**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K/A**

**(Amendment No. 1)**

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**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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**For the fiscal year endedDecember 31, 2006**

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**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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**For the transition periodfrom                                   to                                   **

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**Commission File Number1-12599**

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**VITA FOOD PRODUCTS, INC.**

(Exact name of registrantas specified in its charter)
| **Nevada**                                                                   | **36-3171548**                                           |
|------------------------------------------------------------------------------|----------------------------------------------------------|
| (State or other  jurisdiction of incorporation or organization)              | (I.R.S. Employer  Identification No.)                    |
|                                                                         |                                                     |
| **2222  West Lake Street, Chicago, Illinois   60612**              |
| (Address of  principal executive offices)   (Zip code)             |
|                                                                         |
| Registrant’s  telephone number, including area code: **(312) 738-4500** |
|                                                                         |
| Securities  registered pursuant to Section 12(b) of the Act:                 |
|                                                                         |
| Title of each class                                                          | Name  of each exchange on which registered               |
| **Common Stock, par value  $.01 per share**                                  | **American Stock Exchange & Chicago Stock Exchange** |

 

Indicate by check mark if the registrant is a well-known seasonedissuer, 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 reportspursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

Large AcceleratedFiler o   AcceleratedFiler o   Non-acceleratedFiler x

Indicate by check mark whether the registrant is ashell company (as defined in Rule12b-2 of the Exchange Act). Yes o No x

The aggregate market value of common stock held bynon-affiliates of the registrant as of June 30, 2006 was $7,246,158.

The number of shares outstanding of the registrant’scommon stock as of March 30, 2007 was 4,935,247.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the definitive Proxy Statement to bedelivered to stockholders in connection with the Annual Meeting of Stockholdersto be held on May 17, 2007 are incorporated by reference in Part III.

 

 

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**EXPLANATORY NOTE**

We are filing this Amendment No. 1 to our AnnualReport on Form 10-K for the year ended December 31, 2006 (this “Amendment No. 1”)to amend our Form 10-K for the same period initially filed with the Securitiesand Exchange Commission (the “SEC”) on April 17, 2007 (the “Initially FiledForm 10-K”). This Amendment No. 1 amends and restates the following items ofthe Initially Filed Form 10-K: (i) Part I, Item 1A — Risk Factors, (ii) PartII, Item 7 — Management’s Discussion and Analysis of Financial Condition andResults of Operations, (iii) Part II, Item 8 — Financial Statements andSupplementary Data, (iv) Part III, Item 12 — Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters, (v) Part III,Item 13 — Certain Relationships and Related Transactions, and DirectorIndependence , and (vi) Part IV, Item 15 — Exhibits and Financial StatementSchedules. These items are being amended to reflect the fact that thepercentage of our outstanding common stock that would be owned by HowardBedford, a director, upon the exercise of all warrants to be issued to himpursuant to our agreement in principle with Mr. Bedford, would be 53.4%, ratherthan the 48.5% reported in the Initially Filed Form 10-K. In addition, we arefiling herewith certain currently dated certifications pursuant to Rule 12b-15of the Securities and Exchange Act of 1934, as amended (the “SecuritiesExchange Act”). No other information contained in the Initially Filed Form 10-Kis being amended hereby and such information is not reproduced in thisAmendment No. 1. All information in the Initially Filed Form 10-K, as amendedby this Amendment No. 1, speaks as of the date of the original filing of theInitially Filed Form 10-K and does not reflect any subsequent information orevents, except as presented in this Amendment No. 1 and except for Exhibits31.1, 31.2, 32.1, and 32.2.

All information contained in this Amendment No. 1 issubject to updating and supplementing as provided in our reports filed with theSEC subsequent to the date of the filing of the Initially Filed Form 10-K.

**PART I**

**Item 1A. RiskFactors.**

The Company is subject toa number of important risks and uncertainties. The accompanying risk factorsshould be read in conjunction with the information included in this AnnualReport on Form 10-K.

***We haveincurred substantial indebtedness.***   Amountsoutstanding under our revolving credit facility, Term A facility and Term Bfacility at December 31, 2006 were $7,526,730; $5,282,000 and $150,000respectively. The ratio of long term debt to total capitalization was 79% atDecember 31, 2006. This substantial indebtedness represents an element of riskin the event that our operating proceeds are insufficient to meet the principaland interest payments on our indebtedness. If our cash flow is insufficient toservice our debt, the value of our equity could be reduced or eliminatedthrough foreclosure.

***Restrictionsimposed by the terms of our Loan Agreement may limit our operating andfinancial flexibility.*****  **Allof our assets have been pledged as security for any borrowings under our LoanAgreement. The Loan Agreement contains various business and financial covenantsincluding among other things, a debt service ratio, a net worth covenant and aratio of total liabilities to tangible net worth. Our failure to comply withour obligations under the Loan Agreement may result in an event of default,which, if not cured or waived, may permit acceleration of the indebtednessunder the Loan Agreement. We most likely would not have sufficient fundsavailable to pay any accelerated indebtedness and cannot be certain that wewould even have the ability to refinance accelerated indebtedness on favorableterms should an event of default occur.

***Changesin interest rates affect the interest rate payable under our Loan Agreement.***   Weare exposed to interest rate fluctuations, primarily as a result of the factthat rates under our Loan Agreement are based on a factor of the prime rate andthus subject to market fluctuations. We do not currently use derivativeinstruments to alter the interest rate characteristics of any debt.

***Generaleconomic conditions and conditions in the retail environment could adverselyaffect our customers.***   Our largestcustomers are in the retail grocery business and we guarantee the sales to themajority of these customers. Accordingly, a slow down in the economy,especially in the retail market could directly affect our revenues andprofitability.

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***We aredependent on a few large customers.***   During2006, our three largest customers represented 24%, 11% and 11% of our netsales. We do not have a long term contract with either of these customers andthe loss of either customer would have a material adverse affect on the Company’sbusiness.

***Reducedspending by customers could significantly impact our operating results,financial condition and cash flows.***   Whilewe enjoy very good relationships with our customers, there can be no assurancethat our principal customers will continue to purchase products from us at thecurrent levels. Orders from our customers are affected by factors such as newproduct introductions, product life cycles, inventory levels, manufacturingstrategies, contract awards, competitive conditions and general economicconditions. The reduction, delay or cancellation of orders or a delay inshipment of products to such customers could have a material adverse effect onour operating results, financial condition and cash flows.

***Pricesof our raw materials regularly fluctuate.***   Thecost of our raw materials, especially herring, salmon and honey, represents alarge portion of the cost to customers of our products. Customers may beunwilling to pay cost increases resulting from increases in raw materialprices. A significant increase in the cost of our products which cannot bepassed on to the customers could have an adverse affect on our revenues andprofits.

***HowardBedford, a member of the board of directors, may control approximately 38.2% ofour outstanding voting stock in the near future.***   TheCompany has reached an agreement in principle with Mr. Bedford pursuant towhich he would acquire additional Common Stock that would bring him to thistotal ownership percentage interest. By virtue of this significant ownershippercentage, Mr. Bedford would have substantial influence over the Company’saffairs and the election of the members of our board of directors. He also maybe able to prevent or cause a change in control of the Company. If Mr. Bedfordexercises all of the warrants that are part of the agreement, he would controlapproximately 53.4% of the Company’s outstanding voting stock.

***Ourreserves may be inaccurate.***   Preparingfinancial statements requires management to make estimates and assumptions thataffect the reported amounts. Actual results may differ from these estimates.

***Ourquality control procedures could fail to detect a quality issue.***   Althoughthe Company has six full-time employees responsible primarily for ensuring thequality of all the Company’s products by overseeing the production process andby frequently testing the consistency of the products as they are produced, andthe Company uses high-tech equipment in its production processes dedicatedsolely to quality control purposes, the Company’s quality control procedurescould fail to detect a particular issue affecting the quality of one or more ofits products. See “Item 7 Management’s Discussion and Analysis of FinancialCondition and Results of Operations” for information relating to qualitycontrol in fiscal year 2006.

***We havenumerous competitors with financial and other resources greater than ours.***   Weencounter competition from a number of competitors in the sale of our products.Many of our competitors have financial, product development and other resourcesgreater than ours. Our inability to compete with our competitors effectively bydeveloping and introducing innovative new products on a timely basis could havean adverse affect on our results of operations.

***Ourbusiness is seasonal in nature.***   Many ofour products are seasonal in nature causing a concentration of annual revenuegeneration to occur in a relatively short time span. Consequently, a loss ofbusiness during the peak business season, for any reason, may result in reducedfull year revenues.

***We maybe unable to execute our acquisition strategy.***   Ourlong term strategy includes a focus on acquisitions. We anticipate thatsignificant future growth, if any, will be the result of the acquisitionstrategy and the successful integration of the acquired businesses into theexisting operations. Currently, we have no agreements or understandings withrespect to any acquisitions and there can be no assurance that we will besuccessful in pursuing other potential acquisitions. Moreover, no assurancescan be given that any completed acquisition will be beneficial to us or thatthe operations of an acquired entity will be successfully integrated into ouroperations. In addition, the costs associated with this strategy, means offinancing any potential acquisitions, and consummation and integration of anypotential acquisitions could significantly impact our financial and operatingperformance.

***We mayexperience significant volatility in our stock price which may negativelyimpact our ability to finance future growth.***   Thetrading price of our Common Stock is subject to wide fluctuations in responseto quarter-to-quarter fluctuations in operating results and other events orfactors. In addition, 

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stock markets have experienced extreme price andtrading volume volatility in recent years. Our Common Stock has historicallyhad relatively small trading volumes. As a result, small transactions in ourCommon Stock can have a disproportionately large impact on the quoted price ofthe Common Stock. We believe that our future growth through either currentoperations or any future acquisitions may be at least partially financedthrough the capital markets. Thus, fluctuations in our stock price will have anaffect on the financing available.

***We aredependent on attracting and retaining key personnel.***   TheCompany believes the success of the organization is dependant upon thecontinued success of attracting and retaining talented personnel.

***Theterms of our relationships with our suppliers could change.***   Wedo not have long term purchase agreements with any supplier. Our ability tocontinue to procure key materials at a competitive price is critical to futuresuccess. There can be no assurance that our current suppliers will notconsolidate, go out of business, terminate their relationship with us ornegatively change the terms upon which they service us. We purchase herringfrom one supplier. Other raw materials, such as salmon, and co-packed productsare purchased from a number of sources, allowing us to negotiate competitiveprices. A consolidation of such suppliers could have an adverse affect on theprice of our key materials.

***Tradeaccounts receivable potentially subject us to significant concentrations ofcredit risk.***   We primarily provide creditin the normal course of business. In the year ended December 31, 2006, theCompany had sales to three customers representing 24%, 11% and 11% of totalannual net sales. At December 31, 2006, these customers had open accountsreceivable balances of $1,002,000, $618,000 and $1,104,000, respectively. Weperform ongoing credit evaluations of our customers and maintain allowances forpotential credit losses, if necessary. However, actual write-offs could exceedthose recorded allowances for doubtful accounts.

***Promotionalprograms offered to our customers may result in excessive cost.***   Inaccordance with industry practices, inventory is sold to customers often withthe right to return or dispose if the merchandise is not resold prior to theexpiration of its shelf life. In order to support our products, variousmarketing programs are offered to customers, which reimburse them for aportion, or all of their promotional activities related to our products. Weregularly review and revise, when we deem necessary, estimates of costs to usfor these marketing and merchandising programs based on estimates of what hasbeen incurred by customers. Actual costs incurred by us may differsignificantly if factors such as the level and success of the customers’programs or other conditions differ from expectations.

***Wecould experience material goodwill impairment.***   Ourassets include a substantial amount of goodwill. This is a result of theacquisition of VSF. The value of this goodwill is assessed at least annually.If future operating performance at this business unit were to fallsignificantly below current levels, a non-cash charge to operating earnings forgoodwill impairment could result as has happened in 2004 and 2006. Theimpairments were principally due to the decline in the sales volume of Halifaxproducts in 2004 and overall performance issues in 2006.

***Thecost and potentially reduced availability of petroleum based products andservices, including freight, utilities and raw material surcharges, couldimpact our profitability.***   Anysignificant increases in the prevailing price levels or any change in thesupply availability of petroleum based products and services could have asignificant affect on our costs. A significant increase in costs which cannotbe passed on to our customers will have an adverse affect on our profitability.

***Governmentregulations including any future claims could have a negative impact.***   Localauthorities measure and assess the amount of certain pollutants discharged fromthe Chicago facility and entering the wastewater treatment system. Theseauthorities have the power to fine or temporarily close that productionfacility. Furthermore, the quality of our products is regulated by the FDA andfailure to comply with regulations could result in a product recall ortemporary closure of a facility. The Martinsburg, West Virginia facility usesingredients under the regulation of the Alcohol, Tobacco and Firearms Agencyand failure to comply with regulations could result in a product recall ortemporary closing of the facility.

***Certainof our employees are covered under a collective bargaining agreement.***   Ourproduction employees at the Chicago facility, other than supervisors, arerepresented by the Local 1546 United Food & Commercial Workers,International Union and maintenance employees are represented by the Local 399International Union of Operating Engineers. Although we consider our laborrelations to be good, a 

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strike, walkout or lockout occurred for a significantperiod of time could have an adverse affect on results of operations.

***Wecould be exposed to increased costs and risks associated with complying withincreasing and new regulations of corporate governance and disclosurestandards.***   The SEC has postponed, forone year, the compliance date for reporting on internal controls bynon-accelerated filers. Despite this postponement, we expect to continue tospend an increased amount of management time and internal and externalresources to comply with changing laws, regulations and standards relating tocorporate governance and public disclosure, including the Sarbanes-Oxley Act of2002, new SEC regulations and American Stock Exchange rules. In particular,Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annualreview and evaluation of our internal control system and attestations of theeffectiveness of these systems by our independent auditors. We will bedocumenting and testing internal control systems and procedures and consideringimprovements that could be necessary in order for us to comply with therequirements of Section 404 by the end of 2007. This process may require us tohire outside advisory services and has resulted in additional accounting andlegal expenses. While we believe that we currently have adequate internalcontrols over financial reporting, in the event that the chief executiveofficer, chief financial officer or independent auditors determine that thecontrols over financial reporting are not effective as defined under Section404, investors’ perceptions of us could be adversely affected and could cause adecline in the market price of our stock.

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**PART II**

**Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operation.**

**Comparison of YearEnded December 31, 2006 and Year Ended December 31, 2005**

**Revenues.**   Netsales for the year ended December 31, 2006 were $50,954,000 compared to$46,573,000 for 2005, an increase of approximately $4,381,000 or 9.4%. Of thisincrease, approximately $2,532,000 is attributable to the Vita Seafood Segment,which had 2006 net sales of approximately $28,878,000, representing an increaseof approximately 9.6% and approximately $1,849,000 is attributable to the VitaSpecialty Foods Segment, which had 2006 net revenues of approximately$22,075,000, representing an increase of approximately 9.1%. The increase forthe Vita Seafood Segment is the result of increased gross sales of salmonproducts, which were up approximately $3,253,000, off-set by minor decreases ingross sales for herring products and other products coupled with an increase insales deductions of approximately $362,000 as a result of fourth quarterpromotional activity. The increase for the Vita Specialty Foods Segment is theresult of increased gross sales of sauces, which were up approximately$1,918,000 and honey products, which were up approximately $475,000. Theincrease in gross sales of sauces is attributable to the introduction of the **BudweiserTM** line of sauces. The increase in honey productssales is attributable to additional sales to an existing customer.

**Gross Margin.**   GrossMargin for the year ended December 31, 2006 was approximately $12,787,000compared to approximately $13,939,000 for 2005, or a decrease of approximately$1,152,000 or approximately 8.2%. The Vita Seafood Segment accounted for anincrease of approximately $649,000 and Vita Specialty Foods Segment off-set theincrease with a decrease of approximately $1,801,000. The increased grossmargin for Vita Seafood was mainly the result of increased sales volume. As apercentage of net sales, gross margin totaled 26.3%, which was .1 percentagepoints under the prior year result. Gross margin for the Vita Specialty FoodsSegment, as a percentage of net sales decreased to approximately 23.5%,compared to approximately 34.6% for the prior year. A major cause of thedecline was the establishment, in the third quarter, of a one-time reserve ofapproximately $430,000 to provide for costs associated with the start-up of anew line of Vita Specialty Foods’ products. These costs resulted from aone-time oversight with respect to established quality control procedures whichhas been identified and fully rectified. In addition, an unrelated productrecall caused by the failure to declare a milk allergen on a product labelresulted in the establishment of a reserve of approximately $444,000. Therehave not been any allergy issues related to this mis-labeling event and allaffected product has been recalled. Additional conversion and start-up costs,materials, direct labor and manufacturing expenses, were incurred relating toVita Specialty Foods Segment new products.

**Operating Expenses.**   Selling,marketing and administrative expenses for the year ended December 31, 2006 wereapproximately $13,203,000 compared to approximately $13,796,000 for 2005, animprovement of approximately $593,000 or approximately 4.3%. As a percentage ofnet sales these expenses decreased to 25.9% from 29.6%. The Vita SeafoodSegment is responsible for the decrease in operating expenses with a decreaseof approximately $690,000 off-setting an increase in Vita Specialty Foods ofapproximately $98,000. The reduction of $690,000 is mainly attributable toreduced compensation expenses as a result of headcount reductions, professionalfees, ads, marketing incentives and coupons. The $98,000 increase is mainly dueto freight cost increases.

**LongTerm Asset Impairment Charges****.**   InDecember 2006, management determined that it would exercise its option toterminate its lease of the Company’s Berryville plant. The option was exercisedin February 2007 and the lease will terminate as of April 2007. The plasticbottle manufacturing operations of this plant will be terminated and theCompany will start purchasing plastic bottles for its Martinsburg plant fromthird parties. Additionally, honey processing operations will be transferred tothe Martinsburg plant other than a small industrial grade honey processingoperation which represented an immaterial product line for the Company. Due tothis decision, management evaluated the remaining long-lived assets at thisfacility and determined that a $321,000 impairment charge was required to writedown assets, primarily leasehold improvements that could not be transferred toMartinsburg, to their estimated fair values. In addition, the carrying value ofthese assets started being depreciated over a term to end in April 2007. OtherBerryville equipment will be sold for amounts in excess of carrying value ortransferred to Martinsburg where they will be put back in operation during thesecond and third quarters of 2007.

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Annually,effective as of December 31, the Company engages an independent appraiser toassist in management’s assessment as to whether recorded goodwill is impaired.The independent appraisals are made using customary valuation methodologies,including discounted cash flow and other fundamental analysis and comparisons.In its 2006 assessment, management determined that the Company’s recordedgoodwill was in excess of its fair value and accordingly, the Company recordeda goodwill impairment charge of $2,314,000 in 2006. The impairment wasprincipally due to overall performance issues in 2006.

**EmploymentContract Charge.**   During the fourthquarter of 2005 a $502,000 charge was recognized to account for the futurecosts associated with a senior executive officer, pursuant to a 2005 amendmentto his employment contract, which significantly reduced his duties during 2006and terminated the employment agreement as December 31, 2006. The Company paid$278,000 in 2006 without the benefit of any services from the officer and$224,000 in 2007 as severance. There was no similar expense in 2006.

**Interest Expense.**   Interestexpense for the year ended December 31, 2006 was $1,314,000 compared to$1,082,000 for the same period in 2005, an increase of $232,000 or 21.4%. Thisincrease was primarily attributable to higher interest rates on the Company’sbank loan facilities as detailed under “Liquidity and Capital Resources-ThirdParty Financing” and in Note 4 of “Item 8. Financial Statements”.

**Income Taxes.**   Atax credit for the year ended December 31, 2006 of $785,000 or 24.7% of pretaxloss, was recognized, compared to a credit of $552,000 or 38% of pretax loss,for 2005.

**Net Income.**   Asa result of the operating results described above, net loss for the year endedDecember 31, 2006 was approximately $(2,391,000) or approximately $(0.51) pershare on both a basic and diluted per share basis. This compares to a net lossof $(889,000) or $(0.23) per share on both a basic and diluted basis for 2005,a 169.0% increase of the loss which totaled approximately $(1,502,000) orapproximately $(0.28) per share, on both basic and a diluted basis. 2006results include the impact of the sale of 1,000,000 common shares in February2006.

**Comparison of YearEnded December 31, 2005 and Year Ended December 31, 2004**

***Revenues.***   Net sales for the year ended December 31,2005 were $46,572,000 compared to $48,408,000 for 2004, a decrease of$1,836,000 or 3.8%. Of this decrease, $1,266,000 is attributable to the VitaSpecialty Foods Segment, which had 2005 revenues of $20,226,000, representing areduction of 5.9% and $570,000 is attributable to the Vita Seafood Segment,which had 2005 revenues of $26,346,000, representing a decrease of 2.1%. Thedecrease for the Vita Specialty Foods Segment is largely a reflection of thesales of honey products, which were down $1,178,000 and salad dressing productswhich were down $640,000. The decrease in honey sales is a result of a 25%decrease in average selling price, since there was actually more pounds ofhoney sold in 2005 than in 2004. These lower prices followed the open marketpricing for this commodity. Salad dressing sales decreased primarily as aresult of sales broker transition issues which affected one key regionalmarket. Partially offsetting the decline in sales of these Vita Specialty Foodproduct lines was an improvement of returns and allowances for this businessunit of $586,000, primarily due to reduced sales promotional programs. Inaddition to the decrease from the Vita Specialty Foods Segment was a decline of$570,000, or 2.1% for the Vita Seafood Segment, which was primarily the resultof an $833,000 decrease in gross sales of herring products reflecting both theloss of a significant co-pack customer which is no longer in business andreduced volume with a major wholesale club. This decrease in the herringproduct line was partially offset by an $114,000 increase for salmon products,primarily reflecting the success of marketing for both colored and naturalproducts and an improvement of $145,000 for sales returns and allowancesresulting from reduced promotional costs.

***Gross Margin.***   Gross margin for the year ended December31, 2005 was $13,939,000 compared to $14,000,000 for 2004, a decrease of$61,000 or .4%. The Vita Seafood Segment accounted for a $90,000 increase butthe Vita Specialty Foods Segment, following the large sales decline, incurred a$150,000 decrease. The increased gross margin for the Vita Seafood Segment, inthe face of lower sales, was a result of both this segment’s ability to passalong a portion of the cost increases by focusing on product pricing and on thereduction of sales return and allowance costs. As a percentage of net sales,gross margin totaled 29.9%, which was 1.0 percentage point above the 28.9%prior year result. Gross margin for the Vita Specialty Foods Segment, as apercentage of net sales rose to 34.6%, compared to the 33.2% prior year 

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result, as the sales decrease occurred largely in the lower margin honeyproduct line. The Vita Seafood Segment’s gross margin, as a percentage of netsales, also increased, rising to 26.4% in 2005 from 25.5% in 2004; this wasprimarily due to a combination of strategic pricing decisions, reduced salesreturns and allowances and a sales mix shift away from the lower margin resalesalmon product and in favor of the higher margin colored and natural lines.

***Operating Expenses.***   Selling, marketing, distribution andadministrative expenses for the year ended December 31, 2005 were $13,796,000compared to $13,905,000 for 2004, a decrease of $109,000 or 0.8%. As a percentageof net sales, however, these expenses rose to 29.6% from 28.7% for 2004. TheVita Specialty Foods Segment accounted for a decrease of $505,000 with anincrease of $396,000 attributable to the Vita Seafood Segment. The totalreduction reflects a $414,000 decrease for selling, marketing and distributionand a $305,000 increase in administrative expenses. The Vita Specialty FoodsSegment is primarily responsible for the improvement in selling, marketing anddistribution expenses. This improvement primarily reflects lower totalsalespersons’ compensation expenses of $265,000, largely as a result of theBudd settlement and additional reductions in proportion with the volumedecrease plus a reduction of freight out and other distribution relatedexpenses totaling $178,000, which results from both the overall lower salesvolume and from a greater portion of the current year sales being concentratedin large volume transactions. The decrease in selling, marketing anddistribution was partially offset by a $305,000 increase in administrativespending. This can be explained by increased professional fees totaling$323,000 reflecting, among other things, the cost of work performed for thestockholders’ rights plan, acquisition investigations and the Sarbanes Oxleyinitiative.

***Employment Contract Charge.***   During the fourth quarter of 2005 a $502,000,charge was recognized to account for the future costs associated with a seniorexecutive officer, pursuant to a 2005 amendment to his employment contract,which significantly reduced his duties during 2006 and committed the Company toterminate the agreement in 2007. The Company paid $294,000 in 2006 without thebenefit of any services from the officer and $208,000 in 2007 as severance.

***Goodwill Impairment Charge.***   TheCompany’s goodwill resulted from the acquisitions of Virginia Honey andHalifax. Annually, effective as of December 31, the Company engages anindependent appraiser to assist in management’s assessment as to whether therecorded goodwill is impaired. The independent appraisals are made using customaryvaluation methodologies, including discounted cash flow and other fundamentalanalysis and comparisons. In its 2004 assessment, management determined thatthe Company’s recorded goodwill was in excess of its fair value andaccordingly, the Company recorded goodwill impairment charges of $2,314,000.

***Interest Expense.***   Interest expense for the year endedDecember 31, 2005 was $1,082,000 compared to $767,000 for the same period in2004, an increase of $315,000 or 41.1%. This increase was primarily attributableto higher interest rates on the Company’s bank loan facilities as detailedunder “Liquidity and Capital Resources — Third Party Financing” and in Note 4of “Item 8. Financial Statements”.

***Income Taxes.***   A tax credit for the year ended December31, 2005 of $552,000 or 38% of pretax loss was recognized, compared to a creditof $269,000 or 40% of pretax income, excluding the goodwill impairment, during2004.

***Net Income.***   Asa result of the operating results described above, net loss for the year endedDecember 31, 2005 was $(889,000) or $(0.23) per share on both a basic anddiluted per share basis. This compares to a net loss of $(2,717,000) or $(0.71)per share on both a basic and diluted basis for 2004, a 67% reduction of theloss which totaled $1,882,000 or $0.48 per share, on both a basic and a dilutedbasis.

**Seasonality;Quarterly Results**

The Company has in the past and expects in the futureto experience significant fluctuation in quarterly operating results.Historically, the Company’s net sales and net income, absent unusual charges,have typically been the highest in the fourth quarter of each year. The Company’sbusiness is seasonal because its sales volume increases significantly duringthe Christmas holiday season and, to a lesser extent, during other holidays inthe fall and spring and periods of colder weather in certain sections of thecountry. Certain of these holidays, including Passover, Easter, Yom Kippur andRosh Hashanah, may fall in different quarters in different years and couldcause the quarterly operating results to fluctuate in the future. However, 

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through the Vita Specialty Foods Segment acquisitionsand the introduction of new non-seasonal or counter-seasonal products, thevariability in the Company’s quarterly operating results have been lesspronounced.

**Liquidity andCapital Resources**

***Working Capital***

At December 31, 2006, the Company had $6,197,000 inworking capital, compared to $7,851,000 at December 31, 2005, a decrease of$1,654,000. As a result, the current ratio fell to 1.7 to 1.0 from 2.3 to 1.0.Primary factors contributing to the working capital reduction include anapproximately $3,784,000 increase in accounts payable and other currentliabilities due to the delayed timing of payments at both business segments at2006 year end. This decrease in working capital is offset by an accountsreceivable increase of approximately $1,253,000 as a result of increased sales,an inventory increase of approximately $388,000 and an approximately $166,000combined net increase in cash, prepaids and current deferred income taxoffsetting a decrease in income taxes receivable of approximately $381,000.

***Cash Flow 2006 compared to 2005***

***Cash flows from operating activities.***   Net cash provided by operating activitieswas approximately $1,501,000 for the year ended December 31, 2006, compared to$300,000 for the year ended December 31, 2005. The increase is mainly due to anincrease in accounts payable due to the delayed timing of payments at bothbusiness segments offset by an increase in accounts receivable due to increasedsales and collection in 2006 of income taxes receivable.

***Cash flows from investing activities***.   Net cash used in investing activities was$1,184,000 and $863,000 for the years ended December 31, 2006 and 2005,respectively. During both years, this cash was used primarily for capitaladditions totaling $1,166,000 during 2006 and $841,000 during 2005. Similarcash usage is anticipated for the year ending December 31, 2007.

***Cash flows from financing activities.  ***Net cash used in financing activities was $287,000for the year ended December 31, 2006, compared to cash provided of $532,000 forthe year ended December 31, 2005. The most recent year activity included$700,000 used to make the scheduled installment payment under the terms of theVirginia Honey acquisition agreement. During 2006, proceeds from the issuanceof stock and exercise of stock options provided approximately $2,433,000 (seeNote 10 of “Item 8-Financial Statements”) which was mainly used to payscheduled debt payments. Accordingly, approximately $1,045,000 of debt was paiddown in 2006. During 2005, $1,383,000 of net bank borrowing was provided tocover both the debt pay down and the investing activities, net of cash providedfrom operations, as described above.

***Cash Flow 2005 compared to 2004***

***Cash flows from operating activities.***   Net cash provided by operating activitieswas $300,000 for the year ended December 31, 2005, compared to $2,420,000 forthe year ended December 31, 2004. Since net non cash income was relatively flatbetween years, this $2,120,000 decrease was largely due to changes in non cashworking capital items. Most noteworthy was an increase of inventories of which$1,160,000 was raw materials purchased in anticipation of strong first quarter2006 sales.

***Cash flows from investing activities***.   Net cash used in investing activities was$863,000 and $1,196,000 for the years ended December 31, 2005 and 2004,respectively. During both years, this cash was used primarily for capitaladditions totaling $841,000 during 2005 and $1,178,000 during 2004. The capitalexpenditures for both years primarily reflect investment in productionequipment at the Chicago and the Martinsburg facilities. The reduction betweenyears is primarily due to the largest single piece of production equipmenthaving been obtained during 2005 through an operational lease agreement whichthus had minimal effect on cash flow.

***Cash flows from financing activities.  ***Net cash provided by financing activities was$532,000 for the year ended December 31, 2005, compared to cash used of$1,293,000 for the year ended December 31, 2004. The most recent year activityincluded $840,000 used to make the scheduled installment payment under theterms of the Virginia Honey acquisition agreement. During 2005, $1,383,000 ofnet bank borrowing was provided to cover both the cash used for thisinstallment payment and the investing activities, net of cash provided byoperations as described above. Outflows in 2004 primarily include $1,382,000 ofdebt payments.

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***Equity Issuance***

In February 2006, the Company entered into agreementspursuant to which five individuals or their affiliated entities invested atotal of $2,500,000 in the Company. Substantially all of these funds were usedto reduce funded debt. The investors received units consisting of an aggregateof 1,000,000 shares of common stock; three-year warrants to purchase 500,000shares of common stock at an exercise price of $5.00 per share; and five-yearwarrants to purchase an additional 500,000 shares of common stock at anexercise price of $7.50 per share. The investors include the following: (i)Stephen D. Rubin, then president and Chairman of the Board of Directors of theCompany, and as of August 18, 2006, Chairman of the Board of Directors, (ii)Clifford K. Bolen, then Senior Vice President, Chief Operating Officer andChief Financial Officer of the Company, and, as of August 18, 2006, Presidentand Chief Executive Officer, (iii) Delphi Casualty Co., of which Glen S.Morris, a director of the Company, owns a 44% equity interest, (iv) a trust ofwhich John C. Seramur, a director of the Company, serves as trustee, as well as(v) Howard Bedford, then an unrelated third-party investor and, as of May 18,2006, a director of the Company.

***Loan Agreement***

On September 8, 2003, the Company entered into a loanagreement with a bank (the “Loan Agreement”) and paid off its existing creditfacility with initial borrowings under this new Loan Agreement. The originalLoan Agreement provided for a two-year $8,500,000 revolving line of credit (the‘revolver’), a five-year $6,500,000 term loan (the ‘Term A Loan”) and asix-year $3,000,000 term loan (the “Term B Loan”). The Term B Loan was neverutilized. During 2004 and 2005, the Loan Agreement was amended several timesto, among other things, extend the maturity dates of the revolver and changethe available borrowings under the revolver (which most recently had been$10,500,000) and the Term Loans and add an over-advance loan of $1,000,000which was terminated on February 28, 2006. On March 24, 2006, the LoanAgreement was further amended. Pursuant to this amendment, the Loan Agreementprovided for a $9,500,000 revolver which was scheduled to terminate on April 1,2007; a $7,750,000 Term A Loan due in monthly installments of $80,000 throughJuly 31, 2008 with a balloon payment of $3,682,000 due on August 31, 2008; a$150,000 capital expenditure Term Loan B due in monthly installments of 1/60thof the outstanding balance as of August 2006 from that date through May 31,2010 and the remainder due on June 30, 2010. On March 30, 2007, the LoanAgreement was amended again to extend the date of maturity date of the revolverfor one year to April 1, 2008 and to amend certain of the loan covenants. Therevolver is now limited to a borrowing base equal to 80% of eligible accountsreceivable and 60% of eligible inventories, as defined in the Loan Agreement(as amended). On April 13, 2007, the Loan Agreement was amended to add aone-year $1,000,000 term loan and to modify the loan covenants. Outstandingborrowings under the Loan Agreement are secured by substantially all assets ofthe Company.

Interest under each piece of the amended LoanAgreement is at a floating rate per annum equal to the prime rate plus 0.5%other than the new $1,000,000 term loan which bears an interest rate of primeplus 2.0%. The prime rate was 8.25 % as of December 31, 2006.

The Loan Agreement imposes certain restrictions on theCompany, including its ability to complete significant asset sales, merge oracquire businesses and pay dividends. Additionally, the Company had beenrequired to meet certain financial covenants at each quarter end during theterm of the Loan Agreement, including a Minimum Tangible Net Worth, a MinimumEBITDA and a Minimum Cash Flow Coverage Leverage ratio, all as defined in theLoan Agreement. During 2005 and 2006, the Company had violated certain of thesecovenants and had obtained permanent waivers from the bank for such violations.The March 24, 2006 amendment to the Loan Agreement retroactively amended thesefinancial covenants, and, as amended, the Company was in compliance with thosecovenants as of December 31, 2005 and June 30, 2006. During the third andfourth quarter of 2006, the Company was not in compliance with certain of therevised covenants. The March 30, 2007 amendment to the Loan Agreement waivedthese 2006 covenant violations and the April 13, 2007 amendment reset thecovenants to start with the six months ending June 30, 2007 and to only includea Minimum EBITDA and a Minimum Cash Flow Coverage Leverage Ratio.

***Amounts Owed Pursuant to Acquisitions***

Pursuant to the Company’s acquisitions of VirginiaHoney and Halifax in 2001 and 2002, respectively, the previous owners of thosebusinesses were subject to earn out provisions that have resulted in additionalpayments by the Company for the acquired businesses. As amended, the earn outprovisions for Terry Hess, the previous owner of Virginia Honey, have resultedin an additional amount of 

9

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$840,000 paid to Mr. Hess in April 2005 based onspecific VSF operating results from January 1, 2001 to December 31, 2002. Inaddition, a second earn out payment to Mr. Hess in the amount of $700,000 waspaid in April 2006 based on the operating results of VSF for the period fromJanuary 1, 2003 to December 31, 2005. Provisions for a third earnout paymentwere cancelled as described below.

Effective December 2006, the Company entered intocertain agreements (the “Hess Agreements”) with Mr. Hess, who had resigned asVice Chairman and a member of the Company’s Board of Directors effectiveNovember 20, 2006 and retired from his position as Chief Executive Officer ofVSF effective August 25, 2006. The Hess Agreements include (i) an EarnoutAgreement, (ii) a Termination Agreement and (iii) first amendments to theleases between Virginia Honey and an affiliate of Mr. Hess with respect to theKiller Bee Packaging Plant located in Martinsburg, West Virginia and thefacility located in Berryville, Virginia (the “Lease Amendments”).

The Earnout Agreement provides that all earnouts underthe Stock Purchase Agreement dated June 29, 2001, as amended, between theparties (the “Stock Purchase Agreement”) pursuant to which the Companypurchased the stock of Virginia Honey from Mr. Hess are satisfied in full andthat no further amounts are owed by the Company to Mr. Hess. The EarnoutAgreement also provides for the release of the shares of Virginia Honey’scapital stock from the Company’s pledge to Mr. Hess to secure the earn outpayments under the Stock Purchase Agreement. The Earnout Agreement includesmutual non-disparagement provisions and releases between the Company andVirginia Honey, on the one hand, and Mr. Hess, on the other, except for theperformance of obligations under the Hess Agreements and the Stock PurchaseAgreement.

The Termination Agreement formalizes the terminationof Mr. Hess’ Employment Agreement with the Company, including reaffirming Mr.Hess’ five-year non-competition agreement with the Company. Pursuant to theLease Amendments, the Company has given up its option to purchase theBerryville, Virginia and Martinsburg, West Virginia properties owned by Mr.Hess’ affiliate. In addition, the Lease Amendments provide the Company with anoption to terminate the Berryville lease upon 60 days notice until December 31,2007, which the Company exercised on February 26, 2007 to be effective April30, 2007, and an option to terminate the Martinsburg lease upon 12 monthsnotice at the end of five and nine years from the date of the applicableAmendment. In connection with these agreements, Mr. Hess also resigned as adirector and officer of the Company and each of its subsidiaries.

Similarly, Mr. Budd, the previous owner of Halifax,had two separate earnout periods — January 1, 2003 to December 31, 2005 andJanuary 1, 2006 to December 31, 2007. Potential remaining earn out payments toMr. Budd were to be based on earnings of VSF, as computed by a pre-definedallocation formula. On January 7, 2005, the Company terminated the EmploymentAgreement (the “Employment Agreement”) made as of November 1, 2002, betweenHalifax and Mr. Budd. The Company alleged a for “cause” termination and,accordingly, filed suit against Mr. Budd which was settled in accordance withthe terms and conditions of the Confidential Settlement Agreement and MutualRelease entered into on March 28, 2005 (the “Settlement Agreement”). Pursuantto the Settlement Agreement, the remaining potential earn out payments to Mr.Budd have been eliminated entirely.

The Settlement Agreement also amended theNon-Competition and Non-Solicitation Agreement entered into by Budd in connectionwith the Company’s acquisition of Halifax. Pursuant to the Non-CompetitionAgreement, as amended, Budd is prohibited from competing with the Company andsoliciting its employees and customers until March 1, 2010, provided, that Mr.Budd may freely engage in any business that is not producing productscompetitive with the products of the Company as of February 28, 2005.

***Possible Subsequent Event—Additional***Equity Issuance

The Company has reached an agreement in principle,with Howard Bedford, a Company director, pursuant to which Mr. Bedford wouldinvest $3,000,000 in the Company. Substantially all of these funds would beused for working capital requirements. In consideration for his investment, Mr.Bedford would receive 2,400,000 shares of Common Stock; two year warrants topurchase 500,000 shares of Common Stock at an exercise price of $1.25 pershare; three-year warrants to purchase 500,000 shares of Common Stock at anexercise price of $1.50 per share; four-year warrants to purchase 500,000shares of Common Stock at an exercise price of $1.50 per share; and five-yearwarrants to purchase 500,000 shares of Common Stock at an exercise price of$1.75 per share. The warrants would be exercisable immediately. Subsequent tothis transaction, Mr. Bedford would own approximately 38.2% of the Company’soutstanding common stock and warrants to acquire another 15.2%. On April 10,2007, $1,000,000 has been invested.

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***Contractual Obligations***

The aggregate amount of long-term obligations maturingby year is presented in the table below.

During 2006, the Company incurred rental expense ofapproximately $824,000, primarily due to operating leases for the facilities inMartinsburg, West Virginia; Berryville, Virginia and for equipment at theherring and salmon product processing facility in Chicago, Illinois. Futurecommitments under all operating leases are presented in the table below.

In connection with the Halifax acquisition, theCompany acquired the licensing rights to various brand names. Along with theserights, the Company has assumed the commitment to make minimum royalty paymentsunder the terms of these licensing agreements.

The Company intends to refinance the bank debt comingdue during years 1 through 3.
| **Contractual Obligations**                   | ** ** | **Payments due by period(in thousands)** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                         | ** ** | **Total**                                                    | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **More than  5 years** | ** ** |
| **Long-Term Debt Obligations  Including Interest** | ** ** | **$**                                                        | **17,278** | ** ** | **$** | **1,660** | ** ** | **$** | **13,413** | ** ** | **$** | **504** | ** ** | **$** | **1,701** | ** ** |
| **Operating Lease Obligations**                    | ** ** | **5,072**                                                    | ** ** | **530** | ** ** | **826** | ** ** | **826** | ** ** | **2,890** | ** ** |
| **Minimum Licensing Royalties**                    | ** ** | **543**                                                      | ** ** | **258** | ** ** | **285** | ** ** | **—** | ** ** | **—** | ** ** |
| **Total Contractual Obligations**                  | ** ** | **$**                                                        | **22,893** | ** ** | **$** | **2,448** | ** ** | **$** | **14,524** | ** ** | **$** | **1,330** | ** ** | **$** | **4,591** | ** ** |

 

An additional $1.0 million of long-term debt was issuedin April, 2007 which bears interest at a rate of prime plus 2.0% (10.25% as ofApril 17, 2007) and is due in full April 1, 2008.

The ratio of long-term debt-to-total capitalizationwas 79% at December 31, 2006 and 82% at December 31, 2005. The Company believesits financial resources are adequate to fund its needs for at least the next 12months.

**Inflation**

Inflation has historically not had a material effecton the Company’s operations.

**Recently IssuedAccounting Standards**

In June 2006, the FASB issued Interpretation No. 48,”Accountingfor Uncertainty in Income Taxes” (“FIN 48”) which clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for Income Taxes”. TheCompany adopted FIN 48 effective January 1, 2007 and management does not expectany material impact on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measures” (“SFAS 157”). This Statement defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. The Company expects toadopt SFAS 157 in 2008 and does not anticipate any material impact on theCompany’s financial statements.

In September 2006, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 108, “QuantifyingMisstatements in Financial Statements” (“SAB 108”). The SEC staff outlined theapproach it believes registrants should use to quantify the misstatement ofcurrent year 

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financial statements that result from misstatements ofprior year financial statements. The Company expects to apply SAB 108 in 2007and does not anticipate any material impact on the Company’s financialstatements.

**CriticalAccounting Policies and Estimates**

The Company’s financial statements reflect theselection and application of accounting policies that require management tomake significant estimates and assumptions. The Company believes that thefollowing are some of the more critical judgment areas in the application ofits accounting policies that currently affect the Company’s financial conditionand results of operations.

Preparation of the consolidated financial statementsin accordance with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions affecting thereported amounts of assets, liabilities, revenues and expenses and relatedcontingent liabilities. On an on-going basis, the Company evaluates itsestimates, including those related to revenues, returns, bad debts, incometaxes and contingencies and litigation. The Company bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances. Actual results may differ from theseestimates under different assumptions or conditions.

*RevenueRecognition and Merchandise Returns*

Revenue is recognized upon the passing of title to thecustomers, which occurs upon shipment of product to customers, includingbrokers, in fulfillment of customer orders. In accordance with industrypractices, inventory is sold to customers often with the right to return ordispose if the merchandise is not resold prior to the expiration of its shelflife. In order to support the Company’s products, various marketing programsare offered to customers, who reimburse them for a portion, or all of theirpromotional activities related to the Company’s products. The Company regularlyreviews and revises, when it deems necessary, estimates of costs to the Companyfor these marketing and merchandising programs based on estimates of what hasbeen incurred by customers. Actual costs incurred by the Company may differsignificantly if factors such as the level and success of the customers’programs or other conditions differ from expectations. Sales are reduced by aprovision for estimated future returns, disposals and promotional expense.

The Vita Seafood Segment guarantees the sale of mostof its products sold in Supermarkets, excluding warehouse clubs, which salesrepresent approximately 76% of that segment’s sales. This guarantee helpsensure that consumers receive fresh products. Under the guarantee, the majorityof customers are issued an allowance off-invoice to cover products not soldbefore the expiration date. Other customers with product not sold before theexpiration date have the right to return unsold product to the Company throughits food brokers or dispose of the unsold product themselves or through a fooddistributor. A credit is then issued to the Supermarket or food distributor.The Company provides a reserve that is recorded concurrently with the sale. TheCompany believes, based on its historical return rates, which have been fairlyconsistent over the past several years, that this reserve is adequate torecognize the cost of all foreseeable future product return credits associatedwith previously recognized revenues.

*Income Tax Assetsand Liabilities*

The Company recognizes deferred income tax assets andliabilities for the expected future tax consequences of temporary differencesbetween the tax basis and financial reporting basis of certain assets andliabilities and certain income tax credit carryforwards. A valuation reserve isrecognized based on the evidence available; if it is more likely than not thatsome portion or the entire deferred income tax asset will not be realized. Inestimating future tax consequences, the Company generally considers allexpected future events other than enactments of changes in tax laws or rates inits assessment of whether adequate taxable income will be available in thefuture to offset current net deferred taxes.

*Goodwill CarryingValue*

The Company assesses the impairment of goodwill, atleast annually and whenever events or changes in circumstances indicate thatthe carrying value may not be recoverable. Factors the Company considersimportant, which could trigger an impairment review include the following:

·                  Significantunderperformance relative to expected historical or projected future operatingresults;

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·                  Significantchanges in the manner of the Company’s use of the acquired assets or thestrategy for the Company’s overall business;

·                  Significantnegative industry or economic trends;

·                  Significantdecline in the Company’s stock price for a sustained period; and

·                  The Company’smarket capitalization relative to net book value.

When the Company determines that the carrying value ofgoodwill may not be recoverable based upon the existence of one or more of theabove indicators of impairment, the Company will review for impairment underthe provisions of SFAS 142. The Company uses an independent appraisal in itsassessments. If future operating performance at this business unit were to fallsignificantly below current levels, a non-cash charge to operating earnings forgoodwill impairment could result as has happened in 2004 and 2006. Theimpairments were principally due to the decline in the sales volume of Halifaxproducts in 2004 and overall performance issues in 2006.

See Note 1 of “Item 8. Financial Statements” for afurther description of the annual goodwill impairment assessment.

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**Item 8. FinancialStatements and Supplementary Data.**

Listed below are the financial statements included inthis part of the Annual Report on Form 10-K:
| (a)    |   | Consolidated  Financial Statements                                                                          |   | Page No.     |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------|--------|--------------|--------|
|   |   |                                                                                                        |   |         |   |
|   |   | Report  of Independent Registered Public Accounting Firm                                                    |   | 15           |   |
|   |   |                                                                                                        |   |         |   |
|   |   | Consolidated  Balance Sheets at December 31, 2006 and December 31, 2005                                     |   | 16           |   |
|   |   |                                                                                                        |   |         |   |
|   |   | Consolidated  Statements of Operations for the years ended December 31, 2006, 2005 and 2004                 |   | 17           |   |
|   |   |                                                                                                        |   |         |   |
|   |   | Consolidated  Statements of Shareholders’ Equity for the years ended December 31, 2006,  2005 and 2004 |   | 17           |   |
|   |   |                                                                                                        |   |         |   |
|   |   | Consolidated  Statements of Cash Flow for the years ended December 31, 2006, 2005 and 2004                  |   | 18           |   |
|   |   |                                                                                                        |   |         |   |
|   |   | Notes to Consolidated  Financial Statements                                                                 |   | 19 – 34 |   |

 

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**Report of Independent Registered Public Accounting Firm**

To the Board of Directors ofVita Food Products, Inc.Chicago, Illinois

We have audited the accompanying consolidated balance sheets of VitaFood Products, Inc. and Subsidiary, as of December 31, 2006 and 2005, and therelated consolidated statements of operations, shareholders’ equity and cashflows for each of the three years in the period ended December 31, 2006. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. The Companyis not required to have, nor were we engaged to perform, an audit of itsinternal controls over financial reporting. Our audits included considerationof internal controls over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlsover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall presentation of the financial statements. We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Vita FoodProducts, Inc. and Subsidiary, as of December 31, 2006 and 2005, and theresults of their operations and cash flows for each of the three years in theperiod ended December 31, 2006, in conformity with accounting principlesgenerally accepted in the United States of America.

As described in Note 1 to the consolidated financial statements,effective January 1, 2006, the Company adopted the fair value method ofaccounting provisions of Statement of Financial Accounting Standard No. 123(revised 2004), “Share Based Payment.”

/s/ BDO Seidman, LLP

Chicago, IllinoisApril 13, 2007

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**Vita Food Products, Inc.And SubsidiaryConsolidated Balance Sheets**
| **December 31,**                                                                                                                | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                           |       |       |       |       |       |
| **ASSETS**                                                                                                                           |       |       |       |       |       |
| Current Assets                                                                                                                       |       |       |       |       |       |
| Cash                                                                                                                                 |       |       |       |       |       |
| Accounts  receivable-trade, net of allowance for discounts, returns, and doubtful  accounts of $948,000 in 2006 and $563,000 in 2005 |       | $          | 54,194     |       | $          | 25,133 |   |
| Inventories                                                                                                                          |       | 6,468,669  |       | 5,215,912  |       |
| Raw material and  supplies                                                                                                           |       | 5,562,243  |       | 5,503,048  |       |
| Work in process                                                                                                                      |       | 170,167    |       | 192,630    |       |
| Finished goods                                                                                                                       |       | 2,178,575  |       | 1,827,245  |       |
| Prepaid expenses  and other current assets                                                                                           |       | 446,516    |       | 400,679    |       |
| Income taxes  receivable                                                                                                             |       | —     |       | 381,312    |       |
| Deferred income  taxes                                                                                                               |       | 610,714    |       | 519,578    |       |
| Total Current Assets                                                                                                                 |       | 15,491,078 |       | 14,065,537 |       |
|                                                                                                                                 |       |       |       |       |       |
| Property, Plant and  Equipment                                                                                                       |       |       |       |       |       |
| Land                                                                                                                                 |       | 35,000     |       | 35,000     |       |
| Building and  improvements                                                                                                           |       | 3,105,339  |       | 2,660,975  |       |
| Leasehold  improvements                                                                                                              |       | 582,620    |       | 549,926    |       |
| Machinery and  office equipment                                                                                                      |       | 11,970,640 |       | 11,302,648 |       |
| ** **                                                                                                                           |       | 15,693,599 |       | 14,548,549 |       |
| Less accumulated  depreciation and amortization                                                                                      |       | (9,950,781 | )          | (8,710,072 | )          |
| Net Property, Plant and  Equipment                                                                                                   |       | 5,742,818  |       | 5,838,477  |       |
|                                                                                                                                 |       |       |       |       |       |
| Goodwill                                                                                                                             |       | 5,571,012  |       | 6,696,705  |       |
| Other Assets                                                                                                                         |       | 403,572    |       | 422,661    |       |
| Deferred income taxes                                                                                                                |       | 325,304    |       | —     |       |
| Total Assets                                                                                                                         |       | $          | 27,533,784 |       | $          | 27,023,380 |   |
| ** **                                                                                                                           |       |       |       |       |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                       |       |       |       |       |       |
| Current Liabilities                                                                                                                  |       |       |       |       |       |
| Current  maturities of long-term obligations                                                                                         |       | $          | 1,513,783  |       | $          | 2,217,840 |   |
| Accounts payable                                                                                                                     |       | 6,520,166  |       | 3,142,406  |       |
| Accrued expenses                                                                                                                     |       | 1,260,308  |       | 853,982    |       |
| Total Current  Liabilities                                                                                                           |       | 9,294,257  |       | 6,214,228  |       |
|                                                                                                                                 |       |       |       |       |       |
| Long-term Obligations,  Less Current Maturities                                                                                      |       | 14,373,490 |       | 16,653,369 |       |
|                                                                                                                                 |       |       |       |       |       |
| Deferred income taxes                                                                                                                |       | —     |       | 453,728    |       |
|                                                                                                                                 |       |       |       |       |       |
| Shareholders’ Equity                                                                                                            |       |       |       |       |       |
| Preferred stock,  $.01 par value, authorized 1,000,000 shares; none issued                                                           |       |       |       |       |       |
| Common stock,  $.01 par value; authorized 10,000,000 shares; outstanding 4,941,763 shares in  2006 and 3,879,338 shares in 2005      |       | 49,417     |       | 38,793     |       |
| Treasury stock,  at cost 6,516 shares                                                                                                |       | (50,043    | )          | (50,043    | )          |
| Additional  paid-in capital                                                                                                          |       | 6,357,093  |       | 3,812,397  |       |
| Accumulated  deficit                                                                                                                 |       | (2,490,430 | )          | (99,092    | )          |
| Total Shareholders’  Equity                                                                                                     |       | 3,866,037  |       | 3,702,055  |       |
| Total Liabilities and Shareholders’ Equity                                                                                      |       | $          | 27,533,784 |       | $          | 27,023,380 |   |

 

See accompanyingnotes to consolidated financial statements.

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**Vita Food Products, Inc.And SubsidiaryConsolidated Statements of Operations**
| **Year Ended December 31,**  | ** ** | **2006**       | ** **     | **2005**       | ** ** | **2004**       | ** ** |
|---------------------------------------------|------------|----------------|----------------|----------------|------------|----------------|------------|
| Net Sales                                   | ** ** | **$**          | **50,954,166** | ** **     | **$**      | **46,572,268** |       | $ | 48,407,989 |   |
| Cost of Goods Sold                          | ** ** | **38,166,705** | ** **     | **32,633,126** |       | 34,408,406     |       |
| Gross Margin                                | ** ** | **12,787,461** |           | 13,939,142     |       | 13,999,583     |       |
|                                        | ** ** | ** **     |           |           |       |           |       |
| Selling and  Administrative Expenses        | ** ** | ** **     |           |           |       |           |       |
| Selling,  marketing & distribution      | ** ** | **9,201,615**  | ** **     | **9,209,363**  |       | 9,623,655      |       |
| Administrative                              | ** ** | **4,001,645**  | ** **     | **4,586,282**  |       | 4,281,352      |       |
| Employment  contract charge                 |       | —         |           | 501,709        |       | —         |       |
| Impairment of  long term assets             | ** ** | **1,446,294**  | ** **     | **—**     | ** ** | **2,313,954**  | ** ** |
| Total Selling  and Administrative Expenses  | ** ** | **14,649,554** |           | 14,297,354     |       | 16,218,961     |       |
| Operating Loss                              | ** ** | **(1,862,093** | **)**          | (358,212       | )          | (2,219,378     | )          |
|                                        | ** ** | ** **     |           |           |       |           |       |
| Interest Expense                            | ** ** | **1,314,245**  | ** **     | **1,082,484**  |       | 766,823        |       |
| Loss Before Income Tax  Benefit             | ** ** | **(3,176,338** | **)**          | (1,440,696     | )          | (2,986,201     | )          |
| Income Tax Benefit                          | ** ** | **(785,000**   | **)**          | **(552,000**   | **)**      | (269,000       | )          |
| Net Loss                                    | ** ** | **$**          | **(2,391,338** | **)**          | $          | (888,696       | )          | $ | (2,717,201 | ) |
|                                        | ** ** | ** **     |           |           |       |           |       |
| Basic Loss Per Share                        | ** ** | **($0.51**     | **)**          | **($0.23**     | **)**      | ($0.71         | )          |
| Weighted Average Common  Shares Outstanding | ** ** | **4,679,113**  | ** **     | **3,862,430**  |       | 3,840,017      |       |
|                                        | ** ** | ** **     |           |           |       |           |       |
| Diluted Loss Per Share                      | ** ** | **($0.51**     | **)**          | **($0.23**     | **)**      | ($0.71         | )          |
| Weighted Average Common Shares Outstanding  | ** ** | **4,679,113**  | ** **     | **3,862,430**  |       | 3,840,017      |       |

 

**Vita Food Products, Inc.And SubsidiaryConsolidated Statements of Shareholders’ Equity**
| ** **                                           | ** ** | ** **            | ** ** | ** **   | ** ** | ** **  | ** **   | **Additional** | ** ** | ** **    | ** ** | ** **      | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|--------------|------------|-------------|--------------|----------------|------------|---------------|------------|-----------------|------------|
| ** **                                           | ** ** | **Common Stock** | ** ** | **Treasury** | ** ** | **Paid-in** | ** **   | **Retained**   | ** ** | ** **    | ** ** |
| ** **                                           | ** ** | **Shares**            | ** ** | **Amount**   | ** ** | **Stock**   | ** **   | **Capital**    | ** ** | **Earnings**  | ** ** | **Total**       | ** ** |
|                                                 |       |                  |       |         |       |        |         |           |       |          |       |            |       |
| Balance, at January 1,  2004                         |       | 3,819,116             |       | $            | 38,191     |        | $            | 0              |       | $             | 3,647,262  |            | $          | 3,506,805 |   | $ | 7,192,258 |   |
|                                                 |       |                  |       |         |       |        |         |           |       |          |       |            |       |
| Proceeds from stock  purchase and stock option plans |       | 46,138                |       | 461          | ** ** | **—**  |         | 138,334        | ** ** | **—**    |       | 138,795         |       |
|                                                 |       |                  |       |         |       |        |         |           |       |          |       |            |       |
| Treasury stock  purchases                            | ** ** | **—**            | ** ** | **—**   |       | (50,043     | )            | **—**     | ** ** | **—**    |       | (50,043         | )          |
|                                                 |       |                  |       |         |       |        |         |           |       |          |       |            |       |
| Net Income                                           | ** ** | **—**            | ** ** | **—**   | ** ** | **—**  | ** **   | **—**     |       | (2,717,201    | )          | (2,717,201      | )          |
| Balance, at December  31, 2004                       |       | 3,865,254             |       | 38,652       |       | (50,043     | )            | 3,785,596      |       | 789,604       |       | 4,563,809       |       |
|                                                 |       |                  |       |         |       |        |         |           |       |          |       |            |       |
| Proceeds from stock  purchase and stock option plans |       | 14,084                |       | 141          | ** ** | **—**  |         | 26,801         | ** ** | **—**    |       | 26,942          |       |
|                                                 |       |                  |       |         |       |        |         |           |       |          |       |            |       |
| Net loss                                             | ** ** | **—**            | ** ** | **—**   | ** ** | **—**  | ** **   | **—**     |       | (888,696      | )          | (888,696        | )          |
| Balance, at December  31, 2005                       |       | 3,879,338             |       | 38,793       |       | (50,043     | )            | 3,812,397      |       | (99,092       | )          | 3,702,055       |       |
|                                                 |       |                  |       |         |       |        |         |           |       |          |       |            |       |
| Common stock and  warrants issuance, net             |       | 1,000,000             |       | 10,000       | ** ** | **—**  |         | 2,350,141      | ** ** | **—**    |       | 2,360,141       |       |
|                                                 |       |                  |       |         |       |        |         |           |       |          |       |            |       |
| Stock options exercised                              |       | 17,000                |       | 170          | ** ** | **—**  |         | 28,668         | ** ** | **—**    |       | 28,838          |       |
|                                                 |       |                  |       |         |       |        |         |           |       |          |       |            |       |
| Stock based  compensation expense                    | ** ** | **—**            | ** ** | **—**   | ** ** | **—**  |         | 78,814         | ** ** | **—**    |       | 78,814          |       |
|                                                 | ** ** | ** **            |       |         |       |        |         |           |       |          |       |            |       |
| Shares issued to settle  director fees               | ** ** | **17,026**            | ** ** | **170**      | ** ** | **—**  |         | 43,067         | ** ** | **—**    |       | 43,237          |       |
|                                                 |       |                  |       |         |       |        |         |           |       |          |       |            |       |
| Proceeds from stock  purchase plans                  |       | 28,399                |       | 284          | ** ** | **—**  |         | 44,006         | ** ** | **—**    |       | 44,290          |       |
|                                                 |       |                  |       |         |       |        |         |           |       |          |       |            |       |
| Net loss                                             | ** ** | **—**            | ** ** | **—**   | ** ** | **—**  | ** **   | **—**     |       | (2,391,338    | )          | (2,391,338      | )          |
| Balance, at December 31, 2006                        | ** ** | **4,941,763**         | ** ** | **$**        | **49,417** | ** **  | **($50,043** | **)**          | **$**      | **6,357,093** | ** ** | **($2,490,430** | **)**      | **$** | **3,866,037** | ** ** |
|                                                      |            |                       |            |              |            |             |              |                |            |               |            |                 |            |  |  |  |  |  |

 

See accompanyingnotes to consolidated financial statements.

17

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**Vita Food Products, Inc.And SubsidiaryConsolidated Statements of Cash Flows**
| **Year Ended December 31,**                                       | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** **  |
|----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|-------------|
|                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  |
| **Cash Flows From Operating  Activities**                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  |
| Net loss                                                                         |       | $          | (2,391,338 | )          | ($888,696  | )          | ($2,717,201 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |       |       |       |       |       |        |
| Depreciation and  amortization                                                   |       | 993,357    |       | 961,927    |       | 983,366    |        |
| Deferred income  tax benefit                                                     |       | (785,000   | )          | (458,000   | )          | (288,000   | )           |
| Employment  contract charge                                                      |       | —     |       | 501,709    |       | —     |        |
| Non-cash  stock-based compensation expense                                       |       | 78,814     |       | —     |       | —     |        |
| Impairment of  long term assets                                                  |       | 1,446,294  |       | —     |       | 2,313,954  |        |
| Changes in  assets and liabilities                                               |       |       |       |       |       |       |        |
| Accounts  receivable                                                             |       | (1,252,757 | )          | (97,395    | )          | 1,426,004  |        |
| Inventories                                                                      |       | (388,062   | )          | (553,741   | )          | 249,330    |        |
| Prepaid expenses  and other current assets                                       |       | (45,721    | )          | 32,857     |       | 33,767     |        |
| Income taxes  receivable                                                         |       | 296,144    |       | (98,645    | )          | 518,863    |        |
| Accounts payable                                                                 |       | 3,377,759  |       | 863,710    |       | (20,884    | )           |
| Accrued expenses                                                                 |       | 171,111    |       | 36,060     |       | (79,094    | )           |
| Net cash provided by  operating activities                                       |       | 1,500,601  |       | 299,786    |       | 2,420,105  |        |
|                                                                             |       |       |       |       |       |       |        |
| **Cash Flows From Investing  Activities**                                        |       |       |       |       |       |       |        |
| Capital  expenditures                                                            |       | (1,166,153 | )          | (840,865   | )          | (1,177,642 | )           |
| Change in other  assets                                                          |       | (18,247    | )          | (22,064    | )          | (18,567    | )           |
| Net cash used in  investing activities                                           |       | (1,184,400 | )          | (862,929   | )          | (1,196,209 | )           |
|                                                                             |       |       |       |       |       |       |        |
|                                                                             |       |       |       |       |       |       |        |
| **Cash Flows From Financing  Activities**                                        |       |       |       |       |       |       |        |
| Proceeds from  issuance of stock and warrants                                    |       | 2,433,269  |       | 26,942     |       | 138,795    |        |
| Net borrowings  (payments) under revolving loan facility                         |       | (1,061,361 | )          | 910,472    |       | (613,625   | )           |
| Payments on term  loan facility                                                  |       | (1,045,276 | )          | (825,489   | )          | (768,512   | )           |
| Proceeds from  term loan facility                                                |       | 101,154    |       | 1,298,846  |       | —     |        |
| Payments on  other debt                                                          |       | (700,000   | )          | (840,422   | )          | —     |        |
| Purchase of  treasury stock                                                      |       | —     |       | —     |       | (50,043    | )           |
| Deferred loan  costs paid                                                        |       | (14,926    | )          | (38,041    | )          | —     |        |
| Net cash provided by  (used in) financing activities                             |       | (287,140   | )          | 532,308    |       | (1,293,385 | )           |
| Net (decrease) increase  in cash                                                 |       | 29,061     |       | (30,835    | )          | (69,489    | )           |
|                                                                             |       |       |       |       |       |       |        |
| Cash, at beginning of  year                                                      |       | 25,133     |       | 55,968     |       | 125,457    |        |
| Cash, at end of year                                                             |       | $          | 54,194     |       | $          | 25,133     |        | $ | 55,968 |   |
|                                                                             |       |       |       |       |       |       |        |
| Supplemental Disclosure  of Cash Flow Information:                               |       |       |       |       |       |       |        |
| Cash paid for  interest                                                          |       | $          | 1,277,036  |       | $          | 990,682    |        | $ | 682,398 |   |
| Income taxes paid  (received)                                                    |       | ($296,144  | )          | $          | 4,646      |       | ($499,506   | ) |

 

See accompanyingnotes to consolidated financial statements.

18

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**Vita Food Products, Inc. andSubsidiaries**

**Notes to Consolidated Financial Statements**

**1.      Summary of Significant Accounting Policies**

# **Industry**

Vita Food Products, Inc. (“Vita Seafood”) processes and sells variousherring, cured and smoked salmon products and other complementary specialtyfood products throughout the United States. Vita Seafood has one processingplant located in Chicago, Illinois. Vita Specialty Foods, Inc. (“VSF”), awholly owned subsidiary of Vita Seafood, manufactures and distributes salad dressings,gourmet sauces, honey, jams and jellies. Through April 2007, VSF has twomanufacturing plants located in Martinsburg, West Virginia and Berryville,Virginia at which time the Company will exit the leased Berryville location.Management considers Vita Seafood and VSF as separate business segments whichare collectively referred to herein as the “Company”.

A summary of the significant accounting policiesutilized in the preparation of the accompanying financial statements follows.

**Principles of Consolidation**

The consolidated financial statements include theaccounts of Vita Seafood and VSF. VSF includes the now integrated results ofThe Virginia Honey Company, Inc. (“Virginia Honey”), acquired in 2001, and TheHalifax Group, Inc. (“Halifax”), acquired in 2002. All significant intercompanytransactions and balances have been eliminated.

**Concentration of CreditRisk**

Financial instruments thatpotentially subject the Company to significant concentrations of credit riskconsist principally of trade accounts receivable. The Company primarilyprovides credit in the normal course of business. The Company performs ongoingcredit evaluations of its customers and maintains allowances for potentialcredit losses, if necessary.

**Revenue Recognition andMerchandise Returns**

Revenue is recognized uponthe passing of title to the customers, which occurs upon shipment of product tocustomers, including brokers, in fulfillment of customer orders. In accordancewith industry practices, inventory is sold to customers often with the right toreturn or dispose if the merchandise is not resold prior to the expiration ofits shelf life. In order to support the Company’s products, various marketingprograms are offered to customers, which reimburse them for a portion, or all,of their promotional activities related to the Company’s products. The Companyregularly reviews and revises, when it deems necessary, estimates of costs tothe Company for these marketing and merchandising programs based on estimatesof what has been incurred by customers. Actual costs incurred by the Companymay differ significantly if factors such as the level and success of thecustomers’ programs or other conditions differ from expectations. Sales arereduced by a provision for estimated future returns, disposals and promotionalexpense.

Starting on January 1, 2006, the Company changed theclassification of “Slotting” expense, which had previously been included in theSelling, Marketing and Distribution category of operating expenses, to betreated as a sales deduction and thus classify these expenses as a reduction toarrive at the Net Sales total. These expenses are fees charged by customers toplace the Company’s new items into the customers’ distribution system.Additionally, the 2005 and 2004 operating results, as presented above, havebeen adjusted to consider this change and thus make these results morecomparable with the 2006 results. The result of this reclassification, whichhad no affect on Operating Loss or Net Loss, 

19

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was to reduce both Net Sales and Selling, Marketingand Distribution expenses, in an offsetting fashion, for the year endedDecember 31, 2005 and 2004 by $284,000 and $348,000, respectively.

**Accounts Receivable and Allowance for DoubtfulAccounts**

Accountsreceivable are customer obligations due under normal trade terms. The Companysells products to distributors and retailers throughout the food industry. TheCompany performs continuing credit evaluations of its customers’ financialcondition.

Seniormanagement reviews accounts receivable on a regular basis to determine if anyreceivables will potentially be uncollectible. The Company provides anallowance sufficient to cover any accounts receivable balances that arepotentially uncollectible, along with a general reserve based on historicexperience. After attempts to collect the receivable have failed and it isconsidered to be uncollectible, it is written off against the allowance. Basedon the information available, the Company believes the allowance for doubtfulaccounts as of December 31, 2006 to be adequate and not excessive. However, itis still possible that in the future, actual write offs may exceed the recordedbalance.

Theallowance for discounts, returns and doubtful accounts has fluctuated asfollows over the last three years:

**Allowance for Discounts, Returns and Doubtful Accounts**

**(in thousands)**

|          | **Calendar  Year** | ** ** | ** ** | **Balance at  Beginning of  Year** | ** ** | **Charged to  Expense** | ** ** | **Write-offs &  Collections** | ** ** | **Balance at  End  of Year** | ** ** |
|----------|--------------------|------------|------------|----------------------------------------------|------------|------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| **2004** | ** **         | **$**      | **301**    | ** **                                   | **306**    | ** **                   | **(38**    | **)**                                  | **$**      | **569**                                | ** ** |
| **2005** | ** **         | **$**      | **569**    | ** **                                   | **99**     | ** **                   | **(105**   | **)**                                  | **$**      | **563**                                | ** ** |
| **2006** | ** **         | **$**      | **563**    | ** **                                   | **444**    | ** **                   | **(59**    | **)**                                  | **$**      | **948**                                | ** ** |

#  

**Inventories**

Inventories are stated at thelower of cost or market. Costs are determined by the first-in, first-out methodand include raw materials, labor and plant overhead.

In November 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”)which clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs and wasted material (spoilage). The Company adopted theprovisions of SFAS 151 for inventory costs incurred in 2006. The adoption ofthis statement did not have a material impact on the Company’s financialcondition or results of operations.

**Property, Plant andEquipment**

Property, plant and equipment are stated at cost.Depreciation and amortization are being provided, on straight-line methods,over the estimated useful lives of the assets as follows:

| Buildings                |   | 31.5 years    |
|--------------------------|--------|---------------|
|                     |   |          |
| Buildings  improvements  |   | 15 years      |
|                     |   |          |
| Machinery and  equipment |   | 5 to 15 years |

 

20

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|                                 |   |         |
|--------------------------------------|--------|--------------|
| Office and  transportation equipment |   | 3 to 7 years |

 

Leasehold improvements are being amortized on astraight-line basis over the terms of the respective leases or the servicelives of the improvements whichever is shorter. Amortization of assets undercapital lease is included in depreciation and amortization. Repair andmaintenance items are expensed as incurred.

The Company reviews the carrying values of itsproperty, plant and equipment for possible impairment whenever events orchanges in circumstances indicate that the carrying amount of the assets maynot be recoverable. A long-lived asset held for use will be considered impairedif the estimated future undiscounted cash flows generated by its use andeventual disposal are lower than its then carrying amount. The resultingimpairment charge would be the difference between its carrying value and itsfair value, generally determined by a discounted cash flows method. Any assetsheld for disposal are reported at the lower of their carrying amounts or fairvalue less cost to sell

In December 2006, management determined that it wouldexercise its option to terminate its lease of the Company’s Berryville plant.The option was exercised in February 2007 and the lease will terminate as ofApril 2007. The plastic bottle manufacturing operations of this plant will beterminated and the Company will start purchasing plastic bottles for itsMartinsburg plant from third parties. Additionally, honey processing operationswill be transferred to the Martinsburg plant other than a small industrialgrade honey processing operation which represented an immaterial product linefor the Company. Due to this decision, management evaluated the remaininglong-lived assets at this facility and determined that a $321,000 impairmentcharge was required to write down assets, primarily leasehold improvements thatcould not be transferred to Martinsburg, to their estimated fair values. Inaddition, the carrying value of these assets started being depreciated over aterm to end in April 2007. Other Berryville equipment will be sold for amountsin excess of carrying value or transferred to Martinsburg where they will be putback in operation during the second and third quarters of 2007. Moving costswill be expensed as incurred.

**Goodwill**

Thechanges in the carrying amount of goodwill related to the VSF acquisitions forthe years ended December 31, 2006 and 2005 were as follows:

| Balance as of December 31,  2004             |   | $          | 5,996,705 |   |
|----------------------------------------------|--------|------------|-----------|--------|
|                                         |   |       |      |
| Contingent  purchase price paid (see Note 2) |   | 700,000    |      |
| Balance as of  December 31, 2005             |   | 6,696,705  |      |
|                                         |   |       |      |
| Goodwill  impairment charge                  |   | (1,125,693 | )         |
| Balance as of December  31, 2006             |   | $          | 5,571,012 |   |

 

The Company’s goodwillresulted from the acquisitions of Virginia Honey and Halifax. Annually,effective as of December 31, the Company engages an independent appraiser toassist in management’s assessment as to whether the recorded goodwill isimpaired. The independent appraisals are made using customary valuationmethodologies, including discounted cash flow and other fundamental analysisand comparisons. In its 2004 and 2006 assessments, management determined thatthe Company’s recorded goodwill was in excess of its fair value andaccordingly, the Company recorded goodwill impairment charges of $2,313,954 and$1,125,693 in 2004 and 2006, respectively. The impairments were principally dueto the decline in the sales volume of Halifax products in 2004 and overallperformance issues in 2006.

21

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**Estimates**

The accompanying financial statements includeestimated amounts and disclosures based on management’s assumptions aboutfuture events. Actual results may differ from those estimates.

**Fair Value of FinancialInstruments**

The carrying amounts of cash,accounts receivable, accounts payable and short-term obligations approximatefair value due to the short-term nature of these instruments. The carryingvalue of the Company’s long-term obligations, based on rates currentlyavailable for instruments with similar terms and maturities, also approximatesfair value.

**Advertising**

Advertising costs are expensed as incurred andincluded in selling, marketing and distribution expenses. Advertising expensesamounted to approximately $284,000, $280,000 and $349,000 in 2006, 2005 and2004, respectively.

**Shipping and Handling Fees**

The Company classifies shippingand handling costs billed to customers as revenue. Costs related to shippingand handling are classified as part of selling, marketing and distributionexpenses and were $3,640,000, $3,339,000 and $3,539,000 in 2006, 2005 and 2004,respectively.

**Income Taxes**

The Company recognizes deferred income tax assets andliabilities for the expected future tax consequences of temporary differencesbetween the tax basis and financial reporting basis of certain assets andliabilities and certain income tax credit carryforwards. In estimating futuretax consequences, the Company generally considers all expected future eventsother than enactments of changes in tax laws or rates. A valuation reserve isrecognized based on the evidence available; if it is more likely than not thatsome portion or the entire deferred income tax asset will not be realized.

**Basic and Diluted Earnings(Loss) Per Common Share**

Basic earnings (loss) per share is computed bydividing income (loss) available to common shareholders by the weighted-averagenumber of common shares outstanding for the period. Diluted earnings (loss) pershare follows the computation of basic earnings (loss) per share but also giveseffect to all dilutive potential common shares equivalents that wereoutstanding during the year.

In 2006, 2005 and 2004 there were 1,339,100, 349,600and 330,400 common shares, respectively, issuable upon exercise of stockoptions and warrants that were not considered in the computation because theywould have been anti-dilutive.

22

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**Accounting for Stock Based Compensation**

EffectiveJanuary 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share BasedPayment” (“SFAS 123 (R)”), applying the modified prospective method inaccounting for stock-based awards. Prior to the adoption of SFAS 123(R), theCompany applied the provisions of APB Opinion No. 25, “Accounting for StockIssued to Employees,” in accounting for its stock-based awards, and under suchprovisions, recognized no compensation cost for its stock-based awards. Underthe modified prospective method, SFAS 123(R) applies to new awards and toawards that were outstanding as of December 31, 2005 that are subsequentlyvested, modified, repurchased or cancelled. Compensation expense recognizedduring 2006 includes the portion vesting during the period for (1) allshare-based payments granted prior to, but not yet vested as of December 31,2005, based on the grant date fair value estimated in accordance with theoriginal provisions of Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”) and (2) all share-based paymentsgranted subsequent to December 31, 2005, based on the grant date fair valueestimated in accordance with SFAS 123(R), both using grant-date fair valuesestimated under the Black-Scholes option-pricing model. Due to the late 2005acceleration of vesting for all outstanding stock options granted prior toJanuary 1, 2005, future compensation expense related to unvested stock optionsgranted before such date was minimized. As a result of the Company’s decisionto adopt the modified prospective method, prior period results have not beenrestated.

Before adoption of SFAS 123(R), pro forma disclosuresreflected the fair value of each option grant estimated on the date of grantusing the Black-Scholes option-pricing model with the following results:
|                                                                                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average  fair value per options granted                                                            |       | $        | 1.25       |     | $          | 2.67     |       | $ | 4.42 |   |
|                                                                                                        |       |     |       |     |       |     |       |
| Significant  assumptions (weighted average)                                                                 |       |     |       |     |       |     |       |
| Risk-free interest rate at grant date                                                                       |       | 4.7      | %          | 4.3      | %          | 4.1      | %          |
| Expected stock price volatility                                                                             |       | 0.54     |       | 0.43     |       | 0.68     |       |
| Expected dividend payout                                                                                    |       | —   |       | —   |       | —   |       |
| Expected option life (years)                                                                                |       | 5        |       | 5        |       | 5        |       |
|                                                                                                        |       |     |       |     |       |     |       |
| Net loss                                                                                                    |       |     |       |     |       |     |       |
| As reported                                                                                                 |       |     |       | $        | (888,696   | )        | $          | (2,717,201 | ) |
| Deduct total stock based compensation expense (net  of income taxes) determined under the fair value method |       |     |       | (108,075 | )          | (41,490  | )          |
| Pro forma                                                                                                   |       |     |       | $        | (996,771   | )        | $          | (2,758,691 | ) |
|                                                                                                        |       |     |       |     |       |     |       |
| Basic loss per  share                                                                                       |       |     |       |     |       |     |       |
| As reported                                                                                                 |       |     |       | $        | (0.23      | )        | $          | (0.71 | ) |
| Pro forma                                                                                                   |       |     |       | $        | (0.26      | )        | $          | (0.72 | ) |
|                                                                                                        |       |     |       |     |       |     |       |
| Diluted loss per  share                                                                                     |       |     |       |     |       |     |       |
| As reported                                                                                                 |       |     |       | $        | (0.23      | )        | $          | (0.71 | ) |
| Pro forma                                                                                                   |       |     |       | $        | (0.26      | )        | $          | (0.72 | ) |
|                                                                                                             |            |          |            |          |            |          |            |  |  |  |

 

The accelerated vesting of certain stock options in2005 (see note 9 for further description) increased the 2005 pro forma expenseby $70,000.

23

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The key assumptions used in the Black Sholes modelare:

Expected volatility — based on the historicalvolatility of the Company’s common stock for the expected term of the stockoptions.

Dividend yield — based on the Company’s historical andprojected dividend payouts.

Risk-free interest rate — based on the observedinterest rates appropriate for the expected term of the Company’s stock options.

Expected option life — based on historical experience.

Forfeiture rate assumption — assumed 0% for theforfeiture rate based on limited historical experience.

The aggregate intrinsic value (defined as the spreadbetween the market price of the Company’s common stock as of the end of theperiod and the exercise price of the stock options) for both stock optionsoutstanding and exercisable as of December 31, 2006 was $8,745 and $8,109,respectively.

SFAS 123(R) also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as cashflow from financing activities rather than as cash flow from operations asrequired under Emerging Issues Task Force issue No. 00-15, “Classification inthe Statement of Cash Flow of the Income Tax Benefit Received by a Company uponExercise of a Nonqualified Employee Stock Option.” The Company has only hadimmaterial net income tax impacts related to stock compensation expense orexercising of stock options.

**Recent Accounting Pronouncements**

In June 2006, the FASB issued Interpretation No. 48,”Accountingfor Uncertainty in Income Taxes” (“FIN 48”) which clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for Income Taxes”. TheCompany adopted FIN 48 effective January 1, 2007 and management does not expecta material impact upon the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measures” (“SFAS 157”). This Statement defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. The Company expects toadopt SFAS 157 in 2008 and is evaluating if adoption will have any materialimpact on the Company’s financial statements.

In September 2006, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 108, “QuantifyingMisstatements in Financial Statements” (“SAB 108”). The SEC staff outlined theapproach it believes registrants should use to quantify the misstatement ofcurrent year financial statements that result from misstatements of prior yearfinancial statements. The Company adopted SAB 108 on January 1, 2007 and it didnot have any material impact on the Company’s financial statements.

**2.      Earn Out Provision under Acquisition Agreements**

Pursuant to the Company’s acquisitions of VirginiaHoney and Halifax in 2001 and 2002, respectively, the previous owners of thosebusinesses were subject to earn out provisions that have resulted in additionalpayments by the Company for the acquired businesses. As amended, the earn outprovisions for Terry Hess, the previous owner of Virginia Honey, have resultedin an additional amount of $840,000 paid to Mr. Hess in April 2005 based onspecific VSF operating results from January 1, 2001 to December 31, 2002. Inaddition, a second earn out payment to Mr. Hess in the amount of $700,000 waspaid in April 2006 based on the operating results of VSF for the period fromJanuary 1, 

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2003 to December 31, 2005. Provisions for a thirdearnout payment were cancelled as described below.

Effective December 2006, the Company entered intocertain agreements (the “Hess Agreements”) with Mr. Hess, who had resigned asVice Chairman and a member of the Company’s Board of Directors effectiveNovember 20, 2006 and retired from his position as Chief Executive Officer ofVSF effective August 25, 2006. The Hess Agreements include (i) an EarnoutAgreement, (ii) a Termination Agreement and (iii) first amendments to theleases between Virginia Honey and an affiliate of Mr. Hess with respect to theKiller Bee Packaging Plant located in Martinsburg, West Virginia and thefacility located in Berryville, Virginia (the “Lease Amendments”).

The Earnout Agreement provides that all earnouts underthe Stock Purchase Agreement dated June 29, 2001, as amended, between theparties (the “Stock Purchase Agreement”) pursuant to which the Companypurchased the stock of Virginia Honey from Mr. Hess are satisfied in full andthat no further amounts are owed by the Company to Mr. Hess. The EarnoutAgreement also provides for the release of the shares of Virginia Honey’scapital stock from the Company’s pledge to Mr. Hess to secure the earn outpayments under the Stock Purchase Agreement. The Earnout Agreement includesmutual non-disparagement provisions and releases between the Company andVirginia Honey, on the one hand, and Mr. Hess, on the other, except for theperformance of obligations under the Hess Agreements and the Stock PurchaseAgreement.

The Termination Agreement formalizes the terminationof Mr. Hess’ Employment Agreement with the Company, including reaffirming Mr.Hess’ five-year non-competition agreement with the Company. Pursuant to theLease Amendments, the Company has given up its option to purchase theBerryville, Virginia and Martinsburg, West Virginia properties owned by Mr.Hess’ affiliate. In addition, the Lease Amendments provide the Company with anoption to terminate the Berryville lease upon 60 days notice until December 31,2007, which the Company exercised on February 26, 2007 to be effective April30, 2007, and an option to terminate the Martinsburg lease upon 12 monthsnotice at the end of five and nine years from the date of the applicableAmendment. In connection with these agreements, Mr. Hess also resigned as adirector and officer of the Company and each of its subsidiaries.

Similarly, Mr. Budd, the previous owner of Halifax,had two separate earnout periods — January 1, 2003 to December 31, 2005 andJanuary 1, 2006 to December 31, 2007. Potential remaining earn out payments toMr. Budd were to be based on earnings of VSF, as computed by a pre-definedallocation formula. On January 7, 2005, the Company terminated the EmploymentAgreement (the “Employment Agreement”) made as of November 1, 2002, betweenHalifax and Mr. Budd. The Company alleged a for “cause” termination and,accordingly, filed suit against Mr. Budd which was settled in accordance withthe terms and conditions of the Confidential Settlement Agreement and MutualRelease entered into on March 28, 2005 (the “Settlement Agreement”). Pursuantto the Settlement Agreement, the remaining potential earn out payments to Mr.Budd have been eliminated entirely.

The Settlement Agreement also amended theNon-Competition and Non-Solicitation Agreement entered into by Budd inconnection with the Company’s acquisition of Halifax. Pursuant to theNon-Competition Agreement, as amended, Budd is prohibited from competing withthe Company and soliciting its employees and customers until March 1, 2010,provided, that Mr. Budd may freely engage in any business that is not producingproducts competitive with the products of the Company as of February 28, 2005.

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**3.      Accrued Expenses**

Accrued expenses consist of the following:
| *December 31,*            | ** ** | **2006**    | ** **    | **2005** | ** ** |
|--------------------------------|------------|-------------|---------------|----------|------------|
| Interest                       | ** ** | **$**       | **107,046**   |     | $          | 111,069 |   |
| Salaries and  bonuses          |       | **304,422** | ** **    | 302,882  |       |
| Taxes other than  income taxes |       | **59,529**  | ** **    | 54,200   |       |
| Utilities,  freight and other  | ** ** | **789,311** |          | 385,831  |       |
|                           | ** ** | **$**       | **1,260,308** |     | $          | 853,982 |   |

 

**4.      Long-Term Obligations**

Long-term obligations consist of the following:
| *December 31,*                                | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
| Revolving loan  facility (a)                       |       | $          | 7,526,730  |       | $          | 8,588,089 |   |
| Term loan—A  facility (a)                     |       | 5,282,000  |       | 6,242,000  |       |
| Term loan—B  facility (a)                     |       | 150,000    |       | 48,846     |       |
| Term loan  payable (b)                             |       | 2,353,455  |       | 2,480,948  |       |
| Additional  purchase price payable to Mr. Hess (c) |       | —     |       | 700,000    |       |
| Robert J. Budd  note (d)                           |       | 131,285    |       | 231,887    |       |
| Employment  contract (e)                           |       | 223,256    |       | 501,709    |       |
| Other notes  payable                               |       | 220,547    |       | 77,730     |       |
|                                               |       | 15,887,273 |       | 18,871,209 |       |
| Less current  maturities                           |       | 1,513,783  |       | 2,217,840  |       |
|                                               | ** ** | ** ** |       |       |       |
|                                               | ** ** | $          | 14,373,490 |       | $          | 16,653,369 |   |

 

(a)             On September 8, 2003,the Company entered into a loan agreement with a bank (the “Loan Agreement”)and paid off its existing credit facility with initial borrowings under thisnew Loan Agreement. The original Loan Agreement provided for a two-year$8,500,000 revolving line of credit (the ‘revolver’), a five-year $6,500,000term loan (the ‘Term A Loan”) and a six-year $3,000,000 term loan (the “Term BLoan”). The Term B Loan was never utilized. During 2004 and 2005, the LoanAgreement was amended several times to, among other things, extend the maturitydates of the revolver and change the available borrowings under the revolver(which most recently had been $10,500,000) and the Term Loans and add anover-advance loan of $1,000,000 which was terminated on February 28, 2006. OnMarch 24, 2006, the Loan Agreement was further amended. Pursuant to thisamendment, the Loan Agreement provided for a $9,500,000 revolver which wasscheduled to terminate on April 1, 2007; a $7,750,000 Term A Loan due inmonthly installments of $80,000 through July 31, 2008 with a balloon payment of$3,682,000 due on August 31, 2008; a $150,000 capital expenditure Term Loan Bdue in monthly installments of 1/60th of the outstanding balance as of August2006 from that date through May 31, 2010 and the remainder due on June 30,2010. The revolver is now limited to a borrowing base equal to 80% of eligibleaccounts receivable and 60% of eligible inventories, as defined in the LoanAgreement (as amended). On March 30, 2007, the Loan Agreement was amended againto extend the date of maturity date of the revolver for one year to April 1,2008 and to amend certain of the loan covenants. The revolver is now limited toa borrowing base equal to 80% of eligible accounts receivable and 60% ofeligible inventories, as defined in the Loan Agreement (as amended). On April13, 2007, the Loan Agreement was amended to add a one-year $1,000,000 term loanand to further modify the loan covenants. Outstanding borrowings under the LoanAgreement are secured by substantially all assets of the Company.

Interest under each piece of the amended LoanAgreement is at a floating rate per annum equal to the prime rate plus 0.5%other than for the new $1,000,000 term loan which bears an interest rate ofprime plus 2.0%. The prime rate was 8.25 % as of December 31, 2006.

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The Loan Agreement imposes certain restrictions on theCompany, including its ability to complete significant asset sales, merge oracquire businesses and pay dividends. Additionally, the Company had beenrequired to meet certain financial covenants at each quarter end during the termof the Loan Agreement, including a Minimum Tangible Net Worth, a Minimum EBITDAand a Minimum Cash Flow Coverage Leverage ratio, all as defined in the LoanAgreement. During 2005 and 2006, the Company had violated certain of thesecovenants and had obtained permanent waivers from the bank for such violations.The March 24, 2006 amendment to the Loan Agreement retroactively amended thesefinancial covenants, and, as amended, the Company was in compliance with thosecovenants as of December 31, 2005 and June 30, 2006. During the third andfourth quarter of 2006, the Company was not in compliance with certain of therevised covenants. The March 30, 2007 amendment to the Loan Agreement waivedthese 2006 covenant violations and the April 13, 2007 amendment reset thecovenants to start with the six months ending June 30, 2007 and to only includea Minimum EBITDA and a Minimum Cash Flow Coverage Leverage Ratio.

(b)            As part of theacquisition agreement for Virginia Honey, the Company assumed a 7.0% notepayable to a former Virginia Honey shareholder. At December 31, 2006, thebalance due was $2,353,457. This note is secured and is payable in monthlyinstallments through 2018.

(c)             As described in Note2, Mr. Hess earned additional purchase price on his sale of Virginia Honey tothe Company based on a measurement date of December 31, 2005. That obligationwas paid in April 2006. The agreement with Mr. Hess has been terminated and nofurther amounts are payable thereunder.

(d)            The merger agreementwith Halifax provided that, as part of the acquisition price, the Company wouldrepay the balance of a note due to the former owner by Halifax, on April 1,2006. The Settlement Agreement entered into between the Company and such formerowner in connection with the Company’s institution of litigation against theformer owner amended the terms of the note to provide for payment in 78bi-weekly equal installments of $4,241. The principal amount did not change andno interest accrues on this debt. See Note 10 for further information regardingthis obligation.

(e)             During the fourthquarter of 2005, a $501,709 non cash charge was recognized to account for thefuture costs associated with a senior officer, pursuant to a 2005 amendment tohis employment contract, which significantly reduced his duties during 2006 andterminated the agreement as of December 31, 2007. The Company paid $278,453 tothe officer in 2006 without the benefit of any services from him and paid$223,256 to the officer in 2007 as severance.

Scheduled annualmaturities of long-term obligations as of December 31, 2006 are as follows:
| *Year ending December 31,* | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|
| 2007                                      |       | $          | 1,513,783  |   |
| 2008                                      |       | 12,111,006 |       |
| 2009                                      |       | 235,102    |       |
| 2010                                      |       | 254,926    |       |
| 2011                                      |       | 208,772    |       |
| 2012 and  subsequent                      |       | 1,563,684  |       |
|                                      |       |       |       |
|                                      |       | $          | 15,887,273 |   |

 

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**5.      Income Taxes**

Deferred income taxes reflect the net effects of temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes as well as creditcarryforwards. The effects of existing temporary differences, that give rise tosignificant portions of the net deferred income tax asset (liability), are asfollows:
| *December 31,*                               | ** ** | **2006**      | ** **  | **2005** | ** ** |
|---------------------------------------------------|------------|---------------|-------------|----------|------------|
|                                              | ** ** | ** **    |        |     |       |
| Deferred income  tax asset:                       | ** ** | ** **    |        |     |       |
| Uniform inventory capitalization                  | ** ** | **$**         | **57,000**  |     | $          | 76,000 |   |
| Accrued expenses and reserves                     | ** ** | **500,000**   |        | 383,000  |       |
| Contributions carryover                           | ** ** | **53,000**    |        | 60,000   |       |
| Net operating loss carryforwards                  | ** ** | **845,000**   |        | 264,000  |       |
|                                              | ** ** | ** **    |        |     |       |
|                                              | ** ** | **1,455,000** |        | 783,000  |       |
| Deferred income  tax liability:                   | ** ** | ** **    |        |     |       |
| Depreciation and other property basis differences | ** ** | **(519,000**  | **)**       | (717,000 | )          |
|                                              | ** ** | ** **    |        |     |       |
| Net deferred income tax  asset (liability)        | ** ** | **$**         | **936,000** |     | $          | 66,000 |   |

 

The Company has gross federal net operating loss carryforwards of $1.0million, which expire, if unused, in 2022 – 2026.

Income tax benefit for the years ended December31, 2006, 2005 and 2004 consist of the following:
| *December 31,* | ** ** | **2006**     | ** **   | **2005**   | ** ** | **2004** | ** ** |
|---------------------|------------|--------------|--------------|------------|------------|----------|------------|
|                | ** ** | ** **   | ** **   | ** ** |       |     |       |
| Current             | ** ** | **$**        | **—**   |       | $          | (94,000  | )          | $ | 19,000 |   |
| Deferred            | ** ** | **(785,000** | **)**        | (458,000   | )          | (288,000 | )          |
|                | ** ** | ** **   | ** **   | ** ** |       |     |       |
| Income tax benefit  | ** ** | **$**        | **(785,000** | **)**      | $          | (552,000 | )          | $ | (269,000 | ) |

 

The reconciliation of income tax computed at the United States federalstatutory tax rate of 34% to income tax benefit is as follows:

| *Year ended December 31,* | ** ** | **2006**    | ** **    | **2005**   | ** ** | **2004** | ** ** |
|------------------------------------------|------------|-------------|---------------|------------|------------|----------|------------|
|                                     |       |        |          |       |       |     |       |
| Tax at federal  statutory rate           | ** ** | **$**       | **1,080,000** | **)**      | $          | (490,000 | )          | $ | (1,015,000 | ) |
| Goodwill  impairment charge              | ** ** | **383,000** |          | **—** |       | 787,000  |       |
| Other (primarily  state taxes)           | ** ** | **(88,000** | **)**         | (62,000    | )          | (41,000  | )          |
|                                     |       |        |          |       |       |     |       |
| Income tax benefit                       | ** ** | **$**       | **(785,000**  | **)**      | $          | (552,000 | )          | $ | (269,000 | ) |

** **

**6.      Commitments and Contingencies**

A.             Inthe ordinary course of business, the Company becomes involved in litigation asa defendant in various lawsuits. In the opinion of management, afterconsidering the advice of counsel, the ultimate resolution of these legalproceedings will not have a material effect on the financial statements takenas a whole and thus no provision has been made in the financial statements forany loss contingencies.

B.               TheCompany leases two of its Virginia Honey facilities from a former owner ofVirginia Honey, who was an officer of Vita Seafood and VSF until August 25,2006. However, one of the leases was terminated by the Company on February 26,2007, effective April 30, 2007. The other terminates in 2018 unless terminatedearlier by the Company or renewed by mutual consent. Future payments underthese leases amount to approximately $431,000 for 2007, $413,000 for 2008,$413,000 for 2009, $413,000 for 2010, $413,000 for 2011 and $413,000thereafter. Rent expense under these agreements totaled $572,000, $519,000 and$451,000 in 2006, 2005 and 2004, respectively.

C.               TheCompany had leased its Atlanta office from an unrelated lessor. The leaseexpired on August 31, 2006. Rent expense was less than $50,000 per year.

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D.              TheCompany has an operating lease for production equipment at the Virginia Honeyfacility. This lease originated in 2004 and during 2006, 2005 and 2004 theCompany paid approximately $138,000, $60,000 and $21,000 respectively. Thislease expires in 2007. Future payments are expected to be approximately $99,000**,**all of which is payable in 2007.

E.                TheCompany has brand name product licensing agreements, which contain provisionsfor minimum future royalty payments, which currently expire in 2008. During 2006,2005 and 2004, the Company paid $460,000, $555,000 and $535,000, respectively,in royalty payments under these licensing agreements. The minimum futureroyalty payments are $258,000 and $285,000 for 2007 and 2008, respectively.

F.                Otherthan for a contract terminated in February 2007 upon the resignation of therelated employee, the Company was party to two employment contracts as ofDecember 31, 2006. The two officers covered under these contracts have annualcash salaries (as amended) of $250,000 and $260,000, respectively, for 2007with provisions for annual increases through 2009 and 2008, respectively. Bothagreements also provide for the payment of severance benefits in certaincircumstances. One agreement provides for annual one year extensions.

**7.      Employee Benefit Plans**

The Company has established a qualified 401(k) profit sharing plancovering its non-union employees. Participants may elect to defer a portion oftheir annual compensation. The Company may contribute amounts at the discretionof the board of directors. The Company expensed 401(k) matching contributionsof $42,000, $43,000 and $68,000 in 2006, 2005 and 2004, respectively.

Additionally, the Company participates in two multi-employer plans thatprovide benefits to the Company’s union employees. Contributions to the plansfor the years ended December 31, 2006, 2005 and 2004 were $36,000, $34,000 and$35,000, respectively.

**8.      Major Customers**

In the year ended December 31, 2006, the Company had sales to threecustomers representing 24%, 11% and 11% of total annual net sales. At December31, 2006, these customers had open accounts receivable balances of $1,002,000,$618,000 and $1,104,000, respectively. During 2005, the Company had sales toone customer representing 20% and sales to another customer representing 12% oftotal annual net sales. At December 31, 2005, these customers had open accountsreceivable balances of $767,000 and $554,000, respectively. During 2004, theCompany had sales to one customer representing 21% and sales to anothercustomer representing 14% of total annual net sales.

**9.      Stock Option and Purchase Plans**

On September 11, 1996, the Company adopted the Vita Food Products, Inc.1996 Stock Option Plan for employees or other constituencies of the Company,including members of the board of directors who are employees. The plan wasamended and restated in 2004 to provide for 525,000 shares of common stock tobe reserved for issuance upon the exercise of options designated as either an “incentivestock option” or as a “nonqualified stock option.” These options vest at 20%per year and may be granted to employees or other constituencies of theCompany, including members of the board of directors who are employees. OnSeptember 11, 1996, the Company also adopted the Vita Food Products, Inc. 1996Stock Option Plan for Non-Employee Directors. The plan was amended and restatedin 2000 to provide for 175,000 shares of common stock to be reserved forissuance upon the exercise of options designated as a “nonqualified stockoption.” These options become fully vested six months after issuance and may begranted to directors who are not employees of the Company. Generally, alloptions are issued at exercise prices equal to market price and are exercisablefor a period of ten years from the date of grant. Further, in September 1996,the Company adopted the 1996 Employee Stock Purchase Plan pursuant to which150,000 shares of common stock have been reserved for issuance. In December2005, the Company’s board of 

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directors elected to fully vest all unvested employee stock optionsgranted between 2001-2004. This election was made in order to reduce thecomplications of and potential compensation expense pursuant to adopting FASB123(R) as of January 1, 2006. No additional compensation expense was recordeddue to exercise prices of the accelerated unvested options exceeding the marketvalue of the Company’s stock in December 2005.

In November 2006, the Company adopted the Vita Food Products, Inc. 2006Stock Option Plan for employees, directors and other constituencies of theCompany. This plan provides for 475,000 shares of common stock to be reservedfor issuance upon the exercise of options designated as either “incentive stockoptions” or “nonqualified stock options.” The plan was effective as ofSeptember 11, 2006, the expiration date of the 1996 Stock Option Plan and 1996Stock Option Plan for Non-Employee Directors, and remains subject toshareholder approval at the Company’s 2007 Annual Meeting of Stockholders.Options granted under this new plan 50,000 as of December 31, 2006, arereflected in the tables and disclosures below even though shareholder approvalis still pending.

In November 2006, the Company also adopted the Vita Food Products, Inc.2006 Employee Stock Purchase Plan pursuant to which 150,000 shares of commonstock have been reserved for issuance and which 28,399 shares have been issuedas of December 31, 2006. The plan was effective as of September 11, 2006, theexpiration date of the 1996 Employee Stock Purchase Plan, and remains subjectto shareholder approval at the Company’s 2007 Annual Meeting of Stockholders.

Information with respect to the stock option plans follows:

| *Year ended December 31,*     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**   | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
|                                         |       |     |       |     |       |       |       |
| Options outstanding at  beginning of year    |       | 349,600  |       | 330,400  |       | 314,400    |       |
| Options granted                              |       | 70,000   |       | 80,500   |       | 50,000     |       |
| Options exercised                            |       | (17,000  | )          | 0        |       | (23,500    | )          |
| Options forfeited                            |       | (63,500  | )          | (61,300  | )          | (10,500    | )          |
|                                         |       |     |       |     |       |       |       |
| Options outstanding at  end of year          |       | 339,100  |       | 349,600  |       | 330,400    |       |
|                                         |       |     |       |     |       |       |       |
| Weighted average  remaining contractual life |       | 6.6 yrs. |       | 6.6 yrs. |       | 6.8 yrs.   |       |
| Options exercisable                          |       | 240,700  |       | 286,600  |       | 200,180    |       |
|                                         |       |     |       |     |       |       |       |
| Exercise prices per option granted           |       | $        | 2.12-$3.73 |     | $          | 1.71-$3.41 |       | $ | 4.45-$7.52 |   |
|                                              |            |          |            |          |            |            |            |  |  |  |

 
| Weighted Average Exercise Price  Information | ** ** | **2006** | ** ** | **2005**   | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                                        |       |     |       |       |       |     |       |
| Outstanding  January 1,                                     |       | **$**    | **3.84**   | ** ** | $          | 4.15     |       | $ | 3.52 |   |
| Outstanding  December 31,                                   |       | **3.61** | ** ** | 3.84       |       | 4.15     |       |
| Exercisable at  year end                                    |       | **4.11** | ** ** | 4.14       |       | 3.60     |       |
| Exercised during  year                                      |       | **1.70** | ** ** | 0          |       | 2.43     |       |
| Forfeited during year                                       | ** ** | **4.02** |       | 3.99       |       | 4.83     |       |
|                                                             |            |          |            |            |            |          |            |  |  |  |

 

For 2006, stock-based compensation expense fromoption plans and share purchase plans was $23,408 and $52,097, respectively. Asof December 31, 2006, there was $100,221 of total unrecognized compensationcost related to outstanding stock options granted to employees and directorswhich is expected to be recognized over a weighted average period of 58 months.The total intrinsic value of stock options exercised during 2006 and 2004 was$32,303 and $123,418, respectively...

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**10.   Equity Issuance**

In February 2006, the Company entered into agreementspursuant to which five individuals or their affiliated entities invested atotal of $2,500,000 in the Company. Substantially all of these funds were usedto reduce funded debt. The investors received units consisting of an aggregateof 1,000,000 shares of common stock; three-year warrants to purchase 500,000shares of common stock at an exercise price of $5.00 per share; and five-yearwarrants to purchase an additional 500,000 shares of common stock at anexercise price of $7.50 per share. The warrants are currently exercisable. Theinvestors include the following: (i) Stephen D. Rubin, then president andChairman of the Board of Directors of the Company, and as of August 18, 2006, Chairmanof the Board of Directors, (ii) Clifford K. Bolen, then Senior Vice President,Chief Operating Officer and Chief Financial Officer of the Company, and, as ofAugust 18, 2006, President and Chief Executive Officer, (iii) Delphi CasualtyCo., of which Glen S. Morris, a director of the Company, owns a 44% equityinterest, (iv) a trust of which John C. Seramur, a director of the Company,serves as trustee, as well as (v) Howard Bedford, then an unrelated third-partyinvestor and, as of May 18, 2006, a director of the Company.

**11.   Business Segments**

The Company reports two operating business segments inthe same format as reviewed by the Company’s senior management. Segment one,Vita Seafood, processes and sells various herring, and cured and smoked salmonproducts throughout the United States and Mexico. Segment two, VSF, combinesthe products of Virginia Honey and Halifax and manufactures and distributeshoney, salad dressings, sauces, marinades, jams and jellies and gift basketsthroughout North America. Management predominately uses operating profit as themeasure of profit or loss by business segment. The significant accountingpolicies as described in Note 1 were utilized in the preparation of thefinancial statements for both segments.

Business segment information is as follows ($000’s):
| *Year ended December 31,* | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004**   | ** ** |
|------------------------------------------|------------|------------|------------|----------|------------|------------|------------|
| ** **                               |       |       |       |     |       |       |       |
| **Goodwill**                             |       |       |       |     |       |       |       |
| Vita Seafood                             | ** ** | $          | **—** |     | $          | **—** |       | $ | **—** |   |
| VSF (a)                                  |       | 5,571      |       | 6,697    |       | 5,997      |       |
|                                     |       |       |       |     |       |       |       |
| Total Goodwill                           | ** ** | $          | 5,571      |     | $          | 6,697      |       | $ | 5,997 |   |
|                                     |       |       |       |     |       |       |       |
| **Total  Assets**                        |       |       |       |     |       |       |       |
| Vita Seafood                             | ** ** | $          | 19,174     |     | $          | 18,523     |       | $ | 17,934 |   |
| VSF                                      |       | 8,360      |       | 8,500    |       | 7,366      |       |
|                                     |       |       |       |     |       |       |       |
| Total Assets                             | ** ** | $          | 27,534     |     | $          | 27,023     |       | $ | 25,300 |   |
|                                     |       |       |       |     |       |       |       |
| **Net  Sales**                           |       |       |       |     |       |       |       |
| Vita Seafood                             | ** ** | $          | 28,879     |     | $          | 26,346     |       | $ | 26,916 |   |
| VSF                                      |       | 22,075     |       | 20,226   |       | 21,491     |       |
|                                     |       |       |       |     |       |       |       |
| Total Net Sales                          | ** ** | $          | 50,954     |     | $          | 46,572     |       | $ | 48,407 |   |
|                                     |       |       |       |     |       |       |       |
| **Operating  (Loss) Profit**             |       |       |       |     |       |       |       |
| Vita Seafood (b) (c)                     | ** ** | $          | (576       | )        | $          | (1,290     | )          | $ | (483 | ) |
| VSF (a)(d)                               |       | (1,286     | )          | 932      |       | (1,736     | )          |
|                                     |       |       |       |     |       |       |       |
| Total Operating  (Loss) Profit           | ** ** | $          | (1,862     | )        | $          | (358       | )          | $ | (2,219 | ) |
|                                     | ** ** | ** ** |       |     |       |       |       |
| **Net  (Loss) Income**                   | ** ** | ** ** |       |     |       |       |       |
| Vita Seafood (b) (c)                     | ** ** | $          | (179       | )        | $          | (1,174     | )          | $ | (521 | ) |

 

31

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| VSF (a)(d)                           |       | (2,212 | )      | 285    |   | (2,196 | )      |
|--------------------------------------|------------|--------|--------|--------|--------|--------|--------|
|                                 |       |   |   |   |   |   |   |
| Total Net (Loss)  Income             | ** ** | $      | (2,391 | )      | $      | (889   | )      | $ | (2,717 | ) |
|                                 |       |   |   |   |   |   |   |
| **Depreciation  and Amortization**   |       |   |   |   |   |   |   |
| Vita Seafood                         | ** ** | $      | 536    |   | $      | 491    |   | $ | 500 |   |
| VSF                                  |       | 458    |   | 471    |   | 483    |   |
|                                 |       |   |   |   |   |   |   |
| Total  Depreciation and Amortization | ** ** | $      | 994    |   | $      | 962    |   | $ | 983 |   |
|                                 |       |   |   |   |   |   |   |
| **Capital  Expenditures**            |       |   |   |   |   |   |   |
| Vita Seafood                         | ** ** | $      | 698    |   | $      | 244    |   | $ | 612 |   |
| VSF                                  |       | 1,166  |   | 597    |   | 566    |   |
|                                 |       |   |   |   |   |   |   |
| Total Capital  Expenditures          | ** ** | $      | 1,162  |   | $      | 841    |   | $ | 1,178 |   |

 

(a)            Includesthe 2006 and 2004 goodwill impairment charge of $1,126 and $2,314,respectively.

(b)           Includesvarious unallocated corporate expenses that benefit both segments but aremonitored as part of the Vita Seafood segment.

(c)            Includesin 2005 a $502 charge, $301 net of tax benefit, to recognize the future costsassociated with a senior executive officer, whose duties were materiallyreduced.

(d)           Includesin 2006 a $321 charge to recognize a long term asset impairment related to thetermination of a facility lease.

32

----

**12.   Selected Quarterly Financial Data (unaudited)**

**For The ThreeMonth Periods Ended(in thousands, except share and per share data)**
|                                             | ** ** | **March 31,  2006** | ** ** | **June 30,  2006** | ** ** | **September 30,  2006** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Revenues                                    | ** ** | $                        | 12,788     | ** **              | $          | 11,828                       | ** ** | $                           | 12,451     | ** ** | $ | 13,887 | ** ** |
| Gross Margin                                |       | 3,896                    |       | 3,372                   |       | 2,440                        |       | 3,079                       |       |
| Net Income  (Loss)                          |       | 57                       |       | 15                      |       | (725                         | )          | (a) (1,738)                 |       |
|                                        |       |                     |       |                    |       |                         |       |                        |       |
| Basic Income  (Loss) per Share              | ** ** | $                        | 0.01       | ** **              | $          | 0.00                         | ** ** | $                           | (0.15      | ) | $ | (0.35 | ) |
| Weighted Average  Common Shares Outstanding |       | 3,995,044                |       | 4,884,778               |       | 4,904,086                    |       | 4,916,328                   |       |
|                                        |       |                     |       |                    |       |                         |       |                        |       |
| Diluted Income  (Loss) per Share            | ** ** | $                        | 0.01       | ** **              | $          | 0.00                         | ** ** | $                           | (0.15      | ) | $ | (0.35 | ) |
| Weighted Average Common  Shares Outstanding |       | 4,016,193                |       | 4,938,816               |       | 4,904,086                    |       | 4,916,328                   |       |

 

**For The Three Month Periods Ended(in thousands, except share and per share data)**
|                                             | ** ** | **March 31,  2005** | ** ** | **June 30,  2005** | ** ** | **September 30,  2005** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Revenues                                    |       | $                        | 10,897     |                    | $          | 10,158                       |       | $                           | 11, 370    |   | $ | 14,147 |   |
| Gross Margin                                |       | 3,201                    |       | 3,478                   |       | 3,179                        |       | 4,081                       |       |
| Net Income  (Loss)                          |       | (257                     | )          | 51                      |       | (257                         | )          | (b) (426)                   |       |
|                                        |       |                     |       |                    |       |                         |       |                        |       |
| Basic Income  (Loss) per Share              |       | $                        | (0.07      | )                       | $          | 0.01                         |       | $                           | (0.07      | ) | $ | (0.11 | ) |
| Weighted Average  Common Shares Outstanding |       | 3,858,738                |       | 3,858,738               |       | 3,866,062                    |       | 3,866,062                   |       |
|                                        |       |                     |       |                    |       |                         |       |                        |       |
| Diluted Income  (Loss) per Share            |       | $                        | (0.07      | )                       | $          | 0.01                         |       | $                           | (0.07      | ) | $ | (0.11 | ) |
| Weighted Average Common  Shares Outstanding |       | 3,858,738                |       | 3,884,002               |       | 3,866,062                    |       | 3,866,062                   |       |

 

(a)                                  Includesa $193 charge, net of tax benefit, to recognize impairment of long-livedassets.

(b)                                 Includes a $301 charge, net of tax benefit, torecognize the future costs associated with a senior executive whose duties havebeen materially reduced.

**13.   Subsequent Event (unaudited)**

On February 16, 2007, the Company voluntarily recalled certain productsbecause the labels did not disclose that the products contained a flavoringredient derived from milk. No illnesses or adverse reactions have beenreported to date in connection with this label disclosure issue. Existingprocedures have been reviewed and corrected where necessary. The recallresulted in the establishment of a reserve of approximately $444,000 (audited)in the fourth quarter of 2006.

33

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The Company has reached an agreement in principle with Howard Bedford,a Company director, pursuant to which Mr. Bedford would invest $3,000,000 inthe Company. Subsequently all of these funds would be used for****working capital requirements. In consideration for hisinvestment, Mr. Bedford would receive 2,400,000 shares of the Company’s commonstock, two year warrants to purchase 500,000 shares of Common Stock at anexercise price of $1.25 per share; three-year warrants to purchase 500,000shares of Common Stock at an exercise price of $1.50 per share; four-yearwarrants to purchase 500,000 shares of Common Stock at an exercise price of$1.50 per share; and five-year warrants to purchase 500,000 shares of CommonStock at an exercise price of $1.75 per share. The warrants would beexercisable immediately. Subsequent to this transaction, Mr. Bedford would ownapproximately 38.2% of the Company’s common stock and warrants to acquireanother 15.2%. On April 10, 2007, $1,000,000 has been invested. With the equityinfusion, management believes it would be able to effectively operate itsbusiness during 2007 and beyond.

34

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**PART III**

**Item 12. Security Ownership of Certain Beneficial Owners and****Management and RelatedStockholder Matters.**

The information required by this Item 12 isincorporated by reference to the information set forth under the caption “SecurityOwnership of Principal Holders and Management” in the Company’s definitiveProxy Statement for the 2007 Annual Meeting of Stockholders.

**Item 13. Certain Relationshipsand Related Transactions, and Director Independence.**

The information required by this Item 13 is incorporatedby reference to the information set forth under the captions “Transactions withRelated Persons, Promoters and Certain Control Persons” and “CorporateGovernance” in the Company’s definitive Proxy Statement for the 2007 AnnualMeeting of Stockholders.

**PART IV**

**Item 15. Exhibits and Financial Statement Schedules.**

(a)(1), (a)(2) and (c):             The Company has filed itsconsolidated financial statements in Part II, Item 8 of this Annual Report onForm 10-K.

(a)(3) and (b):        Listed below are the exhibits filed as part ofthis Annual Report on Form 10-K:

35

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** **
| Number       | ** ** | **Exhibit Title**                                                                                                                                                                                 | ** ** |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| (1)  2.1     |       | Stock  Purchase Agreement, dated as of June 29, 2001, between Vita Food Products,  Inc., Virginia Honey Company, Inc. and Terry W. Hess (Ex. 2.1)                                                      |       |
| (2)  2.2     |       | Merger  Agreement, dated as of October 17, 2002, between the Company, Vita Holdings,  Inc., Vita/Halifax Acquisition Company, Halifax, Robert J. Budd, Oak Hill  Family LLC and Terry W. Hess (Ex 2.2) |       |
| (3)  3.1     |       | Articles  of Incorporation of the Company (Ex. 3.1)                                                                                                                                                    |       |
| (3)  3.2     |       | By-laws  of the Company (Ex. 3.2)                                                                                                                                                                      |       |
| (3)  4.1     |       | Form  of Common Stock Certificate (Ex. 4.1)                                                                                                                                                            |       |
| (9)  4.2     |       | Certificate  of Designation of Series A Preferred Stock, as filed with the Secretary of  State of Delaware on November 11, 2005 (Ex. 4.1)                                                              |       |
| (4)  10.1    |       | Loan  and Security Agreement dated as of September 5, 2003 by and between the  Company and LaSalle National Bank, N.A. (Ex. 10.1)                                                                      |       |
| (10)  10.1.1 |       | First Amendment to Loan  and Security Agreement dated November 5, 2004 (Ex. 10.1.1)                                                                                                                    |       |
| (5)  10.1.2  |       | Second Amendment to  Loan and Security Agreement dated December 21, 2004 (Ex. 10.1)                                                                                                                    |       |
| (11)  10.1.3 |       | Third Amendment to Loan  and Security Agreement dated January 31, 2005 (Ex. 10.1)                                                                                                                      |       |
| (12)  10.1.4 |       | Fourth Amendment to  Loan and Security Agreement dated April 4, 2005 (Ex. 10.1)                                                                                                                        |       |
| (13)  10.1.5 |       | Fifth Amendment to Loan  and Security Agreement dated June 30, 2005 (Ex. 10.1)                                                                                                                         |       |
| (14)  10.1.6 |       | Sixth Amendment to Loan  and Security Agreement dated August 4, 2005 (Ex. 10.1)                                                                                                                        |       |
| (15)  10.1.7 |       | Seventh Amendment to  Loan and Security Agreement dated August 30, 2005 (Ex. 10.1)                                                                                                                     |       |
| (20)10.1.8   |       | Eighth Amendment to  Loan and Security Agreement dated March 30, 2007 (Ex. 10.1)                                                                                                                       |       |
| (17)10.1.9   |       | Ninth Amendment to Loan  and Security Agreement dated March 24, 2006 (Ex. 10.1)                                                                                                                        |       |
| (21)10.1.10  |       | Tenth Amendment to Loan  and Security Agreement dated April 13, 2007 (Ex. 10.1.10)                                                                                                                     |       |
| (3)  10.2    |       | Form of 1996 Employee  Stock Option Plan (Ex. 10.4)                                                                                                                                                    |       |
| (3)  10.3    |       | Form of 1996 Stock  Option Plan for Non-Employee Directors (Ex. 10.5)x                                                                                                                                 |       |

 

36

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| (3) 10.4     |   | Form of Employment  Agreement between the Company and Stephen D. Rubin (Ex. 10.7) x                                                                                                |   |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| (6)  10.4.1  |   | Amendment One to  Employment Agreement between the Company and Stephen D. Rubin (Ex. 10.4.1) x                                                                                     |   |
| (10)  10.4.2 |   | Amendment Two to  Employment Agreement between the Company and Stephen D. Rubin (Ex. 10.4.2) x                                                                                     |   |
| (18)  10.4.3 |   | Employment Agreement  between the Company and Stephen D. Rubin, dated April 4, 2006 (Ex. 10.1) x                                                                                   |   |
| (7)  10.5    |   | Employment  Agreement dated as of January 1, 2004 between the Company and Clark L.  Feldman (Ex. 10.6) x                                                                           |   |
| (3)  10.6    |   | Long  Term Supply/Purchase Agreement dated as of September 1, 1992 by and between  the Company and Barry’s Limited (Ex. 10.9)x                                                |   |
| (3) 10.7     |   | Gorenstein  Agreement dated September 20, 1996 by and among the Company, Stephen D.  Rubin, Clark L. Feldman, Sam Gorenstein, David Gorenstein and J.B.F.  Enterprises (Ex. 10.26) |   |
| (1)  10.8    |   | Form  of Employment Agreement, dated as of July 1, 2001, between Virginia Honey  Company, Inc. and Terry W. Hess (First Exhibit to Ex. 2.1) x                                      |   |
| (10)  10.8.1 |   | Amendment  One to Employment Agreement between Virginia Honey Company, Inc. and Terry W.  Hess (Ex. 10.8.1) x                                                                      |   |

 

37

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| (8) 10.9    |   | Employment  Agreement, made as of November 1, 2002 between The Halifax Group, Inc. and  Robert J. Budd (Ex. 10.1) x                                                                                                                            |   |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| (8)  10.10  |   | Amendment  to Employment Agreement, made as of March, 2003 between The Halifax Group,  Inc. and Robert J. Budd (Ex. 10.2)                                                                                                                      |   |
| (8)  10.11  |   | Non-Competition  and Non-Solicitation Agreement, made as of November 1, 2002 among Vita Food  Products, Inc., Vita Holdings, Inc., The Halifax Group, Inc. and Robert J.  Budd (Ex. 10.3)                                                      |   |
| (10)  10.12 |   | Confidential  Settlement Agreement and Mutual Release, entered into on March 28, 2005,  among the Vita Food Products, Inc., Vita Specialty Foods, Inc., Virginia  Honey Company, Inc., The Halifax Group, Inc. and Robert J. Budd (Ex. 10.12)x |   |
| (9)  10.13  |   | Form  of Rights Agreement dated as of November 10, 2005, between Vita Food  Products, Inc. and American Stock Transfer and Trust Company (Ex. 10.1)                                                                                            |   |
| (16)  10.14 |   | Employment  Agreement, made as of March 20, 2006 between Vita Food Products, Inc. and  Clifford Bolen (Ex. 10.1) x                                                                                                                             |   |
| (19)  10.15 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and  Howard Bedford (Ex. 10.1)                                                                                                                               |   |
| (19)  10.16 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and  Stephen D. Rubin (Ex. 10.2)                                                                                                                             |   |
| (19)  10.17 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and  Stephen D. Rubin (Ex. 10.3)                                                                                                                             |   |
| (19)  10.18 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and the  John C. Seramur 2005 Flite Trust dated September 19, 2005 (Ex. 10.4)                                                                                |   |
| (19)  10.19 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and the  John C. Seramur 2005 Flite Trust dated September 19, 2005 (Ex. 10.5)                                                                                |   |
| (19)  10.18 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and  Clifford K. Bolen and Affiliates (Ex. 10.6)                                                                                                             |   |
| (19)  10.19 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and  Delphi Casualty Co. (Ex. 10.7)                                                                                                                          |   |
| (7)  14.1   |   | Code  of Ethics (Ex. 14.1)                                                                                                                                                                                                                     |   |
| (7)21.1     |   | Subsidiary  of the Company (Ex. 21.1)                                                                                                                                                                                                          |   |
| (21)23.1    |   | Consent  of Independent Registered Public Accounting Firm (Ex. 23.1)                                                                                                                                                                           |   |
| 31.1        |   | Principal  Executive and Financial Officer Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 *                                                                                                                          |   |
| 32.1        |   | Principal Executive  Officer and Financial Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 *                                                                                                                          |   |

----

(1)             Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onAugust 30, 2001. Form 8-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

38

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(2)             Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onNovember 6, 2002. Form 8-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

(3)             Incorporatedby reference to Form SB-2 Registration Statement (File No. 333-5738),filed with the Securities and Exchange Commission on September 23, 1996. FormSB-2 Exhibit Number is included in parenthesis following the title of theexhibit.

(4)             Incorporatedby reference to Form 10-Q for the fiscal quarter ended September 30, 2003,filed with the Securities and Exchange Commission on November 14, 2003. Form10-Q Exhibit Number is included in parenthesis following the title of theexhibit.

(5)             Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on January 6, 2005. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(6)             Incorporatedby reference to Form 10-QSB for the fiscal quarter ended June 30, 1999, filedwith the Securities and Exchange Commission on August 9, 1999. Form 10-QSBExhibit Number is included in parenthesis following the title of the exhibit.

(7)             Incorporatedby reference to Form 10-K for the fiscal year ended December 31, 2003, filedwith the Securities and Exchange Commission on March 30, 2004. Form 10-KExhibit Number is included in parenthesis following the title of the exhibit.

(8)             Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on January 13, 2005. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(9)             Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on November 15, 2005. Form 8-KExhibit Number is included in parenthesis following the title of the exhibit.

(10)       Incorporatedby reference to Form 10-K for the fiscal year ended December 31, 2004, filedwith the Securities and Exchange Commission on March 31, 2005. Form 10-KExhibit Number is included in parenthesis following the title of the exhibit.

(11)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on April 12, 2005. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(12)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on April 18, 2005. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(13)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on July 13, 2005. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(14)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on August 11, 2005. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(15)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on September 8, 2005. Form 8-KExhibit Number is included in parenthesis following the title of the exhibit.

(16)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on March 23, 2006. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(17)       Incorporatedby reference to Form 10-K filed with the Securities and Exchange Commission onMarch 30, 2006. Form 10-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

(18)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onApril 7, 2006. Form 8-K Exhibit Number is included in parenthesis following thetitle of the exhibit.

(19)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onFebruary 22, 2006. Form 8-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

(20)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onApril 5, 2007. Form 8-K Exhibit Number is included in parenthesis following thetitle of the exhibit.

(21)       Incorporatedby reference to Form 10-K filed with the Securities and Exchange Commission onApril 17, 2007. Form 8-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

39

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x                      Indicatesan employee benefit plan, management contract or compensatory plan orarrangement.

*                    Filedherewith.

40

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
|        | **VITA FOOD PRODUCTS, INC.** |
|--------|------------------------------|
|   | ** **                   |
|   | By:                          | /s/ Clifford K. Bolen |
|   |                         | Clifford K. Bolen |
|   |                         | President |
|   |                         |   |
|   | Date:                        | May 1, 2007 |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the following capacities on May 1,2007.
| Signatures              | ** ** | **Title**                                                   |
|-------------------------|------------|-------------------------------------------------------------|
|                    |       |                                                        |
| /s/ Clifford K. Bolen   |       | President and  Chief Executive Officer                      |
| Clifford K. Bolen       |       | (Principal  Executive and Financial and Accounting Officer) |
|                    |       |                                                        |
| /s/ Stephen D. Rubin    |       | Chairman of the  Board                                      |
| Stephen D. Rubin        |       |                                                        |
|                    |       |                                                        |
| /s/ Howard Bedford      |       | Director                                                    |
| Howard Bedford          |       |                                                        |
|                    |       |                                                        |
| /s/ Scott Levitt        |       | Director                                                    |
| Scott Levitt            |       |                                                        |
|                    |       |                                                        |
| /s/ Glenn Morris        |       | Director                                                    |
| Glenn Morris            |       |                                                        |
|                    |       |                                                        |
| /s/ Steven A. Rothstein |       | Director                                                    |
| Steven A. Rothstein     |       |                                                        |
|                    |       |                                                        |
| /s/ John C. Seramur     |       | Director                                                    |
| John C. Seramur         |       |                                                        |

 

41

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**Exhibit Index**
| Number       | ** ** | **Exhibit Title**                                                                                                                                                                                 | ** ** |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| (1)  2.1     |       | Stock  Purchase Agreement, dated as of June 29, 2001, between Vita Food Products,  Inc., Virginia Honey Company, Inc. and Terry W. Hess (Ex. 2.1)                                                      |       |
| (2)  2.2     |       | Merger  Agreement, dated as of October 17, 2002, between the Company, Vita Holdings,  Inc., Vita/Halifax Acquisition Company, Halifax, Robert J. Budd, Oak Hill  Family LLC and Terry W. Hess (Ex 2.2) |       |
| (3)  3.1     |       | Articles  of Incorporation of the Company (Ex. 3.1)                                                                                                                                                    |       |
| (3)  3.2     |       | By-laws  of the Company (Ex. 3.2)                                                                                                                                                                      |       |
| (3)  4.1     |       | Form  of Common Stock Certificate (Ex. 4.1)                                                                                                                                                            |       |
| (9)  4.2     |       | Certificate  of Designation of Series A Preferred Stock, as filed with the Secretary of  State of Delaware on November 11, 2005 (Ex. 4.1)                                                              |       |
| (4)  10.1    |       | Loan  and Security Agreement dated as of September 5, 2003 by and between the  Company and LaSalle National Bank, N.A. (Ex. 10.1)                                                                      |       |
| (10)  10.1.1 |       | First Amendment to Loan  and Security Agreement dated November 5, 2004 (Ex. 10.1.1)                                                                                                                    |       |
| (5)  10.1.2  |       | Second Amendment to  Loan and Security Agreement dated December 21, 2004 (Ex. 10.1)                                                                                                                    |       |
| (11)  10.1.3 |       | Third Amendment to Loan  and Security Agreement dated January 31, 2005 (Ex. 10.1)                                                                                                                      |       |
| (12)  10.1.4 |       | Fourth Amendment to  Loan and Security Agreement dated April 4, 2005 (Ex. 10.1)                                                                                                                        |       |
| (13)  10.1.5 |       | Fifth Amendment to Loan  and Security Agreement dated June 30, 2005 (Ex. 10.1)                                                                                                                         |       |
| (14)  10.1.6 |       | Sixth Amendment to Loan  and Security Agreement dated August 4, 2005 (Ex. 10.1)                                                                                                                        |       |
| (15)  10.1.7 |       | Seventh Amendment to  Loan and Security Agreement dated August 30, 2005 (Ex. 10.1)                                                                                                                     |       |
| (20)10.1.8   |       | Eighth Amendment to  Loan and Security Agreement dated March 30, 2007 (Ex. 10.1)                                                                                                                       |       |
| (17)10.1.9   |       | Ninth Amendment to Loan  and Security Agreement dated March 24, 2006 (Ex. 10.1)                                                                                                                        |       |
| (21)10.1.10  |       | Tenth Amendment to Loan  and Security Agreement dated April 13, 2007 (Ex. 10.1.10)                                                                                                                     |       |
| (3)  10.2    |       | Form of 1996 Employee  Stock Option Plan (Ex. 10.4)                                                                                                                                                    |       |
| (3)  10.3    |       | Form of 1996 Stock  Option Plan for Non-Employee Directors (Ex. 10.5)x                                                                                                                                 |       |

 

42

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| (3) 10.4     |   | Form of Employment  Agreement between the Company and Stephen D. Rubin (Ex. 10.7) x                                                                                                |   |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| (6)  10.4.1  |   | Amendment One to  Employment Agreement between the Company and Stephen D. Rubin (Ex. 10.4.1) x                                                                                     |   |
| (10)  10.4.2 |   | Amendment Two to  Employment Agreement between the Company and Stephen D. Rubin (Ex. 10.4.2) x                                                                                     |   |
| (18)  10.4.3 |   | Employment Agreement  between the Company and Stephen D. Rubin, dated April 4, 2006 (Ex. 10.1) x                                                                                   |   |
| (7)  10.5    |   | Employment  Agreement dated as of January 1, 2004 between the Company and Clark L.  Feldman (Ex. 10.6) x                                                                           |   |
| (3)  10.6    |   | Long  Term Supply/Purchase Agreement dated as of September 1, 1992 by and between  the Company and Barry’s Limited (Ex. 10.9)x                                                |   |
| (3) 10.7     |   | Gorenstein  Agreement dated September 20, 1996 by and among the Company, Stephen D.  Rubin, Clark L. Feldman, Sam Gorenstein, David Gorenstein and J.B.F.  Enterprises (Ex. 10.26) |   |
| (1)  10.8    |   | Form  of Employment Agreement, dated as of July 1, 2001, between Virginia Honey  Company, Inc. and Terry W. Hess (First Exhibit to Ex. 2.1) x                                      |   |
| (10)  10.8.1 |   | Amendment  One to Employment Agreement between Virginia Honey Company, Inc. and Terry W.  Hess (Ex. 10.8.1) x                                                                      |   |

 

43

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| (8) 10.9    |   | Employment  Agreement, made as of November 1, 2002 between The Halifax Group, Inc. and  Robert J. Budd (Ex. 10.1) x                                                                                                                            |   |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| (8)  10.10  |   | Amendment  to Employment Agreement, made as of March, 2003 between The Halifax Group,  Inc. and Robert J. Budd (Ex. 10.2)                                                                                                                      |   |
| (8)  10.11  |   | Non-Competition  and Non-Solicitation Agreement, made as of November 1, 2002 among Vita Food  Products, Inc., Vita Holdings, Inc., The Halifax Group, Inc. and Robert J.  Budd (Ex. 10.3)                                                      |   |
| (10)  10.12 |   | Confidential  Settlement Agreement and Mutual Release, entered into on March 28, 2005,  among the Vita Food Products, Inc., Vita Specialty Foods, Inc., Virginia  Honey Company, Inc., The Halifax Group, Inc. and Robert J. Budd (Ex. 10.12)x |   |
| (9)  10.13  |   | Form  of Rights Agreement dated as of November 10, 2005, between Vita Food  Products, Inc. and American Stock Transfer and Trust Company (Ex. 10.1)                                                                                            |   |
| (16)  10.14 |   | Employment  Agreement, made as of March 20, 2006 between Vita Food Products, Inc. and  Clifford Bolen (Ex. 10.1) x                                                                                                                             |   |
| (19)  10.15 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and  Howard Bedford (Ex. 10.1)                                                                                                                               |   |
| (19)  10.16 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and  Stephen D. Rubin (Ex. 10.2)                                                                                                                             |   |
| (19)  10.17 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and  Stephen D. Rubin (Ex. 10.3)                                                                                                                             |   |
| (19)  10.18 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and the  John C. Seramur 2005 Flite Trust dated September 19, 2005 (Ex. 10.4)                                                                                |   |
| (19)  10.19 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and the  John C. Seramur 2005 Flite Trust dated September 19, 2005 (Ex. 10.5)                                                                                |   |
| (19)  10.18 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and  Clifford K. Bolen and Affiliates (Ex. 10.6)                                                                                                             |   |
| (19)  10.19 |   | Subscription  Agreement, dated February 16, 2006 between Vita Food Products, Inc. and Delphi  Casualty Co. (Ex. 10.7)                                                                                                                          |   |
| (7)  14.1   |   | Code  of Ethics (Ex. 14.1)                                                                                                                                                                                                                     |   |
| (7)21.1     |   | Subsidiary  of the Company (Ex. 21.1)                                                                                                                                                                                                          |   |
| (21)23.1    |   | Consent  of Independent Registered Public Accounting Firm (Ex. 23.1)                                                                                                                                                                           |   |
| 31.1        |   | Principal  Executive and Financial Officer Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 *                                                                                                                          |   |
| 32.1        |   | Principal Executive  Officer and Financial Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 *                                                                                                                          |   |

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(1)             Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onAugust 30, 2001. Form 8-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

(2)             Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onNovember 6, 2002. Form 8-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

(3)             Incorporatedby reference to Form SB-2 Registration Statement (File No. 333-5738),filed with the Securities and Exchange Commission on September 23, 1996. FormSB-2 Exhibit Number is included in parenthesis following the title of theexhibit.

(4)             Incorporatedby reference to Form 10-Q for the fiscal quarter ended September 30, 2003,filed with the Securities and Exchange Commission on November 14, 2003. Form10-Q Exhibit Number is included in parenthesis following the title of theexhibit.

(5)             Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on January 6, 2005. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(6)             Incorporatedby reference to Form 10-QSB for the fiscal quarter ended June 30, 1999, filedwith the Securities and Exchange Commission on August 9, 1999. Form 10-QSBExhibit Number is included in parenthesis following the title of the exhibit.

(7)             Incorporatedby reference to Form 10-K for the fiscal year ended December 31, 2003, filedwith the Securities and Exchange Commission on March 30, 2004. Form 10-KExhibit Number is included in parenthesis following the title of the exhibit.

(8)             Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on January 13, 2005. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(9)             Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on November 15, 2005. Form 8-KExhibit Number is included in parenthesis following the title of the exhibit.

(10)       Incorporatedby reference to Form 10-K for the fiscal year ended December 31, 2004, filedwith the Securities and Exchange Commission on March 31, 2005. Form 10-KExhibit Number is included in parenthesis following the title of the exhibit.

(11)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on April 12, 2005. Form 8-K Exhibit Numberis included in parenthesis following the title of the exhibit.

(12)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on April 18, 2005. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(13)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on July 13, 2005. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(14)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on August 11, 2005. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(15)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on September 8, 2005. Form 8-KExhibit Number is included in parenthesis following the title of the exhibit.

(16)       Incorporatedby reference to Form 8-K filed with theSecurities and Exchange Commission on March 23, 2006. Form 8-K ExhibitNumber is included in parenthesis following the title of the exhibit.

(17)       Incorporatedby reference to Form 10-K filed with the Securities and Exchange Commission onMarch 30, 2006. Form 10-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

(18)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onApril 7, 2006. Form 8-K Exhibit Number is included in parenthesis following thetitle of the exhibit.

(19)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onFebruary 22, 2006. Form 8-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

(20)       Incorporatedby reference to Form 8-K filed with the Securities and Exchange Commission onApril 5, 2007. Form 8-K Exhibit Number is included in parenthesis following thetitle of the exhibit.

(21)       Incorporatedby reference to Form 10-K filed with the Securities and Exchange Commission onApril 17, 2007. Form 8-K Exhibit Number is included in parenthesis followingthe title of the exhibit.

x                      Indicatesan employee benefit plan, management contract or compensatory plan orarrangement.

*                    Filedherewith.

 

44

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