |   | 1,125,000  |   |   |           |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Issuance of note payable to former owners
of Allisons
 Gourmet Kitchens, LP in connection with acquisition                    |  |      |           |      |   | 1,000,000  |   |   |           |  
|                                                                                                                               |  |      |            |      |   |            |   |   |            |  
|Decrease in amounts payable to former
owners of Wild About
 Food due to net loss incurred by Wild                              |  |      | 426,370    |      |   | 37,412     |   |   |           |  

The accompanying notes are an integral part
of these consolidated financial statements.

27

---



Vaughan Foods, Inc.
Notes to Consolidated Financial StatementsDecember 31, 2008 and
2007

|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)                                                                                                                                                                                                                                           | Nature of
 Operations                      
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Vaughan Foods, Inc. (the
 Company) is an Oklahoma-based specialty food processor serving customers in
 a multi-state region. The Company and its subsidiaries operate from
 processing facilities in Moore, Oklahoma and Fort Worth, Texas.
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(2)                                                                                                                                                                                                                                           | Summary
 of Significant Accounting Policies
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                              | (a)                                         | Basis of
 Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                              |                                             | This summary of
 significant accounting policies is presented to assist in understanding the
 Companys consolidated financial statements. The consolidated financial
 statements and notes are representations of the Companys management which is
 responsible for the integrity and objectivity of the consolidated financial
 statements. These accounting policies conform to accounting principles
 generally accepted in the United States of America and have been consistently
 applied in the preparation of the consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                              | (b)                                         | Principles
 of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                              |                                             | The December 31, 2007
 consolidated balance sheet and consolidated statements of operations and
 statements of cash flows for the years ended December 31, 2007 and 2006
 include the accounts of the Company and of Cimarron Holdings, LLC
 (Cimarron). Cimarron is owned by our current chief operating officer and a
 former member of management. Cimarron previously owned an airplane that was
 used by Company management. The Company was making the debt service payments
 on the liability associated with the airplane, as well as all costs of
 maintenance and operations. Because the Company was the primary beneficiary
 of Cimarron, it was considered a variable interest entity subject to
 Financial Accounting Standards Board Interpretation No. 46R (FIN 46R), and
 was previously consolidated by the Company in its consolidated financial
 statements. All significant intercompany transactions and balances have been
 eliminated in consolidation. Due to the sale of the airplane on December 3,
 2007, the Company no longer has a beneficial interest in Cimarron, and
 therefore the consolidated balance sheet, consolidated statement of
 operations and consolidated statement of cash flows do not include the
 accounts of Cimarron as of December 31, 2008 and for the year then ended. See
 Note 19 for additional information regarding Cimarron.On June 30, 2007, the
 Company acquired the net assets of Allisons Gourmet Kitchens, LP
 (Allisons). All of the assets and liabilities of Allisons were assumed by
 the Company.
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                              | (c)                                         | Cash and
 Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                              |                                             | For purposes of the
 consolidated statements of cash flows, the Company considers investments with
 maturities of three months or less at date of purchase to be cash
 equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                              | (d)                                         | Disbursements
 in Transit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                              |                                             | Disbursements in transit
 as presented in the consolidated balance sheet and consolidated statement of
 cash flows, represent drafts for payment to the Companys vendors in transit
 and in the process of being collected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                              | (e)                                         | Accounts
 Receivable and Credit Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                              |                                             | Trade accounts receivable
 are customer obligations due under normal trade terms generally requiring
 payment within 15 to 21 days from the invoice date. Receivables are recorded
 based on the amounts invoiced to customers. Interest and delinquency fees are
 not included in income until realized in cash. Discounts allowed for early
 payment, if any, are charged against income when the payment is received.
 Payments of accounts receivable are allocated to the specific invoices
 identified on the customers remittance advice or, if unspecified, are
 generally applied to the earliest unpaid invoices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                              |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                              |                                             | The carrying amount of
 accounts receivable is reduced by an allowance for credit losses that
 reflects managements estimate of the amounts that will not be collected. The
 allowance for credit losses is based on various factors including among other
 things, (a) our assessment of the collectibility of specific customer
 accounts, (b) our macro assessment of political and economic risks, (c) the
 overall aging of accounts receivable portfolio, and (d) the effects each of
 these and other factors have on the consolidated portfolio. Balances still
 outstanding after management has used reasonable collection efforts are
 charged off to the valuation allowance. Recoveries on accounts previously
 charged off are credited to the valuation allowance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

28

---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | A lien exists on certain
 receivables related to fresh produce under the Perishable Agricultural
 Commodities Act of 1930, which partially subordinates the lien placed by the
 line of credit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (f) | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | Inventories consist
 principally of food products and are stated at the lower of average cost
 (which approximates first-in, first-out) or market. Costs included in
 inventories consist of materials, certain prepaid expenses related to
 materials, packaging supplies, and labor. General and administrative costs
 are not charged to inventories.                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (g) | Property
 and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | Property and equipment are
 recorded at cost. Equipment classified as capital leases are recorded at the
 present value of the future minimum lease payments, and amortized on a
 straight-line basis over the shorter of the lease term or the estimated
 useful life of the asset. Expenditures for major additions and improvements
 are capitalized, while minor replacements, maintenance and repairs are
 charged to expense as incurred. When property and equipment are retired or
 otherwise disposed of, the cost of the asset and related accumulated
 depreciation are removed from the accounts and any resulting gain or loss is
 included in other income and expense.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     | Depreciation, including
 assets classified as capital leases, are provided using the straight-line
 method over the following estimated useful lives:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                         |               
|------------------------ | --------------
|Plant and improvements   | 15
 - 40 years
|Machinery and equipment  | 2
 - 15 years 
|Transportation equipment | 3
 - 10 years 
|Office equipment         | 2
 - 7 years  

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (h) | Concentrations
 of Credit Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | The Company maintains its
 cash in bank deposit accounts which, at times, may exceed federally insured
 limits. The Company has not experienced any losses in such accounts. The
 Company believes it is not exposed to any significant credit risk on cash and
 cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (i) | Revenue
 Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | The Company recognizes
 revenue, net of related sales discounts and allowances, when persuasive
 evidence of an arrangement exists (such as a customer purchase order),
 delivery has occurred, our price to the customer has been fixed or is
 determinable, and collectibility is reasonably assured. Revenues also include
 those amounts related to shipping and handling. Shipping and handling
 expenses are also included in cost of sales. Consideration from the Company
 to a customer is presumed to be a reduction to the selling price of the
 Companys products and accordingly, is characterized as a reduction of sales
 when recognized in the Companys consolidated statements of operations. As a
 result, certain promotional expenses are recorded as a reduction of net
 sales, at the time the sale is recognized.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (j) | Accounting
 for Rebates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | The Company establishes
 liabilities for rebates to customers based on specific programs, expected
 usage and historical experience.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (k) | Income
 Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | Income taxes are accounted
 for under the asset and liability method. Deferred tax assets and liabilities
 are recognized for the future tax consequences attributable to differences
 between the financial statement carrying amounts of existing assets and
 liabilities and their respective tax bases. Deferred tax assets and
 liabilities are measured using enacted tax rates expected to apply to taxable
 income in the years in which those temporary differences are expected to be
 recovered or settled. The effect on deferred tax assets and liabilities of a
 change in tax rates is recognized in income in the period that includes the
 enactment date.                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (l) | Earnings
 (Loss) Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | Basic earnings (loss) per
 share (EPS) excludes dilution and is calculated by dividing net income
 (loss) available to common stockholders by the weighted-average number of
 shares of common stock outstanding during the period. Diluted EPS is computed
 in a manner similar to that of basic EPS except that the weighted-average
 number of common shares outstanding is increased to include the number of
 incremental                                                                                                                                                                                                                                                                                                                                                                                                           

29

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | common shares (computed
 using the treasury stock method) that would have been outstanding if all
 potentially dilutive common shares (such as stock options) were issued during
 the period. Diluted EPS is not presented if the effect of the incremental shares
 is anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | As of December 31, 2008
 and 2007, the Company had Class A and Class B warrants outstanding resulting
 from its initial public offering as described in Note 12. The exercise price
 of both classes of warrants exceeds the Companys stock price, therefore
 the Company has not included these warrants as shares in diluted earnings per
 share because the effects of inclusion would be anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | On November 26, 2008, the
 Company granted 605,000 stock options to certain employees, members of the
 board of directors and certain consultants to the Company, as further
 described in Note 16, vesting over four years. The exercise price of the
 options is equal to or greater than the Companys stock price on the date
 of issuance, which exceeds the Companys average stock price over the period
 beginning with the date of issuance and ending at December 31, 2008,
 therefore the Company has not included these options as shares in diluted
 earnings per share because the effects of inclusion would be anti-dilutive.                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (m) | Use of
 Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | The preparation of the
 consolidated financial statements in conformity with accounting principles
 generally accepted in the United States of America requires management to
 make estimates and assumptions that affect reported amounts of assets and
 liabilities and disclosure of contingent assets and liabilities at the date
 of the consolidated financial statements and the reported amounts of revenues
 and expenses during the reporting period. Actual results could differ from
 those estimates. An estimate for the value of intangible assets related to
 acquired customer relationships was determined by discounting estimated
 future cash flows from the acquired customer relationships to the date of
 acquisition using an appropriate discount rate, and recognized to the extent
 of the contingent liability of the excess purchase price.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (n) | Fair
 Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | The carrying value of cash
 and cash equivalents, accounts receivable, accounts payable and accrued
 liabilities are measured at cost which approximates fair value because of the
 short-term nature of these instruments. The carrying amount of the Companys
 borrowings under the line of credit and long-term debt approximates fair
 value because the interest rate on the instruments fluctuate with market
 interest rates or represents borrowing rates available with similar terms.                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (o) | Stock-Based
 Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | The Company accounts for
 stock based compensation in accordance with SFAS No. 123R. Under the fair
 value recognition provisions of SFAS 123R, stock-based compensation cost is
 measured at the grant date based on the fair value of the award and is
 recognized as expense ratably over the requisite service period, net of
 estimated forfeitures. The Company uses the Black-Scholes option-pricing
 model to determine the fair-value of stock option awards. The Company awards
 stock options to employees, executive officers, directors and certain
 consultants.                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (p) | Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | All of the Companys
 investments are classified as available for sale and are stated at fair
 value. Any related unrealized gains and losses are excluded from earnings and
 reported net of income tax as a separate component of stockholders equity
 until realized. There were no unrealized gains or losses for the years ended
 December 31, 2008, 2007 or 2006. Realized gains and losses on sales of
 securities are based on the specific identification method. Declines in the
 fair value of investment securities below their carrying value that are other
 than temporary are recognized in earnings. As of December 31, 2008 and 2007,
 the Companys investments consisted primarily of guaranteed investment
 contracts at a fixed interest rate of 2.25 percent.                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (q) | Recently
 Issued Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | In September of 2006, the
 FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
 value, establishes guidelines for measuring fair value and expands
 disclosures regarding fair value measurements. SFAS No. 157 is effective for
 fiscal years beginning after November 15, 2007. The Company has determined
 that the adoption of this statement will not have an effect on its
 consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | In February 2007, the FASB
 issued SFAS No. 159, The Fair Value Option for Financial Assets and
 Financial Liabilities, which provides companies an option to report selected
 financial assets and liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

30

---



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | at fair value. This
 Statement defines fair value, establishes a framework for measuring fair value
 in generally accepted accounting principles, and expands disclosures about
 fair value measurements. SFAS No. 159 does not require any new fair value
 measurements. However, if applied, SFAS No. 159 requires companies to provide
 information helping financial statement users to understand the effect of a
 companys choice to use fair value in determining its earnings, as well as to
 display the fair value of the assets and liabilities a company has chosen to
 use fair value for on the face of its balance sheet. Additionally, SFAS No.
 159 establishes presentation and disclosure requirements designed to simplify
 comparisons between companies that choose different measurement attributes
 for similar types of assets and liabilities. The statement is effective as of
 the beginning of an entitys first fiscal year beginning after November 15,
 2007. The Company has determined the effects of the adoption of this
 statement will not have an effect on its consolidated financial statements,
 because the Company has elected not to report any liabilities or assets at
 any value other than that achieved by historical cost, and that if the
 Company were to make such an election, the difference in values reported on
 the Companys consolidated financial statements would not provide more
 relevant and understandable information for the users of the Companys
 consolidated financial statements.                                                                                                                                              
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | In December 2007, the FASB
 issued SFAS No. 141(R), Business Combinations. This Statement improves the
 relevance, representational faithfulness, and comparability of the
 information that a reporting entity provides in its financial reports about a
 business combination and its effects by establishing principles and
 requirements for how the acquirer (i) recognizes and measures in its
 financial statements the identifiable assets acquired, the liabilities
 assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and
 measures the goodwill acquired in the business combination or a gain from a
 bargain purchase, and (iii) determines what information to disclose to enable
 users of the financial statements to evaluate the nature and financial
 effects of the business combination. The Company must apply prospectively
 SFAS No. 141(R) to business combinations for which the acquisition date is on
 or after the beginning of 2009. The impact that adoption of SFAS No. 141(R)
 will have on the Companys financial condition, results of operations and
 cash flows is dependent upon many factors. Such factors would include, among
 others, the fair values of the assets acquired and the liabilities assumed in
 any applicable business combination, the amount of any costs the Company
 would incur to effect any applicable business combination, and the amount of
 any restructuring costs the Company expected but was not obligated to incur
 as the result of any applicable business combination. Thus, we cannot
 accurately predict the effect SFAS No. 141(R) will have on acquisitions until
 such acquisitions are consummated.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | In December 2007, the FASB
 issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
 Statements  an amendment of ARB No. 51, which establishes accounting and
 reporting standards for ownership interests in subsidiaries held by parties
 other than the parent, the amount of consolidated net income attributable to
 the parent and to the noncontrolling interest, changes in a parents
 ownership interest and the valuation of retained non-controlling equity
 investments when a subsidiary is deconsolidated. The statement also
 establishes reporting requirements that provide sufficient disclosures that
 clearly identify and distinguish between the interests of the parent and the
 interests of the non-controlling owners. SFAS No. 160 is effective for fiscal
 years beginning after December 15, 2008. The adoption of SFAS No. 160 will
 not have a material effect on the Companys consolidated financial statements
 unless the Company acquires less than 100 percent of an entity, since
 Companys subsidiaries are owned 100 percent as of December 31, 2008. Accordingly,
 the effect of application of SFAS No. 160 on future acquisitions will vary
 depending on the nature of the acquistion.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | In March 2008, the FASB
 issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
 Activities, which amends and expands the disclosure requirements of SFAS No.
 133. SFAS No. 161 requires enhanced disclosures about an entitys derivative
 and hedging activities. The statement encourages, but does not require,
 comparative disclosures for earlier periods at initial adoption. SFAS No. 161
 is effective for financial statements issued for fiscal years and interim
 periods beginning after November 15, 2008, with early application encouraged.
 The Company has determined that the adoption of SFAS No. 161 will not have a
 material effect on the consolidated financial statements due to the absence
 of derivatives and hedging instruments in the Companys consolidated
 financial statements. If the Company engages in activities which include
 derivatives and hedging instruments, then the adoption of SFAS No. 161 could
 have an effect on its consolidated financial statements, and such effect
 could be material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | In April 2008, the FASB
 issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets
 (FSP 142-3). This FSP 142-3 amends the factors that should be considered in
 developing renewal or extension assumptions used to determine the useful life
 of a recognized intangible asset under FASB Statement No. 142, Goodwill and
 Other Intangible Assets (SFAS 142). The intent of FSP 142-3 is to improve
 the consistency between the useful life of a recognized intangible asset
 under SFAS 142 and the period of expected cash flows used to measure the fair
 value of the asset under SFAS 141R, and other U.S. generally accepted
 accounting principles. FSP 142-3 is effective for our interim and annual
 financial                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

31

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|    | statements beginning in
 2009. The adoption of FSP 142-3 will not have a material effect on the
 Companys consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|    | In May 2008, the FASB
 issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
 Principles which identifies the sources of accounting principles and the
 framework for selecting the principles to be used in the preparation of
 financial statements of nongovernmental entities that are presented in
 conformity with generally accepted accounting principles (GAAP) in the
 United States (the GAAP hierarchy). The statement is effective 60 days
 following the SECs approval of the Public Company Accounting Oversight Board
 amendments to AU Section 411, The Meaning of Present Fairly in Conformity
 With Generally Accepted Accounting Principles. The Company does not
 anticipate the adoption of SFAS No. 162 will have a material effect on the
 consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|(3) | Operating
 Results and Liquidity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|    | The Company incurred a
 loss of $3.4 million in 2008, used cash of $2.7 million and has experienced a
 decrease in working capital of $6.6 million during 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|    | Management has taken
 several actions to provide assurance that the Company will continue as a
 going concern through December 31, 2009, including plans to enhance and
 conserve liquidity and capital resources. These plans include, among other
 things, (a) aggressive cost and cash management, including a moratorium on
 hiring of non-core personnel, compensation adjustments, and non-essential
 capital expenditures, (b) increased operational discipline, including the
 completion of the implementation of an Enterprise Resource Planning system
 designed to strengthen internal accounting and operational controls, and
 provide considerably more transparency and visibility into the business, (c)
 timely and adequate pricing adjustments to mitigate changes in input costs,
 (d) undertaking steps to mitigate the effects of spikes on certain input and
 commodity costs, (e) continued aggressive management of the balance sheet,
 capital structure and working capital, (f) refinancing the revolving line of
 credit, which was completed subsequent to December 31, 2008, and (g) continuing
 to seek longer-term sources of capital, such as consideration of sales and
 leasebacks of real estate assets. Not all of these actions will be undertaken
 with equal importance, and some may not be implemented at all. Those that are
 implemented may not be successful in achieving managements objectives. There
 can be no assurance that actions taken will be sufficient to enable
 management to mitigate the effects of continuing fragile economic conditions,
 and other external market conditions which are beyond the control of
 management. A further worsening of the economy in the United States of
 America could materially adversely affect the Companys business, including
 its results of operations, financial condition and prospects.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|(4) | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|    | A summary of inventories
 follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                           |  |                    |           |                    |   |           | 
|-------------------------- |  | ------------------ | --------- | ------------------ | - | --------- | 
|                           |  | December 31,
 2008 |           | December 31,
 2007 |  
|                           |  |                    |           |                    |  
|                           |  |                    |           |                    |   |           | 
|Raw materials and supplies |  | $                  | 2,740,137 |                    | $ | 2,096,887 | 
|Finished goods             |  |                    | 472,879   |                    |   | 627,060   | 
|Deferred production costs  |  |                    | 163,164   |                    |   | 122,107   | 
|                           |  |                    |           |                    |   |           | 
|                           |  |                    |           |                    |   |           | 
|Total inventory            |  | $                  | 3,376,180 |                    | $ | 2,846,054 | 
|                           |  |                    |           |                    |   |           | 

|    |                                                                                                                                                                                                                                                          | 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|    | The Company has advanced
 certain monies related to growing costs to growers, pursuant to contracts and
 accounted for those advanced monies as Deferred production costs. The
 prepaid amounts represent raw materials that have yet to be harvested.
|    |                                                                                                                                                                                                                                                          | 
|(5) | Restricted
 Assets                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                          | 
|    | The Company is required to
 hold cash in reserve in separate trust accounts applicable to its $5.0
 million Cleveland County Industrial Authority Industrial Development Revenue
 Bonds, issued December 2004. The project                              

32

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| |                                                                                                                                                                                                                                                                                                                                        | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | construction account
 represents proceeds of the bond offering to be drawn for approved capital
 expenditures. The debt reserve account represents funds to be used for debt
 service in the event of default. The interest and principal accounts
 represent deposits to be used for debt service. Restricted assets are as
 follows:

|                              |  |                    |         |                    |   |         | 
|----------------------------- |  | ------------------ | ------- | ------------------ | - | ------- | 
|                              |  | December 31,
 2008 |         | December 31,
 2007 |  
|                              |  |                    |         |                    |  
|                              |  |                    |         |                    |   |         | 
|Project construction
 account |  | $                  | 287     |                    | $ | 283     | 
|Debt reserve account          |  |                    | 500,000 |                    |   | 512,134 | 
|Interest fund account         |  |                    | 29,456  |                    |   | 129,195 | 
|Principal fund account        |  |                    | 32,259  |                    |   | 66,969  | 
|                              |  |                    |         |                    |   |         | 
|                              |  |                    |         |                    |   |         | 
|Total restricted assets       |  | $                  | 562,002 |                    | $ | 708,581 | 
|                              |  |                    |         |                    |   |         | 

|    |                                                             
|--- | ------------------------------------------------------------
|(6) | Property
 and Equipment                                     
|    |                                                             
|    | Property and equipment, at
 cost, consists of the following:

|                               |  |                    |            |                    |   |            |  
|------------------------------ |  | ------------------ | ---------- | ------------------ | - | ---------- | -
|                               |  | December 31,
 2008 |            | December 31,
 2007 |  
|                               |  |                    |            |                    |  
|                               |  |                    |            |                    |   |            |  
|Land                           |  | $                  | 238,162    |                    | $ | 238,162    |  
|Plant and improvements         |  |                    | 11,693,585 |                    |   | 11,325,438 |  
|Machinery and equipment        |  |                    | 9,083,707  |                    |   | 8,170,088  |  
|Transportation equipment       |  |                    | 560,257    |                    |   | 2,066,506  |  
|Office equipment               |  |                    | 178,991    |                    |   | 187,145    |  
|Software development           |  |                    | 1,420,811  |                    |   | 19,624     |  
|Construction in progress       |  |                    | 162,616    |                    |   | 191,714    |  
|                               |  |                    |            |                    |   |            |  
|                               |  |                    | 23,338,129 |                    |   | 22,198,677 |  
|Less accumulated
 depreciation |  |                    | (6,279,438 | )                  |   | (5,629,482 | )
|                               |  |                    |            |                    |   |            |  
|Property and equipment, net    |  | $                  | 17,058,691 |                    | $ | 16,569,195 |  
|                               |  |                    |            |                    |   |            |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | During the years ended
 December 31, 2008, 2007 and 2006, depreciation expense, including
 depreciation on assets classified as capital leases, was $1,598,108,
 $1,369,232, and $1,018,822, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(7) | Line of
 Credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | On December 31, 2007, the
 Company secured a $5.0 million secured bank line of credit, due on March 31,
 2010, providing for interest, floating at the banks prime rate minus 0.625
 percent (the prior revolving line of credit). The rate was adjustable
 quarterly depending on the Companys financial ratio of funded debt to
 EBITDA, as defined (earnings before interest, tax, depreciation and
 amortization). A change in the financial ratio would have caused a variation
 in the adjustment to the prime rate in the range between 1.000% and 0.375%.
 The line of credit was secured by accounts receivable, inventory and general
 intangibles, and subject to a debt service coverage ratio covenant of 1.25x
 to 1.0x, as defined, for which the Company was not in compliance as of June
 30, 2008, and the event of non-compliance was continuing through December 31,
 2008.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Company obtained a
 waiver of non-compliance with the agreement from its lender and subsequent to
 the execution of that waiver, availability under the prior revolving line of
 credit was tied to certain benchmarks of performance, such that the Companys
 availability was limited to $1.0 million through December 31, 2008. The
 interest rate on the prior revolving line of credit was the prime rate plus
 1.0 percent. There were short-term borrowings under the prior line of credit
 of $1.0 million and zero at December 31, 2008 and December 31, 2007,
 respectively.                                                                                                                                                                                                                                                                                                        

33

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Subsequent to December 31,
 2008, the Company closed on an asset-based line of credit of up to $3.0
 million, secured by accounts receivable and inventories (the new revolving
 line of credit). The new revolving line of credit bears interest, floating
 at the Wall Street Journal Prime Rate plus 4.5 percent, and is subject to
 certain financial covenants, including minimum cash position and net income,
 measured on a monthly and quarterly basis, respectively. The new revolving
 line of credit matures on March 5, 2010. In connection with the new revolving
 line of credit, the Company issued 252,454 warrants to purchase common stock
 of the Company. The prior line of credit was retired with proceeds from the
 new revolving line of credit.                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(8) | Short-term
 Borrowings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The Company agreed to enter
 into a 10 percent non-secured promissory note on September 21, 2006 for a
 maximum of $1.0 million. The maturity date was the earlier of April 30, 2007,
 or the consummation of any initial public offering consummated before the
 maturity date. Borrowings under this note were $1.0 million at December 31,
 2007. This note was payable to the lead underwriter for the Companys initial
 public offering (see Note 12). Following the completion of the initial public
 offering, the Company entered into an agreement to extend the note to the
 earlier of June 30, 2008 or the closing of an equity financing in which the
 Company receives at least $4.0 million in gross proceeds. On January 24,
 2008, the borrowings and accrued interest were repaid.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(9) | Long-Term
 Debt and Capital Lease Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Long-term debt consists of
 the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                                                                                                    |  |                    |           |                    |   |            | 
|------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | ------------------ | - | ---------- | 
|                                                                                                                    |  | December 31,
 2008 |           | December 31,
 2007 |  
|                                                                                                                    |  |                    |           |                    |  
|                                                                                                                    |  |                    |           |                    |   |            | 
|6.75 - 7.10% Cleveland County Industrial Revenue Bonds secured by
 real property final payment due December 1, 2024 |  | $                  | 4,015,000 |                    | $ | 4,365,000  | 
|5.75 - 9.00% Real estate loans secured by real property final
 payments due July 22, 2009 and August 1, 2028        |  |                    | 3,383,671 |                    |   | 3,455,589  | 
|8.75% Equipment loan secured by manufacturing equipment final payment
 due March 3, 2011                            |  |                    | 1,396,674 |                    |   | 1,814,547  | 
|Various equipment and real estate loans with interest rates from 4.75
 - 9.56% and due dates from 2008 - 2021       |  |                    | 248,570   |                    |   | 376,036    | 
|                                                                                                                    |  |                    |           |                    |   |            | 
|                                                                                                                    |  |                    |           |                    |   |            | 
|Total long-term debt                                                                                                |  |                    | 9,043,915 |                    |   | 10,011,172 | 
|Less current portion                                                                                                |  |                    | 1,093,974 |                    |   | 865,062    | 
|                                                                                                                    |  |                    |           |                    |   |            | 
|Net long-term debt                                                                                                  |  | $                  | 7,949,941 |                    | $ | 9,146,110  | 
|                                                                                                                    |  |                    |           |                    |   |            | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Industrial Development
 Revenue Bonds issued by Cleveland County Industrial Authority contain certain
 financial covenants as follows:                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Debt Service Coverage Ratio: The Company is required to maintain a debt service coverage ratio of
 1.50x to 1.00. The ratio will be reported to the Trustee and notice given to
 Beneficial Owners quarterly for each of the previous four quarters. If the
 Debt Service coverage ratio reported for each of the previous four quarters
 is less than 1.50x to 1.00 the Company is required to retain a consultant. As
 of December 31, 2008, our earnings before

34

---



| |                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | interest, income tax,
 depreciation and amortization (EBITDA) is a negative number which causes our
 debt service coverage ratio to result in a negative number, and therefore is
 not a meaningful ratio.                                                                          
| |                                                                                                                                                                                                                                                                                     
| | Current Ratio: The Company
 is required to maintain a current ratio of 1.10x to 1.00 calculated as of the
 last day of each calendar quarter beginning after January 1, 2006. The actual
 current ratio as of December 31, 2008 is 0.63x to 1.00.                                   
| |                                                                                                                                                                                                                                                                                     
| | Debt to Equity Ratio: The Company is required to maintain a debt to equity ratio of not more than 4.00x
 to 1.00 calculated as of the last day of each calendar quarter beginning
 after January 1, 2006. The actual debt to equity ratio as of December 31,
 2008 is 1.12x to 1.00.
| |                                                                                                                                                                                                                                                                                     
| | Accounts Payable: The Company agrees that not more than 20 percent of its accounts payable shall be
 in excess of 75 days past due. The actual percentage as of December 31, 2008
 is 0.98 percent.                                                                                 
| |                                                                                                                                                                                                                                                                                     
| | Accounts Receivable: The Company agrees that not more than 20 percent of accounts receivable will be
 in excess of 90 days past due. The actual percentage as of December 31, 2008
 is 1.44 percent.                                                                                
| |                                                                                                                                                                                                                                                                                     
| | Capital lease obligations
 consist of the following:                                                                                                                                                                                                                                

|                               |  |                    |         |                    |   |         | 
|------------------------------ |  | ------------------ | ------- | ------------------ | - | ------- | 
|                               |  | December 31,
 2008 |         | December 31,
 2007 |  
|                               |  |                    |         |                    |  
|                               |  |                    |         |                    |  
|8.95 - 9.19% Equipment
 leases |  | $                  | 297,429 |                    | $ | 482,302 | 
|8.62% Equipment lease          |  |                    | 722     |                    |   | 4,124   | 
|                               |  |                    |         |                    |   |         | 
|                               |  |                    | 298,151 |                    |   | 486,426 | 
|Less current portion           |  |                    | 203,672 |                    |   | 189,364 | 
|                               |  |                    |         |                    |   |         | 
|Net long-term debt             |  | $                  | 94,479  |                    | $ | 297,062 | 
|                               |  |                    |         |                    |   |         | 

| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | Annual
 Debt Service Requirements                                                                                                             
| |                                                                                                                                               
| | The annual principal
 payment requirements to maturity, for long-term debt and capital lease
 obligations at December 31, 2008 are as follows:

|                                            |   |                |           |                            |         |         |   |           |           | 
|------------------------------------------- | - | -------------- | --------- | -------------------------- | ------- | ------- | - | --------- | --------- | 
|Year Ending
 December 31,                   |   | Long-Term Debt |           | Capital Lease
 Obligations |         | Total   |  
|                                            |   |                |           |                            |         |         |  
|2009                                        |   | $              | 1,093,974 |                            | $       | 203,672 |   | $         | 1,297,646 | 
|2010                                        |   |                | 960,171   |                            |         | 94,479  |   |           | 1,054,650 | 
|2011                                        |   |                | 1,053,021 |                            |         |        |   |           | 1,053,021 | 
|2012                                        |   |                | 539,789   |                            |         |        |   |           | 539,789   | 
|2013                                        |   |                | 570,760   |                            |         |        |   |           | 570,760   | 
|Thereafter                                  |   |                | 4,826,200 |                            |         |        |   |           | 4,826,200 | 
|                                            |   |                |           |                            |         |         |   |           |           | 
|Principal
 outstanding at December 31, 2008 | $ | 9,043,915      |           | $                          | 298,151 |         | $ | 9,342,066 |          
|                                            |   |                |           |                            |         |         |   |           |          

|     |                                                                                                                                                                                                                                                                                                                      
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | During the years ended
 December 31, 2008, 2007 and 2006, total interest costs were $833,008,
 $2,071,903 and $1,616,980, respectively. The amounts of interest costs
 capitalized to construction projects during the years ended December 31, 2008,
    2007 and 2006 were $0, $106,988 and $229,410, respectively.
|     |                                                                                                                                                                                                                                                                                                                      
|(10) | Accrued
 Liabilities                                                                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                      
|     | A summary of accrued
 liabilities follows:                                                                                                                                                                                                                                                                           

35

---



|                          |  |                    |           |                    |   |           | 
|------------------------- |  | ------------------ | --------- | ------------------ | - | --------- | 
|                          |  | December 31,
 2008 |           | December 31,
 2007 |  
|                          |  |                    |           |                    |  
|                          |  |                    |           |                    |   |           | 
|Rebates and commissions   |  | $                  | 1,122,673 |                    | $ | 939,242   | 
|Interest expense          |  |                    | 88,652    |                    |   | 228,199   | 
|Compensation              |  |                    | 195,071   |                    |   | 309,261   | 
|Workers compensation     |  |                    | 283,566   |                    |   | 194,192   | 
|Payroll taxes             |  |                    |          |                    |   | 56,452    | 
|Promotions and incentives |  |                    | 154,113   |                    |   | 131,218   | 
|Property taxes            |  |                    | 5,977     |                    |   | 23,474    | 
|Other                     |  |                    | 653       |                    |   | 7,308     | 
|                          |  |                    |           |                    |   |           | 
|Total accrued liabilities |  | $                  | 1,850,705 |                    | $ | 1,889,346 | 
|                          |  |                    |           |                    |   |           | 

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | Intangible
 Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | The Company holds an
 intangible asset, a customer list acquired by the Company in the amount of
 $154,210. The Company began amortizing the asset to expense over a period of
 five years beginning July 1, 2007, resulting in accumulated amortization
 expense of $46,272 and a net carrying amount at December 31, 2008 of
 $107,938.                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(12) | Initial
 Public Offering                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | On July 3, 2007, the
 Company completed an initial public offering of its shares. The offering
 consisted of 2.15 million units, with each unit consisting of one share of
 common stock, one Class A warrant and one Class B warrant. The units were
 priced at $6.50 each in the offering.                                                                                                                                                                                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | Class A warrants entitle
 the holder to buy one common share at $9.75 a share. The Class B warrants
 entitle holders to buy one share at $13 a share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | The Class A and Class B
 warrants are exercisable at any time after they become separately tradable.
 The Company may redeem some or all of the warrants commencing six months
 after the initial public offering, after they become separately tradable, at
 a price of $0.25 per warrant, on 30 days notice to the holders. On July 27,
 2007, the units separated into common stock and warrants and the stock and
 each warrant commenced trading, individually, on that date, on the Nasdaq
 Capital Market under the symbols: FOOD for the common stock, FOODW for the
 Class A warrants and FOODZ for the Class B warrants. The Units ceased to
 trade on that date.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | The Company may redeem the
 Class B warrants only if its gross revenue, for any period of twelve months
 preceding the notice is equal to or greater than $100 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | The Class A and Class B
 warrants expire on June 27, 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | A portion of the proceeds
 from the initial public offering were used to (a) acquire the net assets of
 Allisons for $1.5 million in cash and a deferred payment of $1.0 million
 (see Note 21), (b) repay a short-term borrowing of $2.0 million which was
 used to complete the extension of our existing facility, and (c) repay our
 bank line of credit of $2.7 million. The remainder of the proceeds were used
 to supplement our working capital and for general corporate purposes.                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(13) | Income
 Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | Income tax expense
 (benefit) for the years ended December 31, 2008, 2007 and 2006, consist of
 the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

36

---



|                                   |  |      |            |      |   |          |   |   |          |  
|---------------------------------- |  | ---- | ---------- | ---- | - | -------- | - | - | -------- | -
|                                   |  | 2008 |            | 2007 |   | 2006     |  
|                                   |  |      |            |      |   |          |  
|                                  
|Current:                           |  |      |            |      |   |          |   |   |          |  
|Federal                            |  | $    |           |      | $ |         |   | $ |         |  
|State                              |  |      |           |      |   |         |   |   |         |  
|                                   |  |      |            |      |   |          |   |   |          |  
|                                   |  |      |           |      |   |         |   |   |         |  
|                                   |  |      |            |      |   |          |   |   |          |  
|Deferred:                          |  |      |            |      |   |          |   |   |          |  
|Federal                            |  |      | (1,948,218 | )    |   | (195,752 | ) |   | (303,323 | )
|State                              |  |      | (229,292   | )    |   | (10,869  | ) |   | (4,320   | )
|                                   |  |      |            |      |   |          |   |   |          |  
|                                   |  |      | (2,177,510 | )    |   | (206,621 | ) |   | (307,643 | )
|                                   |  |      |            |      |   |          |   |   |          |  
|Total income tax expense (benefit) |  | $    | (2,177,510 | )    | $ | (206,621 | ) | $ | (307,643 | )
|                                   |  |      |            |      |   |          |   |   |          |  

Deferred
tax assets (liabilities) are as follows:

|                                                |  |                    |           |                    |   |          |  
|----------------------------------------------- |  | ------------------ | --------- | ------------------ | - | -------- | -
|                                                |  | December 31,
 2008 |           | December 31,
 2007 |  
|                                                |  |                    |           |                    |  
|                                                |  |                    |           |                    |   |          |  
|Net operating loss
 carryforward                |  | $                  | 3,037,028 |                    | $ | 802,874  |  
|Depreciation                                    |  |                    | (759,901  | )                  |   | (497,248 | )
|Deferred gain on sale of
 assets                |  |                    | 30,198    |                    |   |         |  
|Inventory capitalization                        |  |                    | 54,789    |                    |   |         |  
|Reserve for worker
 compensation expense        |  |                    | 107,755   |                    |   |         |  
|Allowance for credit losses                     |  |                    | 53,531    |                    |   | 40,264   |  
|Oklahoma job and investment
 credits            |  |                    | 866,310   |                    |   | 711,932  |  
|Allowance for state job and
 investment credits |  |                    | (778,743  | )                  |   | (624,365 | )
|                                                |  |                    |           |                    |   |          |  
|Net deferred tax asset                          |  | $                  | 2,610,967 |                    | $ | 433,457  |  
|                                                |  |                    |           |                    |   |          |  
|                                                |  |                    |           |                    |   |          |  
|Current portion                                 |  | $                  | 310,266   |                    | $ | 40,264   |  
|Non-current portion                             |  |                    | 2,300,701 |                    |   | 393,193  |  
|                                                |  |                    |           |                    |   |          |  
|                                                |  | $                  | 2,610,967 |                    | $ | 433,457  |  
|                                                |  |                    |           |                    |   |          |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In assessing the
 realizability of the net deferred tax assets, management considers whether it
 is more likely than not that some or all of the deferred tax assets will not
 be realized. The ultimate realization of deferred tax assets is dependent
 upon either the generation of future taxable income during the periods in
 which those temporary differences become deductible or the carryback of
 losses to recover income taxes previously paid during the carryback period.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Company is not
 currently subject to any specific audit by any federal, state or local taxing
 authority. There are no tax positions previously taken which could give rise
 to uncertainty, and therefore there are no calculations or classifications of
 interest, penalties or effects on income tax rates related to such
 uncertainties. The Company has taken the position that the acquistion of
 Allisons is a non-taxable transaction.                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | As of December 31, 2008,
 the Company has a net operating loss carryforward of $8.0 million,
 representing a tax asset of $3.0 million which, if unused, will commence
 expiring in 2023 and state new jobs/investment credit carryforwards totaling
 $867,000 of which the Company has elected to provide a realizability
 allowance of $779,000, resulting in net carrying amount of $88,000. If
 unused, the credits will commence expiring on December 31, 2021.                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Actual income tax expenses
 differ from expected income tax, computed by applying the U.S. Federal
 corporate tax rate of 34 percent to earnings from operations before income
 taxes, as follows:                                                                                                                                                                                                                                                                                     

37

---



|                                                                        |  |      |            |      |   |          |   |   |          |  
|----------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | -------- | - | - | -------- | -
|Income Tax Expense (Benefit)                                           
|                                                                       
|                                                                        |  | 2008 |            | 2007 |   | 2006     |  
|                                                                        |  |      |            |      |   |          |  
|                                                                        |  |      |            |      |   |          |   |   |          |  
|Computed expected income
 taxes                                       |  | $    | (1,883,817 | )    | $ | (378,317 | ) | $ | (514,131 | )
|State income taxes, net of
 federal income tax                          |  |      | (344,698   | )    |   | (66,774  | ) |   | (12,713  | )
|Permanent difference due
 to amortization of equity transactions        |  |      |           |      |   | 191,250  |   |   | 191,250  |  
|Effect of consolidation of
 variable interest entity                    |  |      |           |      |   | 35,050   |   |   | (3,428   | )
|Difference in taxable gain
 and book gain on sale of assets             |  |      | 51,005     |      |   |         |   |   |         |  
|Utilization of net
 operating loss carryforwards against current income |  |      |           |      |   |         |   |   |         |  
|State new jobs/investment
 credits                                      |  |      |           |      |   | 12,170   |   |   | 31,379   |  
|                                                                        |  |      |            |      |   |          |   |   |          |  
|                                                                        |  | $    | (2,177,510 | )    | $ | (206,621 | ) | $ | (307,643 | )
|                                                                        |  |      |            |      |   |          |   |   |          |  

|     |                                                                                                                                                                                                                                                                                                                                                                                                                       
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(14) | Operating
 Leases                                                                                                                                                                                                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                       
|     | The Company has
 noncancelable long-term operating leases for certain distribution equipment
 with various expiration dates, one lease for refrigerated warehouse space and
 one lease for office equipment. The equipment leases require the Company to
 pay a base rate plus specific mileage amounts. Future minimum annual lease
 payments for these long-term leases for the next five years ending December
 31,

|     |  |   |           | 
|---- |  | - | --------- | 
|2009 |  | $ | 591,804   | 
|2010 |  |   | 448,960   | 
|2011 |  |   | 284,680   | 
|2012 |  |   | 215,004   | 
|2013 |  |   | 59,913    | 
|     |  |   |           | 
|     |  | $ | 1,600,361 | 
|     |  |   |           | 

38

---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(15) | Employee Benefit Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     | In 2002, the
 Company adopted a Flexible 401(k) plan covering all full-time employees with
 a minimum of one year of service. The plan contained a provision for the
 Company to contribute an amount equal to 25 percent of the employees
 elective deferral rate, up to a maximum of 4 percent of the employees
 compensation. The Companys contributions to the plan during the years ended
 December 31, 2008, 2007 and 2006 were $6,568, $12,809 and $6,537,
 respectively. The Company terminated the 401(k) plan effective December 31,
 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(16) | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     | In August
 2006, the Company adopted the 2006 Equity Incentive Plan (the Plan)
 providing for potential awards of up to 1,000,000 options to purchase shares
 of common stock in the Company. On November 26, 2008, the Compensation
 Committee of the Board of Directors of the Company approved a proposal by
 management to issue stock options under the Plan to certain employees,
 directors and consultants of the Company or a Subsidiary. Except as noted
 below, options shall have a 10-year term, and shall vest at 25% per year,
 commencing on the first anniversary of the grant date. The grant date was
 November 26, 2008, and the exercise prices are equal to the closing market
 price on November 25, 2008 ($0.69), except for owners of 10% or more of the
 total shares of the Company. Exercise prices for the 10% and greater owners
 are 110% of the closing market price on November 25, 2008 ($0.76) and the
 options (i) have term of five (5) years and (ii) vest at the rate of 25% per
 year. In all cases, the options shall immediately vest upon a Change in
 Control of the Company, as defined in the Plan. All options granted to
 employees are intended to qualify as Incentive Stock Options, as defined by
 Section 422 of the Internal Revenue Code of 1986, as amended, and the stock
 options granted to non-employee directors and consultants to the Company or a
 Subsidiary will be Nonqualified Stock Options as provided for in the Plan. The
 Company uses the Black-Scholes method of valuing the options and charges
 amounts to earnings using the straight-line method over the vesting period. The
 Company charged $7,500 against earnings during the year ended December 31,
 2008, leaving a total of $346,200 of unrecognized expense in conection with
 the issuance of the stock options. The assumptions used to value the options
 and the options granted to the owners of 10% or more of the total shares of
 the Company are as follows:

|                                                                                                            |  |  |        |   
|----------------------------------------------------------------------------------------------------------- |  |  | ------ | --
|Expected volatility                                                                                         |  |  | 118.47 | % 
|                                                                                                            |  |  |        |   
|Expected term (months)                                                                                      |  |  | 75.04, |   
|except for owners of 10% or more of the
 Companys shares, for which the expected life assumption is 45.02  |  |  |        |   
|                                                                                                            |  |  |        |   
|Expected dividend yield                                                                                     |  |  | 0.00   | % 
|                                                                                                            |  |  |        |   
|Risk Free Rate                                                                                              |  |  | 2.43   | %,
|except for owners of 10% or more of the
 Companys shares, for which the risk free rate assumption is 1.38% |  |  |        |   

A summary of
option activity under the Plan as of December 31, 2008 and changes during the
year then ended is as follows:

|                                   |  |        |         |                                    |   |                                |  |   |      | 
|---------------------------------- |  | ------ | ------- | ---------------------------------- | - | ------------------------------ |  | - | ---- | 
|Options                            |  | Shares |         | Weighted
 Average
 Exercise
 Price |   | Weighted
 Average
 Fair
 Value | 
|                                   |  |        |         |                                    |   |                                | 
|                                   |  |        |         |                                    |   |                                |  |   |      | 
|Outstanding
 at January 1, 2008    |  |        |        |                                    | $ |                               |  | $ |     | 
|                                   |  |        |         |                                    |   |                                |  |   |      | 
|Granted                            |  |        | 605,000 |                                    |   | 0.70                           |  |   | 0.58 | 
|                                   |  |        |         |                                    |   |                                |  |   |      | 
|Vested                             |  |        |        |                                    |   |                               |  |   |     | 
|                                   |  |        |         |                                    |   |                                |  |   |      | 
|Exercised                          |  |        |        |                                    |   |                               |  |   |     | 
|                                   |  |        |         |                                    |   |                                |  |   |      | 
|Forfeited
 or expired              |  |        |        |                                    |   |                               |  |   |     | 
|                                   |  |        |         |                                    |   |                                |  |   |      | 
|                                   |  |        |         |                                    |   |                                |  |   |      | 
|Outstanding
 at December 31, 2008  |  |        | 605,000 |                                    | $ | 0.70                           |  | $ | 0.58 | 
|                                   |  |        |         |                                    |   |                                |  |   |      | 
|                                   |  |        |         |                                    |   |                                |  |   |      | 
|Excercisable
 at December 31, 2008 |  |        |        |                                    | $ |                               |  | $ |     | 

39

---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(17) | Major Customers                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | The Company
 has supply arrangements with two certain distributors, representing 12
 percent and 10 percent of its gross revenues. Both distributors are composed
 of numerous discrete purchasing units. No individual purchasing unit of either
 distributor represents greater than 4 percent of gross revenues.                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(18) | Related Party Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     | On June 30,
 2007, the Company acquired the net assets of Allisons. Prior to this
 acquisition, the Company provided a discounted price for products sold to
 Allisons for use as ingredients in Allisons products. In managements
 opinion, all other transactions between the companies have been at fair
 value. During the six months ended June 30, 2007 and the year ended December
 31, 2006, the Companys sales, including freight services, to Allisons and
 purchases from Allisons were as follows:

|                                |  |                                   |         |                                 |   |         | 
|------------------------------- |  | --------------------------------- | ------- | ------------------------------- | - | ------- | 
|                                |  | Six months 
 ended June 30,
 2007 |         | Year ended 
 December 31,
 2006 |  
|                                |  |                                   |         |                                 |   |         | 
|Sales of product to Allisons   |  | $                                 | 491,739 |                                 | $ | 820,602 | 
|Freight revenue from
 Allisons |  |                                   | 207,634 |                                 |   | 541,618 | 
|Purchases from Allisons        |  |                                   | 285,403 |                                 |   | 603,211 | 

Prior to the
acquisition, the Company leased a portion of its facilities to Allisons on an
annual lease agreement. The Company and Allisons shared utilities, sales and
administration staff, and other facility expenses. Allisons reimbursed the
Company for its portion of the shared expenses through periodic reimbursement.
A summary of the shared expenses for the six months ended June 30, 2007 and
year ended December 31, 2006 are as follows:

|          |  |                                   |         |                                 |   |         | 
|--------- |  | --------------------------------- | ------- | ------------------------------- | - | ------- | 
|          |  | Six months 
 ended June 30,
 2007 |         | Year ended 
 December 31,
 2006 |  
|          |  |                                   |         |                                 |  
|Rents     |  | $                                 | 219,805 |                                 | $ | 339,222 | 
|Utilities |  |                                   | 79,220  |                                 |   | 239,700 | 
|Salaries  |  |                                   | 86,812  |                                 |   | 207,689 | 

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(19) | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     | The Company
 and its subsidiaries are subject to legal proceedings and claims which arise
 in the ordinary course of business. Although occasional adverse decisions or
 settlements may occur, the Company is not aware of any proceeding at December
 31, 2008, which is likley to have a material adverse effect on its
 consolidated financial position, results of operations or liquidity.                                                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(20) | Cimarron Holdings, L.L.C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     | The Companys
 current chief operating officer and a former member of management each have a
 50 percent ownership in Cimarron Holdings, LLC. (Cimarron). Cimarron
 previously owned an airplane that was used by Company management. The Company
 had not guaranteed the obligations of Cimarron, but was making the debt
 service payments for Cimarron, as well as all of the costs of maintenance and
 operations of the airplane. The airplane was sold on December 3, 2007.The Companys consolidated financial statements for the years ended 2007 and 2006
 included the financial statements of Cimarron. The consolidation of Cimarron
 increased the Companys consolidated total assets and liabilities at December
 31, 2007 as follows:

40

---



|                  |  |                    |        | 
|----------------- |  | ------------------ | ------ | 
|                  |  | December 31,
 2007 |       
|                  |  |                    |        | 
|Total assets      |  | $                  | 85,167 | 
|Total liabilities |  |                    | 5,000  | 
|                  |  |                    |        | 

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(21) | Acquisition of the Net Assets of Allisons                                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|     | On June 30,
 2007, the Company acquired the net assets of Allisons for $2,500,000, from
 Herbert Grimes, our Chairman and Chief Executive Officer, Mark Vaughan, our
 President and Chief Operating Officer and Stan Gustas, our former Chief
 Financial Officer. The net assets of Allisons were acquired to increase our
 productive capacity for refrigerated prepared salads, increase our
 utilization of refrigerated delivery capacity and broaden our product line.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|     | Notes
 payable were issued to Mr. Grimes and Mr. Gustas for $1.0 million of the
 purchase price, bearing interest at 10 percent per annum. On June 30, 2008,
 the notes to Mr. Gustas were retired and a new note was issued to to Mr.
 Grimes in the principal amount of $802,500, bearing interest at 10%, and
 maturing as follows:                                                                                                                                       

|                   |  |               |         | 
|------------------ |  | ------------- | ------- | 
|Maturity Date      |  | Principal Due |        
|                   |  |               |         | 
|August 12,
 2008   |  | $             | 150,000 | 
|                   |  |               |         | 
|November 11,
 2008 |  |               | 150,000 | 
|                   |  |               |         | 
|March 17,
 2009    |  |               | 200,000 | 
|                   |  |               |         | 
|May 12, 2009       |  |               | 150,000 | 
|                   |  |               |         | 
|June 30,
 2009     |  |               | 152,500 | 

| |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Mr. Grimes
 has the option of deferring any of the principal payments on the note and,
 has deferred each payment through the date hereof, and anticipates deferring
 subsequent payments until such time as the Company believes that it has adequate
 liquidity and capital resources to repay all or a portion of the
 indebtedness. The notes are subordinated to all other indebtedness of the
 company.
| |                                                                                                                                                                                                                                                                                                                                                                                                              
| | The
 acquisition of the net assets of Allisons was accounted for as a purchase
 and, accordingly, all assets and liabilities have been stated at their fair
 values at the date of the acquisition and are included in the accompanying
 consolidated balance sheet as of December 31, 2008 and 2007.                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                              
| | The
 following table summarizes the estimated fair values of the assets acquired
 and liabilities assumed at the date of acquisition                                                                                                                                                                                                                                                                         

|                                          |  |   |            |  
|----------------------------------------- |  | - | ---------- | -
|Current assets                            |  | $ | 4,418,036  |  
|Property and equipment                    |  |   | 3,354,543  |  
|Intangible assets                         |  |   | 872,569    |  
|                                          |  |   |           
|Total assets acquired                     |  |   | 8,645,148  |  
|                                          |  |   |           
|Current liabilities                       |  |   | (3,307,786 | )
|Accounts payable - related
 party         |  |   | (354,328   | )
|Long term liabilities                     |  |   | (1,856,254 | )
|Amounts payable to former
 owners of Wild |  |   | (626,780   | )
|                                          |  |   |           
|Total liabilities assumed                 |  |   | (6,145,148 | )
|                                          |  |   |           
|Net assets acquired                       |  | $ | 2,500,000  |  
|                                          |  |   |           

41

---



| |                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Of the
 $872,569 of intangible assets, substantially all of the amount represents
 customer relationships, which are being amortized over a five-year period. The
 following table summarizes the statements of operations of Allisons for the
 six month period ended June 30, 2007 and the year ended December 31, 2006,
 respectively:

|                                             |  |                                     |            |                                   |   |            | 
|-------------------------------------------- |  | ----------------------------------- | ---------- | --------------------------------- | - | ---------- | 
|                                             |  | Six Months 
 Ended 
 June 30,
 2007 |            | Year 
 Ended 
 December 31,
 2006 |  
|                                             |  |                                     |            |                                   |  
|                                             |  |                                     |            |                                   |   |            | 
|Net sales                                    |  | $                                   | 13,232,939 |                                   | $ | 20,031,808 | 
|Gross profit                                 |  |                                     | 2,390,135  |                                   |   | 4,728,911  | 
|Selling general and
 administrative expenses |  |                                     | 1,462,715  |                                   |   | 3,475,740  | 
|Operating income                             |  |                                     | 927,420    |                                   |   | 1,253,171  | 
|Interest expense                             |  |                                     | 75,948     |                                   |   | 83,736     | 
|Net income                                   |  |                                     | 851,472    |                                   |   | 1,169,435  | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The results
 of operations prior to acquisition of the net assets of Allisons have not
 been included in the primary financial statements for the period of January
 1, 2007 thru June 30, 2007, as incorporated in the statements of operations
 for the year ended December 31, 2007 or the year ended December 31, 2006,
 since the transaction was consummated as of the close of business on June 30,
 2007.
| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
 following Unaudited Proforma Condensed Consolidated Statements of Operations
 for the year ended December 31, 2007 and 2006 give effect to the acquisition
 of the net assets of Allisons as if it had occurred on or before January 1,
 2006:                                                                                                                                                              

42

---



Vaughan Foods, Inc. and Allisons Gourmet
Kitchens, LP 
Unaudited Proforma Condensed Consolidated Statements of Operations 
Year Ended December 31, 2007

|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|------------------------------------------------------- |  | -------------------- | ---------- | --------------------- | - | ------------------------- | - | -- | ----------- | --------------------------- | -- |  | - | ----------- | -
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |   
|                                                        |  | Vaughan 
 Historical |            | Allisons 
 Historical |   | Acquisition 
 Adjustments |   |    |             | ProForma 
 Post Acquisition |   
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |   
|                                                        |  |                      |            |                       |   |                           |   |    | (unaudited) |                             |    |  |   | (unaudited) |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|Net sales                                               |  | $                    | 67,173,174 |                       | $ | 13,232,939                |   | ($ | 984,776     | )                           | A1 |  | $ | 79,421,337  |  
|Cost of sales                                           |  |                      | 60,491,310 |                       |   | 10,842,804                |   |    | (1,204,581  | )                           | A2 |  |   | 70,129,533  |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|Gross profit                                            |  |                      | 6,681,864  |                       |   | 2,390,135                 |   |    | 219,805     |                             |    |  |   | 9,291,804   |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|Selling, general and administrative expenses            |  |                      | 6,212,845  |                       |   | 1,462,715                 |   |    | 15,421      |                             | A3 |  |   | 7,690,981   |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|Operating income                                        |  |                      | 469,019    |                       |   | 927,420                   |   |    | 204,384     |                             |    |  |   | 1,600,823   |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|Rent income                                             |  |                      | 219,805    |                       |   |                          |   |    | (219,805    | )                           | A4 |  |   |            |  
|Interest expense                                        |  |                      | (2,071,903 | )                     |   | (75,948                   | ) |    | (50,000     | )                           | A5 |  |   | (2,197,851  | )
|Loss on sale of asset                                   |  |                      | 101,839    |                       |   |                          |   |    |            |                             |    |  |   | 101,839     |  
|Interest income                                         |  |                      | 168,543    |                       |   |                          |   |    |            |                             |    |  |   | 168,543     |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|Other income and expense, net                           |  |                      | (1,581,716 | )                     |   | (75,948                   | ) |    | (269,805    | )                           |    |  |   | (1,927,469  | )
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|Income (Loss) before income taxes                       |  |                      | (1,112,697 | )                     |   | 851,472                   |   |    | (65,421     | )                           |    |  |   | (326,646    | )
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|Income tax expense (benefit)                            |  |                      | (206,621   | )                     |   |                          |   |    | 82,495      |                             | A6 |  |   | (124,126    | )
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|Net income (loss)                                       |  | $                    | (906,076   | )                     | $ | 851,472                   |   |    | (147,916    | )                           |    |  | $ | (202,520    | )
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|Weighted average shares outstanding - basic and
diluted |  |                      | 3,461,539  |                       |   |                           |   |    |             |                             |    |  |   | 3,461,539   |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  
|Net (loss) per share - basic and diluted                |  | $                    | (0.26      | )                     |   |                           |   |    |             |                             |    |  | $ | (0.06       | )
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |   |             |  

Notes to Unaudited Proforma Condensed
Consolidated Statements of Operations 
Year Ended December 31, 2007

|   |                                                                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A1 | Intercompany elimination of sales
 between Vaughan and Allison in the amount of $984,776.                                                                                                             
|   |                                                                                                                                                                                                       
|A2 | Intercompany elimination of sales
 between Vaughan and Allison, plus the rent paid by Allison to Vaughan in the
 amount of $984,776 and $219,805 respectively.                                        
|   |                                                                                                                                                                                                       
|A3 | Amortization of the customer list
 value of $15,421 (calculated by dividing the $154,210 acquisition valuation
 of customer list at the balance sheet date of June 30, 2007, amortized over 5
 years).
|   |                                                                                                                                                                                                       
|A4 | Elimination of intercompany rent
 income of $219,805 paid by Allison to Vaughan.                                                                                                                      
|   |                                                                                                                                                                                                       
|A5 | Proforma adjustment to reflect
 the interest expense at 10% on the deferred portion of purchase price of
 Allisons in the amount of $1,000,000.                                                      
|   |                                                                                                                                                                                                       
|A6 | Proforma adjustment to record tax
 provision on pretax income using expected rate of 38%.                                                                                                             

43

---



Vaughan Foods, Inc. and Allisons Gourmet
Kitchens, LP 
Unaudited Proforma Condensed Consolidated Statements of Operations 
Year Ended December 31, 2006

|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|------------------------------------------------------- |  | -------------------- | ---------- | --------------------- | - | ------------------------- | - | -- | ----------- | --------------------------- | -- |  | ----------- | ---------- | -
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |   
|                                                        |  | Vaughan 
 Historical |            | Allisons 
 Historical |   | Acquisition 
 Adjustments |   |    |             | ProForma 
 Post Acquisition |   
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |   
|                                                        |  |                      |            |                       |   |                           |   |    | (unaudited) |                             |    |  | (unaudited) |           
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|Net sales                                               |  | $                    | 51,277,371 |                       | $ | 20,031,808                |   | ($ | 1,965,431   | )                           | B1 |  | $           | 69,343,748 |  
|Cost of sales                                           |  |                      | 47,557,067 |                       |   | 16,442,086                |   |    | (2,304,653  | )                           | B2 |  |             | 61,694,500 |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|Gross profit                                            |  |                      | 3,720,304  |                       |   | 3,589,722                 |   |    | 339,222     |                             |    |  |             | 7,649,248  |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|Selling, general and administrative expenses            |  |                      | 4,005,029  |                       |   | 2,336,551                 |   |    | 30,842      |                             | B3 |  |             | 6,372,422  |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|Operating income                                        |  |                      | (284,725   | )                     |   | 1,253,171                 |   |    | 308,380     |                             |    |  |             | 1,276,826  |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|Rent income                                             |  |                      | 339,222    |                       |   |                          |   |    | (339,222    | )                           | B4 |  |             |           |  
|Interest expense                                        |  |                      | (1,616,980 | )                     |   | (83,736                   | ) |    | (100,000    | )                           | B5 |  |             | (1,800,716 | )
|Loss on sale of asset                                   |  |                      | (3,931     | )                     |   |                          |   |    |            |                             |    |  |             | (3,931     | )
|Interest income                                         |  |                      | 54,263     |                       |   |                          |   |    |            |                             |    |  |             | 54,263     |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|Other income and expense, net                           |  |                      | (1,227,426 | )                     |   | (83,736                   | ) |    | (439,222    | )                           |    |  |             | (1,750,384 | )
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|Income (Loss) before income taxes                       |  |                      | (1,512,151 | )                     |   | 1,169,435                 |   |    | (130,842    | )                           |    |  |             | (473,558   | )
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|Income tax expense (benefit)                            |  |                      | (307,643   | )                     |   |                          |   |    | 127,691     |                             | B6 |  |             | (179,952   | )
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|Net income (loss)                                       |  | $                    | (1,204,508 | )                     | $ | 1,169,435                 |   |    | (258,533    | )                           |    |  | $           | (293,606   | )
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|Weighted average shares outstanding - basic and
diluted |  |                      | 2,300,000  |                       |   |                           |   |    |             |                             |    |  |             | 2,300,000  |  
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  
|Net (loss) per share - basic and diluted                |  | $                    | (0.52      | )                     |   |                           |   |    |             |                             |    |  | $           | (0.13      | )
|                                                        |  |                      |            |                       |   |                           |   |    |             |                             |    |  |             |            |  

Notes to Unaudited Proforma Condensed
Consolidated Statements of Operations 
Year Ended December 31, 2006

|   |                                                                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B1 | Intercompany elimination of sales
 between Vaughan and Allison in the amount of $1,965,461.                                                                                                           
|   |                                                                                                                                                                                                       
|B2 | Intercompany elimination of sales
 between Vaughan and Allison, plus the rent paid by Allison to Vaughan in the
 amount of $1,965,461 and $339,222 respectively.                                      
|   |                                                                                                                                                                                                       
|B3 | Amortization of the customer list
 value of $30,842 (calculated by dividing the $154,210 acquisition valuation
 of customer list at the balance sheet date of June 30, 2007, amortized over 5
 years).
|   |                                                                                                                                                                                                       
|B4 | Elimination of intercompany rent
 income of $339,222 paid by Allison to Vaughan.                                                                                                                      
|   |                                                                                                                                                                                                       
|B5 | Proforma adjustment to reflect
 the interest expense at 10% on the deferred portion of purchase price of
 Allisons in the amount of $1,000,000.                                                      
|   |                                                                                                                                                                                                       
|B6 | Proforma adjustment to record tax
 provision on pretax income using expected rate of 38%.                                                                                                             

44

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|     |                                      
|---- | -------------------------------------
|(22) | Interim Financial Results (Unaudited)

|                                                 |  |       |        |        |   |        |   |        |        |   |   |        |  
|------------------------------------------------ |  | ----- | ------ | ------ | - | ------ | - | ------ | ------ | - | - | ------ | -
|(dollars in
 thousands, except share data)       |  | First |        | Second |   | Third  |   | Fourth |       
|                                                 |  |       |        |        |   |        |   |        |        |   |   |        |  
|                                                
|Fiscal year 2008:                                |  |       |        |        |   |        |   |        |        |   |   |        |  
|Net sales                                        |  | $     | 20,816 |        | $ | 24,424 |   | $      | 23,875 |   | $ | 22,737 |  
|Gross profit                                     |  |       | 2,045  |        |   | 1,806  |   |        | 946    |   |   | 277    |  
|Net income (loss)                                |  |       | (418   | )      |   | (546   | ) |        | (1,159 | ) |   | (1,240 | )
|Net income (loss) per share -
 basic and diluted |  | $     | (0.09  | )      | $ | (0.12  | ) | $      | (0.25  | ) | $ | (0.27  | )
|                                                 |  |       |        |        |   |        |   |        |        |   |   |        |  
|                                                 |  |       |        |        |   |        |   |        |        |   |   |        |  
|Fiscal year 2007:                                |  |       |        |        |   |        |   |        |        |   |   |        |  
|Net sales                                        |  | $     | 12,533 |        | $ | 13,946 |   | $      | 20,474 |   | $ | 20,220 |  
|Gross profit                                     |  |       | 1,387  |        |   | 1,087  |   |        | 2,597  |   |   | 1,611  |  
|Net income (loss)                                |  |       | (111   | )      |   | (447   | ) |        | 96     |   |   | (444   | )
|Net income (loss) per share -
 basic and diluted |  | $     | (0.05  | )      | $ | (0.19  | ) | $      | 0.02   |   | $ | (0.10  | )

Earnings per
share were computed independently for each of the periods presented; therefore,
the sum of the earnings per share amounts for the quarters may not equal the
total for the year.

ITEM 9  CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A - CONTROLS AND PROCEDURES

|    |                                                 
|--- | ------------------------------------------------
|(a) | Evaluation of disclosure controls and procedures

Our
management evaluated, with the participation of our Chief Executive Officer and
our Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Annual Report on Form
10-K. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that our disclosure controls and procedures
are effective to ensure that information we are required to disclose in reports
that we file or submit under the Securities Exchange Act of 1934 (i) is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and (ii) is accumulated
and communicated to our management, including our Chief Executive Officer and
our Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. Our disclosure controls and procedures are designed to provide
reasonable assurance that such information is accumulated and communicated to
our management.

45

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(b) Managements Report on Internal Control
over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities
Exchange Act of 1934, as amended, as a process designed by, or under the
supervision of, the companys principal executive and principal financial
officers and effected by the companys board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the companys assets that could have a material effect on
the financial statements.

Under
the supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an assessment of
the effectiveness of our internal control over financial reporting as of
December 31, 2008. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control  Integrated Framework.

Based
on our assessment using the criteria set forth by COSO in Internal Control 
Integrated Framework, management concluded that our internal control over
financial reporting was effective as of December 31, 2008.

Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of the
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

(c) Changes in internal control over
financial reporting

There
were no changes in our internal control over financial reporting that occurred
during the period covered by this report on Form 10-K that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

ITEM 9B  OTHER INFORMATION

None.

PART III

ITEM 10  DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers and Directors

Directors
are elected at our Annual Meeting and serve for one year terms until successors
are elected and qualified or until their earlier resignation or removal.
Executive officers are appointed by and serve at the pleasure of the Board of
Directors. There are no family relationships between any of the executive
officers and directors listed below. Information regarding our executive
officers and directors as of April 15, 2009 is set forth below.

|                  |  |     |  |                                                                                
|----------------- |  | --- |  | -------------------------------------------------------------------------------
|Name              |  | Age |  | Positions                                                                      
|                  |  |     |  |                                                                                
|Herbert B. Grimes |  | 62  |  | Chairman of the
 Board of Directors and Chief Executive Officer                
|Mark E. Vaughan   |  | 43  |  | Chief Operating
 Officer and Director                                          
|Gene P. Jones     |  | 57  |  | Chief Financial
 Officer, Secretary, Treasurer and Principal Accounting Officer
|Robert S. Dillon  |  | 53  |  | Independent
 Director                                                          
|Richard A. Kassar |  | 62  |  | Independent
 Director                                                          
|Laura J. Pensiero |  | 41  |  | Independent
 Director                                                          

46

---



Herbert
B. Grimes. Herb
Grimes has been our Chairman of the Board and Chief Executive Officer since
June 27, 2007. He has also served as President of Braxton Management
Corporation, the general partner of Allisons, and as such, as President and
Chief Executive of Allisons, since he co-founded Allisons in January 2003.
From 2002 until January 2003, he was a private investor. Before that, Mr.
Grimes served as Vice-President of Sales, Marketing, and Research and
Development for Orval Kent Holding Company from November 1996 until Orval Kent
was acquired by Sky Chefs, Inc. in 2002. From January 1996 until November 1996
Mr. Grimes was President of the Mrs. Crocketts Country Kitchens division of
Orval Kent. Before that, from 1982, when he co-founded Mrs. Crocketts Country
Kitchens, Inc. (formerly known as Mrs. Giles Country Kitchens, Inc.) he served
as its Vice President of Sales, Marketing and Research and Development until it
was acquired by Orval Kent in January 1996. Mr. Grimes has over 35 years
experience in the food processing industry, with the bulk of his expertise in
the refrigerated prepared salads business.

Mark E. Vaughan.Mark Vaughan served
as President, Chief
Executive Officer and a director of Vaughan from 1992 until June 27, 2007. On
June 27, 2007 he became President and Chief Operating Officer while remaining a
director. He has over 20 years of food processing experience and has directed
advances in quality control, food safety, purchasing and manufacturing
processes at Vaughan. Mr. Vaughan attended the University of Oklahoma.

Gene P. Jones. Mr.
Jones has served as our Secretary, Treasurer and Chief Financial Officer since
August 2007. In addition to this appointment, Mr. Jones retains a position he
has held since April 2006 as a partner of Tatum, LLC (Tatum), an organization
providing executive financial and information technology services to
businesses. Mr. Jones served the Company in his capacity as a Tatum partner,
beginning in May 2007, and was elected to his current position in August 2007.
Before his affiliation with Tatum, from November 2003 to March 2006, Mr. Jones
was Co-Founder, Secretary, Treasurer and Chief Financial Officer of Encore
Legal Solutions, Inc., a provider of litigation technology support services.
From February 2003 to November 2003, Mr. Jones was involved in raising capital
for the inception of Encore Legal Solutions, Inc. From February 2002 to May
2003, he served as an independent consultant in the restaurant, retailing,
construction and information technology service areas. During that time, he was
also Chief Financial Officer and Treasurer of Vital Link Business Systems,
Inc., a technology company serving the restaurant industry from October 2002 to
May 2003. Mr. Jones has served in senior financial capacities with a number of
public and private firms throughout his career. He began his career with the predecessor
to the international accounting firm of KPMG, achieving the position of senior
audit manager. His public accounting career spanned ten years.

Mr.
Jones holds a Master of Science in Business Administration from Indiana
University and a Bachelor of Science in Accounting from St. Josephs College.
He is a member of the American Institute of Certified Public Accountants, the
Texas Society of Certified Public Accountants and Financial Executives
International.

Robert S. Dillon.Robert
Dillon has served as Director since June 27, 2007. He has been a partner in the
certified public accounting firm of Dillon & Associates, P.C. since June,
1983. He has provided accounting and consulting services to Vaughan Foods since
1983 and to Allisons Gourmet Kitchens Limited Partnership since its formation
in 2003. He is a graduate of the University of Oklahoma and has been a member
of the Oklahoma Society of Certified Public Accountants since 1979.

Richard A. Kassar. Richard
Kassar has served as Director since June 27, 2007. He is Chief Executive
Officer of Fresh Pet Company, a manufacturer of fresh refrigerated pet food,
which he launched as a start-up in October 2006. From July 2006 to October 2006
he raised venture capital for Fresh Pet Company. Before that, from 2002 until
2006 Mr. Kassar was Senior Vice President and Chief Financial Officer of Meow
Mix. When Meow Mix was sold to Del Monte Corporation in May 2006, Mr. Kassar
remained in his position there until July 2006. From 2001 until 2002 he was a
consultant to venture capital businesses with respect to acquisitions of
consumer brands and service organizations. From 1999 to 2001 he was
Co-President and Chief Financial Officer of Global Household Brands, a
manufacturer of consumer household cleaning products. He was Senior Vice
President, Chief Operating Officer and Corporate Comptroller of Chock Full
ONuts Corporation from 1986 to 1999. Mr. Kassar is a director and audit
committee member of World Fuel, a New York Stock Exchange listed public company
whose principal business is supplying fuel to the marine and aviation industry,
and a director and chair of the audit committee of Velocity Express, a NASDAQ
listed public company whose principal business is providing same-day transportation
services. He is a graduate of Baruch College and is an inactive Certified
Public Accountant.

Laura J. Pensiero.Laura
Pensiero has served as Director since June 27, 2007. She has been the owner and
manager of Gigi Trattoria, Rhinebeck, New York since 2001. In 2006 she founded
and opened Gigi Market in Red Hook, New York, a year-round farmers market,
gourmet store bakery and catering site. Since 2005 she has also been a chef
consultant and member of Just Salad LLC, a chain of New York City salad bars
and restaurants. She has served as the nutrition consultant to the Strang
Cancer Prevention Center, New York, New York since 2005, and was the culinary
coordinator for the Memorial Sloan-Kettering Prevention and Wellness Program,
New York, New York, from 19992005. She continues to work with Strangs
nationwide Healthy Children, Healthy Futures initiative. From 1998 to 2004 she
was a consultant to the Culinary Institute of America, Hyde Park, New York.
Since 1992 she has also been the founder and operator of Chef4Life, a nutrition
and culinary consulting service promoting healthy eating. She is a co-author of
The Strang Cancer Prevention Center Cookbook (2004) and the author of numerous
articles on healthful diet and eating and Italian cuisine. She is a graduate of
the State University of New York, Plattsburgh (1989), majoring in

47

---



nutrition and
food service management, and of the Professional Culinary Arts Program of The
French Culinary Institute, New York, New York (1992).

Section 16(a) Beneficial Ownership Reporting Compliance

Section
16(a) of the Exchange Act requires our officers and directors, and persons who
own more than ten percent (10%) of a registered class of our equity securities
to file reports of ownership and changes in ownership with the SEC. Officers,
directors and greater than ten percent (10%) stockholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file. On
November 26, 2008, the Compensation Committee of the Board of Directors of
Vaughan Foods, Inc. approved the award of incentive stock options, of which our
officers and directors received options to purchase common stock. The
transactions were reported late on Form 4 for Herbert B. Grimes, Mark E.
Vaughan, Gene P. Jones, Robert S. Dillon and Laura J. Pensiero on December 4,
2008. Richard A. Kassars transaction was reported late on Form 4 on December
8, 2008. To the best of our knowledge, based solely on review of the copies of
such forms furnished to us or amendments thereto, or written representations
that no other forms were required, we believe that all other Section 16(a)
filing requirements applicable to its officers, directors and greater than ten
percent (10%) stockholders were complied with during 2008. With respect to any
of our former directors, officers, and ten percent (10%) stockholders, we do
not have any knowledge of any other known failures to comply with the filing
requirements of Section 16(a).

Code of Ethics

We
have adopted a code of ethics (as defined in Item 406 of Regulation S-K) that
applies to our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. We have posted the text of our code of ethics on our website,
www.vaughanfoods.com.

Audit Committee

We
have a separately-designated standing audit committee established by and among
the Board of Directors for the purpose of overseeing our accounting and
financial reporting processes and audits of our financial statements. The Audit
Committee is comprised of Ms. Laura Pensiero, Mr. Robert Dillon and Mr.
Richard Kassar. The Board has determined that Mr. Richard Kassar qualifies as
an audit committee financial expert, as that term is defined in Item
407(d)(5) of Regulation S-K.

ITEM 11  EXECUTIVE
COMPENSATION

The following
Summary Compensation Table sets forth all compensation earned, in all
capacities, during the fiscal years ended December 31, 2008 and 2007 by (i) all
individuals serving as our principal executive officer or acting in a similar
capacity during the last completed fiscal year, regardless of compensation
level, and (ii) our most highly compensated executive officers, other than the
principal executive officer, who were serving as executive officers at the end
of the last completed fiscal year, whose total compensation, as required to be
disclosed pursuant to Item 402(n)(2) of Regulation S-K, exceeded $100,000 (the
individuals falling within categories (i) and (ii) are collectively referred to
as the Named Executive Officers).

48

---



Summary Compensation Table

|                              |  |      |      |        |   |         |  |                      |        |                         |   |        |  |   |        |  |   |         | 
|----------------------------- |  | ---- | ---- | ------ | - | ------- |  | -------------------- | ------ | ----------------------- | - | ------ |  | - | ------ |  | - | ------- | 
|Name and
 Principal Position  |  | Year |      | Salary |   | Bonus   |  | Equity
 Compensation |        | All Other
 Compensation |   | Total  | 
|                              |  |      |      |        |   |         |  |                      |        |                         |   |        | 
|                              |  |      |      |        |   |         |  |                      |        |                         |   |        | 
|Herbert B. Grimes             |  |      | 2008 |        | $ | 320,400 |  |                      |        |                         | $ | 30,764 |  | $ |       |  | $ | 351,164 | 
|Chairman of the
 Board        |  |      | 2007 |        | $ | 271,224 |  | $                    | 42,946 |                         |   |       |  |   |       |  | $ | 314,170 | 
|of Directors and
 Chief       |  |      |      |        |   |         |  |                      |        |                         |   |        |  |   |        |  |   |         | 
|Executive Officer             |  |      |      |        |   |         |  |                      |        |                         |   |        |  |   |        |  |   |         | 
|                              |  |      |      |        |   |         |  |                      |        |                         |   |        |  |   |        |  |   |         | 
|Mark E. Vaughan               |  |      | 2008 |        |   | 260,000 |  |                      |       |                         |   | 28,200 |  |   |       |  | $ | 288,200 | 
|Chief Operating
 Officer      |  |      | 2007 |        |   | 239,261 |  |                      |       |                         |   |       |  |   |       |  | $ | 239,261 | 
|and Director                  |  |      |      |        |   |         |  |                      |        |                         |   |        |  |   |        |  |   |         | 
|                              |  |      |      |        |   |         |  |                      |        |                         |   |        |  |   |        |  |   |         | 
|Gene P. Jones                 |  |      | 2008 |        |   | 291,211 |  |                      |       |                         |   | 48,118 |  |   | 28,805 |  | $ | 368,134 | 
|Chief Financial
 Officer,     |  |      | 2007 |        |   | 134,523 |  |                      |       |                         |   |       |  |   | 93,000 |  | $ | 227,523 | 
|Secretary,
 Treasurer and     |  |      |      |        |   |         |  |                      |        |                         |   |        |  |   |        |  |   |         | 
|Principal
 Accounting Officer |  |      |      |        |   |         |  |                      |        |                         |   |        |  |   |        |  |   |         | 

The
Summary Compensation Table includes, in the amounts shown for Herbert B. Grimes
for 2007, compensatory payments consisting of management fees paid by Allisons
Gourmet Kitchens, LP (Allisons) prior to acquisition by the Company, to
Braxton Management, Inc., the general partner of Allisons prior to acquisition
by the Company. Mr. Grimes is the President of Braxton Management, Inc. The
table does not include distributions to the limited partners of Allisons in
respect to their partnership interests.

The
amounts listed as salary for 2007 for Mr. Jones are for a partial year. Mr.
Jones is a partner with Tatum, LLC (Tatum), an executive services firm. The
$93,000 listed as all other compensation for 2007 for Mr. Jones are amounts
paid to Tatum for services provided by Mr. Jones following acceptance of his
current position with the Company and recruiting fees prior to acceptance.

Pursuant
to an executive services agreement between Vaughan and Tatum for Mr. Jones
services, Vaughan was obligated to pay Mr. Jones a salary of $23,600 per month
and Tatum a resource fee of $5,900 per month from July 2007 through October
2007, at which time the agreement was amended to provide that Vaughan would
employ Mr. Jones as a long-term employee. In connection with the amendment to
the agreement, Vaughan paid to Tatum a one-time fee of $62,500. Additionally,
under the amendment, Vaughan will pay to Tatum a resource fee of $1,000 per
month during the term of the amended agreement. The amount listed for 2008
includes $12,000 of such resource fees paid to Tatum.

The
following Outstanding Equity Awards At Fiscal Year End Table sets forth all
outstanding equity awards as of December 31, 2008.

Outstanding Equity Awards At Fiscal Year
End

|                  |  |                                                                      |   |                                                                        |  |                                                                                                   |  |                         |        |                          |   |      |  |  |                   | 
|----------------- |  | -------------------------------------------------------------------- | - | ---------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ------------------------ | - | ---- |  |  | ----------------- | 
|Name              |  | Number of
 Securities
 Underlying
 Unexercised
 Options
 Exercisable |   | Number of
 Securities
 Underlying
 Unexercised
 Options
 Unexercisable |  | Equity
 Incentive
 Plan Awards
 Number of
 Securities
 Underlying
 Unexercised
 Unearned
 Options |  | Option
 Exercise
 Price |        | Option
 Expiration
 Date |  
|                  |  |                                                                      |   |                                                                        |  |                                                                                                   |  |                         |        |                          |  
|                  |  |                                                                      |   |                                                                        |  |                                                                                                   |  |                         |        |                          |  
|Herbert B. Grimes |  |                                                                      |  |                                                                        |  |                                                                                                  |  |                         | 60,000 |                          | $ | 0.76 |  |  | November 26, 2013 | 
|Mark E. Vaughan   |  |                                                                      |  |                                                                        |  |                                                                                                  |  |                         | 55,000 |                          | $ | 0.76 |  |  | November 26, 2013 | 
|Gene P. Jones     |  |                                                                      |  |                                                                        |  |                                                                                                  |  |                         | 80,000 |                          | $ | 0.69 |  |  | November 26, 2018 | 
|Robert S. Dillon  |  |                                                                      |  |                                                                        |  |                                                                                                  |  |                         | 10,000 |                          | $ | 0.69 |  |  | November 26, 2018 | 
|Richard A. Kassar |  |                                                                      |  |                                                                        |  |                                                                                                  |  |                         | 10,000 |                          | $ | 0.69 |  |  | November 26, 2018 | 
|Laura J. Pensiero |  |                                                                      |  |                                                                        |  |                                                                                                  |  |                         | 10,000 |                          | $ | 0.69 |  |  | November 26, 2018 | 

49

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Management Agreements

On
April 8, 2009, the Company entered into a management agreement with Herbert B.
Grimes, Chairman and Chief Executive Officer. The agreement does not have any
specific duration and shall continue in full force and effect unless and until
(i) the Mr. Grimes employment is terminated by either party in accordance with
certain provisions in the agreement. Under the agreement, Mr. Grimes shall be provided
an annual base salary and shall be eligible to participate in the Companys
management incentive plan, which can provide a bonus of up to 50 percent of
base salary, contingent on the achievement of certain Company financial
objectives, in summary, related to the achievement of certain goals related to
revenues, EBITDA and cash flow. The agreement would also provide up to one
years compensation in the event that Mr. Grimes is terminated without cause
(as defined), or resigns for good reason (as defined).

On
April 8, 2009, the Company entered into a management agreement with Mark E.
Vaughan, President and Chief Operating Officer. The agreement does not have any
specific duration and shall continue in full force and effect unless and until
(i) the Mr. Vaughans employment is terminated by either party in accordance
with certain provisions in the agreement. Under the agreement, Mr. Vaughan
shall be provided an annual base salary and shall be eligible to participate in
the Companys management incentive plan, which can provide a bonus of up to 50
percent of base salary, contingent on the achievement of certain Company
financial objectives, in summary, related to the achievement of certain goals
related to revenues, EBITDA and cash flow. The agreement would also provide up
to one years compensation in the event that Mr. Vaughan is terminated without
cause (as defined), or resigns for good reason (as defined).

On
April 8, 2009, the Company entered into a management agreement with Gene P. Jones,
Secretary, Treasurer and Chief Financial Officer. The agreement does not have
any specific duration and shall continue in full force and effect unless and
until (i) the Mr. Jones employment is terminated by either party in accordance
with certain provisions in the agreement. Under the agreement, Mr. Jones shall
be provided an annual base salary and shall be eligible to participate in the
Companys management incentive plan, which can provide a bonus of up to 50
percent of base salary, contingent on the achievement of certain Company
financial objectives, in summary, related to the achievement of certain goals
related to revenues, EBITDA and cash flow. The agreement would also provide up
to one years compensation in the event that Mr. Jones is terminated without
cause (as defined), or resigns for good reason (as defined).

The
following Director Compensation Table sets forth all compensation earned by
directors during the fiscal years ended December 31, 2007 and 2006.

Director Compensation

|                             |  |      |      |                              |   |                         |  |       |       |  |   |        | 
|---------------------------- |  | ---- | ---- | ---------------------------- | - | ----------------------- |  | ----- | ----- |  | - | ------ | 
|Name and
 Principal Position |  | Year |      | Fees Earned
 or Paid in Cash |   | All Other
 Compensation |  | Total |      
|                             |  |      |      |                              |   |                         |  |       |      
|                             |  |      |      |                              |   |                         |  |       |      
|Robert S. Dillon             |  |      | 2008 |                              | $ | 10,500                  |  | $     | 6,015 |  | $ | 16,515 | 
|                             |  |      | 2007 |                              |   | 7,250                   |  |       |      |  | $ | 7,250  | 
|                             |  |      |      |                              |   |                         |  |       |       |  |   |        | 
|Richard A. Kassar            |  |      | 2008 |                              |   | 15,500                  |  |       | 6,015 |  | $ | 21,515 | 
|                             |  |      | 2007 |                              |   | 9,750                   |  |       |      |  | $ | 9,750  | 
|                             |  |      |      |                              |   |                         |  |       |       |  |   |        | 
|Laura J. Pensiero            |  |      | 2008 |                              |   | 8,500                   |  |       | 6,015 |  | $ | 14,515 | 
|                             |  |      | 2007 |                              |   | 7,250                   |  |       |      |  | $ | 7,250  | 

Our
independent directors are paid an annual retainer fee of $5,000, a fee of $1,000
for each board meeting attended in person, a fee of $500 for participation in
each telephonic board meeting, a fee of $1,000 for each audit committee
meeting, a fee of $500 for each compensation committee meeting, a fee of $250
for each corporate governance committee meeting, our audit committee
chairperson is paid a $5,000 retainer fee.

ITEM 12  SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information.

The
following table summarizes information as of December 31, 2008 as to (i)
compensation plans under which our equity securities are authorized for
issuance and (ii) all other securities subject to contracts, options, warrants
and rights

50

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or authorized for future issuance
outside the plans. The shares authorized for future issuance are subject to
adjustment for changes in capitalization stock splits, stock dividends and
similar events.

Equity Compensation Plan Table

|                                                             |  |                                                                                                     |         |                                                                                    |   |                                                                                                                                                        |  |  |         | 
|------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------- | ------- | ---------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | ------- | 
|                                                             |  | Number of securities
 to be issued upon
 exercise of oustanding
 options, warrants
 and rights
 (a) |         | Weighted-average
 exercise price of
 oustanding options,
 warrants and rights
 (b) |   | Number of securities
 remaining available for
 future issuance under
 equity compensation
 plans (excluding
 securities reflected
 in column (a))
 (c) | 
|                                                             |  |                                                                                                     |         |                                                                                    |   |                                                                                                                                                        |  |  |         | 
|Equity Compensation Plans 
 Approved By Security Holders     |  |                                                                                                     | 605,000 |                                                                                    | $ | 0.71                                                                                                                                                   |  |  | 395,000 | 
|Equity Compensation Plans Not 
 Approved By Security Holders |  |                                                                                                     |        |                                                                                    | $ |                                                                                                                                                       |  |  |        | 
|                                                             |  |                                                                                                     |         |                                                                                    |   |                                                                                                                                                        |  |  |         | 
|                                                             |  |                                                                                                     | 605,000 |                                                                                    | $ | 0.71                                                                                                                                                   |  |  | 395,000 | 
|                                                             |  |                                                                                                     |         |                                                                                    |   |                                                                                                                                                        |  |  |         | 

Equity Incentive Plan

In
August 2006, before our initial public offering, our stockholders approved and
ratified a Vaughan Foods, Inc. Equity Incentive Plan, or the Plan, the
purpose of which is to attract and retain the personnel necessary for our
success. The Equity Incentive Plan gives our board of directors the ability to
provide incentives through grants of incentive and non-qualified stock options
to our employees, consultants and directors. A total of 1,000,000 shares of our
common stock were reserved for issuance under the plan. If an award expires or
terminates unexercised or is forfeited to us, the shares underlying the option
award become available for further awards under the plan.

The
purpose of the Plan is to provide incentives to employees, directors and
consultants whose performance will contribute to our long-term success and
growth, to strengthen Vaughans ability to attract and retain employees,
directors and consultants of high competence, to increase the identity of
interests of such people with those of its stockholders and to help build
loyalty to Vaughan through recognition and the opportunity for stock ownership.
The Compensation Committee of the Board administers the Plan and, except as
otherwise provided in the Plan, has complete authority and discretion to
determine the terms of awards.

The
following description of the Plan is a summary and is qualified in its entirety
by reference to the Plan.

Eligibility. Under the Plan, incentive stock
options may
be granted only to employees and non-qualified stock options may be granted to
employees, directors and consultants.

Term and Amendment of the Plan.Unless
terminated earlier, the Plan and will
expire in 2016. Our board may also amend the Plan, provided that no amendment
will be effective without approval of our stockholders if shareholder approval
is required to satisfy any applicable statutory or regulatory requirements.

Terms of Options. The
Plan permits the granting of both incentive stock options and nonqualified
stock options. Under the terms of the plan, the option price of both incentive
stock options and non-qualified stock options must be at least equal to 100% of
the fair market value of the shares on the date of grant. The maximum term of
each option is ten years. For any participant who owns shares possessing more
than 10% of the voting rights of Vaughans outstanding shares of Common Stock,
the exercise price of any incentive stock option must be at least equal to 110%
of the fair market value of the shares subject to such option on the date of
grant and the term of the option may not be longer than five years. Options
become exercisable at such time or times as the Compensation Committee may
determine at the time it grants options.

Federal Income Tax Consequences

Non-qualified Stock Options.The grant of
non-qualified stock options will
have no immediate tax consequences to the Company or the grantee. The exercise
of a non-qualified stock option will require an employee to include in his
gross income the amount by which the fair market value of the acquired shares
on the exercise date (or the date on which any substantial risk of forfeiture
lapses) exceeds the option price. Upon a subsequent sale or taxable exchange of
the shares acquired upon exercise of a non-qualified stock option, an employee
will recognize long or short-term capital gain or loss equal to the difference
between the amount realized on the sale and the tax basis of such shares.
Vaughan will be entitled (provided applicable withholding requirements are met)
to a deduction for Federal income tax purposes at the

51

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same time and in the same
amount as the employee is in receipt of income in connection with the exercise
of a non-qualified stock option.

Incentive Stock Options.The grant of an
incentive stock option will
have no immediate tax consequences to Vaughan or its employee. If the employee
exercises an incentive stock option and does not dispose of the acquired shares
within two years after the grant of the incentive stock option nor within one
year after the date of the transfer of such shares to him (a disqualifying
disposition), he will realize no compensation income and any gain or loss that
he realizes on a subsequent disposition of such shares will be treated as a
long-term capital gain or loss. For purposes of calculating the employees
alternative minimum taxable income, however, the option will be taxed as if it
were a non-qualified stock option.

Awards Under the Plan

On
November 26, 2008, the Compensation Committee of the Board of Directors of
Vaughan Foods, Inc. (Vaughan) approved the award of incentive stock options,
as defined by Section 422 of the Internal Revenue Code, to purchase 537,500
shares of Vaughans common stock, par value $0.001 per share (the Common
Stock), to a total of 29 employees, including an aggregate of 215,000 to
Vaughans Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer and Corporate Controller, pursuant to the Vaughan Foods, Inc. 2006
Equity Incentive Plan, as amended (the Plan). A total of 115,000 shares,
which are included in the 537,500 issued incentive stock options, were issued
to employees owning 10% or more of Vaughans Common Stock. Additionally, 37,500
non-qualified stock options were issued to consultants. On March 12, 2009,
14,120 inentive stock options were issued to Gene P. Jones on substantially the same terms as
the incentive stock options issued on November 26, 2008. Gene P. Jones
immediately executed an Allocation of Beneficial Interest Agreement to allocate
14,118 incentive stock options to Tatum, LLC, pursuant to an executive services
agreement between Vaughan and Tatum for Mr. Jones services.

The
Plan was duly adopted and approved by the stockholders of Vaughan at the Annual
Meeting of the stockholders of Vaughan held on August 7, 2008. In the case of
employees owning 10% or more of Vaughans Common Stock, the options have an
exercise price of $0.76 per share, or 110 percent of the fair market value of
Vaughans Common Stock on the date of grant, and represent in the aggregate
options to purchase 115,000 of shares of Vaughans Common Stock. For all other
employees and consultants, the options have an exercise price of $0.69 per
share, the fair market value of the Common Stock on the date of grant, and
represent options to purchase 460,000 shares of Vaughans Common Stock.

On
November 26, 2008, the Board of Directors of Vaughan also approved the award of
non-qualified stock options to its three non-employee directors pursuant to the
Plan. The options have an exercise price of $0.69 per share, the fair market
value of the Common Stock on the date of grant, and represent options to
purchase 30,000 shares of Vaughans Common Stock.

A
total of 1,000,000 shares of Vaughans Common Stock are issuable under the
Plan. All the above described options vest according to a four-year vesting
schedule, with 25 percent vesting on the one year anniversary of the option
grant date, and 25 percent on each subsequent anniversary of the option grant
date. The options vest immediately in the event of a Change in Control of
Vaughan, as defined in the Plan. All options granted to individuals owing 10
percent or more of the Common Stock of Vaughan expire within five years of the
option grant date, and all other options expire within 10 years of the option
grant date. The Plan is filed as Exhibit 10.3 to this Annual Report on Form
10-K for the year ended December 31, 2008. The form of the Incentive Stock
Option Agreement for employee incentive stock options issued under the Plan is
filed as Exhibit 10.17 to this Annual Report on Form 10-K. The form of the
Non-Employee Director Nonqualified Stock Option Agreement for nonqualified
stock options issued under the Plan is filed as Exhibit 10.18 to this Annual
Report on Form 10-K. The form of the Consultant Nonqualified Stock Option
Agreement for nonqualified stock options issued under the Plan is filed as
Exhibit 10.19 to this Annual Report on Form 10-K.

The
Company intends to file a registration statement on Form S-8 with the
Securities and Exchange Commission registering the Common Stock issuable under
the terms of the Plan before any options issued under the Plan are exercisable.

Security Ownership of Certain Beneficial Owners and
Management

The
following table sets forth information known to us with respect to the
beneficial ownership of our Common Stock as of April 15, 2009 by (1) each of
our directors, (2) each of our Named Executive Officers (as defined above), (3)
all of our directors and executive officers as a group, and (4) each person (or
group of affiliated persons) known by us to be the beneficial owner of more
than 5% of our Common Stock.

52

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|                                               |  |                                                |           |                          |  |       | 
|---------------------------------------------- |  | ---------------------------------------------- | --------- | ------------------------ |  | ----- | 
|Name of
 Beneficial Owner(1)                   |  | Shares of Common Stock
 Beneficially Owned (2) |           | Percentage of
 Ownership | 
|                                               |  |                                                |           |                          | 
|                                               |  |                                                |           |                          |  |       | 
|Herbert B.
 Grimes                             |  |                                                | 1,035,200 |                          |  | 22.39 | 
|Mark E.
 Vaughan                               |  |                                                | 1,037,200 |                          |  | 22.44 | 
|Gene P.
 Jones                                 |  |                                                | 99,120    |                          |  | 2.14  | 
|Robert S. Dillon                               |  |                                                | 10,000    |                          |  | 0.22  | 
|Richard A.
 Kassar                             |  |                                                | 10,000    |                          |  | 0.22  | 
|Laura J.
 Pensiero                             |  |                                                | 10,000    |                          |  | 0.22  | 
|Millenco,
 L.L.C. (3)                          |  |                                                | 531,000   |                          |  | 11.49 | 
|Taylor
 Family Investments, LLC (4)            |  |                                                | 277,225   |                          |  | 6.00  | 
|Directors
 and Officers (6 persons) as a group |  |                                                | 2,201,520 |                          |  | 47.62 | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The address for Herbert B.
 Grimes, Mark E. Vaughan and Gene P. Jones is Vaughan Foods, Inc., 216
 Northeast 12th Street, Moore, Oklahoma 73160. Other addresses are as follows:
 Robert S. Dillon, 1800 South Air Depot Boulevard, Suite D, Midwest City,
 Oklahoma 73110; Richard A. Kassar, 400 Plaza Drive, Secaucus, New Jersey,
 07094; Laura J. Pensiero, 6422 Montgomery Street, Rhinebeck, New York 12572;
 Millenco, L.L.C., 666 Fifth Avenue, New York, New York 10103.                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(2) | A person is deemed to be a
 beneficial owner of securities that can be acquired by such person within 60
 days from the filing of this report upon the exercise of options and warrants
 or conversion of convertible securities. Each beneficial owners percentage
 ownership is determined by assuming that options, warrants and convertible
 securities that are held by such person (but not held by any other person)
 and that are exercisable or convertible within 60 days from April 15, 2009.
 Except as otherwise indicated, and subject to applicable community property
 and similar laws, each of the persons named has sole voting and investment
 power with respect to the shares shown as beneficially owned. On April 15,
 2009, 4,623,077 shares of our Common Stock were outstanding.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(3) | Millenco, L.L.C. is a
 beneficial owner of 531,000 shares of our common stock as reported on its
 Form SC 13D as filed with the U.S. Securities and Exchange Commission on June
 28, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(4) | Taylor Family Investments,
 LLC is a beneficial owner of 277,225 shares of our common stock as reported
 on its Form SC 13D as filed with the U.S. Securities and Exchange Commission
 on April 3, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

ITEM 13  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

Set
forth below are details of transactions during the years ended December 31,
2008 and 2007, or currently proposed transactions, in which Vaughan Foods, Inc.
was or is to be a participant, in which the amount involved in the transaction
exceeded or exceeds the lesser of $120,000 or one percent of the average of our
total assets at the year end for the last two completed fiscal years, and in
which any director, executive officer, principal shareholder holding at least
5% of our common shares, or any family member thereof, had or will have any
material interest, direct or indirect.

Immediately
prior to the closing of our initial public offering, pursuant to amended
agreements dated April, 2007, we acquired from Mark Vaughan our current chief
operating officer and Vernon J. Brandt, Jr., a former member of management, for
nominal consideration, 60% of the limited partnership interest in Allisons
Gourmet Kitchens, a limited partnership, and also acquired from Herbert Grimes
our current Chairman and Chief Executive Officer and Stan Gustas

53

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our former
vice president of finance, the remaining 40% of the limited partnership
interests and the general partnership interest in Allisons Gourmet Kitchens
for a total price of $2,500,000. Mr. Grimes, through an affiliate, owned 87.5%
of such minority interests and was to be paid in total, $2,187,500. Mr. Gustas
owned the remaining 12.5% and was to be paid in total, $312,500. Of these
amounts, we paid a total of $1,500,000 from the net proceeds of our initial
public offering, $1,312,500 to Mr. Grimes and $187,500 to Mr. Gustas. Notes
payable were issued to Mr. Grimes and Mr. Gustas for $1,000,000 of the purchase
price, bearing interest at 10 percent per annum. On June 30, 2008, the notes to
Mr. Gustas were retired and a new note was issued to Mr. Grimes in the
principal amount of $802,500, bearing interest at 10%, and maturing as follows:

|                   |  |               |         | 
|------------------ |  | ------------- | ------- | 
|Maturity Date      |  | Principal Due |        
|                   |  |               |        
|August 12, 2008    |  | $             | 150,000 | 
|                  
|November 11,
 2008 |  |               | 150,000 | 
|                  
|March 17,
 2009    |  |               | 200,000 | 
|                  
|May 12, 2009       |  |               | 150,000 | 
|                  
|June 30,
 2009     |  |               | 152,500 | 

Mr.
Grimes has the option of deferring any of the principal payments on the note
and, has deferred each payment through the date hereof, and anticipates
deferring subsequent payments until such time as the Company believes that it
has adequate liquidity and capital resources to repay all or a portion of the
indebtedness. The notes are subordinated to all other indebtedness of the
company.

The
terms of the acquisition of the limited partnership interests in Allisons were
approved by our board of directors. At the time it was approved, we lacked
sufficient independent directors for majority approval by independent
directors. The terms of the acquisition of the limited liability partnership interests
in Allisons are at least as favorable to Vaughan as could have been obtained
through arms length negotiations with unaffiliated third parties.

In
the future, we will not make or enter into any material transactions or loans
with officers, directors or beneficial owners of 5% or more of our common stock
unless they are on terms that are no less favorable to us than those that can
be obtained from unaffiliated third parties. All material transactions and
loans with affiliates, and any forgiveness of loans, will be approved by a
majority of our independent directors who do not have an interest in the
transactions and who had access, at our expense, to our legal counsel or
separate independent legal counsel. We have also adopted a policy that, in the
future, the Audit Committee must review all material transactions with any
officer, director or 5% stockholder.

Mark
Vaughan our current chief operating officer and Vernon J. Brandt, Jr. a former
member of management, each have a 50% ownership in Cimarron Holdings, L.L.C.,
which previously owned an airplane that was used by management of Vaughan to
visit customers and suppliers for business purposes. Vaughan had not guaranteed
the obligations of Cimarron, but was making the debt service payments for
Cimarron, and all of the costs of maintenance and operation of the airplane. The
airplane was sold on December 3, 2007.

Review, Approval or Ratification of Transactions with Related
Persons

In
order to formalize the process by which the Company reviews any transaction
with a related person, the Board of Directors, at its March 13, 2008 meeting,
adopted a policy addressing the Companys procedures with respect to the
review, approval, and ratification of related person transactions that are
required to be disclosed pursuant to Item 404 (a) of Regulation S-K. Under the
policy, the Companys Chief Financial Officer initially determines if a
transaction or relationship constitutes a transaction that requires compliance
with the policy. The policy provides that any transaction, arrangement or
relationship, or series of similar transactions, with any Director, executive
officer, 5% beneficial owner, or any of the immediate family members
(collectively, related persons) in which the Company has or will have a
direct or indirect material interest and which exceeds the lesser of one
percent of the average of our total assets at year end for the last two
completed fiscal years, or $120,000 in the aggregate shall be subject to
review, approval or ratification by the Audit Committee. In its review of
related person transactions, the Audit Committee will review the material facts
and circumstances of the transaction.

Director Independence

Our
Board of Directors is comprised of Herbert B. Grimes, Mark E. Vaughan, Robert
S. Dillon, Richard A. Kassar and Laura J. Pensiero.

54

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The
Board has determined, in accordance with Nasdaqs listing standards, that: (i)
Robert S. Dillon, Richard A. Kassar and Laura J. Pensiero (the Independent
Directors) are independent and represent a majority of its members; (ii)
Robert S. Dillon, Richard A. Kassar and Laura J. Pensiero, as the sole members
of the Audit Committee, are independent for such purposes; and (iii) Robert S.
Dillon, Richard A. Kassar and Laura J. Pensiero, as the sole members of the
Compensation Committee, are independent for such purposes.

In
determining director independence, our Board applies the independence standards
set by Nasdaq. In its application of such standards the Board takes into
consideration all transactions with Independent Directors and the impact of
such transactions, if any, on any of the Independent Directors ability to
continue to serve on our Board. To that end, for the fiscal year ended 2008, our
Board considered the fees paid to the Independent Directors disclosed above in
Item 10Executive CompensationDirector Compensation and determined that
those transactions were within the limits of the independence standards set by
Nasdaq and did not impact their ability to continue to serve as Independent
Directors.

ITEM 14  PRINCIPAL ACCOUNTANT FEES AND
SERVICES

With
respect to the years ended December 31, 2008 and 2007 the aggregate fees billed
by Cole & Reed, P.C. are as follows:

|                   |  |      |         |  |  |      |      |   |         |  |  |      |  
|------------------ |  | ---- | ------- |  |  | ---- | ---- | - | ------- |  |  | ---- | -
|                   |  | 2008 |         |  |  |      | 2007 |   |         |  | 
|                   |  |      |         |  |  |      |      |   |         |  |  |      |  
|                   |  |      |         |  |  |      |      |   |         |  |  |      |  
|Audit Fees         |  | $    | 227,350 |  |  | 96.6 | %    | $ | 318,250 |  |  | 97.7 | %
|Audit Related Fees |  | $    | 9,100   |  |  | 3.4  | %    | $ | 7,500   |  |  | 2.3  | %
|Tax Fees           |  | $    |        |  |  | 0.0  | %    | $ |        |  |  | 0.0  | %
|All Other Fees     |  | $    |        |  |  | 0.0  | %    | $ |        |  |  | 0.0  | %

|    |                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit fees reflect
 aggregate fees billed by Cole & Reed, P.C. for the audit of the Companys
 financial statements, the review of the Companys interim financial
 statements, and for the review of documents filed with or submitted to the
 Securities and Exchange Commission.
|    |                                                                                                                                                                                                                                                                                    
|(2) | Audit related fees reflect
 aggregate fees billed by Cole & Reed, P.C. for services related to
 employee benefit plan audits.                                                                                                                                                      

The
Audit Committee determined that the non-audit services provided by Cole &
Reed, P.C. during the year ended December 31, 2008 and 2007 were compatible
with maintaining the independence of Cole & Reed, P.C.

55

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PART IV

ITEM 15  EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES

| |     |                                                                       
| | --- | ----------------------------------------------------------------------
| | (a) | List of
 Documents Filed as a Part of this Annual Report on Form 10-K:

The
following Consolidated Financial Statements of the Company and the report of
our independent registered public accounting firm are filed as part of this
Annual Report on Form 10-K.

Consolidated
Balance Sheets at December 31, 2008 and 2007; and the related Consolidated
Statements of Operations, Consolidated Statements of Stockholders Equity and
Consolidated Statements of Cash Flows for the years ended December 31, 2008,
2007 and 2006; Notes to Consolidated Financial Statements; and Report of
Independent Registered Public Accounting Firm.

| |                                                                                    |         
| | ---------------------------------------------------------------------------------- | --------
| | (b)                                                                                | Exhibits
|
| | The exhibits
 listed below are filed as a part of this Annual Report on Form 10-K.

|            |      |             |                                                                                                                    
|----------- | ---- | ----------- | -------------------------------------------------------------------------------------------------------------------
|Exhibit No. |      | Description
|            |      |            
|            |      |             |                                                                                                                    
|            | 1.1  |             | Form of
 Underwriting Agreement4                                                                                   
|            |      |             |                                                                                                                    
|            | 3.1  |             | Certificate
 of Incorporation, as amended1                                                                         
|            |      |             |                                                                                                                    
|            | 3.2  |             | Bylaws1                                                                                                            
|            |      |             |                                                                                                                    
|            | 4.1  |             | Specimen
 stock certificate2                                                                                       
|            |      |             |                                                                                                                    
|            | 4.2  |             | Form of
 warrant agreement, including form of Class A and Class B warrants4                                        
|            |      |             |                                                                                                                    
|            | 4.3  |             | Specimen
 unit certificate2                                                                                        
|            |      |             |                                                                                                                    
|            | 4.4  |             | Form of
 representatives warrant4                                                                                 
|            |      |             |                                                                                                                    
|            | 4.5  |             | Mortgage and
 loan agreement dated December 31, 20041                                                              
|            |      |             |                                                                                                                    
|            | 4.6  |             | Indenture of
 trust dated December 31, 20041                                                                       
|            |      |             |                                                                                                                    
|            | 4.7  |             | Real estate
 loan due August 1, 20281                                                                              
|            |      |             |                                                                                                                    
|            | 4.8  |             | Agreement of
 the registrant to furnish agreements defining rights of holders of long term
 debt1                  
|            |      |             |                                                                                                                    
|            | 10.1 |             | Agreement
 between Vaughan Foods, Inc., Mark E. Vaughan and Vernon J. Brandt, Jr. Dated
 June 12, 20061            
|            |      |             |                                                                                                                    
|            | 10.2 |             | Agreement
 between Vaughan Foods, Inc., Braxton Management, Inc., Herb Grimes and Stan
 Gustas, dated May 19, 20061
|            |      |             |                                                                                                                    
|            | 10.3 |             | Vaughan
 Foods, Inc. equity incentive plan2                                                                        
|            |      |             |                                                                                                                    
|            | 10.4 |             | Form of
 Securities Purchase and Subscription Agreement dated as of July 17, 20061                                 

56

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| |         |  |                                                                                                                                                                                   
| | ------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.5    |  | Form of
 Registration Rights Agreement dated as of July 17, 20061                                                                                                                 
| |         |  |                                                                                                                                                                                   
| | 10.6    |  | Promissory
 Note dated September 25, 20061                                                                                                                                        
| |         |  |                                                                                                                                                                                   
| | 10.7    |  | Form of
 Lock-Up Agreement2                                                                                                                                                       
| |         |  |                                                                                                                                                                                   
| | 10.8    |  | Agreement
 between Vaughan Foods, Inc., Mark E. Vaughan and Vernon Brandt, Jr. dated
 April 20, 20075                                                                             
| |         |  |                                                                                                                                                                                   
| | 10.9    |  | Agreement
 between Vaughan Foods, Inc., Braxton Management, Inc., Herb Grimes and Stan
 Gustas dated April 20, 20073                                                              
| |         |  |                                                                                                                                                                                   
| | 10.10   |  | Form of
 amended Promissory Note dated September 25, 20063                                                                                                                        
| |         |  |                                                                                                                                                                                   
| | 10.11   |  | Amended
 Promissory Note dated September 25, 20065                                                                                                                                
| |         |  |                                                                                                                                                                                   
| | 10.12   |  | Promissory
 Note dated July 3, 20075                                                                                                                                              
| |         |  |                                                                                                                                                                                   
| | 10.13   |  | Promissory
 Note dated July 3, 20075                                                                                                                                              
| |         |  |                                                                                                                                                                                   
| | 10.14 + |  | Form of
 Interim Executive Services Agreement dated June 29, 20076                                                                                                                
| |         |  |                                                                                                                                                                                   
| | 10.15   |  | Loan
 Agreement dated as of December 31, 20077                                                                                                                                    
| |         |  |                                                                                                                                                                                   
| | 10.16   |  | Security
 Agreement dated as of December 31, 20077                                                                                                                                
| |         |  |                                                                                                                                                                                   
| | 10.17   |  | Form of
 Employee Incentive Stock Option pursuant to the Vaughan Foods, Inc. 2006
 Equity Incentive Plan, as amended8                                                             
| |         |  |                                                                                                                                                                                   
| | 10.18   |  | Form of
 Non-Employee Director Non-Qualified Option pursuant to the Vaughan Foods,
 Inc. 2006 Equity Incentive Plan, as amended8                                                  
| |         |  |                                                                                                                                                                                   
| | 10.19   |  | Form of
 Consultant Non-Qualified Option pursuant to the Vaughan Foods, Inc. 2006
 Equity Incentive Plan, as amended8                                                             
| |         |  |                                                                                                                                                                                   
| | 10.20   |  | Revolving
 Credit Loan Promissory Note dated as of December 31, 20077                                                                                                             
| |         |  |                                                                                                                                                                                   
| | 10.21   |  | Management
 Agreement, dated April 8, 2009, between Registrant and Herbert B. Grimes.                                                                                             
| |         |  |                                                                                                                                                                                   
| | 10.22   |  | Management
 Agreement, dated April 8, 2009, between Registrant and Mark E. Vaughan.                                                                                               
| |         |  |                                                                                                                                                                                   
| | 10.23   |  | Management
 Agreement, dated April 8, 2009, between Registrant and Gene P. Jones.                                                                                                 
| |         |  |                                                                                                                                                                                   
| | 31.1*   |  | Certification
 of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or
 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
 2002*           
| |         |  |                                                                                                                                                                                   
| | 31.2*   |  | Certification
 of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or
 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*            
| |         |  |                                                                                                                                                                                   
| | 32.1**  |  | Certifications
 of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
 Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
 2002*

|   |                                                                                                                          
|-- | -------------------------------------------------------------------------------------------------------------------------
|*  | Filed
 herewith                                                                                                          
|   |                                                                                                                          
|** | Furnished,
 not filed, pursuant to Item 601(b) (32) of Regulation S-K.                                                   
|   |                                                                                                                          
|+  | Management
 contract, compensation plan or arrangement                                                                   
|   |                                                                                                                          
|1. | Previously
 filed as an exhibit to the initial filing of our registration statement on
 Form S-1 filed on October 6, 2006
|   |                                                                                                                          
|2. | Previously
 filed as an exhibit to our registration statement on Form S-1/A filed on
 January 30, 2007                   
|   |                                                                                                                          
|3. | Previously
 filed as an exhibit to our registration statement on Form S-1/A filed on
 April 26, 2007                     
|   |                                                                                                                          
|4. | Previously
 filed as an exhibit to our registration statement on Form S-1/A filed on May
 10, 2007                       
|   |                                                                                                                          
|5. | Previously
 filed as an exhibit to our quarterly report on Form 10-Q filed on August 12,
 2007                           
|   |                                                                                                                          
|6. | Previously
 filed as an exhibit to our current report on Form 8-K filed on August 15,
 2007                              
|   |                                                                                                                          
|7. | Previously
 filed as an exhibit to our current report on Form 8-K filed on January 4,
 2008                              
|   |                                                                                                                          
|8. | Previously
 filed as an exhibit to our current report on Form 8-K filed on December 3,
 2008                             

57

---



SIGNATURES

Pursuant to
the requirements of Section 13 or 15(d) 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.

| |                       |                                         | 
| | --------------------- | --------------------------------------- | 
| | VAUGHAN FOODS, INC.  
| |                       |                                        
| | By:                   | /s/ Herbert B. Grimes                   | 
| |                       |                                         | 
| |                       | Herbert B.
 Grimes                     
| |                       | Chairman of
 the Board of Directors and
| |                       | Chief
 Executive Officer               
|
| | Date: April
 15, 2009

Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities on the dates indicated.

|                                                                |  |                                                                                                 |  |               
|--------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | --------------
|Signature                                                       |  | Title                                                                                           |  | Date          
|                                                                |  |                                                                                                 |  |               
|                                                                |  |                                                                                                 |  |               
|Prinicipal
 Executive Officer:                                  |  |                                                                                                 |  |               
|                                                                |  |                                                                                                 |  |               
|/s/ Herbert
 B. Grimes                                          |  | Chairman of
 the Board of Directors and
 Chief Executive Officer
 (Principal Executive Officer) |  | April 15, 2009
|                                                                |  |                                                                                                 |  |               
|Prinicipal
 Finanical Officer and Principal Accounting Officer:
|                                                                |  |                                                                                                 |  |               
|/s/ Gene P.
 Jones                                              |  | Chief
 Financial Officer and
 Principal Accounting Officer                                      |  | April 15, 2009
|                                                                |  |                                                                                                 |  |               
|/s/ Mark E.
 Vaughan                                            |  | Chief
 Operating Officer and Director                                                           |  | April 15, 2009
|                                                                |  |                                                                                                 |  |               
|/s/ Robert
 S. Dillon                                           |  | Director                                                                                        |  | April 15, 2009
|                                                                |  |                                                                                                 |  |               
|/s/ Richard
 A. Kassar                                          |  | Director                                                                                        |  | April 15, 2009
|                                                                |  |                                                                                                 |  |               
|/s/ Laura J.
 Pensiero                                          |  | Director                                                                                        |  | April 15, 2009

58

---



EXHIBIT INDEX

|              |         |             |                                                                                                                     
|------------- | ------- | ----------- | --------------------------------------------------------------------------------------------------------------------
|Exhibit 
 No. |         | Description
|              |         |             |                                                                                                                     
|              |         |             |                                                                                                                     
|             
|              | 1.1     |             | Form of
 Underwriting Agreement4                                                                                    
|              |         |             |                                                                                                                     
|              | 3.1     |             | Certificate
 of Incorporation, as amended1                                                                          
|              |         |             |                                                                                                                     
|              | 3.2     |             | Bylaws1                                                                                                             
|              |         |             |                                                                                                                     
|              | 4.1     |             | Specimen
 stock certificate2                                                                                        
|              |         |             |                                                                                                                     
|              | 4.2     |             | Form of
 warrant agreement, including form of Class A and Class B warrants4                                         
|              |         |             |                                                                                                                     
|              | 4.3     |             | Specimen
 unit certificate2                                                                                         
|              |         |             |                                                                                                                     
|              | 4.4     |             | Form of
 representatives warrant4                                                                                  
|              |         |             |                                                                                                                     
|              | 4.5     |             | Mortgage and
 loan agreement dated December 31, 20041                                                               
|              |         |             |                                                                                                                     
|              | 4.6     |             | Indenture of
 trust dated December 31, 20041                                                                        
|              |         |             |                                                                                                                     
|              | 4.7     |             | Real estate
 loan due August 1, 20281                                                                               
|              |         |             |                                                                                                                     
|              | 4.8     |             | Agreement of
 the registrant to furnish agreements defining rights of holders of long term
 debt1                   
|              |         |             |                                                                                                                     
|              | 10.1    |             | Agreement
 between Vaughan Foods, Inc., Mark E. Vaughan and Vernon J. Brandt, Jr. Dated
 June 12, 20061             
|              |         |             |                                                                                                                     
|              | 10.2    |             | Agreement
 between Vaughan Foods, Inc., Braxton Management, Inc., Herb Grimes and Stan
 Gustas, dated May 19, 20061 
|              |         |             |                                                                                                                     
|              | 10.3    |             | Vaughan
 Foods, Inc. equity incentive plan2                                                                         
|              |         |             |                                                                                                                     
|              | 10.4    |             | Form of
 Securities Purchase and Subscription Agreement dated as of July 17, 20061                                  
|              |         |             |                                                                                                                     
|              | 10.5    |             | Form of
 Registration Rights Agreement dated as of July 17, 20061                                                   
|              |         |             |                                                                                                                     
|              | 10.6    |             | Promissory
 Note dated September 25, 20061                                                                          
|              |         |             |                                                                                                                     
|              | 10.7    |             | Form of
 Lock-Up Agreement2                                                                                         
|              |         |             |                                                                                                                     
|              | 10.8    |             | Agreement
 between Vaughan Foods, Inc., Mark E. Vaughan and Vernon Brandt, Jr. dated
 April 20, 20073               
|              |         |             |                                                                                                                     
|              | 10.9    |             | Agreement
 between Vaughan Foods, Inc., Braxton Management, Inc., Herb Grimes and Stan
 Gustas dated April 20, 20073
|              |         |             |                                                                                                                     
|              | 10.10   |             | Form of
 amended Promissory Note dated September 25, 20063                                                          
|              |         |             |                                                                                                                     
|              | 10.11   |             | Amended
 Promissory Note dated September 25, 20065                                                                  
|              |         |             |                                                                                                                     
|              | 10.12   |             | Promissory
 Note dated July 3, 20075                                                                                
|              |         |             |                                                                                                                     
|              | 10.13   |             | Promissory
 Note dated July 3, 20075                                                                                
|              |         |             |                                                                                                                     
|              | 10.14 + |             | Form of
 Interim Executive Services Agreement dated June 29, 20076                                                  
|              |         |             |                                                                                                                     
|              | 10.15   |             | Loan
 Agreement dated as of December 31, 20077                                                                      

59

---



| |        |  |                                                                                                                                                                                   
| | ------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.16  |  | Security
 Agreement dated as of December 31, 20077                                                                                                                                
| |        |  |                                                                                                                                                                                   
| | 10.17  |  | Form of
 Employee Incentive Stock Option pursuant to the Vaughan Foods, Inc. 2006
 Equity Incentive Plan, as amended8                                                             
| |        |  |                                                                                                                                                                                   
| | 10.18  |  | Form of
 Non-Employee Director Non-Qualified Option pursuant to the Vaughan Foods,
 Inc. 2006 Equity Incentive Plan, as amended8                                                  
| |        |  |                                                                                                                                                                                   
| | 10.19  |  | Form of
 Consultant Non-Qualified Option pursuant to the Vaughan Foods, Inc. 2006
 Equity Incentive Plan, as amended8                                                             
| |        |  |                                                                                                                                                                                   
| | 10.20  |  | Revolving
 Credit Loan Promissory Note dated as of December 31, 20077                                                                                                             
| |        |  |                                                                                                                                                                                   
| | 10.21  |  | Management
 Agreement, dated April 8, 2009, between Registrant and Herbert B. Grimes.                                                                                             
| |        |  |                                                                                                                                                                                   
| | 10.22  |  | Management
 Agreement, dated April 8, 2009, between Registrant and Mark E. Vaughan.                                                                                               
| |        |  |                                                                                                                                                                                   
| | 10.23  |  | Management
 Agreement, dated April 8, 2009, between Registrant and Gene P. Jones.                                                                                                 
| |        |  |                                                                                                                                                                                   
| | 31.1*  |  | Certification
 of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or
 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
 2002*           
| |        |  |                                                                                                                                                                                   
| | 31.2*  |  | Certification
 of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or
 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
 2002*           
| |        |  |                                                                                                                                                                                   
| | 32.1** |  | Certifications
 of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
 Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
 2002*

|   |                                                                                                                          
|-- | -------------------------------------------------------------------------------------------------------------------------
|*  | Filed
 herewith                                                                                                          
|   |                                                                                                                          
|** | Furnished,
 not filed, pursuant to Item 601(b) (32) of Regulation S-K.                                                   
|   |                                                                                                                          
|+  | Management
 contract, compensation plan or arrangement                                                                   
|   |                                                                                                                          
|1. | Previously
 filed as an exhibit to the initial filing of our registration statement on
 Form S-1 filed on October 6, 2006
|   |                                                                                                                          
|2. | Previously
 filed as an exhibit to our registration statement on Form S-1/A filed on
 January 30, 2007                   
|   |                                                                                                                          
|3. | Previously
 filed as an exhibit to our registration statement on Form S-1/A filed on
 April 26, 2007                     
|   |                                                                                                                          
|4. | Previously
 filed as an exhibit to our registration statement on Form S-1/A filed on May
 10, 2007                       
|   |                                                                                                                          
|5. | Previously
 filed as an exhibit to our quarterly report on Form 10-Q filed on August 12,
 2007                           
|   |                                                                                                                          
|6. | Previously
 filed as an exhibit to our current report on Form 8-K filed on August 15,
 2007                              
|   |                                                                                                                          
|7. | Previously
 filed as an exhibit to our current report on Form 8-K filed on January 4,
 2008                              
|   |                                                                                                                          
|8. | Previously
 filed as an exhibit to our current report on Form 8-K filed on December 3,
 2008                             

60

---