**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**
| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------|

 

**For the Quarterly Period Ended September 30, 2006**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|------------------------------------------------------------------------------------------------|

 

**For the Transition Period From                to                 **

 

**Commission File Number 1-12599**

**VITA FOOD PRODUCTS, INC.**

(Exact name of registrant as 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, Illinois60612**

(Address ofprincipal executive offices) (Zip Code)

Registrant’s telephone number, including area code: **(312) 738-4500**

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  Noo

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. (asdefined in Rule 12b-2 of the Exchange Act).
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
|---------------------------|---------------------|-------------------------|

 

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

The number of sharesoutstanding of registrant’s common stock as of October 31, 2006 was 4,911,748.

 

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**VITA FOOD PRODUCTS, INC.**

**FORM 10-Q**

## **For the Quarter Ended September 30, 2006**

## **INDEX**

|              | ** ** | ** **                                                                                  | ** ** | **Page**                                                                                                       |
|--------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                   |       |                                                                                                           |
| ** **   | ** ** | ** **                                                                                  |       |                                                                                                           |
| Item 1.      |       | Unaudited  Financial Statements                                                             |       |                                                                                                           |
|         |       |                                                                                        |       |                                                                                                           |
|         |       | a)                                                                                          |       | Consolidated  Balance Sheets as of September 30, 2006 and December 31, 2005                                    |   | 3 |
|         |       |                                                                                        |       |                                                                                                           |   |   |
|         |       | b)                                                                                          |       | Consolidated  Statements of Operations for the Three Months and Nine Months Ended September  30, 2006 and 2005 |   | 4 |
|         |       |                                                                                        |       |                                                                                                           |   |   |
|         |       | c)                                                                                          |       | Consolidated  Statement of Shareholders’ Equity for the Nine Months Ended September 30,  2006             |   | 4 |
|         |       |                                                                                        |       |                                                                                                           |   |   |
|         |       | d)                                                                                          |       | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2006 and  2005                  |   | 5 |
|         |       |                                                                                        |       |                                                                                                           |   |   |
|         |       | e)                                                                                          |       | Notes to  Consolidated Financial Statements                                                                    |   | 6 |
|         |       |                                                                                        |       |                                                                                                           |
| Item 2.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 11                                                                                                             |
|         |       |                                                                                        |       |                                                                                                           |
| Item 3.      |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 16                                                                                                             |
|         |       |                                                                                        |       |                                                                                                           |
| Item 4.      |       | Controls and  Procedures                                                                    |       | 16                                                                                                             |
|         |       |                                                                                        |       |                                                                                                           |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                       |       |                                                                                                           |
| ** **   | ** ** | ** **                                                                                  |       |                                                                                                           |
| Item 1A.     |       | Risk  Factors                                                                               |       | 17                                                                                                             |
|         |       |                                                                                        |       |                                                                                                           |
| Item 6.      |       | Exhibits                                                                                    |       | 17                                                                                                             |
|         |       |                                                                                        |       |                                                                                                           |
| SIGNATURES   |       | 18                                                                                          |

2

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PART 1.

**Item 1.Financial Statements**
| **Consolidated Balance Sheets** | ** ** | **Vita  Food Products, Inc.** |
|---------------------------------|------------|-------------------------------|
| ** **                      | ** ** | **And  Subsidiary**           |

 
| ** **                                                                                                                           | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                           |       |                         |       |                        |       |
| Current Assets                                                                                                                       |       |                         |       |                        |       |
| Cash                                                                                                                                 |       | $                            | 38,658     |                        | $          | 25,133 |   |
| Accounts  receivable-trade, net of allowance for discounts, returns, and doubtful accounts  of $980,000 in 2006 and $563,000 in 2005 |       | 5,924,771                    |       | 5,215,912                   |       |
| Inventories                                                                                                                          |       |                         |       |                        |       |
| Raw material and  supplies                                                                                                           |       | 5,139,707                    |       | 5,503,048                   |       |
| Work in process                                                                                                                      |       | 225,685                      |       | 192,630                     |       |
| Finished goods                                                                                                                       |       | 2,202,717                    |       | 1,827,245                   |       |
| Prepaid expenses  and other current assets                                                                                           |       | 481,585                      |       | 400,679                     |       |
| Income taxes  receivable                                                                                                             |       | 79,252                       |       | 381,312                     |       |
| Deferred income  taxes                                                                                                               |       | 719,578                      |       | 519,578                     |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Total Current Assets                                                                                                                 |       | 14,811,953                   |       | 14,065,537                  |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Property, Plant and  Equipment                                                                                                       |       |                         |       |                        |       |
| Land                                                                                                                                 |       | 35,000                       |       | 35,000                      |       |
| Building and  improvements                                                                                                           |       | 3,048,508                    |       | 2,660,975                   |       |
| Leasehold  improvements                                                                                                              |       | 585,798                      |       | 549,926                     |       |
| Machinery and  office equipment                                                                                                      |       | 11,728,239                   |       | 11,302,648                  |       |
|                                                                                                                                 |       | 15,397,545                   |       | 14,548,549                  |       |
| Less accumulated  depreciation and amortization                                                                                      |       | (9,404,382                   | )          | (8,710,072                  | )          |
|                                                                                                                                 |       |                         |       |                        |       |
| Net Property, Plant and  Equipment                                                                                                   |       | 5,993,163                    |       | 5,838,477                   |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Goodwill                                                                                                                             |       | 6,696,705                    |       | 6,696,705                   |       |
| Other assets                                                                                                                         |       | 428,648                      |       | 422,661                     |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Total Assets                                                                                                                         |       | $                            | 27,930,469 |                        | $          | 27,023,380 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                       |       |                         |       |                        |       |
| Current Liabilities                                                                                                                  |       |                         |       |                        |       |
| Current  maturities of long-term obligations                                                                                         |       | $                            | 8,833,993  |                        | $          | 2,217,840 |   |
| Accounts payable                                                                                                                     |       | 5,236,417                    |       | 3,142,406                   |       |
| Accrued expenses                                                                                                                     |       | 975,281                      |       | 853,982                     |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Total Current  Liabilities                                                                                                           |       | 15,045,691                   |       | 6,214,228                   |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Long-term Obligations,  Less Current Maturities                                                                                      |       | 7,164,416                    |       | 16,653,369                  |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Deferred Income Taxes                                                                                                                |       | 218,728                      |       | 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; issued 4,918,264 shares in 2006  and 3,879,338 shares in 2005      |       | 49,183                       |       | 38,793                      |       |
| Treasury stock,  at cost 6,516 shares                                                                                                |       | (50,043                      | )          | (50,043                     | )          |
| Additional  paid-in capital                                                                                                          |       | 6,254,144                    |       | 3,812,397                   |       |
| Accumulated  deficit                                                                                                                 |       | (751,650                     | )          | (99,092                     | )          |
|                                                                                                                                 |       |                         |       |                        |       |
| Total Shareholders’  Equity                                                                                                     |       | 5,501,634                    |       | 3,702,055                   |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Total  Liabilities and Shareholders’ Equity                                                                                     |       | $                            | 27,930,469 |                        | $          | 27,023,380 |   |

 

See accompanying notes to consolidated financialstatements.

3

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| **Consolidated Statements of  Operations** | ** ** | **Vita  Food Products, Inc.** |
|--------------------------------------------|------------|-------------------------------|
| ** **                                 | ** ** | **And  Subsidiary**           |

 
| ** **                                  | ** ** | **For the three months ended  September 30,** | ** ** | **For the nine months ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net Sales                                   |       | $                                                                      | 12,451,203 |                                                                  | $          | 11,369,648 |   | $ | 37,068,116 |   | $ | 32,424,989 |   |
| Cost of Goods Sold                          |       | 10,010,867                                                             |       | 8,191,091                                                             |       | 27,359,116 |   | 22,566,483 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gross Margin                                |       | 2,440,336                                                              |       | 3,178,557                                                             |       | 9,709,000 |   | 9,858,506 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling and  Administrative Expenses        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling,  Marketing and Distribution        |       | 2,395,356                                                              |       | 2,301,407                                                             |       | 6,818,105 |   | 6,568,033 |   |
| Administrative                              |       | 922,648                                                                |       | 1,014,229                                                             |       | 3,007,880 |   | 3,321,552 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Total Selling  and Administrative Expenses  |       | 3,318,004                                                              |       | 3,315,636                                                             |       | 9,825,985 |   | 9,889,585 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Operating Loss                              |       | (877,668                                                               | )          | (137,079                                                              | )          | (116,985 | ) | (31,079 | ) |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Interest Expense                            |       | 330,917                                                                |       | 291,886                                                               |       | 970,573 |   | 740,990 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Loss Before Income  Taxes                   |       | (1,208,585                                                             | )          | (428,965                                                              | )          | (1,087,558 | ) | (772,069 | ) |
| Income Tax Benefit                          |       | (484,000                                                               | )          | (172,000                                                              | )          | (435,000 | ) | (309,000 | ) |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net Loss                                    |       | $                                                                      | (724,585   | )                                                                     | $          | (256,965 | ) | $ | (652,558 | ) | $ | (463,069 | ) |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic Loss Per Share                        |       | $                                                                      | (0.15      | )                                                                     | $          | (0.07 | ) | $ | (0.14 | ) | $ | (0.12 | ) |
| Weighted Average Common  Shares Outstanding |       | 4,904,086                                                              |       | 3,866,062                                                             |       | 4,597,966 |   | 3,861,206 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted Loss Per Share                      |       | $                                                                      | (0.15      | )                                                                     | $          | (0.07 | ) | $ | (0.14 | ) | $ | (0.12 | ) |
| Weighted Average Common  Shares Outstanding |       | 4,904,086                                                              |       | 3,866,062                                                             |       | 4,597,966 |   | 3,861,206 |   |

 
| **Consolidated Statement of  Shareholders’ Equity** | ** ** | **Vita  Food Products, Inc.** |
|----------------------------------------------------------|------------|-------------------------------|
| ** **                                               | ** ** | **And  Subsidiary**           |

 
| ** **                                           | ** ** | ** **            | ** ** | ** **   | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|--------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                                           | ** ** | **Common Stock** | ** ** | **Treasury** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                           | ** ** | **Shares**            | ** ** | **Amount**   | ** ** | **Stock**   | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                 |       |                  |       |         |       |        |       |           |       |         |       |       |       |
| Balance, at January 1,  2006                         |       | 3,879,338             |       | $            | 38,793     |        | $          | (50,043        | )          | $            | 3,812,397  |       | $          | (99,092 | ) | $ | 3,702,055 |   |
|                                                 |       |                  |       |         |       |        |       |           |       |         |       |       |       |
| Common stock and  warrant issuance, net              |       | 1,017,000             |       | 10,170       |       | —      |       | 2,378,809      |       | —       |       | 2,388,979  |       |
|                                                 |       |                  |       |         |       |        |       |           |       |         |       |       |       |
| Stock - based  compensation expense                  |       | 7,662                 |       | 77           |       | —      |       | 42,227         |       | —       |       | 42,304     |       |
|                                                 |       |                  |       |         |       |        |       |           |       |         |       |       |       |
| Proceeds from stock  purchase and stock option plans |       | 14,264                |       | 143          |       | —      |       | 20,711         |       | —       |       | 20,854     |       |
|                                                 |       |                  |       |         |       |        |       |           |       |         |       |       |       |
| Net loss                                             |       | —                |       | —       |       | —      |       | —         |       | (652,558     | )          | (652,558   | )          |
|                                                 |       |                  |       |         |       |        |       |           |       |         |       |       |       |
| Balance, at September 30, 2006                       |       | 4,918,264             |       | $            | 49,183     |        | $          | (50,043        | )          | $            | 6,254,144  |       | $          | (751,650 | ) | $ | 5,501,634 |   |

 

See accompanyingnotes to consolidated financial statements.

4

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| **Consolidated Statements of  Cash Flows** | ** ** | **Vita  Food Products, Inc.** |
|--------------------------------------------|------------|-------------------------------|
| ** **                                 | ** ** | **And  Subsidiary**           |

 
| ** **                                                                      | ** ** | **For the nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
|                                                                            |       |                                                                  |       |   |   |
| **Cash Flows From Operating  Activities**                                       |       |                                                                  |       |   |   |
| Net loss                                                                        |       | $                                                                     | (652,558   | ) | $ | (463,069 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities |       |                                                                  |       |   |   |
| Depreciation and  amortization                                                  |       | 732,920                                                               |       | 718,678 |   |
| Gain on sale of  fixed assets                                                   |       | (500                                                                  | )          | (14,066 | ) |
| Deferred income  tax benefit                                                    |       | (435,000                                                              | )          | (318,186 | ) |
| Non-cash  stock-based compensation expense                                      |       | 42,304                                                                |       | 0 |   |
| Changes in  assets and liabilities:                                             |       |                                                                  |       |   |   |
| Accounts  receivable                                                            |       | (708,859                                                              | )          | 101,420 |   |
| Inventories                                                                     |       | (45,186                                                               | )          | (1,618,211 | ) |
| Prepaid expenses  and other current assets                                      |       | (80,906                                                               | )          | (98,560 | ) |
| Income taxes  receivable                                                        |       | 302,060                                                               |       | 4,000 |   |
| Accounts payable                                                                |       | 2,094,011                                                             |       | 1,195,927 |   |
| Accrued expenses  and other long term obligations                               |       | (128,310                                                              | )          | 24,895 |   |
|                                                                            |       |                                                                  |       |   |   |
| Net cash  provided by (used in) operating activities                            |       | 1,119,976                                                             |       | (467,172 | ) |
|                                                                            |       |                                                                  |       |   |   |
| **Cash Flows From Investing  Activities**                                       |       |                                                                  |       |   |   |
| Capital  expenditures                                                           |       | (866,132                                                              | )          | (831,461 | ) |
| Proceeds from  sale of fixed asset                                              |       | 500                                                                   |       | 15,240 |   |
| Change in other  assets                                                         |       | (27,460                                                               | )          | (61,258 | ) |
|                                                                            |       |                                                                  |       |   |   |
| Net cash used in  investing activities                                          |       | (893,092                                                              | )          | (877,479 | ) |
|                                                                            |       |                                                                  |       |   |   |
| **Cash Flows From Financing  Activities**                                       |       |                                                                  |       |   |   |
| Proceeds from  issuance of stock and warrants                                   |       | 2,409,833                                                             |       | 17,058 |   |
| Net (payments)  borrowing under revolving loan facility                         |       | (1,290,679                                                            | )          | 1,483,889 |   |
| Borrowing on  term loan facility                                                |       |                                                                  |       | 1,298,846 |   |
| Payments on term  loan facility                                                 |       | (632,513                                                              | )          | (635,363 | ) |
| Payments on  other debt                                                         |       | (700,000                                                              | )          | (840,422 | ) |
|                                                                            |       |                                                                  |       |   |   |
| Net cash (used  in) provided by financing activities                            |       | (213,359                                                              | )          | 1,324,008 |   |
|                                                                            |       |                                                                  |       |   |   |
| Net increase (decrease)  in cash                                                |       | 13,525                                                                |       | (20,643 | ) |
|                                                                            |       |                                                                  |       |   |   |
| Cash, at beginning of  period                                                   |       | 25,133                                                                |       | 55,968 |   |
|                                                                            |       |                                                                  |       |   |   |
| Cash, at end of period                                                          |       | $                                                                     | 38,658     |   | $ | 35,325 |   |
|                                                                            |       |                                                                  |       |   |   |
| Supplemental Disclosure  of Cash Flow Information                               |       |                                                                  |       |   |   |
| Cash paid for  interest                                                         |       | $                                                                     | 956,000    |   | $ | 747,000 |   |
| Income taxes  (received) paid                                                   |       | $                                                                     | 305,000    |   | $ | 4,000 |   |

 

See accompanying notes toconsolidated financial statements.

5

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## **Vita Food Products, Inc. and Subsidiary**

## **Notes to Consolidated Financial Statements(Unaudited)**

#### **Basis of Presentation**

Inthe opinion of management, the accompanying balance sheets and related interimstatements of operations, cash flows, and shareholders’ equity include alladjustments, consisting only of normal recurring items necessary for their fairpresentation in conformity with U.S. generally accepted accountingprinciples.  Preparing financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenue, and expenses.  Examples include provisions for returns,deductions, bad debts, and length of building and equipment lives.  Actual results may differ from theseestimates.  Interim results are notnecessarily indicative of results for a full year. The information included inthis Form 10-Q should be read in conjunction with Management’s Discussion andAnalysis of Financial Condition and Results of Operations and financialstatements and notes thereto included in the Form 10-K for the fiscal yearended December 31, 2005 of Vita Food Products, Inc.  (“Vita Seafood”) together with its whollyowned subsidiary, Vita Specialty Foods, Inc. (“VSF”), hereinafter collectivelyreferred to as the “Company”.

Forthe third quarter and nine month periods ended September 30, 2006 and 2005,diluted earnings (loss) per share computations exclude 1,192,600 and 1,225,100shares for 2006 and 281,900 and 265,100 shares for 2005, respectively, issuableupon exercise of stock options and warrants because the assumed exercise ofthese options and warrants would be anti-dilutive.

Startingon January 1, 2006, the Company changed the classification of “Slotting”expense, which had previously been included in the Selling, Marketing andDistribution category of operating expenses, to be treated as a sales deductionand thus classify these expenses as a reduction to arrive at the Net Salestotal.  These expenses are fees charged bycustomers to place the Company’s new items into the customers’ distributionsystem.  Additionally, the 2005 operatingresults, as presented above, have been adjusted to consider this change andthus make these results more comparable with the 2006 results.  The result of this reclassification, whichhad no affect on Operating Profit or Net Income (Loss), was to reduce both NetSales and Selling, Marketing and Distribution expenses, in an offsettingfashion, for the nine months ended September 30, 2006 and 2005 by $46,000 and$245,000, respectively and for the three months ended September 30, 2006 and2005 by $10,000 and $48,000, respectively.

**Principles of Consolidation**

The consolidated financial statements include theaccounts of Vita Seafood and VSF.  VSFincludes the now integrated results of Virginia Honey Company, Inc. (“VirginiaHoney”) acquired in 2001 and The Halifax Group, Inc. (“Halifax”), acquired in2002.  All significant intercompanytransactions and balances have been eliminated.

##### **RevenueRecognition**

Revenue is recognizedupon the passing of title to the customers, which occurs upon shipment ofproduct to customers, including brokers, in fulfillment of customerorders.  In accordance with industrypractices, inventory is sometimes sold to customers 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’sproducts, various marketing programs are offered to customers, which reimbursethem for a portion, or all, of their promotional activities related to theCompany’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 Company may differ significantly if factorssuch as the level and success of the customers’ programs or other conditionsdiffer from expectations.  Sales arereduced by a provision for estimated future returns, disposals and promotionalexpense.

6

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**Earn Out Provisions Under Acquisition Agreement**

Pursuantto the Company’s acquisition of Virginia Honey in 2001, the previous owner ofthat business, who continues to be a director of the Company, is subject toearn out provisions that have resulted in additional payments and may continuefor one more period to result in an additional payment by the Company for theacquired business.  As amended, the earnout provisions for Terry Hess, the previous owner of Virginia Honey, have resultedin an additional amount of $840,000 paid to Mr. Hess in April 2005.  This first earn out payment was based on theoperating results of Virginia Honey for the period from January 1, 2001 toDecember 31, 2002.  In addition, a secondearn out payment to Mr. Hess in the amount of $700,000 was paid in April2006.  The second earn out payment wasbased on the operating results of the VSF for the period from January 1, 2003to December 31, 2005.  A potentialremaining earn out payment to Mr. Hess will be based on the earnings of VSF, ascomputed by a predefined allocation formula, for the period from January 1,2006 to December 31, 2007.  Should VSFmaintain its current profitability level throughout this period, managementestimates that no additional payment would be due to Mr. Hess in April2008.  Previous earn out payments havebeen recorded as goodwill.  Any futurepayment would be recorded as additional goodwill, and all current and previouspayments will be subject to impairment analysis.

#### **Bank Loan Agreement**

OnSeptember 8, 2003, the Company entered into a loan agreement with a bank (the “LoanAgreement”) and paid off its existing credit facility with initial borrowingsunder this new Loan Agreement.  The LoanAgreement originally provided for a two-year $8,500,000 revolving line ofcredit (the “revolver”), a five-year $6,500,000 term loan (the “Term A Loan”)and a six-year $3,000,000 term loan (the “Term B Loan”).  The Term B Loan was never utilized.  During 2004 and 2005, the Loan Agreement wasamended several times to, among other things, extend the maturity dates of therevolver and change the available borrowings under the revolver and Term Loansand obtain an over-advance loan of $1,000,000 which was terminated on February28, 2006.  On March 24, 2006, the Loan Agreementwas further amended.  Pursuant to thislatest amendment, the Loan Agreement now provides for a $9,500,000 revolverwhich terminates on April 1, 2007; a $7,750,000 Term A Loan due in monthlyinstallments 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 ofthe outstanding balance as of August 2006 from that date through May 31, 2010and 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.  Outstanding borrowings underthe Loan Agreement are secured by substantially all assets of the Company.

Interest undereach piece of the amended Loan Agreement is at a floating rate per annum equalto the prime rate plus 0.5%.  This ratewas 8.75 percent as of September 30, 2006.

The Loan Agreementimposes certain restrictions on the Company, including its ability to completesignificant asset sales, merge or acquire businesses and pay dividends.  Additionally, the Company must meet certainfinancial covenants at each quarter end during the term of the Loan Agreement,including a Minimum Tangible Net Worth, a Minimum EBITDA and a Minimum CashFlow Coverage Leverage ratio, all as defined in the Loan Agreement.  During 2004 and 2005, the Company hadviolated certain of these covenants and had obtained permanent waivers from thebank for such violations.  The March 24,2006 amendment to the Loan Agreement retroactively amended these financialcovenants.  The impact of the Company’sloss on earnings before income taxes, depreciation and amortization for thetwelve months ended September 30, 2006 resulted in non-compliance with two ofthe Company’s debt covenants at that date. However, the Company received a permanent waiver from its lenderrelating to such non-compliance. Management is in discussions with its lendersabout amending the covenants.

#### **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, combines the products ofVirginia Honey and Halifax and manufactures and distributes honey, saladdressings, sauces, marinades, jams and jellies and gift baskets throughoutNorth America.  Management predominatelyuses operating profit as the measure of profit or loss by business segment.

7

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**Business segment information is as follows ($000’s):**

| Three months ended September 30, | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                 |       |       |       |       |       |
| **Net  Sales**                                       |       |       |       |       |       |
| Vita                                                 |       | **$**      | **6,536**  | ** ** | $          | 5,816 |   |
| Vita Specialty Foods                                 |       | **5,915**  | ** ** | 5,554      |       |
|                                                 |       | ** ** | ** ** |       |       |
| Total Net Sales                                      |       | **$**      | **12,451** | ** ** | $          | 11,370 |   |
|                                                 |       | ** ** | ** ** |       |       |
| **Operating  Profit (Loss)**                         |       | ** ** | ** ** |       |       |
| Vita                                                 |       | **$**      | **(287**   | **)**      | $          | (373 | ) |
| Vita Specialty Foods                                 |       | **(591**   | **)**      | 236        |       |
|                                                 |       | ** ** | ** ** |       |       |
| Total Operating  (Loss)                              |       | **$**      | **(878**   | **)**      | $          | (137 | ) |
|                                                 |       | ** ** | ** ** |       |       |
| **Net  Income (Loss)**                               |       | ** ** | ** ** |       |       |
| Vita                                                 |       | **$**      | **(291**   | **)**      | $          | (320 | ) |
| Vita Specialty Foods                                 |       | **(434**   | **)**      | 63         |       |
|                                                 |       | ** ** | ** ** |       |       |
| Total Net (Loss)                                     |       | **$**      | **(725**   | **)**      | $          | (257 | ) |
|                                                 |       | ** ** | ** ** |       |       |
| **Depreciation  and Amortization**                   |       | ** ** | ** ** |       |       |
| Vita                                                 |       | **$**      | **129**    | ** ** | $          | 129 |   |
| Vita Specialty Foods                                 |       | **133**    | ** ** | 119        |       |
|                                                 |       | ** ** | ** ** |       |       |
| Total  Depreciation and Amortization                 |       | **$**      | **262**    | ** ** | $          | 248 |   |
|                                                 |       | ** ** | ** ** |       |       |
| **Capital  Expenditures**                            |       | ** ** | ** ** |       |       |
| Vita                                                 |       | **$**      | **230**    | ** ** | $          | 73 |   |
| Vita Specialty Foods                                 |       | **108**    | ** ** | 408        |       |
|                                                 |       | ** ** | ** ** |       |       |
| Total Capital  Expenditures                          |       | **$**      | **338**    | ** ** | $          | 478 |   |

 

| Nine months ended September 30, | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------|------------|
|                                                |       |       |       |     |       |
| **Goodwill**                                        |       |       |       |     |       |
| Vita                                                |       | **$**      | **—** |     | $          | — |   |
| Vita Specialty Foods                                |       | **6,697**  |       | 5,997    |       |
|                                                |       | ** ** |       |     |       |
| Total Goodwill                                      |       | **$**      | **6,697**  |     | $          | 5,997 |   |
|                                                |       | ** ** |       |     |       |
| **Total  Assets**                                   |       | ** ** |       |     |       |
| Vita                                                |       | **$**      | **17,855** |     | $          | 16,034 |   |
| Vita Specialty Foods                                |       | **10,075** |       | 10,979   |       |
|                                                |       | ** ** |       |     |       |
| Total Assets                                        |       | **$**      | **27,930** |     | $          | 27,013 |   |
|                                                |       | ** ** |       |     |       |
| **Net  Sales**                                      |       | ** ** |       |     |       |
| Vita                                                |       | **$**      | **19,810** |     | $          | 16,554 |   |
| Vita Specialty Foods                                |       | **17,258** |       | 15,871   |       |
|                                                |       | ** ** |       |     |       |
| Total Net Sales                                     |       | **$**      | **37,068** |     | $          | 32,425 |   |

8

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| **Operating Profit (Loss)**          | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| Vita                                 | ** ** | **$**      | **(221**   | **)**      | $          | (1,051 | ) |
| Vita Specialty Foods                 | ** ** | **104**    | ** ** | 1,020      |       |
|                                 | ** ** | ** ** | ** ** |       |       |
| Total Operating  Profit (Loss)       | ** ** | **$**      | **(117**   | **)**      | $          | (31 | ) |
|                                 | ** ** | ** ** | ** ** |       |       |
| **Net  Income (Loss)**               | ** ** | ** ** | ** ** |       |       |
| Vita                                 | ** ** | **$**      | **(481**   | **)**      | $          | (891 | ) |
| Vita Specialty Foods                 | ** ** | **(172**   | **)**      | 428        |       |
|                                 | ** ** | ** ** | ** ** |       |       |
| Total Net (Loss)                     | ** ** | **$**      | **(653**   | **)**      | $          | (463 | ) |
|                                 | ** ** | ** ** | ** ** |       |       |
| **Depreciation  and Amortization**   | ** ** | ** ** | ** ** |       |       |
| Vita                                 | ** ** | **$**      | **376**    | ** ** | $          | 378 |   |
| Vita Specialty Foods                 | ** ** | **357**    | ** ** | 341        |       |
|                                 | ** ** | ** ** | ** ** |       |       |
| Total  Depreciation and Amortization | ** ** | **$**      | **733**    | ** ** | $          | 719 |   |
|                                 | ** ** | ** ** | ** ** |       |       |
| **Capital  Expenditures**            | ** ** | ** ** | ** ** |       |       |
| Vita                                 | ** ** | **$**      | **506**    | ** ** | $          | 121 |   |
| Vita Specialty Foods                 | ** ** | **360**    | ** ** | 710        |       |
|                                 | ** ** | ** ** | ** ** |       |       |
| Total Capital  Expenditures          | ** ** | **$**      | **866**    | ** ** | $          | 831 |   |

 

**Stock Based Compensation**

Effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards No. 123 (revised 2004), “ShareBased Payment” (SFAS 123 (R)), applying the modified prospective method.  Prior to the adoption of SFAS 123(R), the Companyapplied the provisions of APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” in accounting for its stock-based awards, and accordingly,recognized no compensation cost for its stock option plan awards.  Under the modified prospective method, SFAS123(R) applies to new awards and to awards that were outstanding as of December31, 2005 that are subsequently vested, modified, repurchased or cancelled.  Compensation expense recognized during thefirst nine months of 2006 includes the portion vesting during the period for(1) all share-based payments granted prior to, but not yet vested as ofDecember 31, 2005, based on the grant date fair value estimated in accordancewith the original provisions of Statement of Financial Accounting Standards No.123, “Accounting for Stock-Based Compensation” (SFAS 123) and (2) allshare-based payments granted subsequent to December 31, 2005, based on thegrant-date fair value estimated using the Black-Scholes option-pricingmodel.  Due to the late 2005 accelerationof vesting for all outstanding stock options granted prior to January 1, 2005,future compensation expense related to unvested stock options granted beforesuch date is expected to be less than $50,000. Stock options to purchase 10,000 shares were granted in each of thefirst and second quarters of 2006 to directors and an employeerespectively.  Stock compensation expenseof $4,900, $8,300 and $5,900 was recognized during the first, second and thirdquarters of 2006, respectively, on existing stock options.  As a result of the Company’s decision toadopt the modified prospective method, prior period results have not beenrestated.

**Before adoption of SFAS123(R), pro forma disclosures reflected the fair value of each option grantestimated on the date of grant using the Black-Scholes option-pricing modelwith the following weighted-average assumptions for stock options grantedduring the three months ended September 30, 2005.  The following table also shows similarinformation for the options granted during the third quarter of 2006.**

 
| Three months ended September 30, | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected option  life in years                       |       | 5        |       | 5        |       |
| Risk-free  interest rate                             |       | 4.6      | %          | 4.2      | %          |
| Dividend yield                                       |       | —   |       | —   |       |
| Expected  volatility                                 |       | 51.9     | %          | 40.6     | %          |
| Per share fair value                                 |       | $        | 1.23       |     | $          | 1.16 |   |
|                                                      |            |          |            |          |            |  |  |

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**Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS 123 forthe three and nine months ended September 30, 2005:**

 
| For the period ended September 30, 2005       | ** ** | **Three  Months** | ** ** | **Nine  Months** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| Net loss - as  reported                                                     |       | $                 | (256,965   | )                | $          | (463,066 | ) |
| Deduct: Total  stock based compensation expense, net of related tax effects |       | (10,440           | )          | (46,215          | )          |
| Pro forma net  loss                                                         |       | $                 | (267,405   | )                | $          | (509,281 | ) |
| Basic and  diluted loss per share:                                          |       |              |       |             |       |
| As reported                                                                 |       | $                 | (0.07      | )                | $          | (0.13 | ) |
| Pro forma                                                                   |       | $                 | (0.07      | )                | $          | (0.13 | ) |

 

Theaggregate intrinsic value (defined as the difference between the market valueof the Company’s stock as of the end of the period and the exercise price ofthe stock options) for stock options outstanding and exercisable at September30, 2006 is $35,995 and $26,775, respectively. Stock options representing 17,000 shares were exercised during thesecond quarter of 2006, while none were exercised in the first or thirdquarters.

The following is asummary of non vested stock option activity:
|                                   | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|-----------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                        | ** ** | ** **         | ** ** | **Average**         | ** ** |
| ** **                        | ** ** | **Number**         | ** ** | **Grant-Date**      | ** ** |
| ** **                        | ** ** | **of Shares** | ** ** | **Fair Value** | ** ** |
| Non-vested at  December 31, 2005  |       | 63,000             |       | $                   | 2.47       |   |
| Granted                           |       | 10,000             |       | 2.30                |       |
| Vested                            |       | (1,000             | )          | (3.41               | )          |
| Cancelled                         |       | (4,000             | )          | (3.41               | )          |
| Non-vested at  March 31, 2006     |       | 68,000             |       | $                   | 2.37       |   |
| Granted                           |       | 10,000             |       | 3.73                |       |
| Vested                            |       | (4,000             | )          | (2.49               | )          |
| Cancelled                         |       | —             |       | —              |       |
| Non-vested at  June 30, 2006      |       | 74,000             |       | $                   | 2.55       |   |
| Granted                           |       | 50,000             |       | 2.45                |       |
| Vested                            |       | (13,000            | )          | (2.77               | )          |
| Cancelled                         |       | —             |       | —              |       |
| Non-vested at September  30, 2006 |       | 111,000            |       | $                   | 2.52       |   |

 

At September 30, 2006,there was $109,616 of total unrecognized cost related to non-vested stockoptions which will be recognized over the next five years.

**Equity Issuance**

In February 2006,the Company entered into agreements pursuant to which five individuals or theiraffiliated entities invested a total of $2,500,000 in the Company.  Substantially all of these funds were used toreduce funded debt.  The investorsreceived units consisting of an aggregate of 1,000,000 shares of common stock;three-year warrants to purchase 500,000 shares of common stock at an exerciseprice of $5.00 per share; and five-year warrants to purchase an additional500,000 shares of common stock at an exercise price of $7.50 per share.  The investors included 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 of the Company, (iii) Delphi Casualty Co., of whichGlenn S. Morris, a director of the Company, owns a 44% equity interest, (iv) atrust of which

10

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John C. Seramur, adirector of the Company, serves as trustee, as well as (v) Howard Bedford, thenan unrelated third-party investor and, as of May 18, 2006, a director of the Company.  The warrants were valued at $0.37 and $0.44per share for the three year and five year warrants, respectively, based on theBlack Scholes option pricing model with an expected life assumption of 3 yearsand 5 years respectively, a risk free interest rate of 4.59%, a dividend rateof 0% and a volatility rate of 51.5%. The aggregate value of the warrants is included in additionalpaid-in-capital.  Based on the stockprice on the date the employees and directors committed to acquire the units,the aggregate value of the securities received was not greater than theconsideration paid.  Accordingly, nocompensation was paid.

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

**Comparisonof the Three Months Ended September 30, 2006 and September 30, 2005**

***Revenues.***  Net sales for the three months endedSeptember 30, 2006 were $12,451,000, compared to $11,370,000 for the sameperiod in 2005, an increase of $1,081,000 or 9.5%.  This increase is attributable to bothunits.  Vita Seafood, experienced anincrease of $721,000, or 12.4%, led by growth of $838,000 in its line of salmonproducts.  An additional gain wasreflected in the Vita Seafood herring product line of $55,000, but sales forthe specialty product line decreased $61,000. These results were partially offset by higher returns and allowances of$111,000.  Furthermore, although thisincrease in salmon sales was applicable to most major customers of this productline, two of these customers contributed over half of this gain.  The increase in herring sales was primarilythe result of selling price increases, with volume relatively flat.  Adding to the increase in net sales from VitaSeafood was an increase of $361,000, or 6.5%, for the VSF business. This VSF increasewas primarily the result of a $684,000 or 41.3% improvement in sales of sauces,including a $526,000 increase in hot filled products, primarily barbeque saucesand a $158,000 increase in cold filled products, primarily marinades, almostall of which was driven by demand from two large customers.  The increase in sauce sales was partiallyoffset by increased sales deductions, which rose $343,000 or 102.4%.  This increase resulted from an increase inreserves for potential returns of unsaleable product.  Herring, salmon, and specialty product salesrepresented 41%, 56% and 3%, respectively, of Vita Seafood’s total gross salesduring the current period compared to 46%, 50%, and 4%, respectively, duringthe prior year quarter.  Saladdressings/sauces, honey products and specialty items, represented 79%, 20% and1%, respectively, of VSF current quarter total gross sales compared to 77%, 22%and 1%, respectively, during the prior year quarter.

***Gross Margin.***  Gross margin for the three months endedSeptember 30, 2006 was $2,440,000, compared to $3,178,000 for the same periodin 2005, a decrease of $738,000 or 23.2%. This decrease was attributed to both units, and includes the effect ofestablishing one-time reserves totaling $430,000 to provide for costs associatedwith the start-up of a new line of VSF products.  VSF results decreased $664,000, and theSeafood business decreased $74,000.  As apercent of net sales, gross margin totaled 19.6%, down from 28.0% for the sameperiod in 2005.  Gross margin for theVita Seafood business, as a percentage of net sales, decreased to 19.6% from23.3% for the same period in 2005, thus resulting in the decrease in grossprofit dollars despite the sizeable sales growth.  The falloff as a percent of sales reflectsrising production and distribution costs which have continued outpacing thesteps taken to pass these along through higher selling prices.  The cost of at least one significant rawsalmon item increased over 40% compared to the same quarter of the prioryear.  Similarly, despite the increase insales for the VSF business, gross margin as a percent of net sales decreased to16.9% for the current quarter versus 32.8% for the same period in 2005.  In addition to the effect of establishing thereserves noted above, this decrease was a result of continuing competitivefactors limiting the ability to pass along, through price increases, either therising material or production costs.

***OperatingExpenses****.*  Selling, marketing, distribution andadministrative expenses for the three months ended September 30, 2006 were$3,318,000, closely approximating the $3,316,000 for the same period in2005.  These expenses represented 26.1%of sales for the quarter ended September 30, 2006 compared to 29.2% for thesame period in 2005.  This result is netof a $92,000 reduction in administration expenses and a $94,000 increase inselling, marketing and distribution expenses*. *The reduction in administrativeexpense is most notable at the Vita Seafood unit and primarily reflects asalary and incentive expense decline arising from the fourth quarter 2005amendment to the contract of a senior officer which included a significantreduction in his duties.  The increase inselling, marketing and distribution expense is primarily attributable to theVSF business and arose largely as a result of the increased volume, mostsignificantly in freight out.

***Interest Expense.***  Interest expense for the three months endedSeptember 30, 2006 was $331,000, compared to $292,000 for the same period in2005, an increase of $39,000 or 13.4%. During the 2006 period, average debt decreased

11

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to $15,200,000 from $17,200,000 or 11.6% compared tothe same quarter of the prior year. Thus, the increase in interest expense was primarily attributable tohigher average interest rates under the Company’s Loan Agreement which rose to8.7% in the 2006 period from 6.8% in the 2005 period.

***Income Taxes.*** The Company recognized benefits of $(484,000)and $(172,000) for the quarters ended September 30, 2006 and 2005,respectively.  Both representedapproximately 40% of the pretax results for those periods.

***NetLoss.***  Reflectingthe operating results described above, the net loss for the three months endedSeptember 30, 2006 totaled $(725,000) or $(0.15) per share on both a basic andfully diluted basis.  This compares to anet loss of $(257,000) for the same period in 2005, or $(0.07) per share onboth bases.  Weighted average outstandingshares increased due to the February 2006 issuance of 1,000,000 shares ofcommon stock.

***Comparisonof the Nine Months Ended September 30, 2006 and September 30, 2005***

***Revenues.***  Net sales for the nine months ended September30, 2006 were $37,068,000, compared to $32,425,000 for the same period in 2005,an increase of $4,643,000 or 14.3%.  Thisincrease is attributable to both units. Vita Seafood, experienced an increase of $3,256,000, or 19.7%, led bygrowth of $3,125,000 in its line of salmon products.  An additional gain was reflected in the VitaSeafood herring product line of $539,000, but the specialty product line salesdecreased by $40,000.  These results werepartially offset by higher returns and allowances of $368,000.  Of the substantial increase in salmon sales,approximately $2,650,000 was a result of a volume increase with the balance of $475,000arising primarily from pricing gains. Furthermore, although this increase in salmon sales was applicable tomost major customers of this product line, two major customers contributed overhalf of this gain.  The increase inherring sales was the result of a $315,000 volume increase with the balance of$224,000 arising from net pricing gains. Adding to the increase in net sales from Vita Seafood was an increase of$1,387,000, or 8.7%, for the VSF business, which was primarily the result of a$989,000 or 33.3% improvement in sales of sauces, a $366,000 or 8.9% increasefor honey products and a $253,000 or 2.6% increase for salad dressings.  This increase in gross sales was net of anincrease in sales deductions which grew by $211,000, or 18.3%, driven by anincrease in reserves for potential returns of unsaleable products.  Herring, salmon, and specialty product salesrepresented 43%, 54% and 3%, respectively, of Vita Seafood’s total gross salesduring the current period compared to 48%, 48%, and 4%, respectively, duringthe prior year quarter.  Saladdressings/sauces, honey products and specialty items, represented 75%, 24% and1%, respectively, of VSF current quarter total gross sales which areapproximately the same proportions sold during the prior year quarter.

***Gross Margin.***  Gross margin for the nine months endedSeptember 30, 2006 was $9,709,000, compared to $9,859,000 for the same periodin 2005, a decrease of $150,000 or 1.5%. This decrease was attributed to a net reduction of $960,000 for VSF,partially offset by the Vita Seafood business which increased $810,000.  As a percent of net sales, gross margintotaled 26.2%, down from 30.4% for the same period in 2005.  The gross margin for the Vita Seafoodbusiness, as a percentage of net sales, was steady at 24.8% for both the 2006and the 2005 quarters.  Despite theincrease in sales for the VSF business, gross margin as a percent of net salesdecreased to 27.8% for the current period versus 36.2% for the same period in2005.  This significant decrease resultedfrom the establishment of one-time reserves totaling $430,000 for costsassociated with the start-up of a new line of products, on top of thecontinuing effects of competitive factors limiting the ability to pass along,through pricing increases, either the rising material or production costs.

***Operating Expenses****.*  Selling, marketing,distribution and administrative expenses for the nine months ended September30, 2006 were $9,826,000, compared to $9,890,000 for the same period in 2005,an improvement of $64,000 or 0.6%.  As apercentage of net sales, these expenses were 26.3% compared with 30.5% in2005.  This reduction in expenses was thenet result of a $250,000 increase in the selling, marketing and distributionexpense category and a $314,000 decrease in administrative expenses.  The increase in selling, marketing anddistribution expense arose as a result of several offsetting factors, mostsignificantly, an increase in distribution expenses at both operations whichtotaled $275,000, principally consisting of freight out.  This distribution expense increase directlyresulted from higher sales volume and increased fuel costs.  The reduction in administrative expense isnotable at both units and primarily reflects a reduction in officers’ salaryand incentive expense totaling $292,000 and largely arising from the fourthquarter 2005 amendment to the contract of a senior officer which included asignificant reduction in his duties.

***Interest Expense.*** Interest expense for the nine months ended September 30, 2006 was$971,000, compared to $741,000 for the same period in 2005, an increase of$230,000 or 31.0%.  During the currentperiod, the average debt decreased 2.4% to $15,900,000 compared to the average forthe first nine months of the prior year of $16,300,000.  Thus,

12

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the increase in interest expense was primarily attributable to higheraverage interest rates under the Company’s Loan Agreement which rose to 8.1% inthe 2006 period from 6.1% in the 2005 period.

***IncomeTaxes.*** The Companyrecognized benefits of $(435,000) and $(309,000) for the nine months endedSeptember 30, 2006, and September 30, 2005, respectively.  Both represented approximately 40% of thepretax results for those periods.

***NetLoss.***  Reflectingthe operating results described above, the net loss for the nine months endedSeptember 30, 2006 totaled $(653,000) or $(0.14) per share on both a basic andfully diluted basis.  This compares to anet loss of $(463,000) for the same period in 2005 or $(0.12) per share on bothbases.

#### **Financial Condition**

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 used to reduce funded debt.  The investors received units consisting of anaggregate of 1,000,000 shares of common stock; three-year warrants to purchase500,000 shares of common stock at an exercise price of $5.00 per share; andfive-year warrants to purchase an additional 500,000 shares of common stock atan exercise price of $7.50 per share. The investors included the following: (i) Stephen D. Rubin, thenPresident and Chairman of the Board of Directors of the Company, and as ofAugust 18, 2006, Chairman of the Board of Directors, (ii) Clifford K. Bolen,then Senior Vice President, Chief Operating Officer and Chief Financial Officerof the Company, and, as of August 18, 2006, President and Chief ExecutiveOfficer, (iii) Delphi Casualty Co., of which Glenn S. Morris, a director of theCompany, owns a 44% equity interest, (iv) a trust of which John C. Seramur, adirector of the Company, serves as trustee, as well as (v) Howard Bedford, thenan unrelated third-party investor and, as of May 18, 2006, a director of theCompany.

The Company’s outstanding revolving bank facility of$9,500,000 was scheduled to mature on April 1, 2007 and thus has beenclassified on the September 30, 2006 balance sheet as a currentobligation.  However, at December 31,2005 and at September 30, 2005, the outstanding revolver balances of $8,588,000and $9,162,000 respectively, were classified as long—term obligations.  Primarily as a result of thisreclassification of the revolving debt into the current obligations, theworking capital decreased to $(234,000) at September 30, 2006, versus$7,851,000 at December 31, 2005, and $9,169,000 at September 30, 2005.  Additionally, the current ratio at September30, 2006 dropped to 0.98 to 1.0 compared to 2.3 to 1.0 at December 31, 2005 and2.7 to 1.0 at September 30, 2005.  As aresult of the increase in sales activity, current assets increased $746,000driven by trade accounts receivable ($709,000, which is net of an increase inreserves for potential returns of unsaleable products) and finished goodsinventory ($376,000), partially offset by a $302,000 decline in income taxesreceivable which reflects a refund received in the first quarter.

At September 30, 2006, the Company had $39,000 incash, a revolving credit facility of $9,500,000 and term facilities totaling$7,900,000, consisting of a $7,750,000 facility that represents the Company’slong term borrowing, Term Loan A and a $150,000 capital expenditure line ofcredit, Term Loan B.  As discussed above,the revolving loan facility matures April 1, 2007 (as amended in March 2006)and Term Loan A is payable in monthly installments of $80,000 through July 31,2008, with a balloon payment of $3,682,000 due on August 31, 2008.  Term Loan B is payable in monthlyinstallments of 1/60th of the total principal, beginning on the last businessday of August, 2006 and continuing monthly through May 31, 2010 with anyremaining amount payable on June 30, 2010. Amounts outstanding under the revolving facility, the Term A and Term Bfacilities at September 30, 2006 were $7,297,000, $5,522,000 and $150,000,respectively.

Interest under each piece of the amended LoanAgreement is at a floating rate per annum equal to the prime rate plus0.5%.  This rate was 8.75% as ofSeptember 30, 2006.  The Loan Agreementimposes certain restrictions on the Company, including its ability to completesignificant asset sales, merge or acquire businesses and pay dividends.  Additionally, the Company must meet certainfinancial covenants at each quarter end during the term of the Loan Agreement,including a Minimum Tangible Net Worth, a Minimum EBITDA and a Minimum CashFlow Coverage Leverage ratio, all as defined in the Loan Agreement.  During 2004 and 2005, the Company hadviolated certain of these covenants and had obtained permanent waivers from thebank for such violations.  The March 24,2006 amendment to the Loan Agreement retroactively amended these financialcovenants.  The impact of the Company’sloss on earnings before income taxes, depreciation and amortization for thetwelve months ended September 30, 2006 resulted in non-compliance with two ofthe

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Company’s debt covenants at that date. However, the Company received a permanent waiver from its lenderrelating to such non-compliance. Management is in discussions with its lendersabout amending the covenants.

The ratio of long-term debt to total capitalizationtotaled 33% at September 30, 2006 down from 74% at December 31, 2005.  This change was primarily the result of boththe $2,500,000 equity investment and use of the proceeds to reduce debt and theclassification of the revolving debt into the current category.  The Company believes its financial resourcesare adequate to fund its needs for the next 12 months.

***Cashflows from operating activities.*** Net cash provided byoperating activities was $1,120,000 for the nine months ended September 30,2006, primarily reflecting the $1,131,000 reduction in working capital sinceDecember 31, 2005 (excluding tax-related items and debt).  This amount of net cash provided by operatingactivities for the current nine month period was $1,587,000 more than the$467,000 used during the same period in 2005. Additionally, this increase occurred despite an $810,000 decrease in netcollections of accounts receivable during the period since the decrease wasmore than offset by an additional $1,573,000 resulting from a smaller inventoryincrease in the current period compared to the prior year, and an additional $745,000provided from a larger increase in accounts payable and other obligations.  The reduced collections of accountsreceivable was primarily due to a combination of higher sales in the currentyear quarter and a collection delay due to invoicing specification issues withtwo large customers.

***Cashflows from investing activities.*** Net cash used ininvesting activities was $893,000 for the nine months ended September 30, 2006,which was $15,000 less than the $908,000 used during the same period of theprior year.  During both periods, thesefunds primarily represent investment in the production facilities.

***Cash flows from financing activities.*** Net cashused in financing activities was $213,000 for the nine months ended September30, 2006.  This net usage is the excessof $1,924,000 of net cash used to pay down the loan facilities including$1,291,000 of net revolver payments and $633,000 of term loan payments, inaddition to $700,000 used to make the scheduled installments under the terms ofthe Virginia Honey acquisition agreement; less cash received of $2,379,000representing the February 2006 equity investment, net of associated transactioncosts and less the proceeds from the stock purchase, option and compensationtransactions totaling $30,000.  The cashused in the current year compares to the $1,324,000 provided during the sameperiod in 2005.

#### **Seasonality**

TheVita segment of the Company’s business is seasonal in nature, primarilyresulting from the effect of the timing of certain holidays on the demand forcertain products. Historically, the Company’s sales and profits have beensubstantially higher in the fourth quarter of each year.

**CriticalAccounting Policies and Estimates**

The Company’sfinancial statements reflect the selection and application of accountingpolicies that require management to make significant estimates andassumptions.  The Company believes thatthe following are some of the more critical judgment areas in the applicationof its accounting policies that currently affect the Company’s financialcondition and results of operations.

Preparation of theconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions affecting the reported amounts of assets, liabilities, revenuesand expenses and related contingent liabilities.  On an on-going basis, the Company evaluatesits estimates, including those related to revenues, returns, bad debts, incometaxes and contingencies and litigation. The Company bases its estimates on historical experience and on variousother assumptions that are believed to be reasonable under thecircumstances.  Actual results may differfrom these estimates under different assumptions or conditions.

Revenue is recognizedupon shipment of product to customers in fulfillment of customer orders.  In accordance with industry practices,inventory is sold to customers often with the right to return or dispose if themerchandise is not sold prior to the expiration of its shelf life.  In order to support the Company’s products,various marketing programs are offered to customers which reimburse them for aportion or all of their promotional activities related to the Company’sproducts.  The Company regularly reviewsand revises, when it deems necessary, estimates of costs to the Company forthese marketing and merchandising programs based on estimates of what has beenincurred by customers.  Actual costsincurred by the Company may differ significantly if factors such as the leveland success of the customers’ programs or

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other conditions differfrom expectations.  Sales are reduced bya provision for estimated future returns, disposals and promotional expenses.

The Companyrecognizes deferred income tax assets and liabilities for the expected futuretax consequences of temporary differences between the tax basis and financialreporting basis of certain assets and liabilities and certain income tax creditcarryforwards.  In estimating future taxconsequences, the Company considers expected future events other thanenactments of changes in tax laws or rates. A valuation reserve is recognized based on the evidence available; if itis more likely than not that some portion or the entire deferred income taxasset will not be realized.

The Companyassesses the impairment of its identifiable intangibles and goodwill wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable and at least annually. Factors the Company considers important, which could trigger animpairment review include the following:

·                  Significant underperformance relative toexpected historical or projected future operating results;

·                  Significant changes in the manner of theCompany’s use of the acquired assets or the strategy for the Company’s overallbusiness;

·                  Significant negative industry or economictrends;

·                  Significant decline in the Company’sstock price for a sustained period; and

·                  The Company’s market capitalization relative to netbook value.

When the Companydetermines that the carrying value of its intangible assets may not berecoverable based upon the existence of one or more of the above indicators ofimpairment, the Company will review for impairment under the provisions of SFAS142.

During the fourthquarter of 2003, the Company completed its annual assessment of impairmentregarding the goodwill recorded as a result of the Virginia Honey acquisition ($6,004,000)and the Halifax acquisition ($2,307,000). Those assessments, supported by independent appraisals of the fair valueof VSF, did not identify any impairment.  However, the 2004 independent appraisal – madeusing customary valuation methodologies including discounted cash flows andfundamental analysis, did reveal impairment issues.  The appraisal reflected a decreased fairvalue of VSF, principally caused by the decline in operating income of VSFduring 2004.  That decline was primarilya result of a substantial decline in the sales of Halifax products – which weredown $1,600,000 or 21% in 2004.  Based onthe appraised value of VSF, the resulting impairment charge of approximately$2,314,000 was recorded in the fourth quarter of 2004.  The 2005 assessment and independent appraisaldid not indicate any further impairment. An updated valuation will be completedin the fourth quarter of 2006.

#### **Forward-LookingStatements**

Certainstatements in this report, including statements in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” are “forward-lookingstatements” as defined by the Federal securities laws. Such statements arebased on management’s current expectations and involve known and unknown risksand uncertainties which may cause the Company’s actual results, performance orachievements to differ materially from any results, performance or achievementsexpressed or implied in this report. By way of example and not limitation andin no particular order, known risks and uncertainties include the Company’sfuture growth and profitability, the potential loss of large customers oraccounts, downward product price movements, availability of salmon and otherraw materials, changes in raw material procurement costs, fluctuations in themarket cost of major commodities such as honey, changes in energy costs, theintroduction and success of new products, changes in economic and market conditions,integration and management of acquired businesses, the seasonality of Vita’sbusiness, the Company’s ability to attract and retain key personnel, theCompany’s ability to maintain its relationships with key vendors and retailers,consolidation of the Company’s customer and supplier base, the potential impactof claims and litigation, the effects of competition in the Company’s marketsand the dietary habits and trends of the general public.  In light of these and other risks anduncertainties, the Company makes no representation that any future results,performance or achievements expressed or implied in this report will beattained. The Company’s actual results may differ materially from any resultsexpressed or implied by the forward-looking statements, especially whenmeasured on a quarterly basis.

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**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

The Company is exposed tointerest rate fluctuations, primarily as a result of its $17.4 million LoanAgreement with interest rates based on prime rate plus 0.5%, or 8.75% as ofSeptember 30, 2006.  The Company does notcurrently use derivative instruments to alter the interest rate characteristicsof any of the debt.  A 10% fluctuation ininterest rates would not have a material impact on the Company’s financialstatements.

**Item4.  Controls and Procedures**

Under the supervision and with the participation ofthe Company’s management team, the principal executive officers and principalfinancial officer have evaluated the effectiveness of the design and operationof the Company’s disclosure controls and procedures as defined in Rules 13a –15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”), as of September 30, 2006 and, based on their evaluation,have concluded that these controls and procedures are effective.  There were no changes in the Company’sinternal control over financial reporting during the fiscal period endedSeptember 30, 2006 that have materially affected, or are reasonable likely tomaterially affect, the Company’s internal control over financial reporting.

Disclosure controls and procedures are designed toensure that information required to be disclosed by the Company in the reportsthat it files or submits under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed bythe Company in the reports that it files under the Exchange Act is accumulatedand communicated to the Company’s management, including its principal executiveofficer and principal financial officer, as appropriate to allow timelydecisions regarding required disclosure.

Itshould be noted that any system of controls, however well designed andoperated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met. In addition, the design of any control systemis based in part upon certain assumptions about the likelihood of futureevents. Because of these and other inherent limitations of control systems,there can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions, regardless of how remote.

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**PART II - OTHER INFORMATION**

#### **Item 1A.  Risk Factors**

The risk factorsincluded in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2005 have not materially changed otherthan as set forth below.

**The cost and potentially reducedavailability of petroleum based products and services, including freight,utilities and raw material surcharges, could impact our profitability. **Any significant increasesin the prevailing price levels or any change in the supply availability ofpetroleum based products and services could have a significant affect on ourcosts.  A significant increase in costswhich cannot be passed on to our customers will have an adverse affect on ourprofitability.

#### **Item 6.  Exhibits**

| 10.1   | Description of Chief Financial Officer compensatory  arrangement                                                    |
|--------|---------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                |
| 31.1   | Principal Executive Officer Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.               |
|   |                                                                                                                |
| 31.2   | Principal Financial Officer Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.               |
|   |                                                                                                                |
| 32.1   | Principal Executive and Financial Officer  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

##  

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## **SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                          | **VITA FOOD PRODUCTS, INC.**                  |
|--------------------------|-----------------------------------------------|
| ** **               | ** **                                    |
| Date: November  14, 2006 | By:                                           | /s/ Clifford K.  Bolen |   |
|                     |                                          |  Clifford  K. Bolen |   |
|                     | President and  Chief Executive Officer        |   |
|                     | (Principal  Executive Officer)                |   |
|                     |                                          |   |   |
|                     |                                          |   |   |
| Date: November  14, 2006 | By:                                           | /s/ William J.  Kenealy |   |
|                     | William  J. Kenealy                           |   |
|                     | Chief Financial  Officer                      |   |
|                     | (Principal Financial  and Accounting Officer) |   |

 

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**ExhibitIndex**
| Number | ** ** | **Exhibit Title**                                                                                                   |
|--------|------------|---------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                |
| 10.1   |       | Description of Chief Financial Officer compensatory  arrangement.                                                   |
|   |       |                                                                                                                |
| 31.1   |       | Principal Executive Officer Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.               |
|   |       |                                                                                                                |
| 31.2   |       | Principal Financial Officer Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.               |
|   |       |                                                                                                                |
| 32.1   |       | Principal Executive and Financial Officer  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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