S-1

As filed with the Securities and Exchange Commission on October 6, 2006

Registration No. 333-               

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
__________________

VAUGHAN FOODS, INC.

(Exact name of Registrant as specified in its charter)

Oklahoma	2099	73-1342046
(State or Other Jurisdiction of	(Primary Standard Industrial	(I.R.S. Employer
Incorporation or Organization)	Classification Code Number)	Identification No.)

Vaughan Foods, Inc.
216 N.E. 12^th Street
Moore, OK 73160
(405) 794-2530
(405) 985-6596 Facsimile
(Address, including zip code, and telephone number, including area code, of Registrant’s executive offices)
_________________________________
Mark E. Vaughan
Chief Executive Officer
Vaughan Foods, Inc.
216 N.E. 12^th Street, Moore, OK 73160
(405) 794-2530
(405) 985-6596 Facsimile

(Name, address, including zip code, and telephone number, including area code, of agent for service)
_________________________________Please send copies of all communications to:

Stephen Zelnick, Esq.	John Halle, Esq.
Morse, Zelnick, Rose & Lander LLP	Stoel Rives LLP
405 Park Avenue	900 S.W. Fifth Avenue
Suite 1401	Suite 2600
New York, New York 10022	Portland, Oregon 97204
(212) 838-8040	(503) 224-3380
(212) 838-9190 Facsimile	(503) 220-2480 Facsimile

_________________________________

     Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

     If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box. x

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

     If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

CALCULATION OF REGISTRATION FEE

			Proposed
			Maximum	Proposed
	Amount		Offering	Maximum
	to		Price Per	Aggregate
Title of Each Class of	be		Unit/Share/	Offering		Amount of
Securities to be Registered	Registered (1)		Warrant(2)	Price(2)		Registration Fee
Units, consisting of one share of common
stock, no par value, one Class A warrant
and one Class B warrant, each to purchase
one share of common stock	5,750,000	(1)	$5.50	$	31,625,000	$	3,383.88
Common stock included in the units(4)	5,750,000		–		–
Class A warrants to purchase common stock
included in the units(4)	5,750,000		–		–		–
Class B warrants to purchase common stock
included in the units(4)	5,750,000		–		–		–
Common stock underlying the Class A
warrants included in the units(3)	5,750,000	(1)	$8.25	$	47,437,500	$	5,075.81
Common stock underlying the Class B
warrants included in the units(3)	5,750,000	(1)	$11.00	$	63,250,000	$	6,767.75
Representative’s warrants	500,000			$	100	$	.01
Units issuable upon exercise of the
representative’s warrants	500,000		$6.60	$	3,300,000	$	353.10
Common shares included in the units
underlying the representative’s warrants(4)	500,000		–		–		–
Class A warrants to purchase common stock
included in units issuable upon exercise of
the representative’s warrants(4)	500,000		–		–		–
Class B warrants to purchase common stock
included in the units issuable upon exercise
of the representative’s warrants(4)	500,000		–		–		–
Common stock underlying the Class A
warrants to purchase common stock
included in units issuable upon exercise of
the representative’s warrants(3)	500,000		$8.25	$	4,125,000	$	441.38
Common stock underlying the Class B
warrants to purchase common stock
included in units issuable upon exercise of
the representative’s warrants(3)	500,000		$11.00	$	5,500,000	$	588.50
Total	38,000,000			$	155,237,600	$	16,610.43

(1)	Includes 750,000 units issuable upon exercise of underwriters’ over-allotment option.
(2)	Estimated solely for purposes of calculating the amount of the registration fee paid pursuant to Rule 457(g) under the Securities Act.
(3)	Pursuant to Rule 416 under the Securities Act, there are also being registered hereby such additional indeterminate number of shares as may become issuable pursuant to the antidilution provisions of the warrants.
(4)	No registration fee required pursuant to Rule 457 of the Securities Act.

_________________________________

     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

_________________________________

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)

Dated October [                ], 2006

5,000,000 Units

each consisting of

one share of common stock, one Class A Warrant and one Class B Warrant

     This is our initial public offering. We are offering, on a firm commitment basis, 5,000,000 units, each unit consisting of one share of common stock, one Class A warrant and one Class B warrant. Each Class A warrant entitles its holder to purchase one share of common stock at an exercise price equal to 150% of the initial unit offering price. Each Class B warrant entitles its holder to purchase one share of common stock at an exercise price equal to 200% of the initial unit offering price. The Class A and Class B warrants are exercisable at any time after they become separately tradeable until their expiration date, five years after the date of this prospectus. We may redeem some or all of the Class A warrants at a price of $0.25 per warrant at any time after they become separately tradeable by giving the holders not less than 30 days’ notice. We may redeem some or all of the Class B warrants, at a price of $0.25 per warrant at any time after they become separately tradeable by giving the holders not less than 30 days’ notice, which we may do at any time after our gross revenues, as confirmed by an independent audit, for any period of four consecutive fiscal quarters preceding the notice, are equal to or greater than $100 million.

     We anticipate that the initial public offering price of the units will be in the range of $4.50 - $5.50 per unit.

     Initially, only the units will trade. The common stock and the warrants will begin trading separately on the 30th calendar day following the date of this prospectus. Once separate trading in the common stock and warrants begins, trading in the units will cease, and the units will be delisted.

     We have applied to list the units, common stock, the Class A warrants and the Class B warrants on the Nasdaq Capital Market under the symbols “[           ],” “[           ],” “[           ]” and “[           ],” respectively [and on the Boston Stock Exchange under the symbols “[           ],” “[           ],” “[           ]” and “[           ],” respectively].

     Investing in these units involves significant risks. See “Risk Factors” beginning on page 12.

____________________

     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the disclosures in this prospectus. Any representation to the contrary is a criminal offense.

		Per Unit		Total
	$		$
Public offering price
Underwriting discount	$		$
Proceeds to us, before expenses	$		$

     We have also agreed to pay Paulson Investment Company, Inc., the representative of the underwriters of this offering, a non-accountable expense allowance equal to 2% of the total public offering price for the units offered by this prospectus and issue to Paulson a warrant to purchase 500,000 units, identical to the units offered by this prospectus, having an exercise price per unit equal to 120% of the initial unit public offering price.

     We have also granted to Paulson a 45-day option to purchase up to an additional 750,000 units to cover over-allotments.

Paulson Investment Company, Inc. Capital West Securities, Inc.

The date of this prospectus is                , 2006

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     We hold rights to the following trademarks: “Fresh Fixins^®”, “Allison’s Gourmet Kitchens and design™”, “Vaughan Foods™”, “Serve Fresh Kits™”, “Deli Fresh™” and “Deli Fresh Select™” and “Wild About Food and design^®.”

     All references in this Prospectus to Vaughan, “we,” “us,” or “our” refer to Vaughan Foods, Inc. and its contemplated wholly owned subsidiary Allison’s Gourmet Kitchens, Inc., unless the context otherwise indicates.

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PROSPECTUS SUMMARY

     This summary provides a brief overview of key aspects of the offering. However, it is a summary and may not contain all of the information that is important to you. For a more complete understanding of this offering, we encourage you to read the entire prospectus, including our financial statements and the notes to those statements. All share information in this prospectus has been retroactively adjusted to reflect a stock dividend of 6,249 shares for each share of common stock (which increased our outstanding shares of common stock to 5,000,000 shares) and the increase in our authorized shares approved in June 2006 and effective in September 2006. All information also gives retroactive effect (as if such acquisition had occurred before the date of such information) to our expected acquisition of Allison’s Gourmet Kitchens, LLP, a processor of refrigerated prepared salads, which we refer to as “Allison’s,” including its recently acquired division, Wild About Food, a processor of freshly prepared soups and sauces. Allison’s is currently owned by three of our officers and a director nominee who have agreed to contribute or sell their interests to us. The closing of the acquisition of Allison’s is a condition to the closing of this offering.

Vaughan Foods, Inc.

Overview

     We process and package value-added, refrigerated foods which we distribute to our customers three or more times per week in our fleet of refrigerated trucks and trailers. Distribution is concentrated in the 12-state marketing area within a 500 mile radius of our plant in Moore, Oklahoma, a suburb of Oklahoma City, consisting of all or portions of the states of Arkansas, Colorado, Iowa, Kansas, Louisiana, Mississippi, Missouri, Nebraska, Oklahoma, New Mexico, Tennessee and Texas. Our marketing area is largely determined by the short shelf life of our products and, to a lesser extent, by the cost of refrigerated shipping.

     Our principal products fall into two categories: refrigerated prepared salads, such as chicken, tuna, bean and pasta salads, coleslaw and potato salad, and fresh-cut produce, primarily salads and salad mixes. However, until the end of 2002 our line consisted primarily of fresh-cut produce which we packaged and sold to food service customers. In 2002, we began to expand our operations into a more diverse line of refrigerated foods in order to provide opportunities for greater profit margins. First, we added a limited number of refrigerated prepared salads. In March 2003, three of our officers, together with Herb Grimes, a director nominee, co-founded Allison’s Gourmet Kitchens, LLP to process a line of refrigerated prepared salads for retail outlets, as well as our historical food service customers and restaurant chains. These refrigerated prepared salads generate higher gross profit margins than our fresh-cut produce. Allison’s is integrated with our operations. It uses our production facility in Moore, Oklahoma and our distribution network, including our fleet of refrigerated tractors and trailers, and shares certain office, managerial and other personnel. Allison’s also utilizes our fresh-cut produce in making its prepared salads. Also, since 2002 we have been expanding our fresh-cut line to include more salad mixes, packaged to better meet the needs of retail chain store accounts. These salad mixes for retailers also typically enjoy higher gross profit margins than produce sold to food service customers.

     We believe that we are a leading regional supplier of our products within our primary marketing area. We process approximately 1.4 to 1.7 million pounds of fresh-cut, ready-to-eat branded and private label salads every week and produce approximately 70 different salad products in a variety of food service and retail package sizes, including custom vegetable mixes and custom sized packages for our large volume customers. Salads and salad mixes are sold primarily to restaurant chains, food service businesses, institutional users and, to a lesser extent, retail chains while the bulk of our refrigerated prepared salads are sold to grocery store deli departments, food service distributors and regional restaurant chains.

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     A substantial element of our growth plan is focused on our higher margin opportunities. In accordance with this plan, in June 2006, Allison’s acquired Wild About Food, Inc., a processor of soups, stews, sauces and side dishes.

Competitive Strengths

     We believe we have a number of competitive strengths that in combination contribute to our ability to compete and achieve our growth plans:

• Frequent deliveries. We deliver our perishable and short shelf life products three or more times per week. Our frequent deliveries coupled with our assistance to customers on how to handle our products on a “first in – first out” basis insure the freshness of our product to the ultimate consumer.



• Distribution capability. We maintain a fleet of 23 trucks and 28 fifty-three foot refrigerated trailers giving us rapid delivery capability and strong logistical control.



• Diverse and customized products. We offer a diverse range of ready-to-order quality products in convenient packaging types and sizes. We can also deliver customized “cut-to-order” fresh-cut produce to distributors in less than two days.



• Single source supplier. As a single source supplier of both packaged fresh-cut salads and refrigerated prepared salads, we allow customers the opportunity to consolidate their sources of supply.



• Diverse sources of supply. In 2005, we purchased ingredients from approximately 50 suppliers in five diverse growing regions (California, Arizona, Colorado, Florida and Mexico). This geographic diversity reduces our risk of shortfalls in supplies due to natural disasters, labor disruptions and other supply interruptions in any one area.



• Broad customer base. We currently have approximately 140 recurring end-user revenue accounts throughout the Plains States, Southwest and Southeast. No customer accounted for more than 10% of sales in 2004 or 2005.

Growth Plan

     We currently supply only a small part of the demand of our larger clients for our refrigerated prepared salads and fresh-cut salad and salad mixes. Our ability to supply our customers’ needs within our existing 12-state marketing area is constrained by the size limitations of our existing plant and the limitations of our product line, both of which we are in the process of expanding. In order to supply the needs of these customers and potential new customers outside of our primary market area, we would need to create other new facilities so that we can continue to deliver the freshest products and maintain our pricing and cost structures. We believe that our existing customers would buy additional products that we add to our line, such as freshly prepared soups and stews, sauces and dressings, of the type produced by Wild About Food, as well as organic fruits and vegetables, side dishes and preservative free salad kits. Accordingly, we plan to enlarge our business by taking the following steps:

• Increase productive capacity for refrigerated prepared salads. We are currently building a 40,000 sq. ft. addition to our 108,000 sq. ft. plant in Moore, Oklahoma to be used for refrigerated prepared salads and other prepared products. A new, state-of-the-art potato cook/chill system in that facility will substantially increase output of cooked and chilled potatoes for use in our potato salad products. Other new equipment will enable us to prepare our own dressings and sauces, ingredients that we now purchase. The additional space will also allow us to reorganize our existing plant to increase our capacity for producing salads and salad mixes from approximately 1.4 to 1.7 million pounds per week to approximately 2.2 million pounds per week.



• Increase utilization of refrigerated delivery capacity. We plan to increase the use of our existing fleet of refrigerated trailers, and new refrigerated trailers purchased with proceeds of this offering, in “back haul” transportation for other shippers.



• Broaden product line. We plan to broaden the line of products offered both in our existing primary market region and elsewhere through internal growth and the acquisition of complementary businesses. Our acquisition of Wild about Food and its line of freshly prepared soups, stews, sauces and dressing

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was an initial step in this direction. We believe that the addition of these products as well as organic fruits and vegetables, side dishes, preservative free salad kits and other refrigerated products will enable us to more fully meet the needs of our existing restaurant chain and food service businesses.


• Broaden market reach. Many of our existing customers operate beyond our primary market area. We believe that we can broaden business with these customers and also add new customers, particularly in the Midwest, by building or acquiring new facilities in contiguous and other marketing areas. We believe that our reputation is known in some surrounding areas and that this should facilitate our geographic expansion.



• Strategic Acquisitions. Though much of our growth plan is based on internal growth, we also plan, where feasible, to add to our customer base, increase market share, increase our geographic reach, enhance our productive capacity and broaden our product line by acquisition of regional competitors.

     Achieving our growth plan will enable us to spread fixed overhead costs over a larger revenue base and enable us to have a stronger bargaining position in negotiating for raw material supplies. Larger production runs should also help in containing or reducing processing costs, including per unit labor costs.

Corporate Information

     Vaughan was organized in 1989 under the laws of the state of Oklahoma as a successor to a family business that commenced operations in 1961. Immediately prior to the closing of this offering, pursuant to agreements dated in May and June 2006, assuming gross proceeds from this offering of at least $20.0 million, we will acquire from Mark Vaughan and Vernon J. Brandt, Jr., for nominal consideration, 60% of the limited partnership interests in Allison’s, a limited liability partnership, and also acquire from Herbert Grimes and Stan Gustas the remaining 40% of the limited partnership interests and the general partnership interest in Allison’s Gourmet Kitchens for $2,500,000 and a number of shares equal to $1.0 million divided by the initial public offering price of the units. Allison’s marks our entry into the higher value-added refrigerated prepared salad business. Prior to acquisition it was controlled by our principals and processed its entire product line at our plant in Moore, Oklahoma. Mark Vaughan, Vernon J. Brandt, Jr., Herbert Grimes and Stan Gustas are each officers of Vaughan.

     Our principal executive office is located at 216 N.E. 12^th Street, Moore, OK 73160and our telephone number is (405) 794-2350. Our web address is www.vaughanfoods.com. None of the information on our website is part of this prospectus.

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The Offering

Securities offered	5,000,000 units, each unit consisting of one share of common
	stock, one Class A redeemable common stock purchase warrant
	and one Class B redeemable common stock purchase warrant.
	Initially, only the units will trade. The common stock and the
	warrants included in the units will not trade separately until the
	30th calendar day following the date of this prospectus or the
	first trading day thereafter if the 30th day is a weekend or
	holiday. Once separate trading in the common stock and
	warrants commences, the units will cease trading and will be
	delisted.
Shares of common stock to be outstanding	10,400,000
after this offering
Warrants:
Number of Class A warrants to be
outstanding after this offering	5,200,000
Number of Class B warrants to be
outstanding after this offering	5,200,000
Exercise terms of Class A and Class B	Each Class A warrant entitles its holder to purchase one share of
Warrants	common stock at an exercise price equal to 150% of the initial
	unit offering price. Each Class B warrant entitles its holder to
	purchase one share of common stock at an exercise price equal
	to 200% of the initial unit offering price. The Class A and Class
	B warrants are exercisable at any time after they become
	separately tradable.
Expiration date of Class A and Class B	, 2011
Warrants
Redemption of Class A and Class B Warrants	We may redeem some or all of the warrants at any time after
	they become separately tradeable, at a price of $0.25 per warrant,
	on 30 days’ notice to the holders. However, we may redeem the
	Class B warrants only if our gross revenue, for any period of
	four consecutive fiscal quarters preceding the notice (as
	confirmed by independent audit), is equal to or greater than $100
	million.
Symbols:
	Nasdaq	Boston
	Capital	Stock
	Market	Exchange
	Units
	Common Stock
	Class A Warrants
	Class B Warrants
Risk factors	Investing in our securities involves a high degree of risk. As an
	investor, you should be able to bear the loss of your entire
	investment. You should carefully consider the information set
	forth in the Risk Factor section beginning on page 12 of this
	prospectus in evaluating an investment in our securities.

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Use of Proceeds	We expect to use approximately $8.0 million of the net proceeds
	of the offering towards the acquisition of Allison’s Gourmet
	Kitchens, the expansion of our production facility and construction
	of new facilities, approximately $5.0 million to repay debt,
	including $2.0 million of Secured Notes, and the remainder
	towards working capital.

     The number of shares of common stock and the number of Class A and Class B warrants to be outstanding after this offering includes:

• 200,000 shares, 200,000 Class A warrants and 200,000 Class B warrants included in the units to be issued to the holders of $2.0 million aggregate principal amount of our 10% secured promissory notes due June 30, 2007, which we refer to as the “Secured Notes,” assuming an initial public offering price of $5.00 per unit. The actual number of units that will be issued to the holders of the Unsecured Notes will depend on the actual initial public offering price of the units;



• 200,000 shares to be issued as part of the consideration for the acquisition of the 40% minority limited partnership interests and the general partnership interest in Allison’s Gourmet Kitchens

     Unless otherwise stated, the information contained in this prospectus assumes no exercise of:

• any of the Class A and Class B warrants (including the Class A and Class B warrants that will be issued to the holders of the Secured Notes);



• the over-allotment option granted to the representative to purchase up to an additional 750,000 units;



• the warrant to purchase 500,000 units granted to the representative in connection with this offering; and



• any other warrants and options outstanding on the date of this prospectus.

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Summary Financial Information^*

(in thousands, except per share data)

Vaughan Foods
	Years ended December 31,								Six months ended June 30,
									(Unaudited)
		2003			2004		2005			2005			2006
Consolidated statement of
operations data
Net sales	$	29,369		$	36,133	$	44,730		$	22,331		$	26,318
Gross profit		4,402			6,230		6,754			3,780			3,144
Selling, general and
administrative expenses		3,891			5,387		6,431			3,516			3,515
Rent income		182			168		230			114			134
Interest expense		409			489		1,042			485			489
Other, net		(45	)		12		88			4			28
Income tax expense (benefit)		71			192		(160	)		(30	)		(249	)
Net income expense (loss)	$	168		$	342	$	(241	)	$	(73	)	$	(449	)
Net income (loss) per share – basic
and diluted	$	0.03		$	0.07	$	(0.05	)	$	(0.01	)	$	(0.09	)
Weighted average number of shares
outstanding – basic and diluted		5,000			5,000		5,000			5,000			5,000
Allison’s Gourmet Kitchens
	Years ended December 31								Six Months ended June 30,
									(Unaudited)
		2003			2004		2005			2005			2006
Consolidated statement of
operations data
Net sales	$	3,382		$	9,173	$	13,111		$	7,062		$	8,627
Gross profit		780			2,222		3,265			1,738			1,913
Selling, general and
administrative expenses		663			1,608		2,356			1,212			1,486
Interest expense		16			32		11			13			40
Net income	$	101		$	582	$	898		$	513		$	387

^{______________________________________
*} Financial information relating to Wild About Food, Inc. is reflected in financial information relating to Allison’s Gourmet Kitchens only subsequent to the date of its acquisition in 2006, but not in any pro forma financial information for prior periods.

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Pro forma combined information:

The pro forma combined statement of operations data giving effect to the acquisition of Allison’s by Vaughan as of January 1, 2005

				Six Months ended June 30
	Years ended December 31,
	2005			2005			2006
	(Unaudited)
Consolidated statement of
operations data
Net sales		$	55,935	$	29,351	$	33,909
Gross profit			10,249		5,529		5,175
Selling, general and
administrative expenses			8,453		4,582		4,815
Interest expense			1,053		498		529
Net income (loss)		$	656	$	440	$	(62	)

Consolidated balance sheet data:

     The tables below show selected balance sheet data for Vaughan Foods and Allison’s at December 31, 2005 and June 30, 2006 on an actual basis. The pro forma combined balance sheet data as at December 31, 2005 and June 30, 2006 gives effect to:

• the issuance of an additional $2,000,000 of indebtedness pursuant to the Secured Notes and $1,000,000 of other indebtedness since December 31, 2005, but before the date of this prospectus;



• the issuance of 200,000 shares, 200,000 Class A warrants and 200,000 Class B warrants included in the units to be issued to the holders of the Secured Notes, assuming an initial public offering price of $5.00 per unit. The actual number of units that will be issued to the holders of the Secured Notes will depend on the actual initial public offering price of the units; and



• Our acquisition of all of the partnership interests in Allison’s Gourmet Kitchens for $2,500,000 and 200,000 shares on the assumption that the acquisition occurred on January 1, 2005.

     The pro forma as adjusted data also takes into account our receipt of approximately $25.0 million of estimated net proceeds from this offering and the use of approximately $3.0 million to repay certain indebtedness, including the Secured Notes.

Vaughan Foods
(in thousands)

					June 30, 2006
		December 31, 2005			(Unaudited)
Current assets	$	4,370		$	5,908
Working capital (deficit)		(2,480	)		(3,673	)
Total assets		16,970			18,785
Total current liabilities		6,850			9,581
Total long-term liabilities		9,514			9,046
Stockholders’ equity		606			158

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Allison’s Gourmet Kitchen
(in thousands)
				June 30, 2006
		December 31, 2005		(Unaudited)
Current assets	$	1,842	$	2,915
Working capital (deficit)		613		464
Total assets		2,822		4,978
Total current liabilities		1,229		2,451
Total long term liabilities		205		882
Partner’s capital		1,388		1,646

Pro Forma Combined
(in thousands)
								June 30, 2006
								As Adjusted
		December 31, 2005			June 30, 2006			(Unaudited)
Current assets	$	5,876		$	8,520		$	29,520
Working capital (deficit)		(1,868	)		(3,209	)		17,791
Total assets		19,457			23,461			44,461
Total current liabilities		7,744			11,730			11,730
Total long-term liabilities		9,718			9,928			9,928
Stockholders’ equity (deficiency)		1,994			1,804			22,804

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RISK FACTORS

     This offering and an investment in our securities involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus, including our financial statements and the notes to those statements, before you purchase any units. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could negatively impact our business, results of operations or financial condition in the future. If any of the following risks and uncertainties develops into actual events, our business, results of operations or financial condition could be adversely affected. In those cases, the trading price of our securities could decline, and you may lose all or part of your investment.

Risks Relating to Our Business

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

     Refrigerated products are vulnerable to contamination by organisms producing food-borne illnesses. These organisms are generally found in the environment, and, as a result, there is a risk that, as a result of food processing, they could be found in our products. Once contaminated products have been shipped for distribution, illness and death may result if the pathogens are not eliminated by processing at the foodservice or consumer level. Also, products purchased from others for packing or distribution may contain contaminants that we are unable to identify. The risk can be controlled, but not eliminated, by use of good manufacturing practices and finished product testing. We may also encounter the same risks if a third party tampers with our products or if our products are inadvertently mislabeled. Shipment of adulterated products, even if inadvertent, is a violation of law and may lead to product liability claims, product recalls and increased scrutiny by federal and state regulatory agencies, any of which could have a material adverse effect on our reputation, business, prospects, results of operations and financial condition. Typically, when we purchase certain products or critical raw materials that we use in production, we require a “certificate of analysis” from the vendor showing that the product is free of certain bacteria. Nevertheless, in mid 2005, as a result of our routine internal product testing, we discovered possible contamination by listeria monocytogenes in three different products, produced on various different dates over a period of 25 days. We immediately recalled a total of 23,435 pounds of these products at a total cost to us of $65,000. The USDA Food Safety and Inspection Service has received no complaints of illness associated with consumption of those products. However, after this event, we instituted a number of further safeguards including testing all critical raw materials ourselves, and purchasing an insurance policy to limit our exposure in the event of product contamination. We cannot assure you, however, that these safeguards will prevent our business, results of operations or our financial condition from being adversely affected by product liability claims, product recalls or scrutiny by regulators in the future.

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

     Our ability to process and distribute our products depends, in large part, on the availability and affordability of fresh produce. The prices for high quality fresh produce can be volatile and supplies may be restricted due to weather, plant disease and changes in agricultural production levels. Although we have season-long contracts to purchase approximately 90% of our requirements for lettuce and some of our other products, the amount and quality of available produce can vary greatly from season to season, or within a season, and our suppliers may not be able to meet their contractual obligations, particularly during periods of severe shortages. Limitations of supply, or the poor quality of produce available under our season-long contracts, could force us to buy produce on the open market during periods of rapid price increases, thus significantly increasing our costs. We can sometimes pass these higher costs on to customers, but a number of factors, including price increases that are faster or more severe than we anticipate may result in cost increases that we are not able to fully recover. We were particularly adversely affected during the second quarter of 2006 when adverse growing conditions in Southern California reduced the supply of

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lettuce at a time when alternative supplies from other growing regions were not yet available and forced us to buy lettuce on the open market during a period of rapidly rising prices. We maintained customer goodwill by continuing to supply them with lettuce under our sale and supply contracts, though at a cost of significantly reduced gross profit and overall losses in this segment of our business. We expect that such conditions will recur from time to time and may have an adverse effect on our operating results when and if they do occur.

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

     We process all of our products at our Moore, Oklahoma plant. Since we do not have operations elsewhere, a material disruption at this plant would seriously limit our ability to deliver products to our customers. Such disruption could be caused by a number of different events, including: maintenance outages; prolonged power failures; equipment failure; a chemical spill or release; widespread contamination of our equipment; fires, floods, earthquakes or other natural disasters; or other operational problems. Any of these events would adversely affect our business, financial condition and operating results. In April 2006 we had to shut down the plant for 2 1/2 days due to an ammonia leak. We estimate that this occurrence cost the company approximately $350,000.

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

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

Competition in our industry is intense, and we may not be able to compete successfully.

     The food processing industry is intensely competitive. In the fresh-cut produce business we compete against large national processors, many with production facilities near farms that grow much of the produce supplying the United Statesmarkets, regional processors and store based or local processors often referred to as “chop shops.” The national processors have substantially greater financial and other resources than we do and some may enjoy cost advantages in buying produce. If we and other regional competitors increase our market share, the major national processors could respond by offering special pricing promotions aimed at retaining business or seek to acquire or build regional processing capacities, any of which could hamper our expansion plans.

     In the refrigerated prepared salad business we compete against the largest company in this business and smaller regional processors. Our principal competitor has greater financial and other resources than we do. We expect similar competition in other markets in which we may seek to expand.

Managing our growth may be difficult and our growth rate may decline.

     We have rapidly expanded our operations since 2000. This growth has placed, and continued growth will continue to place, significant demands on our administrative, operational and financial resources. This growth may not continue. However, to the extent it continues, we expect it to place a significant demand on our managerial, administrative, operational and financial resources. Our future performance and results of operations will depend, in part, on our ability to successfully implement enhancements to our business management systems and to adapt those systems as necessary to respond to changes in our business. Similarly, our growth has created a need for expansion of our facilities and processing capacity. As we near maximum utilization of our facility or maximize our processing capacity, operations may be constrained, which could adversely affect our operating results, unless the facility is expanded, volume is shifted to another facility, or additional processing capacity is added. Conversely, as we add additional facilities or expand existing operations or facilities, excess capacity may be created. Any excess

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capacity would add to our overhead burden and also create inefficiencies which would adversely affect our operating results. We cannot assure you that we will be able to successfully implement our growth plan. If our plan is not successful, we will have incurred significant obligations and ongoing expenses, which we may not be able to service from our existing cash flow.

We rely on major customers.

     None of our customers accounted for 10% or more of our sales in 2004 or 2005. However, seven independent Sysco Foods distributors, represented, in the aggregate, approximately 23% of our sales in 2004 and 24% in 2005 and 11 separate Wal-Mart distribution centers represented, in the aggregate, approximately 8.7% of our sales in 2004, and 9.1% in 2005. Texas-based H.E. Butt Grocery Company, known as “HEB,” is our largest customer for deli salads, accounting for approximately 8.0% and 9.3% of our sales of deli salads in 2004 and 2005, respectively. While we believe that each of these customers is independent, it is possible that a termination of a supply arrangement with any one of these customers could adversely affect our business relationships with related entities. A material decrease in sales to any of our major customers or the loss of any of our major customers would have a material adverse impact on our operating results. In addition, to the extent we add new customers, whether following the loss of existing customers or otherwise, we may incur substantial start-up expenses in initiating services to new customers.

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

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

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

     As of June 30, 2006, we had approximately 515 employees, none of whom are unionized. We believe that a substantial number of our factory workers are Mexican immigrants. Though we require all workers to provide us with social security numbers or other documentation showing that they can be legally employed in the United States, some of our workers may, without our knowledge, be illegal immigrants. Illegal immigrants are subject to seizure and deportation. If any of the immigration reform bill approved by the U.S. Senate in May 2006, or the immigration bill approved by the U.S. House of Representatives in December 2005, or a new immigration bill combining provisions from both, becomes law, its effect on our work force is unpredictable. While we consider our relations with our employees to be good, any material labor disruption, as a result of seizure of our workers, strikes or changes in immigration law, or significantly increased labor costs at our facilities in the future, could have a material adverse effect on our business, financial condition and operating results.

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

     Our success depends, in part, on the continued contributions of our executive officers and other key employees. Our management team has significant industry experience and would be difficult to replace. We believe

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that the expertise and knowledge of these individuals in our industry, and in their respective fields, is a critical factor to our continued growth and success. We have not entered into an employment agreement with any of these individuals, although we have key officer and life insurance policies in effect with respect to Messrs. Vaughan and Brandt, our President and Chief Executive and Vice President-Operations, respectively. The loss of the services of any of these individuals could have a material adverse effect on our business and prospects if we are unable to identify a suitable candidate to replace any such individual. Our success is also dependent upon our ability to attract and retain additional qualified marketing, technical and other personnel, and we cannot assure you that we will be able to do so.

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

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

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

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

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

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

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

     In connection with the acquisitions of businesses in the future, we may decide to consolidate the operations of any acquired business with our existing operations or make other changes with respect to the acquired business, which could result in special charges or other expenses. Our results of operations also may be adversely affected by expenses we incur in making acquisitions, by amortization of acquisition-related intangible assets with definite lives and by additional depreciation expense attributable to acquired assets. Any of the businesses we acquire may also have liabilities or adverse operating issues, including some that we fail to discover before the acquisition, and our

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indemnity for such liabilities may be limited. Additionally, our ability to make any future acquisitions may depend upon obtaining additional financing. We may not be able to obtain additional financing on acceptable terms or at all. To the extent that we seek to acquire other businesses in exchange for our Common Stock, fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions.

Our debt agreements contain restrictive covenants and our debt obligations are substantial in relation to our assets.

     At June 30, 2006, Vaughan had total assets of $18.7 million and $12.0 million of outstanding indebtedness, consisting of approximately $2.8 million outstanding under a $4.0 million revolving credit facility, which we refer to as the “Credit Facility,” approximately $5.0 million in respect of the Industrial Development Bonds issued by the Cleveland County (Oklahoma) Industrial Authority, approximately $3.3 million outstanding under a term loan secured by a mortgage on our plant and related real property and $900,000 of miscellaneous other indebtedness. Subsequent to June 30, 2006 we borrowed an additional $2.0 million under the Secured Notes and $1.0 million from the underwriter’s representative on an unsecured basis. In addition, at June 30, 2006, we were subject to operating and capital leases requiring approximately $1.6 million in future minimum lease payments. Accordingly, the total amount of our obligations with respect to indebtedness and leases, in relation to our assets, is substantial.

     Some of our debt instruments, including those relating to our Credit Facility require that we comply with certain financial tests and impose certain restrictions on us, including, among other things, restrictions on our ability to incur additional indebtedness, create liens on assets, make loans or investments and pay dividends. These tests and restrictions limit our operating flexibility, limit ability to plan for and react to changes in our business and make us more vulnerable to economic downturns and competitive pressures. Our indebtedness and lease obligations could have significant negative consequences, including:

• increasing our vulnerability to adverse economic and industry conditions;



• limiting our ability to obtain additional financing;



• requiring that a substantial portion of our cash flows from operations be applied to pay principal and interest on our indebtedness and lease payments under our leases, thereby reducing cash flows available for other purposes; and



• limiting our flexibility in planning for or reacting to changes in our business and the industry in which we compete.

Any of these factors could place us at a possible competitive disadvantage compared to competitors with less leverage or better access to capital resources.

Substantially all of our assets are encumbered by liens, which if foreclosed by our secured creditors would have a material adverse effect on our business, financial condition and operating results.

     Indebtedness under our Credit Facility is secured by a security interest in favor of the lender in substantially all of our assets, other than real property. Our obligations under a term loan in the principal amount of approximately $3.3 million and our obligations under the Industrial Development Bonds are secured by first and second mortgages on our plant in Moore, Oklahoma. If we were unable to pay our secured obligations when due or otherwise default on our obligations to secured creditors, these creditors could foreclose their security interests or mortgages in our assets. Any foreclosure action by our secured creditors could cause us to seek protection under the federal bankruptcy code which, in turn, would have a material adverse effect on the market value of our Common Stock and could result in the loss of your entire investment in the Units.

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Risks Related to this Offering

The representative of the underwriters may have a conflict of interest in underwriting this offering.

      Beginning in September 2006, we borrowed an aggregate of $1.0 million from Paulson Investment Company, the representative of the underwriters, pursuant to a non-secured promissory note bearing interest at 10% per annum and payable on the earlier of the first anniversary of the issue date of the note or the consummation of this offering. Because the probability that Paulson Investment Company will be repaid increases significantly if this offering is completed, a decision by Paulson Investment Company to proceed with the offering may be influenced by our indebtedness to it. This possible conflict of interest may affect the exercise of Paulson Investment Company's discretion and judgment as the representative of the underwriters of this offering.

We are controlled by a limited number of stockholders, which will limit your ability to influence key decisions.

     Immediately after this offering, our executive officers and directors will, in the aggregate, beneficially own 50.24% of the issued and outstanding shares of our common stock, or 46.84% if the over-allotment option is exercised in full. As a result, these stockholders will have the ability to exercise substantial control over our affairs and corporate actions requiring shareholder approval, including electing and removing directors, selling all or substantially all of our assets, merging with another entity or amending our articles of incorporation. This de facto control could be disadvantageous to our other stockholders with interests that differ from those of the control group, if these stockholders vote together. For example, the control group could delay, deter or prevent a change in control even if a transaction of that sort would benefit the other stockholders. In addition, concentration of ownership could adversely affect the price that investors might be willing to pay in the future for our securities.

As a public company, our administrative costs, including compliance with Section 404 of the Sarbanes-Oxley Act, will be significantly higher than they are now, which will make it more difficult for us to be profitable and cash flow positive. Difficulties in complying with Section 404 of the Sarbanes-Oxley Act and other legal and accounting requirements applicable to public companies could affect our market value.

     We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission and the Nasdaq Capital Market, have imposed various new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. New expenses as a result of our being a public company include additional amounts for legal and accounting services, listing fees for Nasdaq and the Boston Stock Exchange, transfer agent fees, additional insurance costs, printing and filing fees, fees for investor and public relations and compensation payable to non-employee directors. For example, we expect the application of these rules and regulations to our company will make it more difficult and more expensive for us to obtain director and officer liability insurance.

     In particular, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. Commencing in 2007, we will be required to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Beginning in 2008, our independent registered public accounting firm will be required to evaluate and test our internal control over financial reporting, and to issue an opinion on the effectiveness of our internal control over financial reporting. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues. We currently do not have an internal audit group, and we will evaluate the need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered

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public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the Securities and Exchange Commission, the Nasdaq Capital Market, the Boston Stock Exchange or other regulatory authorities, which would require additional financial and management resources. In addition, if we are unable to meet filing deadlines for reports required by the Securities Exchange Act, our securities could be delisted from the Nasdaq Capital Market or the Boston Stock Exchange. If our securities were delisted from both exchanges, trading, if any, in our securities would be conducted in the over the counter market on the NASD’s “OTC Bulletin Board.” Consequently, the liquidity of our securities could be impaired.

If we do not maintain an effective registration statement or comply with applicable state securities laws, you may not be able to exercise the warrants.

     In order for you to be able to exercise the warrants included in the units, the underlying shares must be covered by an effective registration statement and qualify for an exemption under the securities laws of the state in which you live. We cannot assure you that we will continue to maintain a current registration statement relating to the offer and sale of the Class A and Class B warrants included in the units and the common stock underlying these warrants, or that an exemption from registration or qualification will be available throughout their term. This may have an adverse effect on the demand for the warrants and the prices that can be obtained from reselling them.

The warrants may be redeemed on short notice. This may have an adverse impact on their price.

     We may redeem the Class A and Class B warrants for $0.25 per warrant on 30 days’ notice at any time after the specific redemption conditions in the respective warrants have been satisfied. If we give notice of redemption, you will be forced to sell or exercise your warrants or accept the redemption price. The notice of redemption could come at a time when it is not advisable or possible for you to exercise the warrants or a current prospectus or exemption from registration or qualification does not exist. As a result, you would be unable to benefit from owning the warrants being redeemed.

Future sales or the potential for sale of a substantial number of shares of our common stock could cause the trading price of our common stock and unit warrants to decline and could impair our ability to raise capital through subsequent equity offerings.

     Sales of a substantial number of shares of our common stock in the public markets, or the perception that these sales may occur, could cause the market price of our stock to decline and could materially impair our ability to raise capital through the sale of additional equity securities. Once this offering is completed, we will have 10,400,000 shares of common stock issued and outstanding and will have approximately an additional 15,800,000 million shares of common stock reserved for future issuance as follows:

• 10,400,000 shares in the aggregate underlying the Class A and Class B warrants (including the warrants held by the holders of the Secured Notes);



• 2,250,000 shares underlying the over-allotment option, including the shares underlying the Class A and Class B warrants included in the units underlying that option;



• 1,500,000 shares underlying the representative’s warrant, including the shares underlying the Class A and Class B warrants included in the representative’s warrants; and



• 1,650,000 shares reserved for issuance under our stock option plan.

     The common stock included in the units sold in this offering as well as the common stock underlying the warrants, other than those shares held by “affiliates,” as defined by the rules and regulations promulgated under the Securities Act of 1933, as amended, or the “Securities Act,” will be freely tradable without restriction. We have agreed to register for resale promptly after the closing of this offering all of the securities included in the units that will be issued to the holders of the Secured Notes, which include 200,000 shares of common stock, 200,000 Class A warrants, 200,000 Class B warrants and 400,000 shares of common stock underlying those warrants (assuming an initial public offering price of $5.00 per unit). Finally, upon the expiration of the one-year “lock-up” agreements to

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be signed by all of our existing stockholders approximately 5,400,000 unregistered shares will be freely tradeable subject to the timing and volume limitations set forth in Rule 144 promulgated under the Securities Act.

The existence of outstanding options and warrants may impair our ability to obtain additional equity financing.

     The existence of outstanding options and warrants may adversely affect the terms at which we could obtain additional equity financing. The holders of these options and warrants have the opportunity to profit from a rise in the value or market price of our common stock and to exercise them at a time when we could obtain equity capital on more favorable terms than those contained in these securities.

Management has broad discretion over the use of proceeds from this offering. We may use the proceeds of this offering in ways that do not improve our operating results or the market value of our securities.

     We will have broad discretion in determining the specific uses of the proceeds from the sale of the units. While we have general expectations as to the allocation of the net proceeds of this offering, that allocation may change in response to a variety of unanticipated events, such as differences between our expected and actual revenues from operations or availability of commercial financing opportunities, unexpected expenses or expense overruns or unanticipated opportunities requiring cash expenditures. We will also have significant flexibility as to the timing and the use of the proceeds. As a result, investors will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds. You will rely on the judgment of our management with only limited information about their specific intentions regarding the use of proceeds. We may spend most of the proceeds of this offering in ways with which you may not agree. If we fail to apply these funds effectively, our business, results of operations and financial condition may be materially and adversely affected.

We may issue shares of preferred stock in the future, which could depress the price of our stock.

     Our corporate charter authorizes us to issue shares of “blank check” preferred stock. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred shares, as well as the authority to issue such shares, without further shareholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends are declared to holders of our common stock, and the right to the redemption of such preferred shares, together with a premium, prior to the redemption of the common stock. To the extent that we do issue such additional shares of preferred stock, the rights of the holders of our common stock and other securities could be impaired thereby, including, without limitation, with respect to liquidation.

Purchasers in this offering will experience immediate and substantial dilution in net tangible book value.

     The initial public offering price is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. As a result, investors purchasing our units in this offering will incur immediate dilution of $0.73 per share or 14.6%, based on an assumed initial public offering price of $5.00 per share. As a result of this dilution, investors purchasing units from us will have contributed 92.7% of the total amount invested in us but will own only 48% of our outstanding common stock. In addition, the exercise of outstanding options and warrants and future equity issuances may result in further dilution to investors and current stockholders.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This prospectus contains forward-looking statements that involve risks and uncertainties relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited, to statements concerning:

• the anticipated benefits and risks associated with our business strategy;



• our future operating results and the future value of our common stock;



• the anticipated size or trends of the markets in which we compete and the anticipated competition in those markets;

• our ability to attract customers in a cost-efficient manner;



• our ability to attract and retain qualified management personnel;



• potential government regulation;



• our future capital requirements and our ability to satisfy our capital needs;



• the anticipated use of the proceeds realized from this offering;



• the potential for additional issuances of our securities;



• the possibility of future acquisitions of businesses or assets; and



• possible expansion into international markets.

     Furthermore, in some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the Risk Factors section above. These factors may cause our actual results to differ materially from any forward-looking statement.

     Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

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RECENT DEVELOPMENTS

Financing Transactions

     In July 2006 we borrowed $2.0 million from 18 accredited investors in the Secured Financing pursuant to 10% Secured Subordinated Promissory Notes, which we refer to as the “Promissory Notes.” The Promissory Notes are repayable on the earlier of June 30, 2007 or the third business day following completion of a public or private financing by Vaughan generating gross proceeds of at least $5 million. The Promissory Notes are secured by a non-recourse pledge of the 60% equity interest in Allison’s Gourmet Kitchens, LP currently held by Mark E. Vaughan and Vernon J. Brandt, Jr., both officers and directors of Vaughan. As added consideration for the purchase of the Promissory Notes, each purchaser will receive that number of equity securities to be issued in this public offering having a value, at the initial public offering price, of 50% of the Promissory Notes purchased by that investor. If we have not completed the required public or private financing by June 30, 2007, but we have repaid the Promissory Notes, the investors will receive an aggregate of 250,000 shares of our common stock. If we have not repaid the Promissory Notes by that time, the investors will receive an aggregate of 500,000 shares of our common stock. Vaughan has agreed to file a registration statement for the resale of the equity securities to be issued to these investors within 60 days following the effective date of this registration statement and will be subject to a late fee of 2% of the original investment amount per month if that registration statement is not filed within the 60-day period or if the resale registration statement has not been declared effective within 60 days after it has been filed (90 days if the financial information in the resale registration statement must be updated) or if after the registration statement has been declared effective it cannot be used in connection with the sale of the covered securities; provided, however, that the amount of the late fee payable to each investor, shall not exceed 10% of the original principal amount of the note purchased by that investor. The investors in the Promissory Notes have agreed to execute a lockup agreement containing the same terms and conditions as those to which Vaughan’s officers, directors and 5% stockholders are subject. In connection with the Promissory Notes, Vaughan agreed to pay Paulson Investment Company a fee of 8% of the gross proceeds and to reimburse Paulson Investment Company for expenses incurred by it in connection with the Secured Financing up to a maximum of $10,000.

     Commencing in September 2006 Vaughan borrowed an aggregate of $1.0 million from Paulson Investment Company, pursuant to a non-secured promissory note bearing interest at 10% per annum and payable on the earlier of the first anniversary of the issue date of the note or the consummation of this offering.

     Acquisition of Allison’s

     Immediately prior to the closing of this offering, pursuant to agreements dated in June 2006, we will acquire from Mark Vaughan and Vernon J. Brandt, Jr., for nominal consideration, 60% of the limited partnership interest in Allison’s Gourmet Kitchens, a limited liability partnership, and also acquire from Herbert Grimes and Stan Gustas the remaining 40% of the limited partnership interests and the general partnership interest in Allison’s Gourmet Kitchens for $2,500,000 and common stock valued at $1,000,000, when the shares are valued at the Unit price in this offering. Mark Vaughan, Vernon J. Brandt, Jr., and Stan Gustas are President and Chief Executive Officer, Vice President of Operations and Vice President and Chief Financial Officer of Vaughan, respectively, and Herbert Grimes is President and Chief Executive Officer of Allison’s.

     Acquisition of Wild About Food

     Allison’s acquired the assets and related real estate and assumed certain liabilities of Wild About Food, Inc., a Texas corporation, and formed Wild About Food-Oklahoma, LLC, a Texas limited liability company, on June 1, 2006. Wild About Food produces fresh soups, stews, sauces and side dishes. The prepared foods are distributed to restaurants, food service and retail customers. The purchase price was comprised of a down-payment of $6,000; the assumption of a note payable in the amount of $154,000, contingent payments equal to 75% of operating income during the three year period following the closing up to a maximum of $240,000, and a further contingent payment equal to 75% of operating income in excess of $250,000 during that period. Allison’s also entered into a three-year employment agreement with Mark Stallons, President and majority owner of Wild About Food, Inc. providing for annual compensation of $95,000 plus a bonus of up to 25% of salary contingent on achieving performance criteria.

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USE OF PROCEEDS

     The principal purposes of this offering are to provide us with capital that will allow us to:

• expand our existing production facility;



• acquire the minority interest in Allison’s;



• build a new facility;



• pay debt; and



• increase working capital.

     Assuming a public offering price of $5.00 per unit, after deducting the estimated expenses of this offering, including the underwriting discount of $2,000,000 the representative’s non-accountable expense allowance of $500,000 and other estimated offering expenses of $1,500,000, we estimate that the net proceeds to us from this offering will be approximately $21,000,000. (Non-accountable expenses are expenses incurred by the representative in connection with this offering that are payable out of the proceeds of the offering, but for which it is not required to produce evidence of payment because we have agreed to pay a fixed percentage of the gross proceeds for this purpose.) If the representative exercises the over-allotment option in full, we estimate that the net proceeds of the offering will be approximately $25,207,000.

We expect to use the net proceeds as follows:

	Approximate		Approximate
Use of Proceeds	Amount		Percentage
Acquisition of Allison’s		$ 2,500,000	11.5
Completion of expansion of existing facility		2,200,000	10.1
Construction of new production facility		3,000,000	13.7
Repayment of debt, excluding accrued interest		5,000,000	22.9
Working Capital		8,300,000	41.8
Total		$ 21,000,000	100	%

     Acquisition of Allison’s. Immediately prior to the closing of this offering, pursuant to agreements dated June 2006, we will acquire from Mark Vaughan and Vernon J. Brandt, Jr., for nominal consideration, 60% of the limited partnership interests in Allison’s Gourmet Kitchens, and also acquire from Herbert Grimes and Stan Gustas the remaining 40% of the limited partnership interests and the general partnership interest in Allison’s Gourmet Kitchens for $2,500,000 and a number of shares equal to $1.0 million divided by the initial public offering price of the units. Mark Vaughan, Vernon J. Brandt, Jr., and Stan Gustas are President and Chief Executive Officer, Vice President of Operations and Vice President and Chief Financial Officer of Vaughan, respectively, and Herbert Grimes is President and Chief Executive Officer of Allison’s.

     Completion of expansion of existing facility. We are currently building a 40,000 sq. ft. extension of our existing plant at Moore, Oklahoma for use by our Allison’s division. We expect to use $2,200,000 of the proceeds from this offering to complete this extension and purchase new equipment that will increase our capacity to produce refrigerated prepared salads, and enable us to develop new prepared products, including soups, dressings and cooked/chilled items.

     Construction of new production facility. We plan to build one or more production facilities to serve areas outside of our current primary marketing area. The exact location and number of new regions and new facilities will depend on further availability of mortgage and construction financing, business opportunities and strategic

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relationships. The estimated amount of $3,000,000 includes the estimated cost of construction (or possible acquisition) and equipment for one or more new production facilities in contiguous or other marketing areas.

     Repayment of debt

     We will use $5 million of the proceeds of this offering to pay the following debt:

• $2.0 million to pay the principal of the Secured Notes due on the earlier of June 30, 2007 or the closing of this offering, and bearing interest at 10% per annum



• $1.0 million to pay the principal of the unsecured note due on the earlier of the first anniversary of its issuance or the closing of this offering and bearing interest at 10% per annum



• $2.0 million to partially pay our line of credit from Bank of the West

     Interest on the above loans from their inception date through the date of payment will be paid from our working capital. The above loans were used to continue work on the building of the addition to our existing facility, to pay certain expenses of this offering and to provide us with additional working capital.

     Working Capital. This amount includes working capital required for general corporate purposes, including broadening our product line, increasing marketing expenditures and constructing or acquiring processing facilities or related businesses in marketing regions outside the area which we currently serve. Working capital may also be used to support new production facilities until they generate positive cash flow. If the underwriter exercises the over-allotment option, we will add the additional net proceeds of approximately $3,750,000 to our working capital.

     The above information represents our best estimate of our capital requirements based upon the current status of our business. We will retain broad discretion in the allocation of the net proceeds within the categories listed above. The amounts actually expended for these purposes may vary significantly and will depend on a number of factors, including our rate of revenue growth, cash generated by operations, evolving business needs, changes in demand for our services, the cost to construct new facilities, our marketing efforts, competitive developments, new strategic opportunities, cost of materials, general economic conditions and other factors that we cannot anticipate at this time.

     Pending their use, we intend to invest the net proceeds of this offering in interest-bearing, investment grade securities.

     We expect that the net proceeds from this offering, when combined with the proceeds of other financing transactions and operations, will be sufficient to fund our operations and capital requirements for at least 12 months following this offering. We may be required to raise additional capital through the sale of equity or other securities sooner if our operating assumptions change or prove to be inaccurate. We cannot assure you that any financing of this type would be available. In the event of a capital inadequacy, we would be required to limit our growth and the expenditures described above.

DIVIDEND POLICY

     We do not intend to pay any dividends in the foreseeable future. We intend to retain any future earnings for use in the operation and expansion of our business. Any future decision to pay dividends on common stock will be at the discretion of our board of directors and will be dependent upon our fiscal condition, results of operations, capital requirements and other factors our board of directors may deem relevant.

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CAPITALIZATION

     The following table sets forth our capitalization as of June 30, 2006 on an actual basis (after adjustment for a stock dividend of 6,249 shares for each share of common stock), on a pro forma basis and pro forma as adjusted for this offering. The pro forma data takes into account:

• The acquisition of all interests in Allison’s Gourmet Kitchens and the issuance of 200,000 (estimated) shares of common stock to the owners of the minority interests in Allison’s as partial payment for their interests;



• The increase in our authorized capitalization to 50,000,000 shares of Common Stock, par value $.001 per share and 5,000,000 shares of Preferred Stock, par value $.001 per share.



• A stock dividend of 6,249 shares for each share of common stock;



• The issuance of 200,000 shares, 200,000 Class A warrants and 200,000 Class B warrants included in the units that we will issue to holders of the Secured Notes on the date of this prospectus (based on an assumed initial public offering price of $5.00 per unit).

     The pro forma as adjusted data also take into account our receipt of $21,000,000 of estimated net proceeds from this offering and our use of approximately $2,650,000 of the proceeds to pay certain of our indebtedness (see “Use of Proceeds.)

	June 30, 2006
						Pro forma,
	Actual			Pro forma		as adjusted
	(in thousands)
Long term debt including capital lease obligation, net of current portion	$	9,046			9,928	$	9,928
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized,
no shares issued and outstanding , actual pro forma and as adjusted		-			-		-
Common stock, $0.001 par value, 50,000,000 shares authorized; 5,000,000
shares issued and outstanding actual, 5,400,000 pro forma; and
10,400,000 shares issued and outstanding, pro forma as adjusted		5			5		10
Additional paid-in capital		411			411		21,405
Retained earnings (deficit)		(258	)		1,359		1,359
Total stockholders’ equity		158		$	1,804	$	22,804
Total capitalization	$	9,139		$	11,732	$	32,732

DILUTION

     If you purchase units in this offering, your interest will be diluted to the extent of the excess of the public offering price per share of common stock over the as adjusted net tangible book value per share of common stock after this offering. Net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of common stock outstanding. For purposes of the dilution computation and the following tables, we have allocated the full purchase price of a unit to the shares of common stock included in the unit and none to the warrants.

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     At June 30, 2006, we had a pro forma net tangible book value of approximately $1,233,360, or approximately $0.23 per share based on 5,400,000 shares issued and outstanding on a pro forma basis. After taking into account the estimated net proceeds from this offering of $21,832,000, our net tangible book value at June 30, 2006 would have been approximately $23,055,360, or $4.27 per share. This represents an immediate increase of $4.04 per share to existing stockholders and immediate dilution of $0.73 per share, or 15%, to the new investors who purchase units in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per share		$	5.00
Net tangible book value per share at June 30, 2006	$0.23
Increase in net tangible book value per share attributable to new investors	4.04
Net tangible book value per share after the offering			4.27
Dilution per share to new investors		$	0.73

     The following table summarizes as of June 30, 2006 the differences between the existing stockholders and the new investors with respect to the number of shares purchased, the total consideration paid and the average price per share paid:

	Shares Purchased				Total Consideration			Average
								Price Per
	Number		Percent		Amount	Percent		Share
Founders, executive
officers and
directors(1)	5,000,000		48.1	%	415,993	1.6	%	$0.08
Other existing
stockholders(2)	400,000		3.8	%	285,714	1.1	%	$0.71
New investors	5,000,000		48.1	%	25,000,000	97.3	%	$5.00	(3)
Total	10,400,000	(4)	100	%	25,701,707	100	%

(1)	Includes shares owned by Mark Vaughan and Vernon J. Brandt.
(2)	Includes (i) 200,000 shares of common stock underlying the units to be issued to the holders of the Secured Notes on the date of this prospectus, assuming an initial public offering price of $5.00 per unit; and (ii) 200,000 shares issued on the date of this prospectus to Herbert Grimes and Stan Gustas in partial payment for their minority interests in Allison’s Gourmet Kitchens. The actual number of units that will be issued to the holders of the Secured Notes will depend on the actual initial public offering price of the units.
(3)	Based on an initial public offering price of $5.00 per unit.
(4)	Does not include any shares underlying unexercised warrants and options.

     If the representative exercises the over-allotment option in full, the new investors will purchase 5,750,000 shares of common stock. In that event, the gross proceeds from this offering will be $28,750,000, representing

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approximately 97.6% of the total consideration for 51.8% of the total number of shares of common stock outstanding, and the dilution to new investors would be $2.67 per share, or 53.4% .

SELECTED CONSOLIDATED FINANCIAL DATA^†

     The selected consolidated financial data set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The consolidated statement of operations data for each of the years in the three-year period ended December 31, 2005, and the consolidated balance sheet data dated December 31, 2005 are derived from our financial statements, which have been audited by Cole & Reed, P.C. certified public accountants, and are included elsewhere in this prospectus. The consolidated statement of operations data for the years ended Deceber 31, 2002 and 2001 and the six-month periods ended June 30, 2006 and 2005 and the consolidated balance sheet data at June 30, 2006 are derived from our unaudited financial statements The unaudited financial statements have been prepared on substantially the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. Historical results are not necessarily indicative of the results to be expected in the future.

Vaughan Foods, Inc.
Consolidated statement of operations data:
(in thousands)

																Six months ended
		Years ended December 31,														June 30,
		(Unaudited)														(Unaudited)
		2001		2002			2003			2004			2005			2005			2006
Net sales	$	18,997	$	23,119		$	29,369		$	36,133		$	44,730		$	22,331		$	26,318
Cost of sales		13,841		18,732			24,967			29,903			37,976			18,551			23,174
Gross profit		5,156		4,387			4,402			6,230			6,754			3,780			3,144
Selling, general and
administrative expenses		5,047		2,916			3,891			5,387			6,431			3,516			3,515
Income from operations		21		1,471			511			843			323			264			(371	)
Other income (expense)		-		(95	)		(272	)		(308	)		(724	)		(368	)		(327	)
Earnings (loss) before
provision for taxes		21		806			240			534			(401	)		(103	)		(697	)
Income tax expense (benefit)		-		154			71			192			(160	)		(30	)		(249	)
Net earnings (loss)	$	21	$	652		$	168		$	342		$	(241	)	$	(73	)	$	(448	)
Net earnings (loss) per share
– basic and diluted	$	0.00	$	0.13		$	0.03		$	0.07		$	(0.05	)	$	(0.01	)	$	(0.09	)
Weighted average number of
shares outstanding – basic
and diluted		5,000		5,000			5,000			5,000			5,000			5,000			5,000

^{_________________________________________
†} Financial information relating to Wild About Food, Inc. is reflected in financial information relating to Allison’s Gourmet Kitchens only subsequent to the date of its acquisition in 2006, but not in any pro forma financial information for prior periods.

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Consolidated balance sheet data:
(in thousands)
						June 30, 2006
			December 31, 2005			(Unaudited)
	Current assets	$	4,370		$	5,908
	Working capital (deficit)		(2,480	)		( 3,673	)
	Total assets		16,970			18,785
	Total current liabilities		6,850			9,581
	Total long-term liabilities		9,514			9,046
	Stockholders’ equity		606			158

Allison’s Gourmet Kitchens
Statement of operations data:
(in thousands)
		Years ended December 31,						Six months ended June 30,
		2003		2004		2005		2005		2006
								(Unaudited)
Net sales	$	3,382	$	9,173	$	13,111	$	7,062	$	8,627
Cost of sales		2,602		6,951		9,845		5,324		6,714
Gross profit		780		2,222		3,265		1,738		1,913
Selling, general and administrative
expenses		664		1,608		2,356		1,212		1,486
Income from operations		117		614		909		526		427
Interest expense		16		32		11		13		40
Net income (loss)	$	101	$	583	$	898	$	513	$	387

Consolidated balance sheet data:
(in thousands)
				June 30, 2006
		December 31, 2005		(Unaudited)
Current assets	$	1,842	$	2,915
Working capital		612		464
Total assets		2,822		4,978
Total current liabilities		1,229		2,451
Total long-term liabilities		205		882
Partners’ capital		1,388		1,646

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

     THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN FORWARD-LOOKING STATEMENTS.

Vaughan Foods

Overview

     We were founded in 1989 to provide fresh-cut produce to customers in the 12-state marketing area within a 500-mile radius of Oklahoma City, Oklahoma. The marketing area is largely determined by the short shelf life of fresh-cut products and, to a lesser extent, by the cost of refrigerated shipping.

     By the end of 2002 our sales had grown to $23 million. However, value-added products were limited and gross profit margins were small, ranging from 15.1 to 17.2% during the last three fiscal years. Commencing in 2002, we began to expand our operations into a more diverse line of refrigerated foods, in order to provide opportunities for greater profit margins. First, we added a limited number of refrigerated prepared salads. In March 2003, three of our officers, together with Herb Grimes, co-founded Allison’s Gourmet Kitchens, Ltd., to process a line of refrigerated prepared salads for retail outlets and our historical food service customers. Typically, Allison’s products generate higher gross profit margins ranging from 23.1% to 24.9% during the last three fiscal years. In addition, Allison’s is integrated with our operations and uses our production facility in Moore, Oklahoma and our distribution network, including our fleet of tractors and trailers. Allison’s also uses our fresh-cut produce in its refrigerated prepared salads and shares certain office, managerial and other personnel. In addition, we also expanded our fresh-cut line to include more salad mixes to better meet the needs of retail chain store accounts. These salad mixes also typically enjoy higher gross profit margins than salad ingredients sold to food service customers.

     Though our historical business provided only limited margins, it introduced us to an important market of food service accounts, restaurant accounts and retail chains that have significant additional food product needs. Thus, it positioned us to meet some of those needs by expanding our product line, particularly into products providing greater margins, and by broadening the geographic region which we serve. Also, the changing focus of our historical business into products, such as salad mixes and our “Fresh Fixins™” line for the retail market also provides opportunities for increased margins.

     Allison’s acquisition, in June 2006, of the assets of Wild About Food, Inc., a processor of fresh soups, stews, sauces and side dishes, represents our most recent step towards expanding our product line into higher margin products,.

     The largest component of our cost of revenue is the cost of the produce. The prices for this produce can be volatile and supplies may be restricted due to weather, plant disease and changes in agricultural production levels. We seek to protect ourselves against price increases by entering into season-long contracts to purchase approximately 80% of our estimated requirements for lettuce and for 70% to 100% of some of our other agricultural requirements. However, the amount and quality of available produce can vary greatly from season to season, or within a season, and our suppliers may not always be able to provide sufficient quality product, particularly during periods of severe shortages. Often, increases in produce cost can be passed on to customers and sometimes, can even generate wider margins as market resistance to price increases fall. However, lettuce supply problems in the second quarter of 2006 resulted in an approximately $4.6 million increase in cost of sales for the six month period ended June 30, 2006 compared to the same period in 2005. The additional costs resulted in an operating loss of approximately $371,000 for that period compared to operating income of $264,000 for the same period in the prior year.

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diminished in volume and quality, at a time when alternative supplies from other growing regions were not yet available.

     We have supply arrangements with twelve separate Wal-Mart distribution centers, representing about 9% of our customer sales, and supply arrangements with several independent Sysco Foods distributors which, in the aggregate, account for approximately 23% of sales. While those Sysco Foods distributors are each independent, it is possible that a termination of a supply arrangement with one could adversely affect business relationships with the others.

     Consolidated operating results are affected to a limited extent by seasonal fluctuations. Sales typically rise due to increased demand during holiday periods and decline in the summer months when schools are not in session.

     Generally, other than fluctuations in certain raw material costs, largely related to short-term supply and demand variances, inflation has not been a material factor in our operations. Inflation is not expected to have a significant impact on our business, results of operations or financial condition since we can generally offset the impact of inflation through a combination of productivity gains and price increases. However, during 2004 and 2005 we experienced significant inflation for key purchased items such as natural gas, diesel fuel and packaging materials which we were unable to fully offset through selective price increases to our customers.

     Forward Buy Raw Product Contracts. We typically enter into substantial purchase obligations covering 80% of our expected requirements for iceberg and romaine lettuce for a six-month advance period and 80% to 100% of our expected requirements for cabbage, onions, peppers and potatoes for three-month to one-year periods. These contracts are with numerous growers in California, Arizona, Colorado, Florida, and Mexico which growing regions supply approximately 100% of our annual produce requirements. Contracts are for a growing season or for periods which vary in length from 6 months to 1 year.

     Commodity Hedging. In order to reduce the impact of changes in commodity prices due to crop failure on our operating results, we have developed a risk management strategy that includes the following elements:

     We have negotiated agreements with certain of our fixed price customers which allow us to raise prices by giving 7 days notice in response to increased commodity prices. The majority of these contracts are with major broad-line foodservice distributor customers who are generally less sensitive to price increases because their customers purchase food products from them on a cost-plus basis.

     We are continuing to transition customers from lower margin lettuce to higher margin, greater value-added specialty products. These products are less sensitive to fluctuations in underlying commodity prices because the raw material component is a smaller percentage of total cost and we generally have the ability to pass on certain cost increases related to our greater value-added products to customers. This transition to greater value-added specialty products has taken place gradually over the past 3 years.

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Results of Operations Vaughan Foods
(in thousands)
		Percentage of Revenue
										Six months ended
		Years Ended December 31,								June 30 (unaudited)
		2003			2004			2005			2005			2006
Net sales	$	29,369		$	36,133		$	44,730		$	22,288		$	26,318
Cost of sales		85.0	%		82.8	%		84.9	%		83.1	%		88.1	%
Gross profit margin		15.0	%		17.2	%		15.1	%		16.9	%		11.9	%
Selling, general and
administrative expenses		13.2	%		14.9	%		14.4	%		15.7	%		13.4	%
Income (loss) from operations		1.7	%		2.3	%		0.7	%		1.2	%		(1.4	)%
Interest expense		1.4	%		1.4	%		2.3	%		2.2	%		1.9	%
Other income (expense)		0.6	%		0.5	%		0.7	%		0.5	%		0.6	%
Income (loss) before provision
for taxes		0.8	%		1.5	%		(0.9	)%		(0.5	)%		(2.6	)%
Net income (loss)		0.6	%		0.9	%		(0.5	)%		(0.3	)%		(1.7	)%

Comparison of Years Ended December 31, 2005 and 2004

     Net Sales. Net sales were $44.7 million and $36.1 million for the years ended December 31, 2005 and 2004, respectively. The increase in net sales was due to increased volume and higher prices. The increase in prices reflected higher commodity costs for raw materials, which we were able to pass on, in part to our customers. The higher pricing was principally for lettuce and tomato products. Volume in total pounds sold grew from 54.7 million in 2004 to 64.7 million in 2005, an increase of 18.3% .

     Gross Profit. Gross profit for the year ended December 31, 2005 increased $524,000 to $6.8 million from $6.2 million for the year ended December 31, 2004. Our gross profit margin was 15.1% of net sales for 2005, compared with 17.2% for 2004. The decrease in gross profit margin was due to higher fuel prices that negatively affected utility, packaging, and transportation costs.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2005 increased $1.0 million, or 18.5%, to $6.4 million from $5.4 million for the year ended December 31, 2004. Selling, general and administrative expenses were 14.4% of net sales in 2005 as compared to 14.9% in 2004. The increase in expenses was caused by the cost to audit the prior 3 years of financial statements, additional legal fees, and the other expenses necessary to prepare the company for a public offering.

     Income (Loss) from Operations. Operating income for the year ended December 31, 2005 decreased $520,000, to $323,000 from operating income of $843,000 for the year ended December 31, 2004, due to the decrease in gross profit margin and increase in expenses described in the preceeding two paragraphs.

     Other Income Other income for the year ended December 31, 2005 increased $138,000, or approximately 76.5%, to $318,000 from $180,000 for the year ended December 31, 2004. This increase is due primarily to increased rental income from Allison’s.

     Interest Expense. Interest expense increased approximately $553,000 in 2005 compared to 2004, reflecting increased debt to expand our processing facility.

     Income Taxes. We had an income tax benefit of $160,000 in 2005 due to the loss before the provision for taxes, but had income tax expense in 2004 of $192,000. Our effective tax rate in 2004 and 2005 was 35.9% and 39.8%, respectively.

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Comparison of Years December 31, 2004 and 2003

     Net Sales. Net sales were $36.1 million and $29.4 million for the years ended December 31, 2004 and 2003, respectively. The increase in net sales was due to new customers, increased volume to existing customers, and a price increase of our lettuce products. The increase in prices reflected higher commodity costs for raw materials, which we were able to pass on, in part, to our customers. The higher pricing was principally for lettuce and cabbage items which represents over 60% of our sales. Volume in total pounds sold, grew from 47.1 million in 2003 to 54.7 million in 2005, an increase of 16.1% .

     Gross Profit. Gross profit for the year ended December 31, 2004 increased $1.8 million to $6.2 million, from $4.4 million for the year ended December 31, 2003. Our gross profit margin was 17.2% of net sales for 2004, compared with 15.0% for 2003. The increase in gross profit margin was due to increased production throughput in our manufacturing process.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2004 increased $1.5 million, or 38.4%, to $5.4 million from $3.9 million for the year ended December 31, 2003. Selling, general and administrative expenses were 14.9% of net sales in 2004 as compared to 13.2% in 2003. The increase in expenses was caused by additional staffing to expand the business.

     Income (Loss) from Operations. Operating income for the year ended December 31, 2004 increased $332,000, to $843,000 from $511,000 for the year ended December 31, 2003. This increase is due to an increase in food-service business which has a higher margin.

     Other Income. Other income for the year ended December 31, 2004 decreased approximately 15.0%, to $180,000 from $207,000 for the year ended December 31, 2003. This decrease is due to adjustments to rent paid by Allison’ Gourmet Kitchens for additional plant space.

     Interest Expense Interest expense increased approximately $80,000 in 2004 compared to 2003, reflecting increased debt for manufacturing equipment.

     Income Taxes Our effective tax rate was 35.9% in 2004 compared to 29.7% in 2003. The increase in the effective tax rate for 2004 was related to decreased tax credits.

Comparison of six months ended June 30, 2006 and 2005

     Net Sales Net sales were $26.3 million and $22.3 million for the six months ended June 30, 2006 and 2005, respectively. The increase in net sales was due to increased volume related to new customers and an increase in prices. The increase in prices reflected higher commodity costs for raw materials, which we were able to pass on, in part, to our customers. The higher pricing was principally for lettuce, tomato and onion items. Volume in total pounds sold, grew from 37.6 million in the six months ended June 30, 2005 to 32.9 million in the six months ended June 30, 2006, an increase of 14.3% .

     Gross Profit Gross profit for the six months ended June 30, 2006 and 2005 decreased $647,000 to $3.1 million in the six months ended June 30, 2006 from $3.8 million for the six months ended June 30, 2005. Our gross profit margin was 11.9% of net sales for the six months ended June 30, 2006, compared with 16.9% for the six months ended June 30, 2005. The decrease in gross profit margin was due to increased costs associated with poor lettuce yields.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended June 30, 2006 remained constant at $3.5 million. Selling, general and administrative expenses were 13.4% of net sales in the six months ended June 30, 2005 as compared to 15.7% in the six months ended June 30, 2005. Expenses remained the same in dollars as volume increased.

     Income (Loss) from Operations. Income from operations for the six months ended June 30, 2006 decreased $635,000 to a loss from operations of $371,000 from operating income of $264,000 for the six months ended June 30, 2005.

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This decrease is due to lower lettuce yields related to crop failure and an ammonia leak which shut the plant down for two days.

     Other Income. Other income for the six months ended June 30, 2006 increased $45,000 or approximately 38% to $162,000 from $117,000 for the year six months ended June 30, 2005. This increase is due to additional rent income from Allison’s.

     Interest Expense. Interest expense increased $6,000 for the six months ended June 30, 2006 compared to the six months ended June 30, 2005, reflecting a slight increase in debt.

     Income Taxes. Our effective tax rate in the six months ended June 30, 2006 compared to the six months ended June 30, 2005 was higher as a result of tax loss carry-forwards

Liquidity and Capital Resources

     Historically, we have financed our liquidity requirements through internally generated funds, senior bank borrowings and the issuance of other indebtedness. We believe such sources remain viable financing alternatives to meet our anticipated needs. Our investments in facilities and equipment have been a significant use of capital. We plan to continue to invest in advanced production facilities to enhance our competitive position.

     Cash used by operating activities was $228,000 for the year ended December 31, 2005, compared to cash provided by operations of $1.4 million for the year ended December 31, 2004. The decrease in our operating cash flow was primarily attributable to a decrease in net earnings, an increase in accounts receivable and a decrease in accounts payable. Cash flow provided by operating activities was $1.4 million for the year ended December 31, 2004 compared to $487,000 for the year ended December 31, 2003. The increase in our cash flow provided by operating activities was attributable to an increase in earnings and an increase in accounts payable. Cash provided by operating activities was $574,000 for the six months ended June 30, 2006 compared to cash used in operating activities of $976,000 for the six months ended June 30, 2005. This was a result of an increase of accounts payable.

     We are obligated to meet certain covenants under our long-term debt. Under the most onerous of these it is required to:

• maintain a debt service coverage ratio of 1.50 to 1.00. The ratio will be reported to the Trustee and beneficial owners of the Industrial Development Bonds quarterly for each of the previous four quarters. If the debt service coverage ratio reported for each of four consecutive quarters is less than 1.50 to 1.00 we could be required to retain a consultant at the request of our revenue bond holders. No consultant has been retained even though the ratio has fallen below the requirement. For the six months ended June 30, 2006 our debt service coverage ratio was 1.07 to 1.00.



• maintain a current ratio of 1.10 to 1.00 calculated as of the last day of each calendar quarter beginning after January 1, 2006. As of June 30, 2006, our current ratio is 0.62 to 1.00.



• maintain a debt to equity ratio of not more than 4.00 to 1.00 calculated as of the last day of each calendar quarter beginning after January 1, 2006. As of June 30, 2006 our debt to equity ratio is 174 to 1.00.



• have not more than 10% of its accounts payable in excess of 75 days past due. We are in compliance with this covenant as of June 30, 2006.



• have not more than 20% of its accounts receivable in excess of 90 days past due. We are in compliance with this covenant as of June 30, 2006.

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     Noncompliance with the debt service coverage ratio, the current ratio, or the debt to equity ratio will not be considered an event of default under the terms of the agreement. Noncompliance with the above ratios results in an increase in the interest rate on each of the Bonds of 1% in total until we are in compliance with the required ratios.

     Net long-term capital lease obligations total $649,000 at December 31, 2005, compared to $806,000 at December 31, 2004. At June 30, 2006, net long-term capital lease obligations totaled $569,000. These obligations consist of various equipment leases at various fixed rates, secured by related equipment. Payment terms and maturity dates vary from lease to lease.

     The principal payment requirements on our long-term debt and our capital lease obligations at December 31, 2005 range from approximately $690,000 in 2006 to $527,000 in 2010 for long term debt and $163,000 to $92,000 for capital lease obligations and aggregate $9.4 million for long-term debt and $812,000 for capital lease obligations until maturity as follows:

Year Ending	Capital Lease
December 31,	Long-Term Debt		Obligation		Total
2006	$	690,308	$	162,804	$	853,112
2007		626,834	169,118		795,952
2008		534,195	185,168		719,363
2009		712,543	202,748		915,291
2010		527,411	92,303		619,714
2011-2028		6,327,957	—		6,327,957
Principal outstanding at
December 31, 2005	$	9,419,248	$	812,141	$	10,231,389

Recently Issued Accounting Pronouncements

     In May 2003, the FASB issued SFAS 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity.” SFAS 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The Company has determined that SFAS No. 150 will not have a material impact on its financial position or results of operations.

     In November 2004, the FASB issued SFAS No. 151, Inventory Costs – An Amendment of Accounting Research Bulletin No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4 “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005, and will be required to be adopted by the Company effective January 1, 2006. The Company has determined that the adoption of SFAS No. 151 will not have a material impact on its results of operations and financial condition.

     In December 2004, the FASB issued a revision to SFAS 123R (revised 2004), Share-Based Payment, which replaces SFAS No. 123 and supersedes APB Opinion No. 25. The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The statement eliminates the alternative method of accounting for employee share-based payments previously available under APB Opinion No. 25. The provisions of the statement will become effective for the Company in the fiscal year beginning January 1, 2006 for all equity awards granted after the effective date. The adoption of SFAS No. 123R has not had a material effect on results of operations because there are have been no share-based payments or stock options granted, although the Company has adopted an equity incentive plan.

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     In December 2004, the FASB issued SFAS 153 “Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29” effective for non-monetary asset exchanges occurring in the fiscal year beginning January 1, 2006. SFAS 153 requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. SFAS 153 is not expected to have a material effect on the Company’s financial position or results of operations.

     In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, which supersedes APB Opinion No. 20 and SFAS No. 3. SFAS 154 applies to all voluntary changes in accounting principle and requires retrospective application to prior periods' financial statements in accounting principle unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Adoption of SFAS 154 is required for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. The Company will adopt this new standard effective January 1, 2006. The adoption of this standard is not expected to have a material effect on the Company's consolidated financial statements.

Allison’s Gourmet Kitchens

Overview

     Allison’s Gourmet Kitchens was formed in March 2003 to diversify Vaughan Foods’ commodity fresh-cut produce with higher margin value added refrigerated prepared salads. The company was founded as a limited partnership by Herb Grimes and Mark Vaughan. Four key factors for this start-up were:

• Vaughan Foods was purchasing high volumes of produce items that are utilized in refrigerated prepared salads.



• Vaughan Foods had a fleet of refrigerated trucks already in place to implement distribution in the region.



• Vaughan Foods was already producing a limited line of refrigerated salads and there was adequate space within the current facility to produce approximately 15,000,000 pounds of product annually.



• Herb Grimes had over 25 years of experience managing businesses in the industry.

     We expanded Vaughan’s 10 existing product lines to 55. This was accomplished by developing marketing programs that are tailored to foodservice and retail grocery chains. The current mix of business is 65% retail with major customers HEB, Brookshires, Ingles, United Supermarkets, Wal-Mart, AWG, and Dillon’s and 35% foodservice with Sysco, Ben E. Keith, Dot Foods, U.S. Foodservice, Labatt, Cash Wa and 20+ other smaller distributors. By the end of 2005 we were at maximum capacity and began construction on an addition to the existing building that will give us the capacity to produce products that can generate sales in excess of $50 million annually.

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Results of Operations Allison’s Gourmet Kitchens
		Percentage of Revenue
											Six months ended
		Years Ended December 31,									June 30,
											(unaudited)
		2003			2004			2005			2005		2006
		(in thousands)
Revenue	$	3,382		$	9,173		$	13,111		$	7,062		8,627
Cost of Revenue		76.9	%		75.8	%		75.1	%		75.4	%	77.8	%
Gross profit/margin		23.1	%		24.2	%		24.9	%		24.6	%	22.2	%
Selling, general and
administrative expenses		19.6	%		17.5	%		18.0	%		17.2	%	17.2	%
Income (loss) from		3.5	%		6.7	%		6.9	%		7.4	%	4.9	%
operations
Interest expense		0.5	%		0.3	%		0.1	%		0.2	%	0.5	%
Other income (expense)		—			—			—			—		—
Income (loss) before
provision for taxes		3.0	%		6.4	%		6.8	%		7.3	%	4.5	%
Net income( loss)		3.0	%		6.4	%		6.8	%		7.3	%	4.5	%

Comparison of Years Ended December 31, 2005 and 2004

     Net Sales. Net sales were $13.1 million and $9.2 million for the years ended December 31, 2005 and 2004, respectively. The increase in net sales was primarily due to an increase in volume and the addition of new customers. Volume in total pounds sold grew from 7.9 million in 2004 to 14.6 million in 2005, an increase of 84.8%.

     Gross Profit. Gross profit for the year ended December 31, 2005 increased $1.1 million to $3.3 million from $2.2 million for the year ended December 31, 2004. Our gross profit margin was 24.9% of net sales for 2005, compared with 24.2% for 2004. The increase in gross profit margin was due to increased sales related to new customers and price increases to existing customers.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2005 increased $749,000, or 46.6%, to $2.4 million from $1.6 million for the year ended December 31, 2004. The increase in expenses was related to an increase in sales. Selling, general and administrative expenses were 18.0% of net sales in 2005 as compared to 17.5% in 2004.

     Income (Loss) from Operations. Operating income for the year ended December 31, 2005 increased $294,000, or approximately 47.9%, to $909,000 from $614,000 for the year ended December 31, 2004. This increase is due to the sales growth of the business.

     Interest Expense. Interest expense decreased $21,000 in 2005 compared to 2004, reflecting decreased debt reduced from operating income.

     Income Taxes. Because Allison’s is a partnership and not a tax-paying entity, no provision was made for income taxes.

Comparison of Years December 31, 2004 and 2003

     Net Sales. Net sales were $9.2 million and $3.4 million for the years ended December 31, 2004 and 2003, respectively. The increase in net sales was due to new customers, increased volume and higher prices. Volume in total pounds sold grew from 3.1 million in 2003 to 7.9 million in 2005, an increase of 157.1% .

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     Gross Profit. Gross profit for the year ended December 31, 2004 increased $1.4 million to $2.2 million from $780,000 for the year ended December 31, 2003. The increase is attributable to an increase in volume. Our gross profit margin was 24.2% of net sales for 2004, compared with 23.1% for 2003.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2004 increased $944,000, or 142.3%, to $1.6 million from $.7 million for the year ended December 31, 2003. The increase in expenses was a result of sales growth. Selling, general and administrative expenses were 17.5% of net sales in 2004 as compared to 19.6% in 2003.

     Income (Loss) from Operations. Operating income for the year ended December 31, 2004 increased $481,000, or approximately 476.3%, to $583,000 from $101,000 for the year ended December 31, 2003. This increase is due to new business with higher margins.

     Interest Expense. Interest expense increased $16,000 in 2004 compared to 2003, reflecting increased debt for manufacturing equipment.

     Income Taxes. Because Allison’s is a partnership and not a tax-paying entity, no provision was made for income taxes.

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Comparison of six months ended June 30, 2006 and 2005

     Net Sales. Net sales were $8.6 million and $7.1 million for the six months ended June 30, 2006 and 2005, respectively. The increase in net sales was due to increased volume related to new customers and an increase in prices. Volume in total pounds sold, grew from 7.2 million in the six months ended June 30, 2005 to 10.5 million in the six months ended June 30, 2006, an increase of 45.8% .

     Gross Profit. Gross profit for the quarters ended June 30, 2006 and 2005 increased to $1.9 million for the six months ended June 30, 2006 from $1.7 million for the six months ended June 30, 2005. Our gross profit margin was 22.2% of net sales for the six months ended June 30, 2006, compared with 24.6% for the six months ended June 30, 2005. The decrease in gross profit margin was due to increased costs associated with over capacity and the expense of using canned potatoes.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended June 30, 2006 increased $274,000, or 22.5%, to $1.5 million from $1.2 million for the six months ended June 30, 2005. The increase in expenses was caused by commissions on new sales. Selling, general and administrative expenses were 17.2% of net sales in the six months ended June 30, 2005 as compared to 17.2% in the six months ended June 30, 2006.

     Income (Loss) from Operations. Operating income for the six months ended June 30, 2006 decreased $99,000 or approximately 18.8% to $427,000 from $526,000 for the six months ended June 30, 2005. This decrease was directly related to the use of canned potatoes which we had to purchase to meet production commitments since we did not have sufficient capacity.

     Interest Expense.Interest expense increased $28,000 for the six months ended June 30, 2006 compared to the six months ended June 30, 2005, reflecting additional debt for new equipment.

     Income Taxes. Because Allison’s is a partnership and not a tax-paying entity, no provision was made for income taxes.

Liquidity and Capital Resources

     Historically, we have financed Allison’s liquidity requirements through internally generated funds, and the issuance of indebtedness. We believe such sources remain viable financing alternatives to meet our anticipated needs. Our investments in equipment have been a significant use of capital. We plan to continue to invest in advanced production facilities to enhance our competitive position.

     Cash flow provided by operating activities was $1.6 million for the year ended December 31, 2005, compared to $68,000 for the year ended December 31, 2004. The increase in cash flow provided by operating activities was primarily attributable to an increase in net earnings, a decrease in accounts receivable and an increase in accounts payable and accrued liabilities. Cash flow provided by operating activities was $68,000 for the year ended December 31, 2004 compared to cash used by operations of $46,000 for the year ended December 31, 2003. The increase in our cash flow provided by operating activities was attributable to an increase in net earnings. Cash flow provided by operating activities was $567,000 for the six months ended June 30, 2005 compared to net cash used in operating activities of $275,000 for the six months ended June 30, 2006. The variance of $842,000 is due to decreased net income for the period of approximately $125,000, increase in accounts receivable of $1.0 million, offset by net increases in accounts payable and accrued liabilities of $400,000.

     Allison’s has a $1,000,000 secured bank line of credit, initiated on March 3, 2006, at an interest rate of Wall Street Journal prime plus 0.50%, with an initial rate of 8.00% . Interest is payable on a monthly basis. The line of credit is secured by all of Allison’s assets, including accounts receivable, inventory and equipment and personal guaranties of Herb Grimes and Mark Vaughan. At June 30, 2006 there was $262,000 borrowed under this line of credit. The bank line of credit agreement is subject to certain covenants that Allison’s was in compliance with or has obtained a waiver as of June 30, 2006. At December 31, 2004 and 2005, there were no short-term borrowings on previous lines of credit.

     In addition to the line of credit, Allison’s secured a loan for equipment purchases in the amount of $2,400,000 with the same interest rate as the secured line of credit discussed above. The maturity date of this loan is

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March 3, 2011. The proceeds of the equipment loan were used to pay off existing debt related to previous equipment purchases and to purchase new equipment, of which some payments had been made as of June 30, 2006.

     Net long-term debt and capital lease obligations were approximately $945,000 and $9,000 at June 30, 2006.

     Annual principal payments to maturity, for long-term debt and capital lease obligations, at December 31, 2005 ranged from approximately $81,000 to $91,000 for long-term debt through 2007 and $54,000 to $69,000 through 2008 for capital leases as follows:

Year Ending	Capital Lease
December 31,	Long-Term Debt		Obligation		Total
2006	$	91,209	$	66,719	$	157,928
2007		80,930		69,559		150,490
2008		—		54,105		54,105
2009		—		—		—
2010		—		—		—
Principal outstanding at
December 31, 2005	$	172,139	$	190,383	$	362,523

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BUSINESS

Overview

     We process and package value-added, refrigerated foods which we distribute to our customers three or more times per week in our fleet of refrigerated trucks and trailers. Distribution is concentrated in the 12-state marketing area within a 500 mile radius of our plant in Moore, Oklahoma, a suburb of Oklahoma City, consisting of all or portions of the states of Arkansas, Colorado, Iowa, Kansas, Louisiana, Mississippi, Missouri, Nebraska, Oklahoma, New Mexico, Tennessee and Texas. Our marketing area is largely determined by the short shelf life of our products and, to a lesser extent, by the cost of refrigerated shipping.

     Our principal products fall into two categories: refrigerated prepared salads, such as chicken, tuna, bean and pasta salads, coleslaw and potato salad, and fresh-cut produce, primarily salads and salad mixes. Until the end of 2002 our line consisted primarily of fresh-cut produce which we packaged and sold to food service customers. In 2002, we began to expand our operations into a more diverse line of refrigerated foods, in order to provide opportunities for greater profit margins. First, we added a limited number of refrigerated prepared salads. In March 2003, three of our officers, together with Herb Grimes, a director nominee, co-founded Allison’s Gourmet Kitchens, LLP to process a line of refrigerated prepared salads for retail outlets, as well as our historical food service customers and restaurant chains. These refrigerated prepared salads generate higher gross profit margins than our fresh-cut produce. Allison’s is integrated with our operations. It uses our production facility in Moore, Oklahoma and our distribution network, including our fleet of refrigerated tractors and trailers, and shares certain office, managerial and other personnel. Allison’s also utilizes our fresh-cut produce in making its prepared salads. Also, since 2002 we have been expanding our fresh-cut line to include more salad mixes, packaged to better meet the needs of retail chain store accounts. These salad mixes for retailers also typically enjoy higher gross profit margins than produce sold to food service customers.

     We believe that we are a leading regional supplier of our products within our primary marketing area. We process approximately 1.4 to 1.7 million pounds of fresh-cut, ready-to-eat branded and private label salads every week and produce approximately 70 different salad products in a variety of food service and retail package sizes, including custom vegetable mixes and custom sized packages for our large volume customers. Salads and salad mixes are sold primarily to restaurant chains, food service businesses, institutional users and, to a lesser extent, retail chains while the bulk of our refrigerated prepared salads are sold to grocery store deli departments, food service distributors and regional restaurant chains.

     A substantial element of our growth plan is focused on our higher margin opportunities. In accordance with this plan, in June 2006, Allison’s acquired Wild About Food, Inc., a processor of fresh soup, stews, sauces and side dishes.

Industry Background

     In 2005, the fresh-cut produce industry generated revenues of $10.5 billion in the United States according to the Produce Marketing Association, or the “PMA.” Since 2000, the industry has shown an annual rate of increase of 12.5% according to the PMA. We believe this growth, has been driven primarily by the convenience and efficiency of pre-cut products in the foodservice industry, our principal market for pre-cut produce, and secondarily by population increases and national demographic and social trends favoring the increased consumption of fresh-cut foods such as an aging population focused on health and nutrition issues and growing awareness of the importance of consumption of fresh fruits and vegetables in countering obesity. We believe that these factors, along with increased education regarding food safety programs, are favorable to sustained growth in the industry.

     In the year ended December 31, 2005, refrigerated prepared foods including prepared salads, entrees, sandwiches and chili generated deli sales of nearly $5 billion, an increase of 8.4% over the prior comparable period, according to the ACNeilsen strategic planner. Comparable items sold through food, drug and mass market channels other than WalMart, generated sales of $1.7 billion, an increase of 6.6% over the comparable period

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Growth Plan

     We currently supply only a small part of the demand of our larger clients for our refrigerated prepared salads and freshly cut salad and salad mixes. Our ability to supply our customers’ needs within our existing 12-state marketing area is constrained by the size limitations of our current plant and the limitations of our product line, while we are in the process of expanding. In order to supply the needs of these customers and potential new customers outside of our primary market area, we would need to create other new facilities so that we can continue to deliver the freshest products and maintain our pricing and cost structures. In addition, we believe that our existing customers would buy additional products that we add to our line, such as freshly prepared soups and stews, sauces and dressings, of the type produced by Wild About Food, as well as organic fruits and vegetables, side dishes and preservative free salad kits. Accordingly, we plan to enlarge our business by taking the following steps:

• Increase productive capacity for refrigerated prepared salads. We are currently building a 40,000 sq. ft. addition to our 108,000 sq. ft. plant in Moore, Oklahoma to be used for refrigerated prepared salads and other prepared products. A new, state-of-the-art potato cook/chill system in that facility will substantially increase output of cooked and chilled potatoes for use in our potato salad products. Other new equipment will enable us to prepare our own dressings and sauces, ingredients that we now purchase. The additional space will also allow us to reorganize our existing plant to increase our capacity for producing salads and salad mixes from approximately 1.4 to 1.7 million pounds per week to approximately 2.2 million pounds per week.



• Increase utilization of refrigerated delivery capacity. We plan to increase the use of our existing fleet of refrigerated trailers, and new refrigerated trailers purchased with proceeds of this offering, in “back haul” transportation for other shippers.



• Broaden product line. We plan to broaden the line of products offered both in our existing primary market region and elsewhere through internal growth and the acquisition of complementary businesses. Our acquisition of Wild about Food and its line of freshly prepared soups, stews, sauces and dressing was an initial step in this direction. We believe that the addition of these products as well as organic fruits and vegetables, side dishes, preservative free salad kits and other refrigerated products will enable us to more fully meet the needs of our existing restaurant chain and food service businesses.



• Broaden market reach. Many of our existing customers operate beyond our primary market area. We believe that we can broaden business with these customers and also add new customers, particularly in the Midwest, by building or acquiring new facilities in contiguous and other marketing areas. We believe that our reputation is known in some surrounding areas and that this should facilitate our geographic expansion.
  
                 •      Though much of our growth plan is based on internal growth, we also plan, where feasible, to add to our customer base, increase market share, increase our geographic reach, enhance our productive capacity and broaden our product line by acquisition of regional competitors.

     Achieving our growth plans will enable us to spread fixed overhead costs over a larger revenue base and enable us to have a stronger bargaining position in negotiating for raw material supplies. Larger production runs should also help in containing or reducing processing costs, including per unit labor costs. Increased distribution may also permit more efficient use of our truck and refrigerated trailer fleet and facilitate the further development of our “back-haul” and third-party logistics transportation business.

Processing, Packaging and Delivery

     Our fresh-cut produce is processed and packaged in refrigerated production rooms. Vegetables are inspected, defective items are removed and the remaining vegetables are then cut, washed and sanitized in chilled chlorinated water. This washing process helps to increase shelf life and eliminate micro-organisms that might cause food-borne illnesses. Produce is then spin-dried and elevated to an automatic scale and form-fill and seal packaging machine. Finally, finished products are packed in sizes that fit customer’s needs, and boxed to insure that delicate items arrive at the customer's door in good condition. Most items are made to order daily for maximum freshness,

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shelf-life and quality. Orders are pulled and palletized in a finished goods cooler, with each pallet tagged by customer and contents to assure delivery to the proper destination.

     The degree of freshness of our products is dependent upon distance to market and delivery schedules of our foodservice distributor customers. In order to ensure freshness of product, we operate our own fleet of 23 trucks and 28 fifty-three foot refrigerated trailers, running 55 outbound routes per week. Approximately 70% of the fleet are 2005 models and all are equipped with GPS tracking. Trucks are pre-cooled before being loaded from our refrigerated loading dock. We deliver cut-to-order products three or more times a week, and up to six times a week to foodservice distributors. While our frequent delivery schedule is expensive, we believe that it helps our marketing efforts by emphasizing the freshness and quality of our produce. While transportation costs have been high, we have recently hired a transportation professional to manage our truck fleet and generate offsetting income through backhaul operations, that is, the use of our transportation assets to haul goods for hire on return trips from our customers. To assure freshness to the ultimate consumer, we urge our customers to use first-in/first-out inventory control.

      Following the combination of our fresh-cut produce and refrigerated prepared salad lines, we expect to realize additional efficiencies in buying produce, processing and delivery.

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

Products

     Fresh-Cut Produce. Our principal products consist of fresh-cut, ready-to-eat, value-added branded salads and salad mixes. We select, process and sell approximately 1.4 to 1.7 million pounds of these fresh-cut products weekly. Products are generally sold in branded packages, including the following:

Salad Kits	Miscellaneous
Chicken Caesar Kit	Onions
Broccoli Salad Kit	Carrot/Celery Snacks
Cole Slaw Kit	Tomatoes
Pico de Gallo	Green, Red and Yellow Peppers
Cabbage and Onions	Cauliflower/Broccoli Florets
	Potatoes
Salad Mixes	Squash
Premium Salad Blend	Turnips
Garden Salad Mix	Radishes
Shredded Iceberg
Garden Salad Mix
Chopped Romaine

     To increase appeal of our products in the retail market we have recently added a “Fresh Fixins^®” line, the most important product in which is a grill kit containing a mix of sliced onions and tomatoes, lettuce and other toppings for burgers prepared at home. We believe that expansion of our “Fresh Fixins^®” and “Serve Fresh Kits™” line presents an opportunity for further growth of our business with retailers as consumers have become frustrated with the lack of quality and food safety problems with products from store based or local processors, often referred to as “chop shops”.

     Following the offering, we plan to broaden our fresh-cut line to include sliced fruit and organic fruits and vegetables.

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     Refrigerated Prepared Salads. The following are our current refrigerated prepared salad products,packaged in various sizes from bulk to “redi-pack”:

	No. of Formulations
Potato Salads	16
Pasta Salads	8
Cole Slaws	3
Bean Salads	4
Misc. Salads	7
Meat Salads	10
Desert Salads	8
Fruit Salad	8

     In 2006 we introduced in Wal-Mart fresh salads based upon a component kit that is mixed fresh each day in the store. These kits contain all the components required for a side dish or salad, packed separately. Store personnel make fresh salads and side-dishes as needed throughout the day providing a fresh product with better cost control for the operator and earning a high level of customer satisfaction. The product has been well received by Wal-Mart and others in the retail and food service communities.

     We plan to introduce a line of fresh-prepared dips after completion of our plant expansion later in 2006 and we plan to differentiate this line from its competitors by utilizing as many fresh vegetables as possible. Development of this line has been completed. The line will include spinach, jalapeno, artichoke, cucumber dill and garden vegetable fresh gourmet dips. We also plan to roll-out other fresh-chilled products in 2007. The technology for these products include batch kettle cooking and rapid “Chill After Cook.” This refrigerated fresh-chilled line will include several soups as well as chili, stews and sauces and will be marketed in bulk and packaged form.

     A major ingredient in our refrigerated prepared salads, and also in our salad component kits, is salad dressing. We currently purchase salad dressings from others. However, with the opening of our expanded production facility, we will manufacture dressings for internal use as well as for external sale.

Delivery System and Hauling Services

     We reduce the costs of our delivery system and also generate revenue from our transportation assets by hauling product for others, either by backhauling or Third-Party Logistics (3PL). In backhauling we find freight for our empty trucks at or near the termination points of our own routes, then transport that freight back to the vicinity of our facility. Backhauls produce lucrative “Less-Than-Truckload” rates for our regional business. In 3PL we warehouse and transport other firms’ goods that have similar distribution requirements to our own products. Though lucrative, our 3PL service is limited by insufficient warehouse space. However, our national growth plans call for increased 3PL capability through renting of additional warehouse space and increasing the ratio of refrigerated trailers to trucks.

     We have invested heavily in our delivery system because it is the key element that ties our product lines together. Our products are perishable and have shelf lives ranging from a few days to a maximum of 45 days. To ensure the freshness and quality of our products we distribute them three times per week, or for some large customers, daily, in our own fleet of more than 25 fifty-three foot refrigerated trailers and more than 20 trucks. Our delivery system is flexible and responsive to our customers’ needs and meets the current consumer demand for high quality, fresh food items. Our pattern of frequent delivery also builds strong customer loyalty.

Agricultural and Other Supplies

     We purchase fresh produce from approximately 50 suppliers in five diverse growing regions of California, Arizona, Colorado, Florida and Mexico. Purchasing produce from a number of different growing regions helps keep cost in control and protects our supply chain against adverse growing factors and seasonal variability in production. This supplier and geographic diversity also reduces our risk of shortfalls in supplies due to natural disasters, labor disruptions and other supply interruptions in any one area. We purchase other ingredients for our processed

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refrigerated prepared salad line and packaging material from a limited number of suppliers, but believe that all of these ingredients and other supplies are generally available in the marketplace at competitive prices. To keep costs down and maintain quality we have long-term established relationships with many of our suppliers and purchase an important part of our fresh produce pursuant to seasonal buying contracts. All produce is purchased directly from growers to further ensure consistent supply and quality.

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

     We believe that our raw produce costs are higher than those of our major West Coast processor competitors. We are seeking to reduce our costs through coordinated buying programs with other regional processors with quality standards similar to our own. However, we may not be able to reach agreement with these other processors and coordinated buying may not lower our cost of raw produce.

Marketing and Sales

     Fresh-cut produce products are marketed and sold to restaurant chains, food service businesses, institutional users and, to a lesser extent, to retail stores and their suppliers. Refrigerated prepared salads are marketed and sold primarily to grocery store deli departments and food service distributors. We believe that our ability to sell both fresh-cut produce and refrigerated prepared salads will provide cross-marketing opportunities that foster increased sales to restaurant chains and food service customers. Our products are currently provided to approximately 140 end-user recurring revenue accounts throughout the Plains States, Southwest and Southeast. While we are not dependent on any single account, seven independent Sysco Foods distributors represented, in the aggregate, approximately 23% of our sales in 2004 and 24% in 2005. Consistent demand enables us to enter into regular supply contracts with growers, helping to insure consistent sourcing.

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

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

     We also promote our products by providing vital educational information to foodservice distributors and their end-user customers. Our marketing materials stress the benefits of fresh-cut produce and emphasize how fresh-cut produce meets the needs of restaurant and institutional food service professionals. We also plan to provide our distributors with information regarding yield and cost comparisons between whole produce and our fresh-cut products, food safety facts obtained from government and research groups, such as the Center for Disease Control, the need for the products which are sanitized of microorganisms that can cause food-borne illnesses and the freshness of our cut-to-order products when compared to those delivered from the West Coast, emphasizing shelf-life at the time of delivery. Proposed additional regional advertising will focus attention on the benefits of a regional fresh-cut processor. We believe that the training, marketing materials and high level of customer support which we provide are important components of our marketing efforts.

     After this offering, we intend to use a portion of our increased working capital to promote increased sales to members of Produce Alliance and Golbon, fresh produce buying groups composed of distributors of fresh produce to the foodservice industry, through direct sales contact, participation in their annual meetings and collaboration in their internal group advertising efforts. While we are currently the only specifically designated supplier of fresh-cut produce for the Golbon group, their distributor members may purchase from other suppliers.

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Competition

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

     In our refrigerated prepared salad business we compete with Reser’s, the largest company in the deli salad business, with Orval Kent Food Company, which operates a processing plant in Baxter Springs, Kansas. We believe we compete successfully on the basis of the quality of our products, our customer service and our record for frequent, on-time, delivery.

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

• Frequent deliveries. We deliver our perishable and short shelf life products three or more times per week. Our frequent deliveries coupled with our assistance to customers on how to handle our products on a “first in – first out” basis insures the freshness of our product to the ultimate consumer.



• Distribution capability. We operate our own fleet of more than 20 trucks and more than 25 fifty-three foot refrigerated trailers giving us rapid delivery capability and strong logistical control.



• Diverse and customized products. We offer a diverse range of ready-to-order quality products in convenient packaging types and sizes. We can also deliver customized “cut-to-order” fresh-cut produce to distributors in less than two days.



• Single source supplier. As a single source supplier of both packaged fresh-cut salads and refrigerated prepared salads, we allow customers the opportunity to consolidate their sources of supply.



• Diverse sources of supply. In 2005, we purchased from approximately 50 suppliers in five diverse growing regions (California, Arizona, Colorado, Florida and Mexico). This geographic diversity reduces our risk of shortfalls in supplies due to weather, natural disasters, labor disruptions and other supply interruptions in any one area.



• Broad Customer Base. We currently have a approximately 140 recurring end-user revenue accounts throughout the Plains States, Southwest and Southeast. No customer accounted for more than 10% of sales in 2004 or 2005.

Intellectual Property

     We hold rights to the following United States trademarks:

• “Fresh Fixins^®”



• “Allison’s Gourmet Kitchens and design™”

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• “Vaughan Foods™”



• “Serve Fresh Kits™”



• “Wild About Food and design^®”

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

Government Regulation

     We are subject to extensive regulation by the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the U.S. Environmental Protection Agency, the U.S. Department of Transportation and state and local authorities in jurisdictions where our products are processed or sold. Among other things, these regulations govern the processing, packaging, storage, distribution and labeling of our products. Our processing facility and products are also subject to periodic compliance inspections by federal, state and local authorities. We are also subject to environmental regulations governing the discharge of air emissions, water and food waste, and the generation, handling, storage, transportation, treatment and disposal of waste materials. Amendments to existing statutes and regulations, adoption of new statutes and regulations, increased production at our facility as well as our expansion into new operations and jurisdictions may require us to obtain additional licenses and permits and could require us to adapt or alter methods of operations at costs that could be substantial. Compliance with applicable laws and regulations may adversely affect our business. Failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as possible criminal sanctions, which could have a material adverse effect on our business. See the Risk Factor on Government Regulation on page 14, above.

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

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

Property

     Our executive offices and plant are located at 216 Northeast 12^th Street, Moore, Oklahoma in an 108,238 square foot office, plant and cold storage facility that we own. The facility operates 24 hours a day every day of the year. We are currently constructing a 44,000 square foot addition to our Moore plant which will add processing capacity to our refrigerated prepared salads business. We expect this addition to be operational by October 2006. We also lease, on a month-to-month basis approximately 13,500 square feet of warehouse space near our Moore facility. We own or lease a fleet of more than 20 trucks and more than 25 fifty-three foot refrigerated trailers, which cover a total of 55 outbound routes per week. About 70% of our trailers are 2005 models and all of our trailers are equipped with GPS tracking.

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Employees

     As of June 30, 2006, Vaughan and Allison’s employed 515 people at our Moore, Oklahoma facility, of which 73 are salaried management, 7 are sales and sales support personnel 42 are other and administrative personnel and 393 are hourly wage personnel engaged in production, warehousing and distribution of our products. None of these employees are unionized. From time-to-time, we employ additional personnel on a part-time basis in manufacturing operations. We do not have collective bargaining agreements with respect to any of our employees. We believe that relations with our employees are good.

Legal Proceedings

     As of the date of this prospectus, we are not party to any material pending or threatened legal proceedings.

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MANAGEMENT

Executive Officers and Directors

     The names, ages and titles of our executive officers and directors, as of May 1, 2006, are as follows:

Name	Age	Positions
Mark E. Vaughan	41	President, Chief Executive Officer and a director
Vernon J. Brandt	47	Vice President-Operations and a director
Stan L. Gustas	67	Vice President and Chief Financial Officer
Herbert Grimes	58	President and Chief Executive of Allison’s and a director nominee.
Marvin Haas	64	director nominee
Robert Dillon	50	director nominee
Laura J. Pensiero	39	director nominee

     Mark E. Vaughan Mark Vaughan has served as President, Chief Executive Officer and a director of Vaughan since 1992. He has over 20 years of food processing experience and has directed advances in quality control, food safety, purchasing and manufacturing processes at Vaughan. Mr. Vaughan attended the University of Oklahoma.

     Vernon J. Brandt – Vernon (“Butch”) Brandt has served as a Vice President and a director of Vaughan since 1994. He has experience in all areas of food processing, including maintenance, production management, distribution, sales and customer support, and nearly 20 years of experience in the fresh-cut vegetable processing industry. He is a graduate of Long Beach City College.

     Stan L. Gustas –Stan Gustas has served as a Vice President and Chief Financial Officer of Vaughan Foods since 1997. Before that he held various management and consulting positions in the food processing industry, including as Group Director of the Beef and Lamb Division of Wilson Foods and Executive Vice President/General Manager of Harris Packing Company. Mr. Gustas has over 40 years of experience in the food processing industry. He is a graduate of the University of Dubuque.

      Herbert Grimes – Herb Grimes has served as the general partner of Allison’s since2003. In 1982, he co-founded Mrs. Crockett’s Kitchens, Inc., formerly known as Mrs. Giles’ Country Kitchens, Inc., and served as its Vice President Sales, Marketing and Research and Television Development until it was acquired by Orval Kent Food Company in 1996. From 1997 to 2000, Mr. Grimes continued to serve as and as Vice-President of Sales, Marketing, Research and Development until the company was acquired by Sky Chef, Inc. in 2002. Mr. Grimes has over 35 years experience in the food processing industry, with the bulk of his expertise in the refrigerated prepared salads business.

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

      Marvin I. Haas -- Marvin Haas has over 25 years’ experience in the food business. He was Vice Chairman and Chief Operating Officer of Chock Full O’Nuts Corporation from 1989 to 1993, when he became its President and Chief Executive Officer, and held those positions until its acquisition by Sara Lee Corporation in 1999. He served as consultant to Sara Lee’s retail coffee division from 1999 to 2000. He holds a B.S. degree from Northwestern University and an MBA from its Graduate School of Business.

      Laura J. Pensiero – Laura Pensiero has been the owner and manager of Gigi Trattoria, Rhinebeck, New York since 2001. In 2006 she founded and opened Gigi Market in Red Hook, New York, a year-round farmers’ market, gourmet store bakery and catering site. Since 1992 she has also been the founder and operator of Chef4Life, a nutrition and culinary consulting service promoting healthy eating and since 2005 a chef consultant and member of Just Salad LLC, a

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chain of New York City salad bars and restaurants. She has also served as the nutrition consultant to the Strang Cancer Prevention Center, New York, New York since 2005, and was the culinary coordinator for the Memorial Sloan-Kettering Prevention and Wellness Program, New York, New York, from 1999-2005. She continues to work with Strang’s nationwide Healthy Children, Healthy Future’s initiative. From 1998 to 2004 she was a consultant to the Culinary Institute of America, Hyde Park, New York. She is a co-author of The Strang Cancer Prevention Center Cookbook (2004) and the author of numerous articles on healthful diet and eating and Italian cuisine. She is a graduate of the State University of New York, Plattsburgh (1989), majoring in nutrition and food service management, and of the Professional Culinary Arts Program of The French Culinary Institute, New York, New York (1992).

Committees of the Board of Directors

     The Board has established three standing committees: an Audit Committee, a Compensation Committee and a Corporate Governance and Nominating Committee. Each committee will be made up entirely of independent directors.

     Audit Committee. The Audit Committee oversees our accounting and financial reporting processes, internal systems of accounting and financial controls, relationships with auditors and audits of financial statements. Specifically, the Audit Committee’s responsibilities include the following:

• selecting, hiring and terminating our independent auditors;



• evaluating the qualifications, independence and performance of our independent auditors;



• approving the audit and non-audit services to be performed by the independent auditors;



• reviewing the design, implementation and adequacy and effectiveness of our internal controls and critical policies;



• overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial statements and other accounting matters;



• with management and our independent auditors, reviewing any earnings announcements and other public announcements regarding our results of operations; and



• preparing the report that the Securities and Exchange Commission requires in our annual proxy statement.

     Following this offering, Mr. Dillon will be chairman of the Audit Committee and the other members of the Audit Committee will be Mr. Haas and Ms. Pensiero. The Board has determined that Mr. Dillon is an “audit committee financial expert,” as that term is defined in Item 401(h) of Regulation S-B, and “independent” for purposes of Nasdaq listing standards and Section 10A(m)(3) of the Securities Exchange Act of 1934.

     Compensation Committee. The Compensation Committee assists the Board in determining the development plans and compensation of our officers, directors and employees. Specific responsibilities include the following:

• approving the compensation and benefits of our executive officers;



• reviewing the performance objectives and actual performance of our officers; and



• administering our stock option and other equity and incentive compensation plans.

     Following this offering, the members of the Compensation Committee will be Messrs. Dillon and Haas and Ms. Pensiero.

     Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee assists the Board by identifying and recommending individuals qualified to become members of the Board, reviewing correspondence from our stockholders and establishing and overseeing our corporate governance guidelines. Specific responsibilities include the following:

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• evaluating the composition, size and governance of our Board and its committees and make recommendations regarding future planning and the appointment of directors to our committees;



• establishing a policy for considering shareholder nominees to our Board;



• reviewing our corporate governance principles and making recommendations to the Board regarding possible changes; and



• reviewing and monitoring compliance without code of ethics and insider trading policy.

     Following this offering, the members of the Corporate Governance and Nominating Committee will be Messrs. Dillon and Haas and Ms. Pensiero.

     As of the date of this prospectus, we have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer and other persons performing similar functions, as well as all of our other employees and directors. This Code of Ethics will be posted on our website at www.vaughanfoods.com.

Compensation of Directors

Executive Compensation

     Summary compensation. The following table sets forth information regarding compensation awarded to, earned by, or paid to our chief executive officer and our other most highly compensated executive officers whose compensation exceeded $100,000 in 2005 for all services rendered to us in all capacities during the last three completed fiscal years.

Summary Compensation Table¹

									Long-Term
									Compensation
									Securities
Name and Principal							Other		underlying
Position	Year		Salary		Bonus		Compensation		options
Mark E. Vaughan,	2005	$	210,082	$	—	$	—	$	—
President and Chief	2004		184,835		—		—		—
Executive Officer	2003		149,495		—		—		—
Herb Grimes, Managing	2005		236,232		98,851		—		—
Partner Allison’s	2004		158,939		90,978		—		—
Gourmet Kitchens	2003		82,363		—		—		—
Vernon Brandt Jr., Vice	2005		140,672		—		—		—
President of Operations	2004		151,600		—		—		—
	2003		148,135		—		—		—
					—		—		—
Roger Clanton, Vice	2005		101,586		—		—		—
President of Sales	2004		97,959		—		—		—
	2003		94,624		—		—		—

^1. The table includes, in the amounts shown for Herb Grimes, compensatory payments consisting of management fees paid by Allison’s to Braxton Management, Inc., the general partner of Allison’s. Mr. Grimes is President of Braxton Management, Inc. The table does not include distributions to the limited partners of Allison’s in respect of their partnership interests.

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Director Compensation

     Compensation of our directors will be determined after all director nominees have assumed their positions on the Board.

Equity Incentive Plan

     In August 2006, our stockholders approved and ratified a Vaughan Foods, Inc. Equity Incentive Plan, or the “Plan,” the purpose of which is to attract and retain the personnel necessary for our success. The Equity Incentive Plan gives our board of directors the ability to provide incentives through grants of incentive and non-qualified stock options to our employees, consultants and directors.

     A total of 1,650,000 shares of our common stock are reserved for issuance under the plan. If an award expires or terminates unexercised or is forfeited to us, the shares underlying the option award become available for further awards under the plan. As of the date of this prospectus, no awards have been made under the Plan.

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

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

Eligibility

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

Term and Amendment of the Plan

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

Terms of Options

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

Federal Income Tax Consequences

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

     Incentive Stock Options. The grant of an incentive stock option will have no immediate tax consequences to Vaughan or its employee. If the employee exercises an incentive stock option and does not dispose of the

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acquired shares within two years after the grant of the incentive stock option nor within one year after the date of the transfer of such shares to him (a "disqualifying disposition"), he will realize no compensation income and any gain or loss that he realizes on a subsequent disposition of such shares will be treated as a long-term capital gain or loss. For purposes of calculating the employee's alternative minimum taxable income, however, the option will be taxed as if it were a non-qualified stock option.

Pension Plans

     We do not maintain any defined benefit pension or retirement plans for our executive officers, directors or employees.

Limitations of Directors’ Liability and Indemnification

     Our certificate of incorporation provides that a director will not be personally liable to us or to our stockholders for monetary damages for breach of the fiduciary duty of care as a director, including breaches which constitute gross negligence. This provision does not eliminate or limit the liability of a director:

• for any breach of the director's duty of loyalty to the corporation or its stockholders



• for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law



• under Section 1053 of the Oklahoma General Corporation Act



• for any transaction from which the director derived an improper personal benefit

     Our certificate of incorporation also provides that we indemnify and hold harmless each of our directors and officers to the fullest extent authorized by the Oklahoma General Corporation Act, against all expense, liability and loss (including attorney's fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith.

     Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to our certificate of incorporation, Bylaws and the Delaware General Corporation Law, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Immediately prior to the closing of this offering, pursuant to agreements dated May and June 2006, we will acquire from Mark Vaughan and Vernon J. Brandt, Jr., for a nominal consideration, 60% of the limited partnership interest in Allison’s Gourmet Kitchens, a limited liability partnership, and also acquire from Herbert Grimes and Stan Gustas the remaining 40% of the limited partnership interests and the general partnership interest in Allison’s Gourmet Kitchens for $2,500,000 and common stock valued at $1,000,000, when valued at one half of the Unit price in this offering. Mr. Grimes, through an affiliate, owns 87.5% of such minority interests and will be paid $2,187,500 of the net proceeds of this offering and will receive 175,000 shares of common stock, and Mr. Gustas owns the remaining 12.5% and will be paid $312,500 from such net proceeds and will receive 25,000 shares of common stock.

     Starting in 2004, Mark Vaughan borrowed a total of approximately $82,000 from us in the form of salary advances. He repaid these advances in full in April 2005.

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PRINCIPAL STOCKHOLDERS

     The following table sets forth information regarding the beneficial ownership of our common shares as of September 2006:

• each person, or group of affiliated persons, known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock;



• each of our directors and director nominees;



• each executive officer named in the Summary Compensation Table above; and



• all of our directors and executive officers as a group.

     The following table takes into account:

• The acquisition of all interests in Allison’s Gourmet Kitchens and the issuance of 200,000 shares of common stock to the owners of the minority interests in Allison’s in part payment for their interests;



• The increase in our authorized capitalization to 50,000,000 shares of Common Stock, par value $.001 per share and 5,000,000 shares of Preferred Stock, par value $.001 per share.



• A stock dividend of 6,249 shares for each share of common stock



• The issuance of 200,000 shares, 200,000 Class A warrants and 200,000 Class B warrants included in the units that we will issue to holders of the Secured Notes on the date of this prospectus (based on an assumed initial public offering price of $10.00 per unit).

     It does not take into account any shares of common stock sold as a result of the exercise of the over-allotment option granted to the representative. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all of the shares owned by them. The individual stockholders have furnished all information concerning their respective beneficial ownership to us.

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		Percent of Shares Outstanding
	Number of Shares	Before the		After the
Name of Beneficial Owners(1)	Beneficially Owned(2)	Offering(3)		Offering(3)
Mark E. Vaughan	4,000,000	74.44		38.64
Vernon J. Brandt	1,000,000	18.69		9.66
Stan L. Gustas(4)	25,000	*		*
Herbert Grimes(5)	175,000	3.27		1.40
All directors and executive officers as a
group ((4) persons)	5,200,000	96.3	%	50.0	%

________________________

*	Less than 1%
(1)	Unless indicated otherwise, all addresses are Vaughan Foods, Inc., 216 Northeast 12th Street, Moore, Oklahoma 73160.
(2)	According to the rules and regulations of the Securities and Exchange Commission, shares that a person has a right to acquire within 60 days of the date of this prospectus are deemed to be outstanding for the purpose of computing the percentage ownership of that person but are not deemed outstanding for the purpose of computing the percentage ownership of any other person.
(3)	Based on 5,400,000 shares issued and outstanding immediately before this offering and 10,400,000 shares issued and outstanding immediately after this offering.
(4)	Includes 25,000 shares to be issued upon acquisition of Allison’s Gourmet Kitchens.
(5)	Includes 175,000 shares to be issued upon acquisition of Allison’s Gourmet Kitchens.

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DESCRIPTION OF SECURITIES

     As of the date of this prospectus, our authorized capital stock consists of 50,000,000 shares of common stock, par value $0.001 per share and 5,000,000 shares of undesignated preferred stock, par value $0.001 per share. After this offering, we will have 10,350,000 shares of common stock issued and outstanding and 11,100,000 shares if the over-allotment option is exercised in full. At the time this offering is effective, we will have 5,400,000 shares of common stock outstanding held of record by approximately 18 stockholders after taking into account (i) 200,000 shares of common stock included in the units that we will issue to the holders of the Secured Notes; and (ii) 200,000 shares of common stock that we have agreed to issue on the date of this prospectus to Mr. Grimes and Mr. Gustas in partial payment for the acquisition of their 40% minority interests in Allison’s. The following description summarizes the most important terms of our capital stock. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description, you should refer to our Articles of Incorporation, as amended, and our bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and to the provisions of Oklahoma law.

Units

     Each unit consists of one share of common stock, one Class A warrant and one Class B warrant. Each Class A and Class B warrant entitles the holder thereof to purchase one share of common stock. Initially, only the units will trade. The common stock and the warrants included in the units will not trade separately until the 30^th calendar day following the date of this prospectus or the first trading day thereafter if the 30^th day is a weekend or holiday. Once separate trading in the common stock and warrants commences, the units will cease trading and they will be delisted.

     At closing, we will deliver only unit certificates. An investor may request physical delivery of the certificate and may immediately request that the unit certificate be exchanged for stock and unit warrant certificates. If the investor does so before the stock and unit warrants trade separately, trades based on the stock and unit warrant certificates will not clear until trading in those securities commences.

Common Stock

     Subject to the rights specifically granted to holders of any shares of our Preferred Stock we may issue in the future, holders of our Common Stockare entitled to vote together as a class on all matters submitted to a vote of our stockholders and are entitled to any dividends that may be declared by our Board of Directors. Holders of our Common Stockdo not have cumulative voting rights. Upon our dissolution, liquidation or winding up, holders of our Common Stockare entitled to share ratably in our net assets after payment or provision for all liabilities and any preferential liquidation rights of any shares of our Preferred Stock we may issue in the future. Holders of our Common Stock have no preemptive rights to purchase shares of our Common Stock. The issued and outstanding shares of our Common Stockare not subject to any redemption provisions and are not convertible into any other shares of our capital stock. All outstanding shares of our Common Stockare, and the shares of our Common Stockto be issued in this offering or upon exercise of the Warrants included herein will be, upon payment of the relevant purchase or exercise price, fully paid and non-assessable. The rights, preferences and privileges of holders of our Common Stockwill be subject to those of the holders of any shares of our Preferred Stock we may issue in the future.

Class A Warrants

     General. Immediately after this offering, there will be 5,200,000 Class A warrants issued and outstanding of which 5,000,000 are included in the units sold in this offering and 200,000 are included in the units that we will issue to the holders of the Secured Notes on the date of this prospectus (assuming an initial public offering price of $5.00 per unit). The Class A warrants issued in this offering may be exercised at any time beginning 30 days after the date of this prospectus and ending on the fifth anniversary of the date of this prospectus. Each Class A warrant entitles the holder to purchase one share of common stock at an exercise price of $[ ] per share (150% of the unit offering price). This exercise price will be adjusted if specific events, summarized below, occur. A holder of Class A warrants will not be deemed a holder of the underlying stock for any purpose until the Class A warrant is exercised.

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     Redemption. At any time after they separate from the units we will have the right to redeem the Class A. warrants at a price of $0.25 per warrant, after providing 30 days’ prior written notice to the warrant-holders, at any time after the closing price for our common stock, as reported on the principal market on which our stock trades, was at or above 200% of the unit offering price for any five consecutive days. We will send a written notice of redemption by first class mail to holders of the Class A warrants at their last known addresses appearing on the registration records maintained by the warrant agent. No other form of notice or publication or otherwise will be required. If we call the Class A warrants for redemption, the holders of the Class A warrants will then have to decide whether to sell the Class A warrants, exercise them before the close of business on the business day preceding the specified redemption date or hold them for redemption. If the Class A warrants are not covered by a current registration statement or are not qualified for sale under the laws of the state in which holders reside, warrantholders may not be able to exercise them.

     Exercise. The holders of the Class A warrants may exercise them only if an appropriate registration statement is then in effect and if the common stock issuable upon their exercise are qualified for sale under the securities laws of the state in which the holder resides. To exercise a Class A warrant, the holder must deliver to our warrant agent the Class A warrant certificate on or before the expiration date or the redemption date, as applicable, with the form on the reverse side of the certificate executed as indicated, accompanied by payment of the full exercise price for the number of Class A warrants being exercised. Fractional shares of common stock will not be issued upon exercise of the Class A warrants.

     In order for you to exercise the warrants, the shares of common stock underlying them must be covered by an effective registration statement and, if the issuance of shares is not exempt under state securities laws, must be properly registered with state securities regulators. At present, we plan to have a registration statement current when the warrants are redeemed and, to the extent that the underlying shares do not qualify for one or more exemptions under state securities laws, we intend to use our best efforts to register the shares with the relevant authorities. However, we cannot provide absolute assurances that state exemptions will be available, the state authorities will permit us to register the underlying shares, or that an effective registration statement will be in place at the relevant time(s). These factors may have an adverse effect on the demand for the warrants and the prices that can be obtained from reselling them.

     Adjustments of exercise price. The exercise price of the Class A warrants will be adjusted if we declare any stock dividend to stockholders or effect any split or share combination with regard to our common stock. If we effect any stock split or stock combination with regard to our common stock, the exercise price in effect immediately before the stock split or combination will be proportionately reduced or increased, as the case may be. Any adjustment of the exercise price will also result in an adjustment of the number of shares underlying a Class A warrant or, if we elect, an adjustment of the number of Class A warrants outstanding.

Class B Warrants

     Immediately after this offering, there will be 5,200,000 Class B warrants issued and outstanding including 5,000,000 Class B warrants included in the units sold in this offering and 200,000 Class B warrants included in the units that we will issue to the holders of the Unsecured Notes on the date of this prospectus (assuming an initial public offering price of $5.00 per unit). The Class B warrants are identical to the Class A warrants except for the following:

• the Class B warrants have an exercise price of $[                ] per share (200% of the unit offering price); and
  
  
• the Class B warrants may only be redeemed after our gross revenue for any previous 12 month period, as confirmed by an independent audit, equals or exceeds $100 million.

Preferred Stock

     Our authorized capital includes 5,000,000 shares of undesignated preferred stock, par value $0.001 per share.

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     Under our Certificate of Incorporation, our board of directors has the authority, without further action by the stockholders, to issue from time to time up to 5,000,000 shares of preferred stock in one or more series. The board of directors may fix the number of shares, designations, preferences, powers and other special rights of each series of the preferred stock. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock, affect adversely the rights and powers, including voting rights, of the holders of common stock, or have the effect of delaying, deferring or preventing a change in control in Vaughan. The rights and preferences may include, but are not limited to:

• the title of the preferred stock;



• the maximum number of shares of the series;



• the dividend rate or the method of calculating the dividend, the date from which dividends will accrue and whether dividends will be cumulative;



• any liquidation preference;



• any redemption provisions;



• any sinking fund or other provisions that would obligate us to redeem or purchase the preferred stock;



• any terms for the conversion or exchange of the preferred stock for other securities of us or any other entity;



• any voting rights; and



• any other preferences and relative, participating, optional or other special rights or any qualifications, limitations or restrictions on the rights of the shares.

     In some cases, the issuance of preferred stock could delay or discourage a change in control of us. Any shares of preferred stock we issue will be fully paid and nonassessable. We do not have any outstanding shares of preferred stock at the date of this Prospectus.

Authorized but Unissued Shares

     The authorized but unissued shares of common stock and preferred stock are available for future issuance without shareholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public or private offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued common or preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.

     The Oklahoma General Corporation Act provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s articles of incorporation, unless the corporation’s articles of incorporation, requires a greater percentage. Our articles of incorporation do not impose any supermajority vote requirements.

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Transfer Agent, Warrant Agent and Registrar

     The transfer agent and registrar for our common stock and the warrant agent for the Class A and Class B warrants will be Continental Stock Transfer & Trust Company, located in New York, New York.

Anti-takeover provisions under Oklahoma law

      Oklahoma business combination statute

     Under the terms of our amended certificate of incorporation, we have not opted out of Section 1090.3 of the Oklahoma General Corporation Act, Oklahoma’s anti-takeover law. In general this section prevents an “interested shareholder” from engaging in a “business combination” with us for three years following the date the person became an interested shareholder, unless:

• prior to the date the person became an interested shareholder, our board of directors approved the transaction in which the interested shareholder became an interested shareholder or approved the business combination;



• upon consummation of the transaction that resulted in the interested shareholder becoming an interested shareholder, the interested shareholder owns stock having at least 85% of all voting power at the time the transaction commenced, excluding stock held by our directors who are also officers and stock held by certain employee stock plans; or



• on or subsequent to the date of the transaction in which the person became an interested shareholder, the business combination is approved by our board of directors and authorized at a meeting of shareholders by the affirmative vote of the holders of two-thirds of all voting power not attributable to shares owned by the interested shareholder.

     An “interested shareholder” is defined, generally, as any person that owns stock having 15% or more of all of our voting power, any person that is an affiliate or associate of us and owned stock having 15% or more of all of our voting power at any time within the three-year period prior to the time of determination of interested shareholder status, and any affiliate or associate of such person.

A “business combination” includes:

• any merger or consolidation involving us and an interested shareholder;



• any sale, lease, exchange, mortgage, pledge, transfer or other disposition to or with an interested shareholder of 10% or more of our assets;



• subject to certain exceptions, any transaction that results in the issuance or transfer by us of any of our stock to an interested shareholder;



• any transaction involving us that has the effect of increasing the proportionate share of the stock of any class or series or voting power owned by the interested shareholder;



• the receipt by an interested shareholder of any loans, guarantees, pledges or other financial benefits provided by or through us; or



• any share acquisition by the interested shareholder pursuant to Section 1090.1 of the OGCA.

     Because we have not opted out of the Oklahoma anti-takeover law, no interested shareholder could pursue a business combination transaction that is not approved by our board of directors.

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     Oklahoma control share statute

     Under the terms of our amended certificate of incorporation, we have not opted out of Sections 1145 through 1155 of the Oklahoma General Corporation Act, Oklahoma’s control share acquisition statute. In general, Section 1145 of the Oklahoma General Corporation Act defines “control shares” as our issued and outstanding shares that, in the absence of the Oklahoma control share statute, would have voting power, when added to all of our other shares that are owned, directly or beneficially, by an acquiring person or over which the acquiring person has the ability to exercise voting power, that would entitle the acquiring person, immediately after the acquisition of the shares to exercise, or direct the exercise of, such voting power in the election of directors within any of the following ranges of voting power:

• one-fifth (1/5) or more but less than one-third (1/3) of all voting power;



• one-third (1/3) or more but less than a majority of all voting power; or



• a majority of all voting power.

     A “control share acquisition” means the acquisition by any person of ownership of, or the power to direct the exercise of voting power with respect to, “control shares.” After a control share acquisition occurs, the acquiring person is subject to limitations on the ability to vote such control shares. Specifically, Section 1149 of Oklahoma General Corporation Act provides that under most control share acquisition scenarios, “the voting power of control shares having voting power of one-fifth (1/5) or more of all voting power is reduced to zero unless the shareholders of the issuing public corporation approve a resolution . . . according the shares the same voting rights as they had before they became control shares.” Section 1153 of Oklahoma General Corporation Act provides the procedures for obtaining shareholder consent of a resolution of an “acquiring person” to determine the voting rights to be accorded the shares acquired or to be acquired in the control share acquisition.

     Because we have not opted out of the Oklahoma control share statute, any shareholder holding control shares will be limited in his or her right to vote his or her shares in the election of directors.

Listing

     We have applied to list the units, common stock, Class A warrants and Class B warrants on the Nasdaq Capital Market under the symbols “[      ]”, “[      ]”, “[      ]” and “[      ]”, respectively [, and on the Boston Stock Exchange under the symbols “[      ]”, “[      ]”, “[      ]” and “[      ]”, respectively]. There is currently no established public trading market for our common stock.

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DESCRIPTION OF CERTAIN INDEBTEDNESS

     Promissory Notes

     In July 2006 we borrowed $2.0 million from 18 accredited investors in the Secured Financing pursuant to 10% Secured Subordinated Promissory Notes, which we refer to as the “Promissory Notes.” The Promissory Notes are repayable on the earlier of June 30, 2007 or the third business day following completion of a public or private financing by Vaughan generating gross proceeds of at least $5 million. The Promissory Notes are secured by a non-recourse pledge of the 60% equity interest in Allison’s Gourmet Kitchens, LP currently held by Mark E. Vaughan and Vernon J. Brandt, Jr., both officers and directors of Vaughan. As added consideration for the purchase of the Promissory Notes, each purchaser will receive that number of equity securities to be issued in this public offering having a value, at the initial public offering price, of 50% of the Promissory Notes purchased by that investor. If we have not completed the required public or private financing by June 30, 2007, but we have repaid the Promissory Notes, the investors will receive an aggregate of 250,000 shares of our common stock. If we have not repaid the Promissory Notes by that time, the investors will receive an aggregate of 500,000 shares of our common stock. Vaughan has agreed to file a registration statement for the resale of the equity securities to be issued to these investors within 60 days following the effective date of this registration statement and will be subject to a late fee of 2% of the original investment amount per month if that registration statement is not filed within the 60-day period or if the resale registration statement has not been declared effective within 60 days after it has been filed (90 days if the financial information in the resale registration statement must be updated) or if after the registration statement has been declared effective it cannot be used in connection with the sale of the covered securities; provided, however, that the amount of the late fee payable to each investor, shall not exceed 10% of the original principal amount of the note purchased by that investor. The investors in the Promissory Notes have agreed to execute a lockup agreement containing the same terms and conditions as those to which Vaughan’s officers, directors and 5% stockholders are subject. In connection with the Promissory Notes, Vaughan agreed to pay Paulson Investment Company a fee of 8% of the gross proceeds and to reimburse Paulson Investment Company for expenses incurred by it in connection with the Secured Financing up to a maximum of $10,000.

     Bridge Loan

     Commencing in September 2006 Vaughan borrowed an aggregate of $1.0 million from Paulson Investment Company, pursuant to a non-secured promissory note bearing interest at 10% per annum and payable on the earlier of the first anniversary of the issue date of the note or the consummation of this offering.

     Vaughan’s Line of Credit

     Vaughan has a $4.0 million secured bank line of credit, due on October 31, 2006, at an interest rate of Wall Street Journal prime plus 0.75%, with an initial rate of 6.75% . The line of credit is secured by accounts receivable, inventory and general intangibles. At June 30, 2006, short-term borrowings under this line of credit were $ 2,814,294. Vaughan had $1,185,706 available under this line of credit at June 30, 2006. Vaughan had a line of credit balance at December 31, 2005 was $2,314,294. The line of credit contains certain financial covenants which replicate those covenants of the Cleveland County Industrial Authority bond issue, some of which Vaughan was not in compliance. Vaughan has not obtained a waiver of the financial covenants.

     Allison’s Line of Credit

     Allison’s has a $1.0 million secured bank line of credit, initiated on March 3, 2006, at an interest rate of Wall Street Journal prime plus 0.50%, with an initial rate of 8.00% . Interest is payable on a monthly basis. The line of credit was secured by all of Allison’s assets, including accounts receivable, inventory and equipment and personal guaranties of all of the partners. At June 30, 2006, short-term borrowings under this line of credit were $220,291. The bank line of credit agreement was subject to certain covenants for which Allison’s was in compliance with or has obtained a waiver as of June 30, 2006. At December 31, 2004 and 2005, short-term borrowings on previous lines of credit were $0.

     Wild About Food Line of Credit

     Wild About Food – Oklahoma has a $600,000 secured bank line of credit, initiated on June 7, 2006 at an interest rate of Wall Street Journal prime plus 1.00% . At June 30, 2006, short-term borrowings under this line of credit were $42,106. Vaughan was in compliance with all covenants.

     Equipment Loan

     In addition to the line of credit, Allison’s secured a loan for equipment purchases in the amount of $2.4 million with the same interest rate. The maturity date of this loan is March 3, 2011. The proceeds of the equipment loan are to pay off existing debt related to previous equipment purchases and to purchase new equipment, of which some down payments have been made as of June 30, 2006.

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SHARES ELIGIBLE FOR FUTURE SALE

This Offering

     After this offering is completed we expect to have 10,400,000 shares of common stock outstanding. This number assumes no exercise of the representative’s over-allotment option, the Class A warrants, the Class B warrants or the representative’s warrants. We expect to have 11,150,000 shares of common stock outstanding if the representative’s over-allotment is exercised in full. Of these shares, the 5,000,000 shares of common stock issued as part of the units sold in this offering (5,750,000) shares if the representative’s over-allotment is exercised in full) will be freely tradeable without restrictions or further registration under the Securities Act of 1933, except that any shares purchased by our “affiliates,” as that term is defined under the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 under the Securities Act. The 5,000,000 shares of common stock underlying the Class A warrants and the 5,000,000 shares of common stock underlying the Class B warrants issued as part of the units sold in this offering (5,750,000 shares of common stock in the case of the Class A warrants and 5,750,000 shares of common stock in the case of the Class B warrants if the representative’s over-allotment is exercised in full) will also be freely tradeable after exercise of the warrants, except for shares held by our affiliates.

Outstanding Restricted Stock

     The remaining 5,350,000 outstanding shares of common stock will be restricted securities within the meaning of Rule 144 and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemption from registration offered by Rule 144. The holders of these shares have agreed not to sell or otherwise dispose of any of their shares of common stock for a period of one year after completion of this offering, without the prior written consent of Paulson Investment Company, Inc., the representative of the underwriters, subject to certain limited exceptions. After the expiration of the lock-up period, or earlier with the prior written consent of the representative, all of the outstanding restricted shares may be sold in the public market pursuant to Rule 144.

     Without taking into account the lock-up agreements, 5,000,000 shares of common stock would be eligible for sale under Rule 144 90 days after completion of the offering. The balance of the restricted shares would be eligible for sale under Rule 144 on the first anniversary of the closing of this offering.

     In general, under Rule 144, as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares for at least one year, including a person who may be deemed to be our affiliate, may sell within any three-month period a number of shares of common stock that does not exceed a specified maximum number of shares. This maximum is equal to the greater of 1% of the then outstanding shares of our common stock or the average weekly trading volume in the common stock during the four calendar weeks immediately preceding the sale. Sales under Rule 144 are also subject to restrictions relating to manner of sale, notice and availability of current public information about us. In addition, under Rule 144(k) of the Securities Act, a person who is not our affiliate, has not been an affiliate of ours within three months prior to the sale and has beneficially owned shares for at least two years would be entitled to sell such shares immediately without regard to volume limitations, manner of sale provisions, notice or other requirements of Rule 144.

     Registration Rights

We have agreed to register for resale a total of approximately (a) 200,000 shares of common stock, (b) 200,000 Class A warrants, (c) 200,000 class B warrants that we will issue to holders of the Secured Notes on the date of this prospectus, as well as the 200,000 shares of common stock underlying those warrants (based on an assumed initial public offering price of $5.00 per unit) and to file a resale registration statement within 60 days after the date of this prospectus. We will be subject to a late fee of 2% of the original investment amount per month if that registration statement is not filed within the 60-day period or if the resale registration statement has not been declared effective within 60 days after it has been filed (90 days if the financial information in the resale registration statement must be updated) or if after the registration statement has been declared effective it cannot be used in connection with the sale of the covered securities; provided, however, that the amount of the late fee payable to each investor, shall not exceed 10% of the original principal amount of the note purchase by that investor.

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UNDERWRITING

     Paulson Investment Company, Inc. is acting as the representative of the underwriters named below. We have entered into an underwriting agreement with these underwriters regarding the units being offered under this prospectus. In connection with this offering and subject to certain conditions, each of these underwriters has severally agreed to purchase, and we have agreed to sell, the number of units set forth opposite the name of the underwriter.

Underwriter  Number of Units 

     The underwriting agreement provides that the underwriters are obligated to purchase all of the units offered by this prospectus, other than those covered by the over-allotment option, if any units are purchased. The underwriting agreement also provides that the underwriters’ obligations to pay for and accept delivery of the units is subject to the approval of certain legal matters by counsel and other conditions, including, among other things, the requirements that no stop order suspending the effectiveness of the registration statement be in effect and that no proceedings for this purpose have been instituted or threatened by the Securities and Exchange Commission, which we refer to as the “SEC.”

     The representative has advised us that the underwriters propose to offer our units to the public initially at the offering price set forth on the cover page of this prospectus and to selected dealers at that price less a concession of not more than $      per unit. The underwriters and selected dealers may reallow a concession to other dealers, including the [                ], of not more than $      per unit. After the public offering of the units is complete, the offering price, the concessions to selected dealers and the reallowance to their dealers may be changed by the underwriters.

     The underwriters have informed us that they do not expect to confirm sales of our units offered by this prospectus on a discretionary basis.

     Over-allotment Option. Pursuant to the underwriting agreement, we have granted the representative an option, exercisable for 45 days from the date of this prospectus, to purchase up to an additional 750,000 units on the same terms as the other units being purchased by the underwriters from us. The representative may exercise the option solely to cover over-allotments, if any, in the sale of the units that the underwriters have agreed to purchase. If the over-allotment option is exercised in full, the total public offering price, underwriting discount and proceeds to us before offering expenses will be $                          , $                          and $                          , respectively.

     Stabilization and Other Transactions. The rules of the SEC generally prohibit the underwriters from trading in our securities on the open market during this offering. However, the underwriters are allowed to engage in some open market transactions and other activities during this offering that may cause the market price of our securities to be above or below that which would otherwise prevail in the open market. These activities may include stabilization, short sales and over-allotments, syndicate covering transactions and penalty bids.

• Stabilizing transactions consist of bids or purchases made by the managing underwriter for the purpose of preventing or slowing a decline in the market price of our securities while this offering is in progress.



• Short sales and over-allotments occur when the managing underwriter, on behalf of the underwriting syndicate, sells more of our shares than they purchase from us in this offering. In order to cover the resulting short position, the managing underwriter may exercise the over-allotment option described above and/or may engage in syndicate covering transactions. There is no contractual limit on the size of any syndicate covering transaction. The underwriters will deliver a prospectus in connection with any such short sales. Purchasers of shares sold short by the underwriters are entitled to the same

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remedies under the federal securities laws as any other purchaser of units covered by the registration statement.


• Syndicate covering transactions are bids for or purchases of our securities on the open market by the managing underwriter on behalf of the underwriters in order to reduce a short position incurred by the managing underwriter on behalf of the underwriters.



• A penalty bid is an arrangement permitting the managing underwriter to reclaim the selling concession that would otherwise accrue to an underwriter if the common stock originally sold by the underwriter were later repurchased by the managing underwriter and therefore was not effectively sold to the public by such underwriter.

     If the underwriters commence these activities, they may discontinue them at any time without notice. The underwriters may carry out these transactions on the Nasdaq Capital Market, the Boston Stock Exchange, in the over-the-counter market or otherwise.

     Indemnification. The underwriting agreement provides for indemnification between us and the underwriters against specified liabilities, including liabilities under the Securities Act, and for contribution by us and the underwriters to payments that may be required to be made with respect to those liabilities. We have been advised that, in the opinion of the SEC, indemnification for liabilities under the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable.

     Underwriters’ Compensation. We have agreed to sell the units to the underwriters at the initial offering price of $ per unit, which represents the initial public offering price of the units set forth on the cover page of this prospectus less an 8% underwriting discount. The underwriting agreement also provides that the representative will be paid a nonaccountable expense allowance equal to 2.0% of the gross proceeds from the sale of the units offered by this prospectus, excluding any units purchased on exercise of the over-allotment option.

     On completion of this offering, we will issue to the representative of the underwriters warrants to purchase up to 500,000 units, for a price per unit of $                , which is equal to 120% of the initial offering price of the units. The representative's warrants will be exercisable for units at any time beginning 180 days after the effective date of this offering, and will expire on the fifth anniversary of the effective date. Neither the representative's warrants nor the underlying securities may be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of the offering, except to any member participating in the offering and the officers or partners thereof, and only if all securities so transferred remain subject to the 180-day lock-up restriction for the remainder of the lock-up period. If we cannot honor the exercise of representative's warrants and the securities underlying the warrants are listed on a securities exchange or if there are three independent market makers for the underlying securities, we may, but are not required to, settle the representative's warrants for a price equal to the difference between the closing price of the underlying securities and the exercise price of the warrants. Because we are not required to settle the representative's warrants by payment of cash, it is possible that the representative's warrants will never be settled in shares or payment of cash.

     The holder of these warrants will have, in that capacity, no voting, dividend or other shareholder rights. Any profit realized on the sale of the units issuable upon exercise of these warrants may be deemed to be additional underwriting compensation. The securities underlying these warrants are being registered pursuant to the registration statement of which this prospectus is a part. During the term of these warrants, the holder thereof is given the opportunity to profit from a rise in the market price of our common stock, our Class A warrants and our Class B warrants. We may find it more difficult to raise additional equity capital while these warrants are outstanding. At any time at which these warrants are likely to be exercised, we may be able to obtain additional equity capital on more favorable terms.

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     The following table summarizes the underwriting discount and non-accountable expense allowance we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ over-allotment option.

		Total
	Per Unit	Without Over-allotment	With over-allotment
Underwriting discount
Non-accountable expense allowance

     Lock-Up Agreements. All our officers and directors and all of our pre-offering stockholders have agreed that, for a period of one year from the date this registration statement becomes effective, they will not sell, contract to sell, grant any option for the sale or otherwise dispose of any of our equity securities, or any securities convertible into or exercisable or exchangeable for our equity securities, without the consent of the representative. The representative may consent to an early release from the lock-up periods if, in its opinion, the market for the common stock would not be adversely impacted by sales and in cases of an officer, director or other stockholders’ financial emergency. We are unaware of any officer, director or current shareholder who intends to ask for consent to dispose of any of our equity securities during the lock-up period.

     Determination of Offering Price. The public offering price of the units offered by this prospectus and the exercise price and other terms of the Class A warrants and Class B warrants were determined by negotiation between us and the underwriters. Among the factors considered in determining the public offering price of the units and the exercise price of the warrants were:

• our history and our prospects;



• the industry in which we operate;



• the status and development prospects for our proposed services;



• our past and present operating results;



• the previous experience of our executive officers; and



• the general condition of the securities markets at the time of this offering.

     The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the units. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the units, or the common stock and warrants contained in the units, can be resold at or above the initial public offering price.

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LEGAL MATTERS

     The validity of the common shares offered by this prospectus will be passed upon for us by Morse, Zelnick, Rose & Lander LLP, New York, New York. Stoel Rives LLP will pass upon certain matters for the underwriters named in this prospectus in connection with this offering.

EXPERTS

     Cole and Reed, P.C., an independent registered public accounting firm, has audited the consolidated financial statements of Vaughan and of Allison’s as of and for the years ended December 31, 2003, 2004 and 2005 as set forth in their reports. We have included these financial statements in this prospectus, and in the registration statement, of which this prospectus is a part, in reliance on Cole and Reed, P.C.’s reports, given on their authority as experts in accounting and auditing.

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WHERE YOU CAN FIND MORE INFORMATION

     In connection with the units offered by this prospectus, we have filed a registration statement on Form S-1 under the Securities Act with the Securities and Exchange Commission. This prospectus, filed as part of the registration statement, does not contain all of the information included in the registration statement and the accompanying exhibits. For further information with respect to our units, shares and warrants, and us you should refer to the registration statement and the accompanying exhibits. Statements contained in this prospectus regarding the contents of any contract or any other document are not necessarily complete, and you should refer to the copy of the contract or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by the actual contents of the contract or other document referred to. You may inspect a copy of the registration statement and the accompanying exhibits without charge at the Securities and Exchange Commission’s public reference facilities, Room 1580, 100 F Street, N.E., Washington, D.C. 20549, and at its regional offices located at 3 World Financial Center, Room 4300, New York, New York 10281, and you may obtain copies of all or any part of the registration statement from those offices for a fee. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a web site that contains registration statements, reports, proxy and information statements and other information regarding registrants that file electronically. The address of the site is http://www.sec.gov.

      We intend to furnish our stockholders with annual reports containing financial statements audited by an independent registered public accounting firm.

     You may rely on the information contained in this prospectus. We have not authorized anyone to provide information different from that contained in this prospectus. Neither the delivery of this prospectus nor sale of common shares means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy our common shares in any circumstances under which the offer or solicitation is unlawful.

66

INDEX TO FINANCIAL STATEMENTS

Vaughan Foods, Inc.
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets at December 31, 2004 and 2005 and June 30, 2006	F-2
Consolidated Statement of Operations for the years ended December 31, 2003, 2004
and 2005 and for the six month periods ended June 30, 2005 and 2006	F-3
Consolidated Statements of Stockholders’ Equity for the years ended December 31,
2003, 2004 and 2005 and for the six month periods ended June 30, 2005 and 2006	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2004 and 2005 and for the six month periods ended June 30, 2005 and 2006	F-5
Notes to Consolidated Financial Statements	F-6-19
Allison’s Gourmet Kitchens, Limited Partnership
Financial Statements
Report of Independent Registered Public Accounting Firm	F-20
Balance Sheets at December 31, 2004 and 2005 and June 30, 2006	F-21
Statement of Operations for the years ended December 31, 2003, 2004
and 2005 and for the six month periods ended June 30, 2005 and 2006	F-22
Statement of Partners’ Equity for the years ended December 31, 2003, 2004 and
2005 and for the six month periods ended June 30, 2005 and 2006	F-23
Statements of Cash Flows for the years ended December 31, 2003, 2004 and
2005 and for the six month periods ended June 30, 2005 and 2006	F-24
Notes to Financial Statements	F-25
Pro Forma Combined Financial Statements
Balance Sheets at December 31, 2005 and June 30, 2006
Statements of Operations for the year ended December 31, 2005 and the six month period
ended June 30, 2006	F-36

67

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Vaughan Foods, Inc.
Moore, Oklahoma

We have audited the accompanying consolidated balance sheets of Vaughan Foods, Inc. as of December 31, 2004 and 2005, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vaughan Foods, Inc. as of December 31, 2004 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ Cole & Reed, P.C.

Oklahoma City, Oklahoma
April 19, 2006

F-1

VAUGHAN FOODS, INC.
CONSOLIDATED BALANCE SHEETS

	December 31, 2004		December 31, 2005			June 30, 2006
						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	683,206	$	36,163		$	74,064
Accounts receivable, net of allowance for doubtful accounts of
$ 90,502 at December 31, 2004, $106,682 at December 31, 2005
and $ 68,041 at June 30, 2006		2,923,364		3,164,644			4,631,921
Accounts receivable, related party		144,748		335,666			302,081
Current portion of note receivable		25,000		-			-
Due from stockholders		65,927		-			-
Inventories		687,430		725,578			721,659
Prepaid expenses and other assets		99,076		39,472			120,840
Income taxes receivable		28,228		28,228			28,228
Deferred tax assets		34,952		40,539			28,803
Total current assets		4,691,931		4,370,290			5,907,596
Restricted assets:
Cash		3,965,204		80,471			-
Investments		-		1,950,580			699,969
Certificate of deposit		-		256,000			256,000
Total restricted assets		3,965,204		2,287,051			955,969
Property and equipment, net		9,253,007		9,836,262			11,323,427
Other assets:
Assets held for sale		40,000		40,000			40,000
Loan origination fees, net of accumulated amortization		500,599		436,465			418,760
Deferred tax assets, noncurrent		-		-			139,187
Other		10,685		-			-
Total other assets		551,284		476,465			597,947
TOTAL	$	18,461,426	$	16,970,068		$	18,784,939
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	3,470,680	$	2,692,648		$	4,650,711
Disbursements in transit		-		-			83,859
Line of credit		1,771,743		2,314,294			2,814,294
Accrued liabilities		621,720		990,432			1,197,483
Current portion of long-term debt		386,740		690,308			671,983
Current portion of capital lease obligation		180,015		162,804			162,593
Total current liabilities		6,430,898		6,850,486			9,580,923
Long term liabilities:
Long-term debt, net of current portion		9,967,611		8,728,940			8,477,770
Due to stockholders		10,751		-			-
Capital lease obligation, net of current portion		806,322		649,337			568,710
Deferred tax liability		289,447		135,367			-
Total long-term liabilities		11,074,131		9,513,644			9,046,480
Shareholders’ equity:
Common stock, $0.001 par value; authorized 50,000,000 shares;
5,000,000 shares issued and outstanding (800 shares issued
and outstanding at December 31, 2004 and 2005.)		800		800			5,000
Paid in Capital		415,193		415,193			410,993
Member Capital (deficit)		80,497		(12,839	)		(16,573	)
Retained earnings (deficit)		459,907		202,784			(241,884	)
Total shareholders' equity		956,397		605,938			157,536
TOTAL	$	18,461,426	$	16,970,068		$	18,784,939

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

F-2 VAUGHAN FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

										Six Months Ended
	Year Ended December 31,									June 30,
		2003			2004			2005			2005			2006
											(Unaudited)			(Unaudited)
Net sales	$	29,369,386		$	36,133,015		$	44,730,265		$	22,330,957		$	26,317,960
Cost of sales		24,966,962			29,903,140			37,976,138			18,551,167			23,173,759
Gross profit		4,402,424			6,229,875			6,754,127			3,779,790			3,144,201
Selling, general and administrative expenses		3,891,147			5,387,313			6,431,322			3,515,583			3,514,716
Operating income (loss)		511,277			842,562			322,805			264,207			(370,515	)
Rent income		182,060			168,084			230,212			113,600			133,623
Interest expense		(409,020	)		(488,618	)		(1,041,918	)		(484,948	)		(488,621	)
Loss on refinancing		(69,624	)		-			-			-			-
Other, net		24,936			12,256			88,180			3,686			28,314
Total other income and expense		(271,648	)		(308,278	)		(723,526	)		(367,662	)		(326,684	)
Earnings (loss) before income taxes		239,629			534,284			(400,721	)		(103,455	)		(697,199	)
Income tax expense (benefit)		71,199			191,981			(159,667	)		(29,799	)		(248,797	)
Net earnings (loss)	$	168,430		$	342,303		$	(241,054	)	$	(73,656	)	$	(448,402	)
Net earnings (loss) per share-basic and diluted	$	0.03		$	0.07		$	(0.05	)	$	(0.01	)	$	(0.09	)
Weighted average shares outstanding-basic and diluted		5,000,000			5,000,000			5,000,000			5,000,000			5,000,000

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

F-3 VAUGHAN FOODS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

	Common Stock							Member			Retained			Total
					Paid in			Capital			Earnings			Stockholder's
	Shares issued	Amount			Capital			(Deficit)			(Deficit)			Equity
Balance at January 1, 2003	800	$	800	$	415,193		$	74,543		$	10,128		$	500,664
Net earnings			-		-			15,450			152,980			168,430
Balance at December 31, 2003	800		800		415,193			89,993			163,108			669,094
Net earnings (loss)			-		-			(9,496	)		351,799			342,303
Dividends			-		-			-			(55,000	)		(55,000	)
Balance at December 31, 2004	800		800		415,193			80,497			459,907			956,397
Net earnings (loss)			-		-			16,069			(257,123	)		(241,054	)
Dividends			-		-			(109,405	)		-			(109,405	)
Balance at December 31, 2005	800		800		415,193			(12,839	)		202,784			605,938
Net earnings (loss) (Unaudited)			-		-			(3,734	)		(444,668	)		(448,402	)
6,250-for-1 Stock split (Unaudited)	4,999,200		4,200		(4,200	)		-			-			-
Balance at June 30, 2006 (Unaudited)	5,000,000	$	5,000	$	410,993		$	(16,573	)	$	(241,884	)	$	157,536

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

F-4

VAUGHAN FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

										Six Months Ended
	Year Ended December 31,									June 30,
		2003			2004			2005			2005			2006
											(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net earnings (loss)	$	168,430		$	342,303		$	(241,054	)	$	(73,656	)	$	(448,402	)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization		446,349			685,841			1,003,563			463,669			547,158
Provision for bad debts		129,867			244,659			61,363			51,363			-
Gain on disposal of property and equipment		(14,062	)		(7,552	)		(21,323	)		-			-
Loss on impairment of property and equipment		-			63,230			-			-			-
Deferred income taxes		71,199			155,210			(159,667	)		(29,799	)		(262,818	)
Changes in operating assets and liabilities:
Accounts receivable		(772,415	)		(942,969	)		(302,643	)		(416,309	)		(1,467,277	)
Accounts receivable - Related party		(79,922	)		(64,826	)		(190,918	)		(9,017	)		33,585
Inventories		(64,003	)		(87,960	)		(38,148	)		83,212			3,919
Prepaid expenses and other assets		(114,402	)		21,111			59,604			(110,421	)		(81,368	)
Income taxes receivable		-			(28,228	)		-			-			-
Other assets		12,245			80,124			10,685			-			-
Disbursements in transit		-			-			-			-			83,859
Accounts payable		604,129			743,851			(778,032	)		(835,869	)		1,958,063
Accrued liabilities		104,942			202,307			368,712			273,662			207,051
Income taxes payable		(5,724	)		-			-			-			-
Net cash provided by (used in) operating activities		486,633			1,407,101			(227,858	)		(603,165	)		573,770
Cash flows from investing activities:
Payments received on notes receivable		61,065			110,314			25,000			25,000			-
Advances on notes receivable		(35,314	)		-			-			-			-
Cash paid for property and equipment		(476,957	)		(3,321,573	)		(1,610,766	)		(1,174,997	)		(2,016,618	)
Proceeds from sale of property and equipment		-			33,797			109,405			-			-
Purchase of restricted certificate of deposit		-			-			(256,000	)		-			-
Purchase of investments		-			-			(48,147	)		-			-
Restricted assets		-			-			-			(9,278	)		(118,681	)
Distributions from restricted assets		-			-			1,982,300			1,380,388			1,449,763
Net cash provided by (used in) investing activities		(451,206	)		(3,177,462	)		201,792			221,113			(685,536	)
Cash flows from financing activities:
Loan proceeds deposited to restricted asset accounts		-			(3,965,204	)		-			-			-
Payments of loan origination fees		-			(500,599	)		-			-			-
Proceeds from line of credit		1,073,913			2,814,663			2,314,294			844,255			500,000
Repayments on line of credit		-			(2,116,833	)		(1,771,743	)		-			-
Proceeds from long-term debt		3,715,090			6,838,593			527,555			265,170			90,140
Repayment of long-term debt and capital leases		(4,455,252	)		(962,619	)		(1,636,854	)		(1,148,200	)		(440,473	)
Due from stockholders		-			(65,927	)		65,927			65,927			-
Repayment of amounts due to stockholders		(80,817	)		(30,380	)		(10,751	)		(10,751	)		-
Distributions to limited liability company members		-			-			(109,405	)		-			-
Net cash provided by (used in) financing activities		252,934			2,011,694			(620,977	)		16,401			149,667
Net increase (decrease) in cash and cash equivalents		288,361			241,333			(647,043	)		(365,651	)		37,901
Cash and cash equivalents at beginning of period		153,512			441,873			683,206			683,206			36,163
Cash and cash equivalents at end of period	$	441,873		$	683,206		$	36,163		$	317,555		$	74,064
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	407,941		$	482,976		$	1,023,731		$	484,947		$	494,554
Income taxes	$	-		$	65,000		$	-		$	-		$	-
Supplemental disclosures of cash flow information:
Property and equipment acquired under capital lease obligations	$	941,497		$	309,238		$	-		$	-		$	-

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

F-5 VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(1)      Nature of Operations

Vaughan Foods, Inc. (the “Company”) is an Oklahoma-based specialty food processor serving customers in a multi-state region. The Company operates from a manufacturing facility in Moore, Oklahoma.

(2)      Summary of Significant Accounting Policies

(a)      Basis of Reporting

This summary of significant accounting policies is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management who is responsible for the integrity and objectivity of the financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

(b)      Principles of Consolidation

The consolidated financial statements include the accounts of the Company and of Cimarron Holdings, L.L.C. (“Cimarron”). Cimarron is owned by the two stockholders of the Company. Cimarron owns an airplane that is used by Company management. The Company is paying the debt service payments on the liability associated with the airplane, as well as all costs of maintenance and operations. Because the Company is the primary beneficiary of Cimarron, it is considered a variable interest entity subject to FIN 46R, and has been consolidated by the Company in its financial statements. All significant intercompany transactions and balances have been eliminated in consolidation. See Note 16 to the consolidated financial statements.

(c)      Unaudited Interim Financial Information

The consolidated balance sheets and statements of shareholders’ equity as of and for the six months ended June 30, 2006, and the consolidated statements of operations and cash flows for the six months ended June 30, 2005 and 2006, and related information contained in the notes to financial statements are unaudited. These unaudited interim financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States of America. Management asserts that the preparation of the unaudited interim financial statements utilize the same basis as that of the audited financial statements. Management further asserts that the unaudited interim financial statements fairly represent the Company’s financial position.

(d)      Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers investments with maturities of three months or less at date of purchase to be cash equivalents.

(e)      Accounts Receivable and Credit Policies

Trade accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within 15 to 21 days from the invoice date. Receivables are recorded based on the amounts invoiced to customers. Interest and delinquency fees are not generally assessed and, if they are assessed, are not included in income or trade accounts receivable. Discounts allowed for early payment, if any, are charged against income when the payment is received.

F-6 VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(2)      Summary of Significant Accounting Policies - (Continued)

(e)      Accounts Receivable and Credit Policies - Continued

Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.

The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance for doubtful accounts based on historical collection trends and an assessment of the creditworthiness of current customers. The adequacy of the valuation allowance is evaluated periodically through an individual assessment of potential losses on customer accounts giving particular emphasis to accounts with invoices unpaid more than 60 days past the due date. Balances still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Recoveries on accounts previously written off are credited back to the valuation allowance. During the years ended December 31, 2005, 2004 and 2003, the Company increased the valuation allowance with charges to bad debt expense totaling approximately $61,000, $245,000 and $ 130,000, respectively. During the six month period ended June 30, 2006, the valuation allowance was reduced by $38,641.

(f)      Inventories

Inventories consist principally of food products and are stated at the lower of cost (first-in, first-out) or market.

(g)      Property and Equipment

Property and equipment are recorded at cost. Equipment acquired under capital leases is recorded at the present value of the future minimum lease payments, and amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. Expenditures for major additions and improvements are capitalized, while minor replacements, maintenance and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in current operations.

Depreciation, including assets acquired under capital leases, is provided using straight-line and accelerated methods over the following estimated useful lives:

Buildings and improvements	15 - 40 years
Machinery and equipment	5 - 15 years
Delivery equipment	3 - 10 years
Office equipment	5 - 7 years

F-7 VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(2)      Summary of Significant Accounting Policies - (Continued)

(h)      Cash and Cash Equivalents and Disbursements-in-Transit

For the purpose of the statement of cash flows, the company considers investments with maturities of three months or less at the date of purchase to be cash equivalents.

As a result of the Company’s cash management system, checks issued but not presented to the banks for payment may create negative book cash balances. Such negative balances are included in Disbursements-in-Transit and are presented as obligations of the Company.

(i)      Concentrations of Credit Risk

The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

(j)      Revenue Recognition

The Company recognizes revenue, net of related sales discounts and allowances, when products are delivered to the customers. Revenues also include those amounts related to shipping and handling. Shipping and handling expenses are included in cost of goods sold. Consideration from a vendor to a retailer is presumed to be a reduction to the selling price of the vendor’s products and, therefore, should be characterized as a reduction of sales when recognized in the vendor’s income statement. As a result, certain promotional expenses are recorded as a reduction of net sales.

(k)      Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(l)        Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) excludes dilution and is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common shares (such as stock options) were issued during the period. Diluted EPS is not presented if the effect of the incremental shares is anti-dilutive. The Company did not have any outstanding dilutive common shares, options or other securities for any of the periods presented in the financial statements.

(m)      Impairment of Long-Lived Assets and Assets Held for Sale

The Company follows the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets in determining impairment losses on long-term assets. Impairment losses are recorded on long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. Impairment losses are recognized based upon the estimated fair value of the asset when required. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

During the year ended December 31, 2004, the Company recognized an impairment loss of approximately $60,000 related to a facility that is being held for sale.

F-8 VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(2)      Summary of Significant Accounting Policies - (Continued)

(n)      Use of Estimates

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

(o)      Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are measured at cost which approximates their fair value because of the short maturity of these instruments. The carrying amount of the Company’s borrowings under the line of credit and long-term debt approximates their fair value because the interest rate on the instruments fluctuate with market interest rates or represents borrowing rates available with similar terms.

(p)      Investments

All of the Company's investments are classified as available for sale and reported at fair value. Any related unrealized gains and losses are excluded from earnings and reported net of income tax as a separate component of shareholders' equity until realized. There were no unrealized gains or losses for the years end 2005, 2004 and 2003. Realized gains and losses on sales of securities are based on the specific identification method. Declines in the fair value of investment securities below their carrying value that are other than temporary are recognized in earnings. As of December 31, 2005, the Company’s investments consisted entirely of guaranteed investment contracts at a fixed interest rate of 2.25 percent.

(q)      Recently Issued Accounting Pronouncements

In May 2003, the FASB issued SFAS 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity.” SFAS 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The Company has determined that SFAS No. 150 will not have a material impact on its financial position or results of operations.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs – An Amendment of Accounting Research Bulletin No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4 “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No.

F-9 VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(2)      Summary of Significant Accounting Policies - (Continued)

(q)      Recently Issued Accounting Pronouncements - Continued

43. Additionally, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005, and will be required to be adopted by the Company effective January 1, 2006. The Company has determined that the adoption of SFAS No. 151 will not have a material impact on its results of operations and financial condition.

In December 2004, the FASB issued a revision to SFAS 123R (revised 2004), Share-Based Payment, which replaces SFAS No. 123 and supercedes APB Opinion No. 25. The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The statement eliminates the alternative method of accounting for employee share-based payments previously available under APB Opinion No. 25. The provisions of the statement will become effective for the Company in the fiscal year beginning January 1, 2006 for all equity awards granted after the effective date. The Company has determined that the adoption of SFAS No. 123R will not have a material effect on results of operations because there are currently no share-based payments or stock option plans.

In December 2004, the FASB issued SFAS 153 “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29” effective for nonmonetary asset exchanges occurring in the fiscal year beginning January 1, 2006. SFAS 153 requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. SFAS 153 is not expected to have a material effect on the Company’s financial position or results of operations.

In May of 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and SFAS 3. SFAS 154 applies to all voluntary changes in accounting principle and requires retrospective application to prior periods' financial statements in accounting principle unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Adoption of SFAS 154 is required for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. The Company will adopt this new standard effective January 1, 2006. The adoption of this standard is not expected to have a material effect on the Company's consolidated financial statements.

(r)      Reclassifications

Certain amounts in the 2004 and 2003 financial statements have been reclassified to conform to the 2005 presentation.

F-10 VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(3)	Inventories
A summary of inventories follows:			December 31,				June 30,
			2004		2005		2006
							(Unaudited)
	Raw Materials	$	687,430	$	625,173	$	691,001
	Finished Goods		-		100,405		30,658
	Total Inventory	$	687,430	$	725,578	$	721,659

(4)      Restricted Assets

The Company is required to hold cash in reserve in separate trust accounts applicable to its $5,000,000 Cleveland County Industrial Authority Industrial Development Revenue Bonds, issued December 2004, and to secure a letter of credit for purposes of self insurance for worker’s compensation. See Note 8 to the consolidated financial statements. These assets are restricted as follows:

			December 31,				June 30,
			2004		2005		2006
							(Unaudited)
Project construction account		$	3,460,500	$	1,445,834	$	-
Debt reserve account			500,000		510,372		513,987
Interest fund account			-		70,916		185,982
Accrued interest receivable			4,704		3,929		-
Certificate of deposit			-		256,000		256,000
Total Restricted Assets		$	3,965,204	$	2,287,051	$	955,969
(5)	Property and Equipment
Property and equipment, at cost, consists of the following:
			December 31,				June 30,
			2004		2005		2006
							(Unaudited)
Land		$	287,844	$	199,762	$	199,762
Plant and improvements			4,899,795		5,919,477		5,919,477
Machinery and equipment			3,241,504		4,640,603		4,640,603
Transportation equipment			1,622,651		1,948,712		2,050,712
Office equipment			24,146		63,382		78,382
Construction in progress			1,622,693		389,393		2,289,011
		11,698,633		13,161,329			15,177,947
Less accumulated depreciation			2,445,626		3,325,067		3,854,520
Net Property, Plant and Equipment		$	9,253,007	$	9,836,262	$	11,323,427

F-11

VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(6)      Assets Held for Sale

Assets held for sale, at cost, net of impairments, consists of the following:

		December 31,				June 30,
		2004		2005		2006
						(Unaudited)
Plant and improvements, Stroud, Oklahoma	$	40,000	$	40,000	$	40,000

(7)      Line of Credit

The Company has a $4,000,000 secured bank line of credit, due on October 31, 2006, at an interest rate of Wall Street Journal prime plus 0.75%, with an initial rate of 6.75% . The line of credit is secured by accounts receivable, inventory and general intangibles. At June 30, 2006, short-term borrowings under this line of credit were $ 2,814,294. The Company had $1,185,706 available under this line of credit at June 30, 2006. The Company had a line of credit balance at December 31, 2005 was $2,314,294. The line of credit contains certain financial covenants which replicate those covenants of the Cleveland County Industrial Authority bond issue, some of which the Company was not in compliance. The Company has not obtained a waiver of the financial covenants. See detail on Cleveland County Industrial Authority.

(8)      Long-Term Debt and Capital Lease Obligation

Long-term debt consists of the following:

		December 31,		December 31,		June 30,
		2004		2005		2006
						(Unaudited)
Industrial Development Revenue Bonds issued
by the Cleveland County Industrial Authority,
payable in annual principal installments
starting December 1, 2006, in amounts ranging
from $100,000 to $515,000, interest payable
semi-annually at rates varying from 6.75% to
7.10%, secured by real property and
equipment, pledge of rents and revenues and a
limited personal guaranty of the principal
shareholder, final payment due on December
1, 2024.	$	5,000,000	$	5,000,000	$	4,845,001
Real estate loan at variable rate of LIBOR plus
4.00%, adjusted every quarter, rate at June 30,
2006 is 9.00%, secured by the Company’s plant
and related real estate, monthly principal and
interest payments of $28,954, due and payable
on August 1, 2028.		3,405,513		3,359,723		3,331,042

F-12

VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(8)      Long-Term Debt and Capital Lease Obligation- (Continued)

		December 31,		December 31,		June 30,
		2004		2005		2006
						(Unaudited)
Real estate loan at a fixed rate of 5.75% until
July 22, 2006, converting to a rate of National
prime plus 1.75%, secured by related real
estate, monthly principal and interest
payments of $1,970, due and payable on July
22, 2009.	$	231,610	$	219,602	$	208,080
Equipment loan at fixed rate of 7.00%, secured
by certain manufacturing equipment, monthly
principal and interest payments of $2,395, due
and payable on September 15, 2007.		71,693		47,200		34,293
Equipment loan at fixed rate of 6.62%, secured
by certain manufacturing equipment, monthly
principal and interest payments of $14,822,
due and payable on January 31, 2010. This loan
was subsequently paid with proceeds of the
Industrial Development Revenue Bonds.		889,186		-		-
Consolidated entity - Overhaul of aircraft
engine loan at fixed rate of 8.00%, secured by
2nd lien on aircraft, monthly payment and
interest payments of $2,261.		-		42,210		30,130
Various vehicle and equipment loans at various
fixed rates, secured by related vehicles and
equipment, payment terms and maturity dates
vary from loan to loan.		489,593		513,080		471,529
Consolidated entity - Loan at variable rate of
lender index plus 1.75%, rate at June 30, 2006
is 10.00%, secured by an airplane, monthly
principal and interest payments of $2,655, final
payment due on April 25, 2019.		247,629		237,433		229,678
Consolidated entity - Real estate at fixed rate
of 7.00%, secured by related real estate,
monthly principal and interest payments of
$1,230, due and payable on April 15, 2005.		19,127		-		-
		10,354,351		9,419,248		9,149,753
Less current portion		386,740		690,308		671,983
Net Long-term debt	$	9,967,611	$	8,728,940	$	8,477,770

F-13 VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(8)      Long-Term Debt and Capital Lease Obligation - (Continued)

The Industrial Development Revenue Bonds issued by Cleveland County Industrial Authority contain certain financial covenants as follows:

Debt Service Coverage Ratio: The Company is required to maintain a debt service coverage ratio of 1.50 to 1.00. The ratio will be reported to the Trustee and beneficial owners of the Industrial Development Bonds quarterly for each of the previous four quarters. If the debt service coverage ratio reported for each of the previous four quarters is less than 1.50 to 1.00 the Company could be required to retain a consultant at the request of our revenue bond holders. No consultant has been retained even though the ratio has fallen below the requirement. For the year ended December 31, 2005, the Company’s debt service coverage ratio is 0.72 to 1.00

Current Ratio: The Company is required to maintain a current ratio of 1.10 to 1.00 calculated as of the last day of each calendar quarter beginning after January 1, 2006. As of December 31, 2005, the Company’s current ratio is 0.64 to 1.00.

Debt to Equity Ratio: The Company is required to maintain a debt to equity ratio of not more than 4.00 to 1.00 calculated as of the last day of each calendar quarter beginning after January 1, 2006. As of December 31, 2005, the Company’s debt to equity ratio is 16.89 to 1.00.

Accounts Payable: The Company agrees that not more than 10% of its accounts payable shall be in excess of 75 days past due. The Company is in compliance with this covenant as of December 31, 2005.

Accounts Receivable: The Company agrees that not more than 20% of accounts receivable will be in excess of 90 days past due. The Company is in compliance with this covenant as of December 31, 2005.

Noncompliance with the debt service coverage ratio, the current ratio, or the debt to equity ratio will not be considered an event of default under the terms of the agreement. Noncompliance with the above ratios will result in an increase in the interest rate on each of the Bonds of 1% until the Company is in compliance with the required ratios.

Capital lease obligations consist of the following:
	December 31,		December 31,		June 30,
	2004		2005		2006
Various equipment leases at various fixed rates,					(Unaudited)
secured by related equipment, payment terms and
maturity dates vary from lease to lease.	$	986,337	$	812,141	$	731,303
Less current portion		180,015		162,804		162,593
Net Long-term Capital Lease Obligations	$	806,322	$	649,337	$	568,710

F-14 VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

Future principal payments for long-term debt and capital lease obligations at December 31, 2005 are as follows:

Year Ending			Capital Lease
December 31,	Long-Term Debt		Obligation		Total
2006	$	690,308	$	162,804	$	853,112
2007		626,834		169,118		795,952
2008		534,195		185,168		719,363
2009		712,543		202,748		915,291
2010		527,411		92,303		619,714
2011-2028		6,327,957		-		6,327,957
Principal outstanding at
December 31, 2005	$	9,419,248	$	812,141	$	10,231,389

(9)      Accrued Liabilities

A summary of accrued liabilities follows:

	December 31,		December 31,		June 30,
	2004		2005		2006
					(Unaudited)
Accrued compensation	$	171,812	$	195,261	$	187,113
Accrued rebates		323,151		419,821		544,334
Accrued promotions/incentives		78,692		74,612		64,221
Accrued worker’s compensation		-		41,749		31,716
Accrued interest expense		26,843		105,467		197,265
Accrued property taxes		-		-		24,178
Accrued legal expenses		-		-		67,500
Accrued payroll taxes		21,222		153,522		81,156
Total Accrued Liabilities	$	621,720	$	990,432	$	1,197,483

(10)     Income Taxes

Income tax expense (benefit) for the year ended December 31, 2003, 2004 and 2005 and the six month periods ended June 30, 2005 and 2006, consist of the following:

	December 31,		December 31,			December 31,			June 30,		June 30,
	2003		2004			2005			2005		2006
									(Unaudited)		(Unaudited)
Current:
Federal	$	-	$	36,771		$	-		$	-	$	-
State		-		-			-			-		-
		-		36,771			-			-		-
Deferred:
Federal		53,451		185,663			(135,156	)		(25,031)		(208,989	)
State		17,748		(30,453	)		(24,511	)		(4,768)		(39,808	)
		71,199		155,210			(159,667	)		(29,799)		(248,797	)
	$	71,199	$	191,981		$	(159,667	)	$	(29,799)	$	(248,797	)

F-15 VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(10)	Income Taxes - (Continued)
Deferred tax assets and liabilities are as follows:		December 31,			December 31,			June 30,
		2004			2005			2006
								(Unaudited)
Deferred Tax Assets Related To:
Tax credits and NOL carryforwards		$	237,365		$	411,856		$	657,056
Accruals and allowances			34,952			40,539			52,831
Less valuation allowance			-			-			-
Total Deferred Tax Asset			272,317			452,395			709,887
Deferred Tax Liabilities Related To:
Property and equipment			526,812			547,223			541,897
Total Deferred Tax Liability			526,812			547,223			541,897
Net Deferred Tax (Liability)		$	(254,495	)	$	(94,828	)	$	167,990
Current asset portion		$	34,952		$	40,539		$	28,803
Non-current asset (liability) portion			(289,447	)		(135,367	)		139,187
Net Deferred Tax (Liability)		$	(254,495	)	$	(94,828	)	$	167,990

In assessing the realizability of the net deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon either the generation of future taxable income during the periods in which those temporary differences become deductible or the carryback of losses to recover income taxes previously paid during the carryback period.

As of December 31, 2005, the Company has a net operating loss carryfoward of $ 675,559 which, if unused, will commence expiring in 2018 and state new jobs/investment credit carryforwards totaling $ 131,116 which, if unused, will commence expiring in 2006.

Actual income tax expenses differ from "expected" income tax, computed by applying the U.S. Federal corporate tax rate of 34% to earnings from operations before income taxes, as follows:

		December 31,			December 31,			December 31,
		2003			2004			2005
Computed "expected" income taxes	$	81,474		$	181,657		$	(135,156	)
State income taxes, net of federal
income tax		14,378			32,057			(24,511	)
Utilization of net operating loss
carryforwards against current income		(24,653	)		(21,733	)		-
State new jobs/investment credits		-			-			-
	$	71,199		$	191,981		$	(159,667	)

F-16 VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(11)      Operating Leases

The Company has noncancelable long-term operating leases for certain distribution equipment with various expiration dates. The leases require the Company to pay a base rate plus specific mileage amounts. Future minimum annual lease payments for these long-term leases for the next five years ending December 31,

2006	$	333,202
2007		262,088
2008		232,615
2009		57,285
2010		-
	$	885,190

(12)      Employee Benefit Plans

In 2002, the Company adopted a Flexible 401(k) plan covering all full-time employees with a minimum of one year of service. The Company makes contributions under the plan at an amount equal to 25% of the employee’s elective deferral rate, up to a maximum of 4% of the employee’s compensation. The Company’s contributions to the Flexible 401(k) plan for 2003, 2004 and 2005, were $2,898, $8,479 and $11,668, respectively. Contributions for the six month periods ending June 30, 2005 and 2006 were $4,171 and 2,461 respectively.

(13)      Major Customers

The Company has supply arrangements with twelve separate Wal-Mart distribution centers, representing about 9% of its customer sales, and supply arrangements with several independent Sysco Foods distributors account for approximately 23% of gross sales revenues. While such purchasers are each independent, it is possible that a termination of a purchasing arrangement with any such entity could adversely affect business relationships with related entities.

F-17 VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(14)      Related Party Transactions

Allison Gourmet Kitchens, Limited Partnership

On March 1, 2003, the two stockholders of the Company became limited partners in Allison's Gourmet Kitchens, Limited Partnership (the “Partnership”); an Oklahoma limited partnership involved in the retail sale of deli salads.

During the normal course of business, the Company sells raw materials and finished goods, provides freight services to the Partnership and purchases finished goods for resale to its customers. These purchases and sales are on substantially the same terms as similar transactions with unrelated customers. During the years ended December 31, 2003, 2004 and 2005, the Company’s sales, including freight services, to the Partnership and purchases from the Partnership were as follows:

		2003		2004		2005		June 30,		June 30,
								2005		2006
								(unaudited)		(unaudited)
Sales to Partnership	$	215,273	$	429,997	$	726,769	$	391,672	$	444,260
Freight Revenue from Partnership	$	208,294	$	359,852	$	576,539	$	255,881	$	311,030
Purchases from Partnership	$	944,258	$	761,077	$	602,841	$	370,986	$	280,414

At December 31, 2003, 2004, 2005 and June 30, 2005 and 2006, trade accounts receivable includes $0, $29,136, $30,995, $53,579 and $129,509 respectively, from the Partnership. Receivables related to freight services were $0, $0, $225, $0 and $0 respectively.

The Company leases a portion of its facilities to the Partnership on an annual lease arrangement. The lease agreement provides for nine consecutive one year options to extend the lease agreement. The Company received $182,060, $196,567, $295,593, $113,757 and $133,623 under this lease during the years ended December 31, 2003, 2004, 2005, and the six month periods ended June 30, 2005 and 2006 respectively. The Company and the Partnership share utilities and other facility expenses through periodic reimbursement. The total utilities that are shared between the two entities resulted in a reimbursement to the Company of $117,718, $116,826, $203,169, $80,300 and $121,506 for fiscal 2003, 2004, 2005 and the six month periods ended June 30, 2005 and 2006 respectively. At December 31, 2003, 2004, 2005 and June 30, 2005 and 2006, the Company was owed $79,922, $115,612, $304,671, $100,186 and $302,081 in outstanding reimbursements from the Partnership, respectively.

The Company receives reimbursement from Allison’s Gourmet Kitchens, LTD for services provided by staff in relation to administration, sales and other in the amounts of $ 62,000, $131,732, $130,422, $94,270 and $105,270 for fiscal 2003, 2004, 2005 and the six month periods ended June 30, 2005 and 2006 respectively.

F-18

VAUGHAN FOODS, INC.
Notes to Consolidated Financial Statements
(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(15)      Commitments and Contingencies

The Company is subject to legal proceedings and claims which arise in the ordinary course of business. Although occasional adverse decisions or settlements may occur, the Company is not aware of any proceeding at December 31, 2003, 2004, 2005 and June 30, 2006 which would have a material adverse effect on its financial position, results of operations or liquidity.

(16)      Cimarron Holdings, L.L.C.

The Company’s two shareholders each have a 50% ownership in Cimarron. Cimarron owns an airplane that is used by Company management. The Company has not guaranteed the obligations of Cimarron, but is making the debt service payments for Cimarron, as well as all of the costs of maintenance and operations of the airplane.

The Company’s consolidated financial statements include the financial statements of Cimarron. The consolidation of Cimarron increased the Company’s consolidated total assets and liabilities at December 31, 2004, 2005 and June 30, 2006 as follows:

	December 31,		December 31,		June 30,
	2004		2005		2006
					(unaudited)
Total assets	$	347,253	$	266,804	$	243,235
Total liabilities	$	266,756	$	279,643	$	259,808

(17)      Subsequent Events (unaudited)

On June 15 2006, the Company’s board of directors approved a stock dividend of 6,249 shares for each share of common stock. As a result stockholders received 6,249 shares of stock for each share held as of June 30, 2006. The par value of the Company’s common stock was reduced to $0.001 per share. All share amounts have been restated to reflect the stock split, except the Statement of Stockholders’ Equity, which reflects the stock split by reclassifying from “Additional Paid-In Capital” to “Common Stock” the amount necessary to reflect the stock split and the change in par value.

The Company entered into 10% secured subordinated promissory notes on July 17, 2007 for an aggregate of $2,000,000. The notes are secured by the pledge by the Company’s stockholders of their 60% of the limited partnership interests in Allison’s Gourmet Kitchens, LP. The notes are payable on the earlier of the consummation of subsequent equity financing generating gross proceeds of at least $5 million, or June 30, 2007. As additional consideration for their purchase of notes, each purchaser will receive that number of equity securities to be issued in any initial public offering consummated before June 30, 2007, having a value, at the initial public offering price, of 50% of the notes purchased by that investor. Proceeds of the note will be used to complete construction of an addition to the existing facility.

The Company agreed to enter into a 10% non-secured promissory note on September 21, 2006 for $1,000,000. The maturity date is the earlier of one year from date of issue, on or about September 25, 2006, or the consummation of any initial public offering consummated before the maturity date.

F-19

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Partners of
Allison’s Gourmet Kitchens, Limited Partnership
Moore, Oklahoma

We have audited the accompanying balance sheets of Allison’s Gourmet Kitchens, Limited Partnership as of December 31, 2004 and 2005, and the related statements of operations, partners’ equity and cash flows period from March 1, 2003 (date of formation) to December 31, 2003, and for the years ended December 31, 2004 and 2005. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Allison’s Gourmet Kitchens, Limited Partnership as of December 31, 2004 and 2005, and the results of its operations and its cash flows for the period from March 1, 2003 to December 31, 2003, and the years ended December 31, 2004 and 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ Cole & Reed, P.C.

Oklahoma City, Oklahoma
April 19, 2006

F-20

ALLISON'S GOURMET KITCHENS, LIMITED PARTNERSHIP
BALANCE SHEETS

	December 31, 2004		December 31, 2005			June 30, 2006
						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	-	$	600,498	$	5,202
Accounts receivable, net of allowance for doubtful accounts of
$ 11,331 at December 31, 2004, $35,462 at December 31, 2005 and
$20,209 at June 30, 2006		1,022,685		652,430		2,014,959
Note receivable		16,048		13,298		13,665
Inventories		572,310		565,873		835,926
Prepaid expenses		-		9,601		45,025
Total current assets		1,611,043		1,841,700		2,914,777
Property and equipment, net		575,694		945,699		2,029,153
Other assets:
Intangible asset		51,119		34,976		34,556
TOTAL		2,237,856		2,822,375		4,978,486
Liabilities and Partners' Equity
Current liabilities:
Disbursements in transit		42,023		-		154,804
Line of credit		-		-		262,397
Accounts payable		496,928		407,630		1,392,194
Accounts payable, related party		144,748		335,666		302,081
Accrued liabilities		154,454		328,153		266,751
Current portion of long-term debt		91,377		91,209		69,444
Current portion of capital lease obligation		61,829		66,719		3,221
Total current liabilities		991,359		1,229,377		2,450,892
Long-term debt, net of current portion		72,997		80,930		875,634
Capital lease obligation, net of current portion		204,184		123,664		5,904
Total long-term liabilities		277,181		204,594		881,538
Partners' Equity:
Limited partners' equity		959,623		1,374,515		1,617,846
General partner's equity		9,693		13,889		28,210
Total partners' equity		969,316		1,388,404		1,646,056
TOTAL	$	2,237,856	$	2,822,375	$	4,978,486
The accompanying notes are an integral part of these financial statements.

F-21

ALLISON'S GOURMET KITCHENS, LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS

								Six Months Ended
		Year Ended December 31,						June 30,
		2003		2004		2005		2005		2006
								(Unaudited)		(Unaudited)
Net sales	$	3,382,269	$	9,173,248	$	13,110,516	$	7,062,460	$	8,627,187
Cost of sales		2,601,996		6,951,176		9,845,433		5,324,407		6,713,974
Gross profit		780,273		2,222,072		3,265,083		1,738,053		1,913,213
Selling, general and administrative expenses		581,161		1,357,793		2,021,227		1,022,144		1,316,656
Management fee - General partner		82,363		249,917		335,083		190,151		169,555
Selling, General and Administrative expenses		663,524		1,607,710		2,356,310		1,212,295		1,486,211
Operating income		116,749		614,362		908,773		525,758		427,002
Interest expense		15,682		31,827		11,236		12,589		40,212
Net earnings	$	101,067	$	582,535	$	897,537	$	513,169	$	386,790
The accompanying notes are an integral part of these financial statements.
F-22

ALLISON'S GOURMET KITCHENS, LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' EQUITY

								Total
		Limited			General			Partners'
		Partners			Partner			Equity
Initial contribution of general partner	$	-		$	2,857		$	2,857
Initial contribution of limited partners		282,857			-			282,857
Net income applicable to the period
from March 1, 2003 to December 31, 2003		100,056			1,011			101,067
Balance at December 31, 2003	$	382,913		$	3,868		$	386,781
Net income applicable to the period
from January 1, 2004 to December 31, 2004		576,710			5,825			582,535
Balance at December 31, 2004	$	959,623		$	9,693		$	969,316
Distributions to general partner		-			(4,779	)		(4,779	)
Distributions to limited partners		(473,670	)		-			(473,670	)
Net income applicable to the period
from January 1, 2005 to December 31, 2005		888,562			8,975			897,537
Balance at December 31, 2005	$	1,374,514		$	13,889		$	1,388,404
Distributions to general partner (Unaudited)		-			(4,877	)		(4,877	)
Distributions to limited partners (Unaudited)		(124,260	)		-			(124,260	)
Net income applicable to the period from
January 1, 2006 to June 30, 2006 (Unaudited)		382,922			3,868			386,790
Balance at June 30, 2006 (Unaudited)	$	1,633,176		$	12,879		$	1,646,056
The accompanying notes are an integral part of these financial statements.
F-23

ALLISON'S GOURMET KITCHENS, LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS

											Six Months Ended
		Year Ended December 31,										June 30,
		2003			2004			2005			2005				2006
											(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net earnings	$	101,067		$	582,535		$	897,537		$	513,169			$	386,790
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization		34,192			76,120			104,019			52,259				60,713
Changes in assets and liabilities:
Accounts and notes receivable		(246,339	)		(792,394	)		373,006			(140,199		)	(1,362,896		)
Inventories		(267,045	)		(305,265	)		6,437			(107,064		)		(139,095	)
Prepaid Expenses		-			-			(9,601	)		-				(35,424	)
Disbursements in transit		-			42,023			(42,023	)		-				154,804
Accounts payable		138,188			358,740			(89,298	)		101,566				796,645
Accounts payable, related party		115,236			29,512			190,918			-				(33,585	)
Accrued liabilities		77,986			76,468			173,699			147,730				(103,417	)
Net cash provided by (used in) operating activities		(46,715	)		67,739			1,604,694			567,461				(275,465	)
Cash flows from investing activities:
Payments received on notes receivable		-			-			-			16,048				-
Cash paid for property and equipment		(378,282	)		(278,129	)		(457,880	)		(140,492		)		(594,635	)
Cash paid for intangible assets		(80,714	)		-			-			-				(7,661	)
Net cash used in investing activities		(458,996	)		(278,129	)		(457,880	)		(124,444		)		(602,296	)
Cash flows from financing activities:
Partner contributions		285,714			-			-			-				-
Partner distributions		-			-			(478,452	)		(269,755		)		(129,138	)
Proceeds from line of credit		173,288			450,750			-			-				220,291
Repayments of line of credit		(173,288	)		(450,750	)		-			-				-
Payments on long-term debt and capital leases		-			(104,603	)		(163,495	)		(22,667		)		(362,522	)
Proceeds of long-term debt		324,331			210,659			95,631			33,682				553,834
Net cash provided by (used in) financing activities		610,045			106,056			(546,316	)		(258,740		)		282,465
Net increase (decrease) in cash and cash equivalents		104,334			(104,334	)		600,498			184,277				(595,296	)
Cash and cash equivalents at beginning of period		-			104,334			-			-				600,498
Cash and cash equivalents at end of period	$	104,334		$	-		$	600,498		$	184,277			$	5,202
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	15,682			30,097		$	24,566		$	12,589			$	22,057
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of Property and Equipment through assumtion of
Long-term debt and other liabilities	$	-		$	-		$	-		$	-			$	541,451
Acquisition of Inventory through assumtion of
debt and other liabilities	$	-		$	-		$	-		$	-			$	130,958
The accompanying notes are an integral part of these financial statements.
F-24

ALLISON’S GOURMET KITCHENS,
LIMITED PARTNERSHIP
Notes to Financial Statements

(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(1) Nature of Operations

Allison’s Gourmet Kitchens, Ltd. (the “Partnership”) is an Oklahoma-based specialty food processor serving customers in a multi-state region. The Partnership operates from a manufacturing facility in Moore, Oklahoma.

(2) Summary of Significant Accounting Policies

(a) Basis of Reporting

This summary of significant accounting policies of the Partnership is presented to assist in understanding the Partnership’s financial statements. The financial statements and notes are representations of the Partnership’s management who is responsible for the integrity and objectivity of the financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

(b) Principles of Consolidation

The consolidated financial statements include the accounts of Wild About Food – Oklahoma, a Texas limited liability company. Wild About Food was created, certain assets purchased and certain liabilities assumed, on May 17, 2006, consisting of total assets of $459,853 and total liabilities of $434,042. In conjunction with the purchase, a payout agreement was entered into based on certain financial performance of the assets. Wild About Food is wholly owned by Allison’s Gourmet Kitchens. The partnership advanced monies for use as operating capital. All intercompany transactions and balances have been eliminated in consolidation.

(c) Disbursements in Transit

Disbursements in transit relate to items in which a check has been issued from the partnership, but the collection of the check has not processed thru the partnership’s financial institution.

(d) Basis of Assets and Liabilities

Assets contributed to the partnership and liabilities assumed by the partnership are recorded at their estimated fair values. These values can differ from the adjusted cost basis used by the individual partner who contributed the asset or for whom a liability was assumed. These differences are not reported as timing differences in the financial statements of the partnership. The adjusted cost basis is used by each partner in determining his personal income tax liability.

F-25

ALLISON’S GOURMET KITCHENS,
LIMITED PARTNERSHIP
Notes to Financial Statements

(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(2) Summary of Significant Accounting Policies- (Continued)

(e) Unaudited Interim Financial Information

The balance sheets and statement of partners’ equity as of and for the six months ended June 30, 2006, and the statements of operations and cash flows for the six months ended June 30, 2005 and 2006, and related information contained in the notes to financial statements are unaudited. These unaudited interim financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States. Management asserts that the preparation of the unaudited interim financial statements utilize the same basis as that of the audited financial statements. Management further asserts that the unaudited interim financial statements fairly represent the Company’s financial position.

(f) Cash and Cash Equivalents

For purposes of the statements of cash flows, the Partnership considers investments with maturities of three months or less at date of purchase to be cash equivalents.

(g) Accounts Receivable and Credit Policies

Trade accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment with 15 to 21 days from the invoice date. Receivables are recorded based on the amounts invoiced to customers. Interest and delinquency fees are not generally assessed and, if they are assessed, are not included in income or trade accounts receivable. Discounts allowed for early payment, if any, are charged against income when the payment is received.

Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices. The carrying amounts of accounts receivable is reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected.

Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance for doubtful accounts based on historical collection trends and an assessment of the creditworthiness of current customers. The adequacy of the valuation allowance is evaluated periodically through an individual assessment of potential losses on customer accounts giving particular emphasis to accounts with invoices unpaid more than 60 days past the due date. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Recoveries on accounts previously written off are credited back to the valuation allowance. Allowances for uncollectible accounts have been recorded in the amount of $35,462 and $11,331 as of December 31, 2005 and 2004, respectively.

F-26

ALLISON’S GOURMET KITCHENS,
LIMITED PARTNERSHIP
Notes to Financial Statements

(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(2) Summary of Significant Accounting Policies- (Continued)

(h) Inventories

Inventories consist principally of food products and are stated at the lower of cost (first-in, first-out) or market.

(i) Property and Equipment

Property and equipment are stated at cost. The Partnership leases facilities from Vaughan Foods Corporation and currently does not hold any real property as an asset. See note 11 for discussion of the lease agreement. Equipment acquired under capital lease is recorded at the present value of future minimum lease payments and amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. Assets are depreciated on the straight-line method. Estimated useful lives are as follows:

Equipment  7 to 10 years 

(j) Income Taxes

A partnership is not a tax-paying entity. Any income or operating loss arising from the activities of the partnership is reported, after appropriate adjustments, on the personal income tax returns of the partners. Adjustments to the income or loss allocated to a particular partner will be required when the tax basis and accounting basis of net contributions (assets contributed, net of liabilities assumed) made by an individual partner are not equal. Because the partnership is not a tax-paying entity, its financial statements are different from those of tax-paying entities. Specifically, on the income statement there is no provision for federal income tax expense that must be paid because income was earned during the year. In addition, the balance sheet does not present a liability for income taxes incurred but not yet paid as of the balance sheet date. Also, the balance sheet does not present any deferred tax assets or liabilities that might arise from different methods used to measure net income for the income statement and taxable income for the individual partners.

(k) Use of Estimates

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

(l) Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are measured at cost which approximates their fair value because of the short maturity of these instruments. The carrying amount of the Partnership’s borrowings under the line of credit and long-term debt approximates their fair value because the interest rate on the instruments fluctuate with market interest rates or represents borrowing rates available with similar terms.

F-27

ALLISON’S GOURMET KITCHENS,
LIMITED PARTNERSHIP
Notes to Financial Statements

(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(2) Summary of Significant Accounting Policies- (Continued).

(m) Revenue Recognition

The Partnership recognizes revenue, net of related sales discounts and allowances, when products are delivered to the customers. Revenues also include those amounts related to shipping and handling. Shipping and handling expenses are included in cost of goods sold. Consideration from a vendor to a retailer is presumed to be a reduction to the selling price of the vendor’s products and, therefore, should be characterized as a reduction of sales when recognized in the vendor’s income statement. As a result, certain promotional expenses are recorded as a reduction of net sales.

(n) Recently Issued Accounting Pronouncements

In May 2003, the FASB issued SFAS 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity.” SFAS 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The Partnership has determined that SFAS 150 will not have a material impact on its financial position or results of operations.

In November 2004, the FASB issued SFAS 151, Inventory Costs – An Amendment of Accounting Research Bulletin No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in ARB 43, Chapter 4 “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005, and was required to be adopted by the Partnership effective January 1, 2006. The Partnership has determined that the adoption of SFAS 151 will not have a material impact on its results of operations and financial condition.

In December 2004, the FASB issued SFAS 123R (revised 2004), Share-Based Payment, which replaces SFAS 123R and supercedes APB Opinion 25. The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The statement eliminates the alternative method of accounting for employee share-based payments previously available under APB Opinion 25. The provisions of the statement will become effective for the Partnership in the fiscal year beginning January 1, 2006 for all equity awards granted after the effective date. The Partnership has determined that the adoption of SFAS 123R will not have a material effect on results of operations because there are currently no share-based payments or stock option plans.

F-28

ALLISON’S GOURMET KITCHENS,
LIMITED PARTNERSHIP
Notes to Financial Statements

(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

2) Summary of Significant Accounting Policies- (Continued).

In December 2004, the FASB issued SFAS 153 “Exchanges of Nonmonetary Assets, an amendment of APB Opinion 29” effective for nonmonetary asset exchanges occurring in the fiscal year beginning January 1, 2006. SFAS 153 requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. SFAS 153 will not have a material effect on the Partnership’s financial position or results of operations.

In May of 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections - a replacement of APB Opinion 20 and SFAS 3. SFAS 154 applies to all voluntary changes in accounting principle and requires retrospective application to prior periods' financial statements in accounting principle unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Adoption of SFAS 154 is required for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. The Partnership adopted this new standard effective January 1, 2006. The adoption of this standard is not expected to have a material effect on the Partnership's financial statements.

(3) Inventories

A summary of inventories follows:

		December 31,				June 30,
		2004		2005		2006
						(unaudited)
Raw materials and packaging	$	514,573	$	487,413	$	667,165
Finished goods		57,737		78,460		168,761
Total Inventory	$	572,310	$	565,873	$	835,926

F-29

ALLISON’S GOURMET KITCHENS,
LIMITED PARTNERSHIP
Notes to Financial Statements

(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(4 )  Property and Equipment
Property and equipment, at cost, consists of the following:
		December 31,				June 30,
	2004		2005			2006
						(Unaudited)
Machinery and equipment	$	607,021	$	791,992	$	1,339,137
Construction in progress		49,390		322,300		911,240
		656,411		1,114,292		2,250,377
Less accumulated depreciation		80,717		168,593		221,224
Net Property, Plant and Equipment	$	575,694	$	945,699	$	2,029,153

(5) Line of Credit

The Partnership has a $1,000,000 secured bank line of credit, initiated on March 3, 2006, at an interest rate of Wall Street Journal prime plus 0.50%, with an initial rate of 8.00% . Interest is payable on a monthly basis. The line of credit was secured by all of the Partnership assets, including accounts receivable, inventory and equipment and personal guaranties of all of the partners. At June 30, 2006, short-term borrowings under this line of credit were $220,291. The bank line of credit agreement was subject to certain covenants for which the Partnership was in compliance with or has obtained a waiver as of June 30, 2006. At December 31, 2004 and 2005, short-term borrowings on previous lines of credit were $0.

Wild About Food – Oklahoma has a $600,000 secured bank line of credit, initiated on June 7, 2006 at an interest rate of Wall Street Journal prime plus 1.00% . At June 30, 2006, short-term borrowings under this line of credit were $42,106. The company was in compliance with all covenants.

In addition to the line of credit, the Partnership secured a loan for equipment purchases in the amount of $2,400,000 with the same interest rate. The maturity date of this loan is March 3, 2011. The proceeds of the equipment loan are to pay off existing debt related to previous equipment purchases and to purchase new equipment, of which some down payments have been made as of June 30, 2006.

F-30

ALLISON’S GOURMET KITCHENS,
LIMITED PARTNERSHIP
Notes to Financial Statements

(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(6) Long-Term Debt and Capital Lease Obligation

Long-term debt consists of the following:

	December 31,				June 30,
	2004			2005		2006
						(Unaudited)
Processing line and equipment loan at fixed
rate of 6.75%, secured by certain manufacturing
equipment, monthly principal and interest
payments of $8,342, due and payable on
May 10, 2008.	$	164,374	$	172,139	$	945,078
Less current portion		91,377		91,209		69,444
Net Long-term debt	$	72,997	$	80,930	$	875,634
Capital lease obligations consist of the following:
	December 31,				June 30,
	2004		2005		2006
Various equipment leases consolidated					(unaudited)
under one master lease, secured by related
equipment; the monthly payment is $6,117,
final payment due December 1, 2008.	$	266,013	$	190,383	$	9,125
Less current portion		61,829		66,719		3,221
Net Long-term Capital Lease Obligations	$	204,184	$	123,664	$	5,904

Future principal payments, for long-term debt and capital lease obligations, at December 31, 2005 are as follows:

Year Ending			Capital Lease
December 31,	Long-Term Debt		Obligation		Total
2006	$	91,209	$	66,719	$	157,928
2007	80,930		69,559		150,490
2008	-		54,105		54,105
2009	-		-		-
2010	-		-		-
Principal outstanding at
December 31, 2005	$	172,139	$	190,383	$	362,523

F-31

ALLISON’S GOURMET KITCHENS,
LIMITED PARTNERSHIP
Notes to Financial Statements

(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(7) Accrued Liabilities
A summary of accrued liabilities follows:
			December 31,				June 30,
			2004		2005		2006
							(Unaudited)
	Accrued compensation	$	28,240	$	160,257	$	141,158
	Accrued rebates		96,333		145,427		77,414
	Accrued interest expense		1,730		673		403
	Accrued payroll taxes		28,151		21,796		40,349
	Other Accruals		—		—		7,427
	Total Accrued Liabilities	$	154,454	$	328,153	$	266,751
(8 )  Intangible Assets

The Partnership holds an intangible asset, a client list acquired from Vaughan Foods, Inc., related to the initial formation of the Partnership in 2003. The Partnership amortizes the asset to expense over a period of five years. Amortization expense was $13,453, $16,143, $16,143, $8,071 and $8,005 for the years 2003, 2004, 2005 and the six month periods ended June 30, 2005 and 2006, respectively.

(9) Employee Benefit Plans

The Partnership adopted a Flexible 401(k) plan covering all employees over the age of 21 with a minimum of 1,000 hours of service. The Partnership makes contributions under the plan at an amount equal to 100% of the employee’s elective deferral rate, up to a maximum of 4% of the employee’s compensation. The Partnership’s contributions to the Flexible 401(k) plan were $283 and $388 for the period March 1, 2003 to December 31, 2003, and the year ended December 31, 2004, respectively. The Partnership has elected to discontinue the plan. No contributions were made during the year ended December 31, 2005.

(10) Partnership Equity

On December 27, 2002, the Company organized as a limited partnership with the State of Oklahoma. An agreement of limited partnership was entered into on March 1, 2003. The term of the Partnership is perpetual from the date of formation unless the Partnership is dissolved or liquidated as provided for in the limited partnership agreement. The partners’ percentage interest in income, gains, losses, deductions, voting rights and distributions are one (1) percent for the general partner and ninety-nine (99) percent for the limited partners.

F-32

ALLISON’S GOURMET KITCHENS,
LIMITED PARTNERSHIP
Notes to Financial Statements

(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

(11) Commitments and Contingencies

The Partnership is subject to legal proceedings and claims which arise in the ordinary course of business. Although occasional adverse decisions or settlements may occur, the Partnership is not aware of any proceeding at June 30, 2006 which would have a material adverse effect on its financial position, results of operations or liquidity.

(12) Leasing Arrangements

The Partnership entered into a one year lease agreement with Vaughan Foods, Inc. for both refrigerated space and non-refrigerated space. The lease agreement provides for nine one-year options to extend the lease terms. The Partnership expended $182,060, $196,567, $295,593, $113,757 and $133,623 under this lease for the years ended December 31, 2003, 2004, 2005 and the six month periods ended June 30, 2005 and 2006 respectively.

(13) Related Party Transactions

During the normal course of business, the Partnership purchases raw materials and sells finished goods to Vaughan Foods, Inc., a company owned by two of the limited partners. The transactions are priced at current market rates. At December 31, 2003, 2004, 2005 and the six month periods ended June 30, 2005 and 2006, the Partnership had trade payables of $0, $29,136, $30,995, $53,579 and $129,509 respectively.

In addition to trade payables, the Partnership had payables due to Vaughan Foods, Inc. for freight services of $0, $0, $225, $0 and $0 at December 31, 2003, 2004, 2005, June 30, 2005 and 2006 respectively. Total freight services for the years ended December 31, 2003, 2004, 2005, and the six month periods ended June 30, 2005 and 2006 were $208,294, $359,852, $576,539, $255,881 and $311,030 respectively.

The Partnership sales to Vaughan Foods, Inc. for the fiscal 2003, 2004, 2005 and the six month periods ended June 30, 2005 and 2006 were $944,258, $761,077, $602,841, $370,986 and $280,414 respectively. The Partnership purchases from Vaughan Foods, Inc. for fiscal 2003, 2004, 2005 and the six month periods ended June 30, 2005 and 2006 were $215,273, $429,997, $726,769, $391,672 and $444,260 respectively.

The Partnership leases their facilities from Vaughan Foods, Inc. on an annual lease arrangement, as discussed in footnote (11). The Partnership shares utilities and other facility expenses with Vaughan Foods, Inc. thru periodic reimbursement. The total utilities that are shared between the two entities resulted in a reimbursement to Vaughan Foods Corporation of $117,718, $116,826, $203,169, $80,300 and $121,506 for fiscal 2003, 2004, 2005, and the six month period ended June 30, 2005 and 2006 respectively. At December 31, 2003, 2004, 2005, and June 30, 2005 and 2006, the Partnership had $79,922, $115,612, $304,671, $100,186 and $302,081 outstanding reimbursements, respectively.

F-33

ALLISON’S GOURMET KITCHENS,
LIMITED PARTNERSHIP
Notes to Financial Statements

(Information as of June 30, 2006 and for the six months ended June 30, 2005 and 2006 is unaudited)

The Partnership utilizes Vaughan Foods administrative, sales and other staff resulting in an agreed upon reimbursement to Vaughan Foods in the amount of $62,000, $131,732, $130,422, $94,270 and $105,270 for fiscal 2003, 2004, 2005, and the six months periods ended June 30, 2005 and 2006 respectively.

(14) Major Customers

The Partnership acquired a new customer in late 2004 which now represents approximately 46% of its total sales. A change in this customer relationship could adversely effect the Partnership’s financial position. As the Partnership continues to increase its sales, this concentration decreases.

(15) Acquisition of Wild About Food

The Partnership acquired the assets and related real estate and assumed certain liabilities of Wild About Food, Inc., a Texas corporation, and formed Wild About Food-Oklahoma, LLC, a Texas limited liability company, on June 1, 2006. Wild About Food produces refrigerated food products for food service and retail customers. The purchase price was comprised of a cash payment of $6,000, the assumption of a note payable in the amount of $154,000, contingent payments equal to 75% of operating income during the three year period following the closing up to a maximum of $240,000, and a further contingent payment equal to 75% of operating income in excess of $250,000. The Partnership also entered into a three-year employment agreement with the previous owner.

F-34

Vaughan Foods, Inc. & Allison's Gourmet Kitchens, LP
PRO FORMA COMBINED BALANCE SHEETS

		December 31, 2005			June 30, 2006
					(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	636,661		$	79,266
Accounts receivable, net		3,817,074			6,660,545
Note receveivable		13,298
Inventories		1,291,451			1,557,585
Prepaid expenses		49,073			165,865
Income tax receivable		28,228			28,228
Deferred tax assets		40,539			28,803
Total current assets		5,876,324			8,520,292
Restricted assets:
Cash		80,471			-
Investments		1,950,580			699,969
Certificate of deposit		256,000			256,000
Total restricted assets		2,287,051			955,969
Property and equipment, net		10,781,961			13,352,580
Other assets:
Assets held for sale		40,000			40,000
Loan origination fees, net		436,465			418,760
Deferred tax assets, noncurrent		-			139,187
Intangible asset		34,976			34,556
TOTAL	$	19,456,777		$	23,461,344
Liabilities and Equity
Current liabilities:
Disbursements in transit	$	-		$	238,663
Line of credit		2,314,294			3,076,691
Accounts payable		3,100,278			6,042,906
Accrued liabilities		1,318,585			1,464,234
Current portion of long-term debt		781,517			741,427
Current portion of capital lease obligation		229,523			165,814
Total current liabilities		7,744,197			11,729,735
Long-term debt, net of current portion		8,809,870			9,353,403
Capital lease obligation, net of current portion		773,001			574,614
Deferred Tax Liability		135,367			-
Total long-term liabilities		9,718,238			9,928,017
Equity:
Common Stock		800			5,000
Paid in Capital		415,193			410,993
Member Capital (Deficit)		(12,839	)		(16,573	)
Retained Earnings		202,784			(241,884	)
Limited partners' equity		1,374,515			1,617,846
General partner's equity		13,889			28,210
Total equity		1,994,342			1,803,592
TOTAL	$	19,456,777		$	23,461,344

F-35

     Vaughan Foods, Inc. & Allison's Gourmet Kitchens, LP
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the twelve month period ended December 31, 2005

		December 31, 2005			June 30, 2006
					(Unaudited)
Net sales	$	55,934,632		$	33,909,484
Cost of sales		45,685,210			28,734,423
Gross Profit		10,249,422			5,175,061
Selling, General and Administrative		8,452,549			4,815,400
Management fee - General partner		335,083			169,555
Selling, General and Administrative Expense		8,787,632			4,984,955
Operating Income		1,461,790			190,106
Interest expense		(1,053,154	)		(528,829	)
Other, net		88,180			28,314
Total Other Income and Expense		(964,974	)		(500,519	)
Earnings (Loss) Before Income Taxes		496,816			(310,409	)
Income Tax (Benefit)		(159,667	)		(248,797	)
Net Earnings	$	656,483		$	(61,612	)

F-36

Until                          , 2006 (the 25th day after the date of this prospectus) all dealers effecting transactions in our units, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.		5,000,000 Units ______________________ PROSPECTUS ______________________ PAULSON INVESTMENT COMPANY, INC. , 2006
_________________
Table of Contents
	Page
Prospectus Summary	4
Risk Factors	12
Special Note Regarding Forward-
Looking Statements	20
Recent Developments	21
Use of Proceeds	22
Dividend Policy	23
Capitalization	24
Dilution	24
Selected Consolidated Financial Data	26
Management’s Discussion and
Analysis of Financial Condition and
Results of Operations	28
Business	39
Management	47
Certain Relationships and Related
Transactions	52
Principal Stockholders	53
Description of Securities	55
Description of Certain Indebtedness	60
Shares Eligible for Future Sale	62
Underwriting	64
Legal Matters	67
Experts	67
Where You Can Find More
Information	68
Index to Financial Statements	69

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

     The following are the expenses of the issuance and distribution of the securities being registered, other than underwriting commissions and expenses, all of which will be paid by Vaughan. Other than the SEC registration fee and the NASD filing fees all of such expenses are estimated.

SEC Registration fee	$	16,610
NASD fee	$	16,024
Nasdaq Capital Market listing fee	$	50,000	*
Boston Stock Exchange listing fee	$	15,000
Printing expenses	$	100,000	*
Accounting fees and expenses	$	150,000	*
Legal fees and expenses	$	250,000	*
Blue sky filing fees and related attorney fees and expenses	$	58,000	*
Transfer agent and registrar fees and expenses	$	3,500	*
"Road Show" and miscellaneous other expenses	$	9,318	*
Total	$	668,000	*

__________________________
*Estimated

Item 14. Indemnification of Directors and Officers

     Section 18-1031 of the Oklahoma General Corporation Act grants us the power to indemnify our directors and officers against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with specified actions, suits or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation - a “derivative action”), if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses (including attorneys’ fees) incurred in connection with the defense or settlement of such actions, and the statute requires court approval before there can be any indemnification in which the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation’s bylaws, disinterested director vote, shareholder vote, agreement, or otherwise.

     Our Articles of Incorporation provides that we indemnify each of our directors and officers to the fullest extent by the Oklahoma General Corporation Act, against expense, liability and loss (including attorney’s fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith.

     Our Articles of Incorporation also provides that a director will not be personally liable to us or to our stockholders for monetary damages for breach of the fiduciary duty of care as a director. This provision does not eliminate or limit the liability of a director:

II-1

• for breach of his or her duty of loyalty to us or to our stockholders;
  
  
• for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or
  
  
• for any improper benefit

     Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to our Articles of Incorporation, Bylaws and the Oklahoma General Corporation Act, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and is, therefore, unenforceable.

     The Underwriting Agreement provides for reciprocal indemnification between us and our controlling persons, on the one hand, and the underwriters and their respective controlling persons, on the other hand, against certain liabilities in connection with this offering, including liabilities under the Securities Act.

15. Recent Sales of Unregistered Securities.

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

• 10% Secured Notes Due June 30, 2007.
  
  
• In September 2006 we sold $2.0 million aggregate principal amount of our 10% secured promissory notes due June 30, 2007 and the right to receive $1.0 million of units sold in this offering based on the initial public offering price per unit. Paulson Investment Company acted as placement agent and received a fee of $160,000 and our commitment to reimburse Paulson Investment Company for its expenses up to a maximum of $10,000.
  
  
• In August 2006 we issued a $1 million principal amount unsecured promissory note, bearing interest at 10% per annum to Paulson Investment Company, the representative of the several underwriters of this offering. The original principal amount and all accrued but unpaid interest thereon is due and payable on the first anniversary of the date of issuance of the note but is repayable out of the proceeds of this offering. No commission or placement agent fee was payable in connection with the isuance of this note.

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

Item 16. Exhibits

Exhibits	Description
No.
1.1	Form of Underwriting Agreement
3.1	Certificate of Incorporation, as amended*
3.2	Bylaws*
4.1	Specimen stock certificate*
4.2	Form of warrant agreement, including form of Class A and Class B
	warrants*
4.3	Specimen unit certificate*
4.4	Form of representative’s warrant*
4.5	Mortgage and loan agreement dated December 31, 2004*
4.6	Indenture of trust dated December 31, 2004*
4.7	Real estate loan due August 1, 2028*
4.8	Agreement of the registrant to furnish agreements defining rights of
	holders of long term debt*
5.1	Form of opinion of Morse, Zelnick, Rose & Lander, LLP*
10.1	Agreement between Vaughan Foods, Inc., Mark E. Vaughan and Vernon
	J. Brandt, Jr. Dated June 12, 2006*
10.2	Agreement between Vaughan Foods, Inc., Braxton Management, Inc.,
	Herb Grimes and Stan Gustas, dated May 19, 2006*
10.3	Vaughan Foods, Inc. equity incentive plan*
10.4	Form of Securities Purchase and Subscription Agreement dated as of July
	17, 2006*
10.5	Form of Registration Rights Agreement dated as of July 17, 2006*
10.6	Loan and Security agreement dated as of June 29, 2005*
10.7	Promissory Note extension agreement dated as of June 28, 2006 and
	Promissory Note dated June 29, 2005*
10.8	Form of Promissory Note dated September 25, 2006*
21.1	Subsidiary schedule*
23.1	Consent of Cole & Reed, PC*
23.2	Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit
	5.1)*
24.1	Power of attorney (included in signature page)*
* Filed herewith

II-2

Item 17. Undertakings

     A. The undersigned Registrant hereby undertakes:

     (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to:

     (a) include any prospectus required by Section 10(a)(3) of the Securities Act;

     (b) reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20% change in maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

     (c) include any additional or changed material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

     (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

     (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

     (4) For the purpose of determining liability under the Securities Act to any purchaser:

(i) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) under the Securities Act shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement: and

(ii) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) under the Securities Act as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to rule 415(a)(1)(i), (vii), or (x) under the Securities Act for the purpose of providing the information required by section 10(a) of the Securities Act shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness o the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed

II-3

to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.

     (5) For the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of securities:

     The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

      (a) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 of this chapter;

      (b) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

      (c) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

      (d) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

     (6) To provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

     (7) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

      (8) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-4

SIGNATURES

     Pursuant to the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Moore, State of Oklahoma on October 5, 2006.

VAUGHAN FOODS, INC. 

by: /s/ Mark E. Vaughan              

Mark E. Vaughan 

Chief Executive Officer 

     ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen A. Zelnick and Mark E. Vaughan and each of them his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all pre- or post-effective amendments to this Registration Statement, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, as amended, the following persons have signed this Registration Statement in the capacities indicated on the date set forth below.

     In accordance with the requirements of the Securities Act of 1933, as amended, the following persons have signed this Registration Statement in the capacities indicated on the date set forth above.

Signature	Title	Date
/s/ Mark E. Vaughan	President, Chief Executive Officer and
Mark E. Vaughan	Director (Principal Executive Officer	October 5, 2006
/s/ Stan L. Gustas	Chief Financial Officer
Stan Gustas	(Principal Financial and Accounting Officer
		October 5, 2006
/s/ Vernon J. Brandt
Vernon J. Brandt	Director	October 5, 2006

II-5

EX-1.1

                               Vaughan Foods, Inc.



                             UNDERWRITING AGREEMENT

                              dated _________, 2006











                        PAULSON INVESTMENT COMPANY, INC.







                             UNDERWRITING AGREEMENT



_________, 2006


Paulson Investment Company, Inc.
811 SW Naito Parkway
Portland, Oregon 97204
Ladies and Gentlemen:

         INTRODUCTORY. Vaughan Foods, Inc., an Oklahoma corporation (the
"COMPANY") proposes to issue and sell to the several underwriters named in
Schedule A (the "UNDERWRITERS") an aggregate of 5,000,000 Units, each Unit
consisting of (i) one share of the Company's common stock ("COMMON STOCK"), (ii)
one redeemable Class A warrant to purchase one share of Common Stock (each a
"CLASS A WARRANT" and, collectively, the "CLASS A WARRANTS"), and (iii) one
redeemable Class B warrant to purchase one share of Common Stock (each a "CLASS
B WARRANT", collectively, the "CLASS B WARRANTS" and, together with the Class A
Warrants, the "WARRANTS"). The Warrants are to be issued under the terms of a
Warrant Agreement (the "WARRANT AGREEMENT") by and between the Company and
Computershare Trust Company, as warrant agent (the "WARRANT AGENT"),
substantially in the form most recently filed as an exhibit to the Registration
Statement (hereinafter defined). The 5,000,000 Units to be sold by the Company
are collectively called the "FIRM UNITS". In addition, the Company has granted
to the Underwriters an option to purchase up to an additional 750,000 Units (the
"OPTIONAL UNITS"), as provided in Section 2. The Firm Units and, if and to the
extent such option is exercised, the Optional Units are collectively called the
"Units". Paulson Investment Company, Inc. has agreed to act as representative of
the several Underwriters (in such capacity, the "REPRESENTATIVE") in connection
with the offering and sale of the Units.

         The Company confirms its agreement with the Underwriters as follows:

         SECTION 1.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

         The Company represents, warrants and covenants to each Underwriter as
follows:

         (a) FILING OF THE REGISTRATION STATEMENT. The Company has prepared and
filed with the Securities and Exchange Commission (the "COMMISSION") a
registration statement on Form S-1 (File No. 333-_______), which contains a form
of prospectus to be used in connection with the public offering and sale of the
Units. Such registration statement, as amended, including the financial
statements, exhibits and schedules thereto, and the documents incorporated by
reference in the prospectus contained in the registration statement at the time
such registration statement became effective, in the form in which it was
declared effective by the Commission under the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder (collectively, the
"SECURITIES ACT"), and including any required information deemed to



be a part thereof at the time of effectiveness pursuant to Rule 430A, Rule 430B
or Rule 430C under the Securities Act, or pursuant to the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder (collectively,
the "EXCHANGE ACT"), is called the "REGISTRATION STATEMENT." Any registration
statement filed by the Company pursuant to Rule 462(b) under the Securities Act
is called the "RULE 462(B) REGISTRATION STATEMENT," and from and after the date
and time of filing of the Rule 462(b) Registration Statement the term
"REGISTRATION Statement" shall include the Rule 462(b) Registration Statement.
Such prospectus, in the form first filed pursuant to Rule 424(b) under the
Securities Act after the date and time that this Agreement is executed and
delivered by the parties hereto (the "EXECUTION TIME"), or, if no filing
pursuant to Rule 424(b) under the Securities Act is required, the form of final
prospectus relating to the Units included in the Registration Statement at the
effective date of the Registration Statement, is called the "PROSPECTUS." All
references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, the Company's preliminary prospectus included in the
Registration Statement (each a "PRELIMINARY PROSPECTUS"), the Prospectus, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR"). Any reference herein to any preliminary
prospectus or the Prospectus or any supplement or amendment to either thereof
shall be deemed to refer to and include any documents incorporated by reference
therein as of the date of such reference.

         (b) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration
Statement has been declared effective by the Commission under the Securities
Act. The Company has complied to the Commission's satisfaction with all requests
of the Commission for additional or supplemental information. No stop order
preventing or suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of the
Company, are contemplated or threatened by the Commission.

         Each preliminary prospectus and the Prospectus when filed complied or
will comply in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical in content to the copy
thereof delivered to the Underwriters for use in connection with the offer and
sale of the Units other than with respect to any artwork and graphics that were
not filed. Each of the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendment thereto, at the time it became
effective and at all subsequent times until the expiration of the prospectus
delivery period required under Section 4(3) of the Securities Act, complied and
will comply in all material respects with the Securities Act and did not and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading. The Prospectus (including any Prospectus wrapper), as
amended or supplemented, as of its date and at all subsequent times until the
Underwriters have completed their distribution of the offering of the Units, did
not and will not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in


                                       2


reliance upon and in conformity with information relating to any Underwriter
furnished to the Company in writing by the Representative expressly for use
therein, it being understood and agreed that the only such information furnished
by the Representative consists of the information described as such in Section 8
hereof. There are no contracts or other documents required to be described in
the Prospectus or to be filed as exhibits to the Registration Statement that
have not been described or filed as required.

         (c) DISCLOSURE PACKAGE. The term "DISCLOSURE PACKAGE" shall mean (i)
the preliminary prospectus, as amended or supplemented, (ii) the issuer free
writing prospectuses as defined in Rule 433 of the Securities Act (each, an
"ISSUER FREE WRITING PROSPECTUS"), if any, identified in Schedule B hereto,
(iii) the pricing terms set forth in Schedule C to this Agreement, and (iv) any
other free writing prospectus that the parties hereto shall hereafter expressly
agree in writing to treat as part of the Disclosure Package. As of 9:00 a.m.
(Eastern time) on the date of this Agreement (the "INITIAL SALE TIME"), the
Disclosure Package did not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The preceding sentence does not apply to statements in or omissions
from the Disclosure Package based upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representative specifically for use therein, it being understood and agreed that
the only such information furnished by or on behalf of any Underwriter consists
of the information described as such in Section 8 hereof.

         (d) COMPANY NOT INELIGIBLE ISSUER. (i) At the time of filing the
Registration Statement and (ii) as of the date of the execution and delivery of
this Agreement (with such date being used as the determination date for purposes
of this clause (ii)), the Company was not and is not an Ineligible Issuer (as
defined in Rule 405 of the Securities Act), without taking account of any
determination by the Commission pursuant to Rule 405 of the Securities Act that
it is not necessary that the Company be considered an Ineligible Issuer

         (e) ISSUER FREE WRITING PROSPECTUSES. No Issuer Free Writing Prospectus
includes any information that conflicts with the information contained in the
Registration Statement, including any document incorporated by reference therein
that has not been superseded or modified. The foregoing sentence does not apply
to statements in or omissions from any Issuer Free Writing Prospectus based upon
and in conformity with written information furnished to the Company by any
Underwriter through the Representative specifically for use therein, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the information described as such in Section 8 hereof.

         (f) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has
delivered to the Representative five complete manually signed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representative have
reasonably requested for each of the Underwriters.

         (h) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company has
not distributed and will not distribute, prior to the later of each Subsequent
Closing Date (as defined


                                       3


below) and the completion of the Underwriters' distribution of the Units, any
offering material in connection with the offering and sale of the Units other
than a preliminary prospectus, the Prospectus, any Issuer Free Writing
Prospectus reviewed and consented to by the Representative, and the Registration
Statement.

         (i) THE UNDERWRITING AGREEMENT. This Agreement has been duly authorized
(to the extent applicable), executed and delivered by, and is a valid and
binding agreement of, the Company, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.

         (j) AUTHORIZATION OF THE COMMON STOCK; VALIDITY OF WARRANTS AND WARRANT
AGREEMENT.

          (i) The Common Stock included in the Units to be purchased by the
         Underwriters from the Company (including units purchasable on exercise
         of the Underwriters' overallotment option described in Section 2(c) and
         the Representative's Warrants described in Section 2(h)) has been duly
         authorized and reserved for issuance and sale pursuant to this
         Agreement and, in the case of Common Stock issuable on exercise of the
         Representative's Warrants, the terms thereof and, when so issued and
         delivered by the Company, will be validly issued, fully paid and
         nonassessable.

         (ii) The Warrants included in the Units to be purchased by the
         Underwriters from the Company have been duly and validly authorized by
         all required corporate actions and will, when issued and delivered by
         the Company pursuant to this Agreement, be validly executed and
         delivered by, and will be valid and binding agreements of, the Company,
         enforceable in accordance with their terms, except as the enforcement
         thereof may be limited by bankruptcy, insolvency, reorganization,
         moratorium or other similar laws relating to or affecting the rights
         and remedies of creditors or by general equitable principles.

         (iii) The Representative's Warrants have been duly and validly
         authorized by all required corporate actions and will, when issued and
         delivered by the Company pursuant to this Agreement, be validly
         executed and delivered by, and will be valid and binding agreements of,
         the Company, enforceable in accordance with their terms, except as the
         enforcement thereof may be limited by bankruptcy, insolvency,
         reorganization, moratorium or other similar laws relating to or
         affecting the rights and remedies of creditors or by general equitable
         principles.

         (iv) The Common Stock issuable on exercise of the Warrants has been
         duly authorized and reserved for issuance and sale pursuant to their
         terms and, when issued and delivered by the Company pursuant to such
         warrants, will be validly issued, fully paid and nonassessable.

         (v) The Warrant Agreement has been duly and validly authorized by all
         required corporate actions of the Company and will, when executed and
         delivered (and assuming


                                       4


         due and valid execution by the Warrant Agent) constitute a valid and
         binding agreement of the Company, enforceable against the Company in
         accordance with its terms, except as the enforcement thereof may be
         limited by bankruptcy, insolvency, reorganization, moratorium or other
         similar laws relating to or affecting the rights and remedies of
         creditors or by general equitable principles.

         (vi) Each of the Warrants and the Representative's Warrants will, when
         issued, possess rights, privileges, and characteristics as represented
         in the most recent form of Warrant Agreement or Representative's
         Warrants, as the case may be, filed as an exhibit to the Registration
         Statement.

         (k) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. Except as
fairly and accurately described in the Registration Statement, there are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.

         (l) NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed in the
Disclosure Package, subsequent to the respective dates as of which information
is given in the Disclosure Package: (i) there has been no material adverse
change, or any development that could reasonably be expected to result in a
material adverse change, in the condition, financial or otherwise, or in the
earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company (any such change
is called a "MATERIAL ADVERSE CHANGE"); (ii) the Company has not incurred any
material liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; and (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company in
respect of its capital stock.

         (m) INDEPENDENT ACCOUNTANTS. Cole & Reed, P.C., who have expressed
their opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto) filed with the Commission as
a part of the Registration Statement and included in the Disclosure Package and
the Prospectus, is an independent registered public accounting firm as required
by the Securities Act and the Exchange Act.

         (n) PREPARATION OF THE FINANCIAL STATEMENTS. Each of the historical and
pro-forma financial statements filed with the Commission as a part of or
incorporated by reference in the Registration Statement, and included or
incorporated by reference in the Disclosure Package and the Prospectus, presents
fairly the information provided as of and at the dates and for the periods
indicated. Such financial statements comply as to form with the applicable
accounting requirements of the Securities Act and have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included or incorporated by reference in the Registration
Statement. Each item of historical or pro-form financial data relating to the
operations, assets or liabilities of the Company and its predecessor set forth
in summary form in each of the preliminary


                                       5


prospectus and the Prospectus fairly presents such information on a basis
consistent with that of the complete financial statements contained in the
Registration Statement.


         (o) INCORPORATION AND GOOD STANDING; SUBSIDIARIES. The Company has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Disclosure Package and the Prospectus and to enter
into and perform its obligations under this Agreement. The Company is duly
qualified as a foreign corporation to transact business and is in good standing
in each jurisdiction in which such qualification is required except for such
jurisdictions where the failure to so qualify or to be in good standing would
not, individually or in the aggregate, result in a Material Adverse Change. The
Company does not own or control, directly or indirectly, any corporation,
association or other entity.

         (p) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized,
issued and outstanding capital stock of the Company is as set forth in the each
of the Disclosure Package and the Prospectus under the caption "Capitalization"
(other than for subsequent issuances, if any, pursuant to employee benefit plans
described in each of the Disclosure Package and the Prospectus or upon exercise
of outstanding options or warrants described in the Disclosure Package and
Prospectus, as the case may be). The Common Stock conforms, and, when issued and
delivered as provided in this Agreement, the Class A Warrants, the Class B
Warrants and the Representative's Warrants will comply in all material respects
to the description thereof contained in the each of the Disclosure Package and
Prospectus. All of the issued and outstanding shares of Common Stock have been
duly authorized and validly issued, are fully paid and nonassessable and have
been issued in compliance with federal and state securities laws. None of the
outstanding shares of Common Stock were issued in violation of any preemptive
rights, rights of first refusal or other similar rights to subscribe for or
purchase securities of the Company. There are no authorized or outstanding
options, warrants, preemptive rights, rights of first refusal or other rights to
purchase, or equity or debt securities convertible into or exchangeable or
exercisable for, any capital stock of the Company other than those accurately
described in the Disclosure Package and the Prospectus. The description of the
Company's stock option, stock bonus and other stock plans or arrangements, and
the options or other rights granted thereunder, set forth or incorporated by
reference in each of the Disclosure Package and the Prospectus accurately and
fairly presents the information required to be shown with respect to such plans,
arrangements, options and rights.

         (q) QUOTATION. The Units, the Common Stock, the Class A Warrants and
the Class B Warrants have been approved for quotation on the Nasdaq Capital
Market under the symbols "_____," "_____," "_____" and "_____," respectively,
and on the Boston Stock Exchange under the symbols "_____," "_____," "_____" and
"_____," respectively.

         (r) NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER
AUTHORIZATIONS OR APPROVALS REQUIRED. The Company is not in violation of its
charter or by-laws or in default (or, with the giving of notice or lapse of
time, would be in default) ("Default") under any indenture, mortgage, loan or
credit agreement, note, contract, franchise, lease or other instrument to which
it is a party or by which it or it may be bound (including, without limitation,
such agreements and

                                       6


contracts filed as exhibits to the Registration Statement or to which any of the
property or assets of the Company is subject (each, an "Existing Instrument")),
except for such Defaults as would not, individually or in the aggregate, result
in a Material Adverse Change. The Company's execution, delivery and performance
of this Agreement and consummation of the transactions contemplated hereby and
by the Disclosure Package and the Prospectus (i) have been duly authorized by
all necessary corporate action and will not result in any violation of the
provisions of the charter or by-laws of the Company, (ii) will not conflict with
or constitute a breach of, or Default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company pursuant to, or require the consent of any other party to, any Existing
Instrument, except for such conflicts, breaches, Defaults, liens, charges or
encumbrances as would not, individually or in the aggregate, result in a
Material Adverse Change and (iii) will not result in any violation of any law,
administrative regulation or administrative or court decree applicable to the
Company. No consent, approval, authorization or other order of, or registration
or filing with, any court or other governmental or regulatory authority or
agency, is required for the Company's execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby and by
the Disclosure Package and the Prospectus, except the registration or
qualification of the Units under the Securities Act and applicable state
securities or blue sky laws and from the National Association of Securities
Dealers, Inc. (the "NASD").

         (s) NO MATERIAL ACTIONS OR PROCEEDINGS. Except as otherwise disclosed
in the Disclosure Package and the Prospectus, there are no legal or governmental
actions, suits or proceedings pending or, to the best of the Company's
knowledge, threatened (i) against or affecting the Company, (ii) which have as
the subject thereof any officer or director (in such capacities) of, or property
owned or leased by, the Company or (iii) relating to environmental or
discrimination matters, where in any such case (A) there is a reasonable
possibility that such action, suit or proceeding might be determined adversely
to the Company and (B) any such action, suit or proceeding, if so determined
adversely, would reasonably be expected to result in a Material Adverse Change
or adversely affect the consummation of the transactions contemplated by this
Agreement. No material labor dispute with the employees of the Company exists
or, to the best of the Company's knowledge, is threatened or imminent except for
such disputes as would not, individually or in the aggregate, result in a
Material Adverse Change.

         (t) INTELLECTUAL PROPERTY RIGHTS. The Company owns or possesses
sufficient trademarks, trade names, patent rights, copyrights, domain names,
licenses, approvals, trade secrets and other similar rights (collectively,
"INTELLECTUAL PROPERTY RIGHTS") reasonably necessary to conduct its businesses
as now conducted; and the expected expiration of any of such Intellectual
Property Rights would not result in a Material Adverse Change. The Company has
not received any notice of infringement or conflict with asserted Intellectual
Property Rights of others, which infringement or conflict, if the subject of an
unfavorable decision, would result in a Material Adverse Change. The Company is
not a party to or bound by any options, licenses or agreements with respect to
the Intellectual Property Rights of any other person or entity that are required
to be set forth in the Disclosure Package and the Prospectus and are not
described in all material respects. None of the technology employed by the
Company has been obtained or is being used by the Company in violation of any
contractual obligation binding on the Company or, to the Company's knowledge,
any of its officers, directors or employees or otherwise in violation of the
rights of any persons.

                                       7





         (u) ALL NECESSARY PERMITS, ETC. Except as otherwise disclosed in the
Disclosure Package and the Prospectus or except as would not result in a
Material Adverse Change, the Company possesses such valid and current
certificates, authorizations or permits issued by the appropriate state, federal
or foreign regulatory agencies or bodies necessary to conduct its businesses,
and the Company has not received any notice of proceedings relating to the
revocation or modification of, or non-compliance with, any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could result in a Material Adverse
Change.

         (v) TITLE TO PROPERTIES. The Company has good and marketable title to
all the properties and assets reflected as owned in the financial statements
referred to in Section 1(n) above (or elsewhere in the Disclosure Package and
the Prospectus), in each case free and clear of any security interests,
mortgages, liens, encumbrances, equities, claims and other defects, except such
as do not materially and adversely affect the value of such property and do not
materially interfere with the use made or proposed to be made of such property
by the Company. The real property, improvements, equipment and personal property
held under lease by the Company are held under valid and enforceable leases,
with such exceptions as are not material and do not materially interfere with
the use made or proposed to be made of such real property, improvements,
equipment or personal property by the Company.

         (w) TAX LAW COMPLIANCE. The Company has filed all necessary federal,
state and foreign income and franchise tax returns and has paid all taxes
required to be paid by it and, if due and payable, any related or similar
assessment, fine or penalty levied against it. The Company has made adequate
charges, accruals and reserves in the applicable financial statements referred
to in Section 1(n) above in respect of all federal, state and foreign income and
franchise taxes for all periods as to which the tax liability of the Company has
not been finally determined.

         (x) COMPANY NOT AN "INVESTMENT COMPANY." The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "INVESTMENT COMPANY ACT"). The Company is not, and after receipt of
payment for the Units and the application of the proceeds thereof as
contemplated under the caption "Use of Proceeds" in each of the preliminary
prospectus and the Prospectus will not be, an "investment company" within the
meaning of the Investment Company Act and will conduct its business in a manner
so that it will not become subject to the Investment Company Act.

         (y) INSURANCE. The Company is insured by recognized, financially sound
and reputable institutions with policies in such amounts and with such
deductibles and covering such risks as the Company reasonably believes are
adequate and customary for its business including, but not limited to, policies
covering real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and earthquakes. The Company
reasonably believes that it will be able (i) to renew its existing insurance
coverage as and when such policies expire or (ii) to obtain comparable coverage
from similar institutions as may be necessary or appropriate to conduct its
business as now conducted and at a cost that would not result in a Material
Adverse Change. The Company has not been denied any insurance coverage which it
has sought or for which it has applied.

                                       8



         (z) NO PRICE STABILIZATION OR MANIPULATION. The Company has not taken
and will not take, directly or indirectly, any action designed to or that might
be reasonably expected to cause or result in stabilization or manipulation of
the price of any securities of the Company to facilitate the sale or resale of
the Units or the underlying securities. The Company acknowledges that the
Underwriters may engage in passive market making transactions in the Units on
the Nasdaq Capital Market in accordance with Regulation M under the Exchange
Act.

         (aa) RELATED PARTY TRANSACTIONS. There are no business relationships or
related-party transactions involving the Company or any other person required to
be described in the preliminary prospectus or the Prospectus that have not been
described as required.

         (bb) DISCLOSURE CONTROLS AND PROCEDURES. The Company has established
and maintains disclosure controls and procedures (as such term is defined in
Rule 13a-15(e) under the Exchange Act), which (i) are designed to ensure that
material information relating to the Company is made known to the Company's
principal executive officer and its principal financial officer by others within
those entities, particularly during the periods in which the periodic reports
required under the Exchange Act are being prepared, (ii) will be evaluated for
effectiveness as of the end of each fiscal quarter and fiscal year of the
Company and (iii) are effective in all material respects to perform the
functions for which they were established. The Company is not aware of (a) any
significant deficiency in the design or operation of internal controls which
could adversely affect the Company's ability to record, process, summarize and
report financial data or any material weaknesses in internal controls or (b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the Company's internal controls.

         (cc) COMPANY'S ACCOUNTING SYSTEM. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

         (dd) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the Company
nor, to the best of the Company's knowledge, any employee or agent of the
Company has made any contribution or other payment to any official of, or
candidate for, any federal, state or foreign office in violation of any law or
of the character required to be disclosed in the Disclosure Package and the
Prospectus.

         (ee) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i) the
Company is not in violation of any federal, state, local or foreign law or
regulation relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including without
limitation, laws and regulations relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum and


                                       9


petroleum products (collectively, "MATERIALS OF ENVIRONMENTAL CONCERN"), or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environment Concern
(collectively, "ENVIRONMENTAL LAWS"), which violation includes, but is not
limited to, noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company under applicable
Environmental Laws, or noncompliance with the terms and conditions thereof, nor
has the Company received any written communication, whether from a governmental
authority, citizens group, employee or otherwise, that alleges that the Company
is in violation of any Environmental Law; (ii) there is no claim, action or
cause of action filed with a court or governmental authority, no investigation
with respect to which the Company has received written notice, and no written
notice by any person or entity alleging potential liability for investigatory
costs, cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising out
of, based on or resulting from the presence, or release into the environment, of
any Material of Environmental Concern at any location owned, leased or operated
by the Company, now or in the past (collectively, "ENVIRONMENTAL CLAIMS"),
pending or, to the best of the Company's knowledge, threatened against the
Company or any person or entity whose liability for any Environmental Claim the
Company has retained or assumed either contractually or by operation of law; and
(iii) to the best of the Company's knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or disposal of
any Material of Environmental Concern, that reasonably could result in a
violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or against any person or entity whose
liability for any Environmental Claim the Company has retained or assumed either
contractually or by operation of law.

         (ff) ERISA COMPLIANCE. The Company and any "employee benefit plan" (as
defined under the Employee Retirement Income Security Act of 1974, as amended,
and the regulations and published interpretations thereunder (collectively,
"ERISA")) established or maintained by the Company or its "ERISA Affiliates" (as
defined below) are in compliance in all material respects with ERISA. "ERISA
AFFILIATE" means, with respect to the Company, any member of any group of
organizations described in Sections 414(b), (c), (m) or (o) of the Internal
Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "CODE") of which the Company is a member. No
"reportable event" (as defined under ERISA) has occurred or is reasonably
expected to occur with respect to any "employee benefit plan" established or
maintained by the Company or any of its ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company or any of its ERISA Affiliates,
if such "employee benefit plan" were terminated, would have any "amount of
unfunded benefit liabilities" (as defined under ERISA). Neither the Company nor
any of its ERISA Affiliates has incurred or reasonably expects to incur any
liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or
4980B of the Code. Each "employee benefit plan" established or maintained by the
Company, or any of its ERISA Affiliates that is intended to be qualified under
Section 401(a) of the Code is so qualified and nothing has occurred, whether by
action or failure to act, which would cause the loss of such qualification.

                                       10



         (gg) COMPLIANCE WITH SARBANES-OXLEY ACT OF 2002. The Company and, to
the best of its knowledge, its officers and directors are in compliance with
applicable provisions of the Sarbanes-Oxley Act of 2002 and the rules and
regulations promulgated in connection therewith (the "SARBANES-OXLEY ACT") that
are effective and are actively taking steps to ensure that they will be in
compliance with other applicable provisions of the Sarbanes-Oxley Act upon the
effectiveness of such provisions, including Section 402 related to loans and
Sections 302 and 906 related to certifications.

         (hh) RELATIONSHIP WITH PARENT. All of the material transactions and the
current relationship between the Company and ITN Energy Systems, Inc. are fairly
and accurately described in the Registration Statement and the Disclosure
Package and there exists no material agreement or understanding between the
Company and ITN that is not fairly and accurately described in the Registration
Statement and the Disclosure Package.

         (ii) MATERIAL UNDERSTANDINGS, GENERALLY. Except as fairly described in
the Prospectus and the Disclosure Package, the Company has not made a
determination to take any action and is not a party to any understanding,
whether or not legally binding, with any other person with respect to the taking
of any action that, if known to prospective purchasers of the Units, would be
likely to affect their assessment of the value or prospects of the Company or
their decision to invest in the Units.

         Any certificate signed by an officer of the Company and delivered to
the Representative or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.

         The Company acknowledges that the Underwriters and, for purposes of the
opinions to be delivered pursuant to Section 5 hereof, counsel to the Company
and counsel to the Underwriters, will rely upon the accuracy and truthfulness of
the foregoing representations and hereby consents to such reliance.

         SECTION 2.  PURCHASE, SALE AND DELIVERY OF THE UNITS.

         (a) THE FIRM UNITS. Upon the terms herein set forth, the Company agrees
to issue and sell the Firm Units to the several Underwriters. On the basis of
the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase the Firm Units from the Company. The
purchase price per Firm Unit to be paid by the several Underwriters to the
Company shall be $_______ per Unit.

         (b) THE FIRST CLOSING DATE. Delivery of the Firm Units to be purchased
by the Underwriters and payment therefor shall be made at 9:00 a.m. New York
time on _______, 2006, or such other time and date as the Representative shall
designate by notice to the Company (the time and date of such closing are called
the "First Closing Date"). The Company hereby acknowledges that circumstances
under which the Representative may provide notice to postpone the First Closing
Date as originally scheduled include, but are in no way limited to, any
determination by the Company or the Representative to recirculate to the public
copies of an


                                       11


amended or supplemented Prospectus or Disclosure Package or a delay as
contemplated by the provisions of Section 10 or Section 19.

         (c) THE OPTIONAL UNITS; EACH SUBSEQUENT CLOSING DATE. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the Underwriters to purchase up to an aggregate of
750,000 Optional Units from the Company at the purchase price per share to be
paid by the Underwriters for the Firm Units. The option granted hereunder may be
exercised at any time and from time to time upon notice by the Representative to
the Company which notice may be given at any time within 45 days from the date
of this Agreement. Such notice shall set forth (i) the aggregate number of
Optional Units as to which the Underwriters are exercising the option, (ii) the
names and denominations in which the Optional Units are to be registered and
(iii) the time, date and place at which such Optional Units will be delivered
(which time and date may be simultaneous with, but not earlier than, the First
Closing Date; and in such case the term "First Closing Date" shall refer to the
time and date of delivery of the Firm Units and the Optional Units). Each time
and date of delivery, if subsequent to the First Closing Date, is called the
"SUBSEQUENT CLOSING DATE" and shall be determined by the Representative and
shall not be earlier than three nor later than five full business days after
delivery of such notice of exercise.

         (d) PUBLIC OFFERING OF THE UNITS. The Representative hereby advises the
Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Units as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representative, in its sole judgment, has determined
is advisable and practicable.

         (e) PAYMENT FOR THE UNITS. Payment for the Units to be sold by the
Company shall be made at the First Closing Date (and, if applicable, at any
Subsequent Closing Date) by wire transfer of immediately available funds to the
order of the Company.

         It is understood that the Representative has been authorized, for its
own account and the accounts of the several Underwriters, to accept delivery of
and receipt for, and make payment of the purchase price for, the Firm Units and
any Optional Units the Underwriters have agreed to purchase. The Representative,
individually and not as the Representative of the Underwriters, may (but shall
not be obligated to) make payment for any Units to be purchased by any
Underwriter whose funds shall not have been received by the Representative by
the First Closing Date or any Subsequent Closing Date, as the case may be, for
the account of such Underwriter, but any such payment shall not relieve such
Underwriter from any of its obligations under this Agreement.

         (f) DELIVERY OF THE UNITS. Delivery of the Firm Units and the Optional
Units shall be made through the facilities of The Depository Trust Company
unless the Representative shall otherwise instruct. Time shall be of the
essence, and delivery at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriters.

         (g) DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 10:00
p.m. on the second business day following the date the Units are first released
by the Underwriters for sale to


                                       12


the public, the Company shall deliver or cause to be delivered, copies of the
Prospectus in such quantities and at such places as the Representative shall
request.

         (h) REPRESENTATIVE'S WARRANTS. In addition to the sums payable to the
Representative as provided elsewhere herein, the Representative shall be
entitled to receive at the closing occurring on the First Closing Date, for
itself alone and not as Representative of the Underwriters, as additional
compensation for its services, Representative's Warrants for the purchase of up
to 500,000 Units at a price of $_____ per Unit, upon the terms and subject to
adjustment and conversion as described in the form of Representative's Warrants
filed as an exhibit to the Registration Statement.

         SECTION 3.  COVENANTS OF THE COMPANY.

         The Company covenants and agrees with each Underwriter as follows:

         (a) REPRESENTATIVE' REVIEW OF PROPOSED AMENDMENTS AND SUPPLEMENTS.
During the period beginning at the Initial Sale Time and ending on the later of
the First Closing Date or such date as, in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered in
connection with sales by an Underwriter or dealer, including under circumstances
where such requirement may be satisfied pursuant to Rule 172 under the
Securities Act (the "PROSPECTUS DELIVERY PERIOD"), prior to amending or
supplementing the Registration Statement or the Prospectus, including any
amendment or supplement through incorporation by reference of any report filed
under the Exchange Act, the Company shall furnish to the Representative for
review a copy of each such proposed amendment or supplement, and the Company
shall not file any such proposed amendment or supplement to which the
Representative reasonably object.

         (b) SECURITIES ACT COMPLIANCE. After the date of this Agreement, the
Company shall promptly advise the Representative in writing (i) when the
Registration Statement, if not effective at the Execution Time, shall have
become effective, (ii) of the receipt of any comments of, or requests for
additional or supplemental information from, the Commission, (iii) of the time
and date of any filing of any post-effective amendment to the Registration
Statement or any amendment or supplement to any preliminary prospectus or the
Prospectus, (iv) of the time and date that any post-effective amendment to the
Registration Statement becomes effective and (v) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereto or of any order or notice
preventing or suspending the use of the Registration Statement, any preliminary
prospectus or the Prospectus, or of any proceedings to remove, suspend or
terminate from listing or quotation the Common Stock from any securities
exchange upon which it is listed for trading or included or designated for
quotation, or of the threatening or initiation of any proceedings for any of
such purposes. The Company shall use its best efforts to prevent the issuance of
any such stop order or prevention or suspension of such use. If the Commission
shall enter any such stop order or order or notice of prevention or suspension
at any time, the Company will use its best efforts to obtain the lifting of such
order at the earliest possible moment, or will file a new registration statement
and use its best efforts to have such new registration statement declared
effective as soon as practicable. Additionally, the Company agrees that it shall
comply with the provisions of Rules 424(b) and 430A, as applicable, under the
Securities Act, including with respect to the


                                       13


timely filing of documents thereunder, and will use its reasonable efforts to
confirm that any filings made by the Company under such Rule 424(b) were
received in a timely manner by the Commission.

         (c) EXCHANGE ACT COMPLIANCE. During the Prospectus Delivery Period, the
Company will file all documents required to be filed with the Commission
pursuant to Section 13, 14 or 15 of the Exchange Act in the manner and within
the time periods required by the Exchange Act.

         (d) AMENDMENTS AND SUPPLEMENTS TO THE REGISTRATION STATEMENT,
PROSPECTUS AND OTHER SECURITIES ACT MATTERS. If, during the Prospectus Delivery
Period, any event or development shall occur or condition exist as a result of
which the Disclosure Package or the Prospectus as then amended or supplemented
would include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein in the light of
the circumstances under which they were made, as the case may be, not
misleading, or if it shall be necessary to amend or supplement the Disclosure
Package or the Prospectus, or to file under the Exchange Act any document
incorporated by reference in the Disclosure Package or the Prospectus, in order
to make the statements therein, in the light of the circumstances under which
they were made, as the case may be, not misleading, or if in the opinion of the
Representative it is otherwise necessary to amend or supplement the Registration
Statement, the Disclosure Package or the Prospectus, or to file under the
Exchange Act any document incorporated by reference in the Disclosure Package or
the Prospectus, or to file a new registration statement containing the
Prospectus, in order to comply with law, including in connection with the
delivery of the Prospectus, the Company agrees to (i) notify the Representative
of any such event or condition (unless such event or condition was previously
brought to the Company's attention by the Representative during the Prospectus
Delivery Period) and (ii) promptly prepare (subject to Section 3(a) and 3(e)
hereof), file with the Commission (and use its best efforts to have any
amendment to the Registration Statement or any new registration statement to be
declared effective) and furnish at its own expense to the Underwriters and to
dealers, amendments or supplements to the Registration Statement, the Disclosure
Package or the Prospectus, or any new registration statement, necessary in order
to make the statements in the Disclosure Package or the Prospectus as so amended
or supplemented, in the light of the circumstances under which they were made,
as the case may be, not misleading or so that the Registration Statement, the
Disclosure Package or the Prospectus, as amended or supplemented, will comply
with law.

         (e) PERMITTED FREE WRITING PROSPECTUSES. The Company represents that it
has not made, and agrees that, unless it obtains the prior written consent of
the Representative, it will not make, any offer relating to the Units that would
constitute an Issuer Free Writing Prospectus or that would otherwise constitute
a "FREE WRITING PROSPECTUS" (as defined in Rule 405 of the Securities Act)
required to be filed by the Company with the Commission or retained by the
Company under Rule 433 of the Securities Act; provided that the prior written
consent of the Representative hereto shall be deemed to have been given in
respect of the Free Writing Prospectuses included in Schedule B hereto. Any such
free writing prospectus consented to by the Representative is hereinafter
referred to as a "PERMITTED FREE WRITING PROSPECTUS". The Company agrees that
(i) it has treated and will treat, as the case may be, each Permitted Free
Writing Prospectus as an Issuer Free Writing Prospectus, and (ii) has complied
and will comply, as the case may be, with the requirements of Rules 164 and 433
of the Securities Act applicable


                                       14


to any Permitted Free Writing Prospectus, including in respect of timely filing
with the Commission, legending and record keeping.

         (f) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The
Company agrees to furnish the Representative, without charge, during the
Prospectus Delivery Period, as many copies of each of the preliminary
prospectus, the Prospectus and the Disclosure Package and any amendments and
supplements thereto (including any documents incorporated or deemed incorporated
by reference therein) as the Representative may reasonably request.

         (g) BLUE SKY COMPLIANCE. The Company shall cooperate with the
Representative and counsel for the Underwriters to qualify or register the Units
for sale under (or obtain exemptions from the application of) the state
securities or blue sky laws of those jurisdictions designated by the
Representative, shall comply with such laws and shall continue such
qualifications, registrations and exemptions in effect so long as required for
the distribution of the Units. The Company shall not be required to qualify as a
foreign corporation or to take any action that would subject it to general
service of process in any such jurisdiction where it is not presently qualified
or where it would be subject to taxation as a foreign corporation. The Company
will advise the Representative promptly of the suspension of the qualification
or registration of (or any such exemption relating to) the Units for offering,
sale or trading in any jurisdiction or any initiation or threat of any
proceeding for any such purpose, and in the event of the issuance of any order
suspending such qualification, registration or exemption, the Company shall use
its best efforts to obtain the withdrawal thereof at the earliest possible
moment.

         (h) USE OF PROCEEDS. The Company shall apply the net proceeds from the
sale of the Units sold by it in the manner described under the caption "Use of
Proceeds" in the Disclosure Package and the Prospectus.

         (i) TRANSFER AGENT. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.

         (j) EARNINGS STATEMENT. As soon as practicable and in any event no
later than 15 months after the effective date of the Registration Statement, the
Company will make generally available to its security holders and to the
Representative an earnings statement (which need not be audited) covering a
period of at least twelve months beginning after the effective date of the
Registration Statement that satisfies the provisions of Section 11(a) of the
Securities Act and Rule 158 under the Securities Act.

         (k) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq Capital Market all reports and documents required to be filed under the
Exchange Act. Additionally, the Company shall report the use of proceeds from
the issuance of the Units as may be required under Rule 463 under the Securities
Act.

         (l) COMPANY TO PROVIDE INTERIM FINANCIAL STATEMENTS. Prior to the First
Closing Date and, if applicable, each Subsequent Closing Date, the Company will
furnish the Underwriters, as soon as they have been prepared by or are available
to the Company, a copy of any unaudited interim financial statements of the
Company for any period subsequent to the


                                       15


period covered by the most recent financial statements appearing in the
Registration Statement and the Prospectus.

         (m) QUOTATION. The Company will use its best efforts to include,
subject to notice of issuance, the Units on the Nasdaq Capital Market.

         (n) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. During the
period commencing on the date hereof and ending on the 365th day following the
date of the Prospectus, the Company will not, without the prior written consent
of the Representative (which consent may be withheld at the Representative's
sole discretion), directly or indirectly, sell, offer, contract or grant any
option to sell, pledge, transfer or establish an open "PUT EQUIVALENT POSITION"
within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose
of or transfer, or announce the offering of, or file any registration statement
under the Securities Act (except as contemplated by the Prospectus) in respect
of, any shares of Common Stock, options or warrants to acquire shares of the
Common Stock or securities exchangeable or exercisable for or convertible into
shares of Common Stock (other than as contemplated by this Agreement with
respect to the Units); provided, however, that the Company may issue shares of
its Common Stock or options to purchase its Common Stock, or shares of Common
Stock upon exercise of options, in each case, pursuant to any stock option,
stock bonus or other stock plan, arrangement or contractual obligation described
in the Prospectus, but only if the holders of such shares, options, or shares
issued upon exercise of such options, agree in writing not to sell, offer,
dispose of or otherwise transfer any such shares or options during such 365-day
period without the prior written consent of the Representative (which consent
may be withheld at the Representative's sole discretion).

         (o) FUTURE REPORTS TO THE REPRESENTATIVE. During the period of five
years hereafter the Company will furnish, if not otherwise available on EDGAR,
to the Representative at 811 SW Naito Parkway, Portland, Oregon 97204 Attention:
Syndicate Department: (i) as soon as practicable after the end of each fiscal
year, copies of the Annual Report of the Company containing the balance sheet of
the Company as of the close of such fiscal year and statements of income,
shareholders' equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public or certified public accountants;
(ii) as soon as practicable after the filing thereof, copies of each proxy
statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current
Report on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of any
report or communication of the Company mailed generally to holders of its
capital stock.

         (p) INVESTMENT LIMITATION. The Company shall not invest, or otherwise
use the proceeds received by the Company from its sale of the Units in such a
manner as would require the Company to register as an investment company under
the Investment Company Act.

         (q) NO MANIPULATION OF PRICE. The Company will not take, directly or
indirectly, any action designed to cause or result in, or that has constituted
or might reasonably be expected to constitute, the stabilization or manipulation
of the price of any securities of the Company.

         (r) EXISTING LOCK-UP AGREEMENTS. Except as described in the Prospectus,
there are no existing agreements between the Company and its security holders
that prohibit the sale, transfer,


                                       16


assignment, pledge or hypothecation of any of the Company's securities. The
Company will direct the transfer agent to place stop transfer restrictions upon
the securities of the Company that are bound by such "lock-up" agreements for
the duration of the periods contemplated therein.

         SECTION 4.  PAYMENT OF EXPENSES.

         (a) The Representative shall be entitled to reimbursement from the
Company, for itself alone and not as Representative of the Underwriters, to a
non-accountable expense allowance equal to 2% of the aggregate initial public
offering price of the Firm Units and any Option Units purchased by the
Underwriters. The Representative shall be entitled to withhold this allowance on
the Closing Date related to the purchase of the Firm Units or the Option Units,
as the case may be.

         (b) In addition to the payment described in Paragraph (a) of this
Section 4, the Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of their obligations hereunder and in connection
with the transactions contemplated hereby, including without limitation (i) all
expenses incident to the issuance and delivery of the Units (including all
printing and engraving costs, if any), (ii) all fees and expenses of the
registrar and transfer agent of the Common Stock, (iii) all necessary issue,
transfer and other stamp taxes in connection with the issuance and sale of the
Units to the Underwriters, (iv) all fees and expenses of the Company's counsel,
independent public or certified public accountants and other advisors, (v) all
costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement (including
financial statements, exhibits, schedules, consents and certificates of
experts), each Issuer Free Writing Prospectus, each preliminary prospectus and
the Prospectus, and all amendments and supplements thereto, and this Agreement,
(vi) all filing fees, attorneys' fees and expenses incurred by the Company or
the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Units for offer and sale under the state securities or blue sky laws, and, if
requested by the Representative, preparing and printing a "Blue Sky Survey" or
memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees incident to,
the NASD's review and approval of the Underwriters' participation in the
offering and distribution of the Units, (viii) the fees and expenses associated
with including the Units on the Nasdaq National Market, (ix) all other fees,
costs and expenses referred to in Item 13 of Part II of the Registration
Statement, and (x) all reasonable out-of-pocket costs and expenses of the
Underwriters. Except as provided in this Section 4, Section 6, Section 8 and
Section 9 hereof, the Underwriters shall pay their own expenses, including the
fees and disbursements of their counsel.

         SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Firm Units
as provided herein on the First Closing Date and, with respect to the Optional
Units, each Subsequent Closing Date, shall be subject to (1) the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date and each
Subsequent Closing Date as though then made; (2) the timely performance by the
Company of its covenants and other obligations hereunder; and (3) each of the
following additional conditions:

                                       17



         (a) ACCOUNTANTS' COMFORT LETTER. On the date hereof, the Representative
shall have received from Cole & Reed, P.C., independent registered public
accounting firm of the Company, a letter dated the date hereof addressed to the
Underwriters, in form and substance satisfactory to the Representative,
containing statements and information of the type ordinarily included in
accountant's "comfort letters" to underwriters, delivered according to Statement
of Auditing Standards No. 72 (or any successor bulletin), with respect to the
audited and unaudited financial statements and certain financial information
contained in the Registration Statement and the Prospectus (and the
Representative shall have received an additional four conformed copies of such
accountants' letter for the several Underwriters).

         (b) EFFECTIVENESS OF REGISTRATION STATEMENT; COMPLIANCE WITH
REGISTRATION REQUIREMENTS; NO STOP ORDER. For the period from and after
effectiveness of this Agreement and prior to the First Closing Date and, with
respect to the Optional Units, any Subsequent Closing Date:

                  (i) the Company shall have filed the Prospectus with the
                  Commission (including the information required by Rule 430A
                  under the Securities Act) in the manner and within the time
                  period required by Rule 424(b) under the Securities Act; or
                  the Company shall have filed a post-effective amendment to the
                  Registration Statement containing the information required by
                  such Rule 430A, and such post-effective amendment shall have
                  become effective; and

                  (ii) no stop order suspending the effectiveness of the
                  Registration Statement, or any post-effective amendment to the
                  Registration Statement, shall be in effect and no proceedings
                  for such purpose shall have been instituted or threatened by
                  the Commission.

         (c) NO MATERIAL ADVERSE CHANGE. For the period from and after the date
of this Agreement and prior to the First Closing Date and, with respect to the
Optional Units, each Subsequent Closing Date, in the judgment of the
Representative there shall not have occurred any Material Adverse Change.

         (d) OPINION OF COUNSEL FOR THE COMPANY. On each of the First Closing
Date and each Subsequent Closing Date the Representative shall have received the
opinion of Morse, Zelnick, Rose & Lander LLP, counsel for the Company, dated as
of the First Closing Date or the Subsequent Closing Date, as applicable,
substantially in the form attached as Exhibit A (and the Representative shall
have received an additional four conformed copies of such counsel's legal
opinion for the several Underwriters).

         (e) OPINION OF COUNSEL FOR THE UNDERWRITERS. On each of the First
Closing Date and each Subsequent Closing Date the Representative shall have
received the opinion of Stoel Rives LLP, counsel for the Underwriters, dated as
of the First Closing Date or the Subsequent Closing Date, as applicable, in a
form satisfactory to the Representative (and the Representative shall have
received an additional four conformed copies of such counsel's legal opinion for
the several Underwriters).

                                       18



         (f) OFFICERS' CERTIFICATE. On each of the First Closing Date and each
Subsequent Closing Date the Representative shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer or
President of the Company and the Chief Financial Officer or Chief Accounting
Officer of the Company, dated as of such Closing Date, to the effect that the
signers of such certificate have reviewed the Registration Statement, the
Prospectus and any amendment or supplement thereto, any Issuer Free Writing
Prospectus and any amendment or supplement thereto and this Agreement, to the
effect set forth in subsection (b)(ii) of this Section 5, and further to the
effect that:

                  (i) for the period from and after the date of this Agreement
                  and prior to such Closing Date, there has not occurred any
                  Material Adverse Change;

                  (ii) the representations, warranties and covenants of the
                  Company set forth in Section 1 of this Agreement are true and
                  correct with the same force and effect as though expressly
                  made on and as of such Closing Date; and

                  (iii) the Company has complied with all the agreements
                  hereunder and satisfied all the conditions on its part to be
                  performed or satisfied hereunder at or prior to such Closing
                  Date.

         (g) BRING-DOWN COMFORT LETTER. On each of the First Closing Date and
each Subsequent Closing Date, the Representative shall have received from Cole &
Reed, P.C., independent public or certified public accountants for the Company,
a letter dated such date, in form and substance satisfactory to the
Representative, to the effect that they reaffirm the statements made in the
letter furnished by them pursuant to subsection (a) of this Section 5, except
that the specified date referred to therein for the carrying out of procedures
shall be no more than three business days prior to the First Closing Date or
Subsequent Closing Date, as the case may be (and the Representative shall have
received an additional four conformed copies of such accountants' letter the
several Underwriters).

         (h) LOCK-UP AGREEMENT FROM CERTAIN SECURITYHOLDERS OF THE COMPANY. On
or prior to the date hereof, the Company shall have furnished to the
Representative an agreement in the form of Exhibit B hereto from each
shareholder of the Company, and such agreement shall be in full force and effect
on each of the First Closing Date and each Subsequent Closing Date.

         (i) ADDITIONAL DOCUMENTS. On or before each of the First Closing Date
and each Subsequent Closing Date, the Representative and counsel for the
Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Units as contemplated herein, or in order to evidence
the accuracy of any of the representations and warranties, or the satisfaction
of any of the conditions or agreements, herein contained.

         If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representative by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Units, at any time prior to each
Subsequent Closing Date, which termination shall be without liability on the
part of


                                       19


any party to any other party, except that Section 4, Section 6, Section 8 and
Section 9 shall at all times be effective and shall survive such termination.

         SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement
is terminated by the Representative pursuant to Section 5, Section 11, or
Section 19, or by the Company pursuant to Section 7, or if the sale to the
Underwriters of the Units on the First Closing Date or Subsequent Closing Date
is not consummated because of any refusal, inability or failure on the part of
the Company to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse the Representative and the other
Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Representative and the
Underwriters in connection with the proposed purchase and the offering and sale
of the Units, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, facsimile and telephone charges.

         SECTION 7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall not
become effective until the later of (i) the execution of this Agreement by the
parties hereto and (ii) notification (including by way of oral notification from
the reviewer at the Commission) by the Commission to the Company of the
effectiveness of the Registration Statement under the Securities Act; provided
that Sections 4, 6, 8 and 9 shall at all times be effective.

         Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company to any Underwriter,
except that (solely in the case where the Company has terminated this Agreement
pursuant to this Section 7) the Company shall be obligated to reimburse the
expenses of the Representative and the Underwriters pursuant to Sections 4 and 6
hereof, or (b) any Underwriter to the Company except that the provisions of
Section 8 and Section 9 shall at all times be effective and shall survive such
termination.

         SECTION 8.  INDEMNIFICATION.

         (a) INDEMNIFICATION OF THE UNDERWRITERS.

         (1) The Company agrees to indemnify and hold harmless each Underwriter,
its officers and employees, and each person, if any, who controls any
Underwriter within the meaning of the Securities Act and the Exchange Act
against any loss, claim, damage, liability or expense, as incurred, to which
such Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such loss, claim, damage, liability or expense (or actions
in respect thereof as contemplated below) arises out of or is based (i) upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A, Rule 430B and Rule 430C under
the Securities Act, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein
not misleading; or (ii) upon any untrue statement or alleged untrue statement of
a material fact contained in any Issuer Free Writing Prospectus, any preliminary

                                       20


prospectus or the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; or (iii) in whole or in part upon any inaccuracy in
the representations and warranties of the Company contained herein; or (iv) in
whole or in part upon any failure of the Company to perform its obligations
hereunder or under law; or (v) upon any act or failure to act or any alleged act
or failure to act by any Underwriter in connection with, or relating in any
manner to, the Common Stock or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage, liability or
action arising out of or based upon any matter covered by clause (i) or (ii)
above, provided that the Company shall not be liable under this clause (v) to
the extent that a court of competent jurisdiction shall have determined by a
final judgment that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its bad faith or willful misconduct; and to
reimburse each Underwriter and each such controlling person for any and all
expenses (including the fees and disbursements of counsel chosen by the
Representative) as such expenses are reasonably incurred by such Underwriter or
such controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; PROVIDED, HOWEVER, that the foregoing indemnity agreement shall not
apply to any loss, claim, damage, liability or expense to the extent, but only
to the extent, arising out of or based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by the
Representative expressly for use in the Registration Statement, any Issuer Free
Writing Prospectus, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto). The indemnity agreement set forth in this
Section 8(a)(1) shall be in addition to any liabilities that the Company may
otherwise have.

         (b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer, or controlling person may become subject, under the
Securities Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based upon
any untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any Issuer Free Writing Prospectus, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or arises
out of or is based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Issuer Free Writing
Prospectus, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written information
furnished to the Company by the Representative expressly for use therein; and to
reimburse the Company, or any such director, officer, or controlling person for
any legal and other expense reasonably incurred by the Company, or any such
director, officer, or controlling


                                       21


person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The Company
hereby acknowledges that the only information that the Underwriters have
furnished to the Company expressly for use in the Registration Statement, any
Issuer Free Writing Prospectus, any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) are the statements set forth in the table
in the first paragraph and in the sixth and seventh paragraphs (relating to
stabilization and market making activities) under the caption "Underwriting" in
the preliminary prospectus and the Prospectus; and the Underwriters confirm that
such statements are correct. The indemnity agreement set forth in this Section
8(b) shall be in addition to any liabilities that each Underwriter may otherwise
have.

         (c) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (the Representative in the case of Section 8(b) and Section
9), representing the indemnified parties who are parties to such action) or (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying party.

                                       22



         (d) SETTLEMENTS. The indemnifying party under this Section 8 shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
8(c) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or consent
to the entry of judgment in any pending or threatened action, suit or proceeding
in respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.

         SECTION 9. CONTRIBUTION. If the indemnification provided for in Section
8 is for any reason held to be unavailable to or otherwise insufficient to hold
harmless an indemnified party in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount paid or payable by such indemnified party, as
incurred, as a result of any losses, claims, damages, liabilities or expenses
referred to therein (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying parties on the one hand, and the
indemnified parties, on the other hand, from the offering of the Units pursuant
to this Agreement or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the indemnifying parties, on the one hand, and the indemnified parties,
on the other hand, in connection with the statements or omissions or
inaccuracies in the representations and warranties herein which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the indemnifying
parties, on the one hand, and the indemnified parties, on the other hand, in
connection with the offering of the Units pursuant to this Agreement shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of the Units pursuant to this Agreement (before deducting expenses)
received by the indemnifying parties, and the total underwriting discount
received by the indemnified parties, in each case as set forth on the front
cover page of the Prospectus bear to the aggregate initial public offering price
of the Units as set forth on such cover. The relative fault of the indemnifying
parties, on the one hand, and the indemnified parties, on the other hand, shall
be determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by indemnifying
parties, on the one hand, or the indemnified parties, on the other hand, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.

                                       23



         The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.

         The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 9.

         Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Units underwritten by it and
distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several, and not joint, in proportion to their respective
underwriting commitments as set forth opposite their names in Schedule A. For
purposes of this Section 9, each officer and employee of an Underwriter and each
person, if any, who controls an Underwriter within the meaning of the Securities
Act and the Exchange Act shall have the same rights to contribution as such
Underwriter; and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of the Securities Act and the Exchange Act shall have
the same rights to contribution as the Company.

         SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or each Subsequent Closing Date, as the case may be, any
one or more of the several Underwriters shall fail or refuse to purchase Units
that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Units which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase does not exceed 10% of the aggregate
number of the Units to be purchased on such date, the other Underwriters shall
be obligated, severally, in the proportions that the number of Firm Units set
forth opposite their respective names on Schedule A bears to the aggregate
number of Firm Units set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representative with the consent of the non-defaulting Underwriters, to purchase
the Units which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date. If, on the First Closing Date or each
Subsequent Closing Date, as the case may be, any one or more of the Underwriters
shall fail or refuse to purchase Units and the aggregate number of Units with
respect to which such default occurs exceeds 10% of the aggregate number of
Units to be purchased on such date, and arrangements satisfactory to the
Representative and the Company for the purchase of such Units are not made
within 48 hours after such default, this Agreement shall terminate without
liability of any party to any other party except that the provisions of Section
4, Section 6, Section 8 and Section 9 shall at all times be effective and shall
survive such termination. In any such case either the Representative or the
Company shall have the right to


                                       24


postpone the First Closing Date or each Subsequent Closing Date, as the case may
be, but in no event for longer than seven days in order that the required
changes, if any, to the Registration Statement and the Prospectus or any other
documents or arrangements may be effected.

         As used in this Agreement, the term "UNDERWRITER" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.

         SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date and, with respect to Optional Units, each Subsequent Closing Date, whether
before or after notification by the Commission to the Company of the
effectiveness of the Registration Statement under the Securities Act, this
Agreement may be terminated by the Representative by notice given to the Company
if at any time (i) trading or quotation in any of the Company's securities shall
have been suspended or limited by the Commission or by the Nasdaq Capital
Market, or trading in securities generally on either the Nasdaq Stock Market or
the New York Stock Exchange shall have been suspended or limited, or minimum or
maximum prices shall have been generally established on any of such stock
exchanges by the Commission or the NASD; (ii) a general banking moratorium shall
have been declared by any of federal, New York or Oklahoma authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective substantial change in United States' or
international political, financial or economic conditions that, in the judgment
of the Representative is material and adverse and makes it impracticable to
market the Units in the manner and on the terms described in the Prospectus or
to enforce contracts for the sale of securities; or (iv) in the judgment of the
Representative there shall have occurred any Material Adverse Change (regardless
of whether any loss associated with such Material Adverse Change shall have been
insured). Any termination pursuant to this Section 11 shall be without liability
on the part of (a) the Company to any Underwriter, except that the Company shall
be obligated to reimburse the expenses of the Representative and the
Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the
Company, or (c) of any party hereto to any other party except that the
provisions of Section 8 and Section 9 shall at all times be effective and shall
survive such termination.

         SECTION 12. NO ADVISORY OR FIDUCIARY RESPONSIBILITY. The Company
acknowledges and agrees that: (i) the purchase and sale of the Units pursuant to
this Agreement, including the determination of the public offering price of the
Units and any related discounts and commissions, is an arm's-length commercial
transaction between the Company, on the one hand, and the several Underwriters,
on the other hand, and the Company is capable of evaluating and understanding
and understands and accepts the terms, risks and conditions of the transactions
contemplated by this Agreement; (ii) in connection with each transaction
contemplated hereby and the process leading to such transaction each Underwriter
is and has been acting solely as a principal and is not the financial advisor,
agent or fiduciary of the Company or its affiliates, shareholders, creditors or
employees or any other party; (iii) no Underwriter has assumed or will assume an
advisory, agency or fiduciary responsibility in favor of the Company with
respect to any of the transactions contemplated hereby or the process leading
thereto (irrespective of whether such Underwriter has advised or is currently
advising the Company on other matters)


                                       25


and no Underwriter has any obligation to the Company with respect to the
offering contemplated hereby except the obligations expressly set forth in this
Agreement; (iv) the several Underwriters and their respective affiliates may be
engaged in a broad range of transactions that involve interests that differ from
those of the Company and that the several Underwriters have no obligation to
disclose any of such interests by virtue of any advisory, agency or fiduciary
relationship; and (v) the Underwriters have not provided any legal, accounting,
regulatory or tax advice with respect to the offering contemplated hereby and
the Company has consulted its own legal, accounting, regulatory and tax advisors
to the extent it deemed appropriate. The Company hereby waives and releases, to
the fullest extent permitted by law, any claims that the Company may have
against the several Underwriters with respect to any breach or alleged breach of
agency or fiduciary duty.

         This Agreement supersedes all prior agreements and understandings
(whether written or oral) between the Company and the several Underwriters, or
any of them, with respect to the subject matter hereof.

         SECTION 13. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Units sold hereunder and any termination of this Agreement.

         SECTION 14. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:

         If to the Representative:

                  Paulson Investment Company, Inc.
                  811 SW Naito Parkway, Suite 200
                  Portland, Oregon 97204
                  Facsimile:  (503) 243-6095
                  Attention:  Syndicate Department

         WITH A COPY TO:

                  Stoel Rives LLP
                  900 SW 5th Avenue
                  Portland, Oregon 97204
                  Facsimile:  (503) 220-2480
                  Attention:  John J. Halle

                                       26


         If to the Company:

                  Vaughan Foods, Inc.
                  216 N.E. 12th Street
                  Moore, Oklahoma 73160
                  Facsimile:  (405) 895-6596
                  Attention:  Chief Executive Officer

         WITH A COPY TO:

                  Morse, Zelnick, Rose & Lander LLP
                  405 Park Avenue
                  New York, New York 10022
                  Facsimile:  (212) 838-9190
                  Attention:  Stephen A. Zelnick

         Any party hereto may change the address for receipt of communications
by giving written notice to the others.


         SECTION 15. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and personal representatives and no other
person will have any right or obligation hereunder. The term "SUCCESSORS" shall
not include any purchaser of the Units as such from any of the Underwriters
merely by reason of such purchase.

         SECTION 16. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.

         SECTION 17. GOVERNING LAW PROVISIONS. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.

         SECTION 18. CONSENT TO JURISDICTION. Any legal suit, action or
proceeding arising out of or based upon this Agreement or the transactions
contemplated hereby ("RELATED PROCEEDINGS") may be instituted in the federal
courts of the United States of America located in Portland, Oregon or the courts
of the Oregon in each case located in Portland, Oregon (collectively, the
"SPECIFIED COURTS"), and each party irrevocably submits to the exclusive
jurisdiction (except for proceedings instituted in regard to the enforcement of
a judgment of any such court (a "RELATED JUDGMENT"), as to which such
jurisdiction is non-exclusive) of such courts in any such suit, action or
proceeding. Service of any process, summons, notice or document by mail to such
party's address set forth above shall be effective service of process for any
suit, action or other proceeding brought in any such court. The parties
irrevocably and unconditionally waive any objection to the laying of venue of
any suit, action or other


                                       27


proceeding in the Specified Courts and irrevocably and unconditionally waive and
agree not to plead or claim in any such court that any such suit, action or
other proceeding brought in any such court has been brought in an inconvenient
forum.

         SECTION 19. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.

         Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.

         The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, regardless of (i) any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, the officers or
employees of any Underwriter, any person controlling any Underwriter, the
Company, the officers or employees of the Company, or any person controlling the
Company, (ii) acceptance of the Units and payment for them hereunder and (iii)
termination of this Agreement.

         Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, the Underwriters' officers and employees, any controlling persons
referred to herein, the Company's directors and the Company's officers who sign
the Registration Statement and their respective successors and assigns, all as
and to the extent provided in this Agreement, and no other person shall acquire
or have any right under or by virtue of this Agreement. The term "SUCCESSORS AND
ASSIGNS" shall not include a purchaser of any of the Units from any of the
several Underwriters merely because of such purchase.


                                       28




         If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.


                                           Very truly yours,

                                           VAUGHAN FOODS, INC.



                                           By:
                                               ------------------------------
                                               Name:  Mark E. Vaughan
                                               Title:    Chief Executive Officer



         The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representative as of the date first above written.

PAULSON INVESTMENT COMPANY, INC.
Acting as Representative of the several Underwriters
named in the attached Schedule A.



By:  ___________________________________
       Name:
       Title:



                                       29



                                   SCHEDULE A

                                                             NUMBER OF FIRM
                                                               UNITS TO BE
UNDERWRITERS                                                    PURCHASED
- -------------------------------------------------------      ---------------
Paulson Investment Company, Inc.







         Total........................................           5,000,000
                                                                 =========


                                    SCH. A-1



                                   SCHEDULE B

                         ISSUER FREE WRITING PROSPECTUS





                                    SCH. B-1



                                   SCHEDULE C

                                  PRICING TERMS



Price per Unit to public:  $_______

Underwriting discounts and commissions per Unit:  $______

Offering proceeds to the Company, before expenses:  $_________

Closing Date: _______, 2006






                                    SCH. C-1








                                                                       EXHIBIT A

                       Opinion of counsel for the Company
     TO BE DELIVERED PURSUANT TO SECTION 5(D) OF THE UNDERWRITING AGREEMENT.
     -----------------------------------------------------------------------

         References to the Prospectus in this Exhibit A include any supplements
thereto at the First Closing Date and, if applicable, each Subsequent Closing
Date. Capitalized terms used and not defined herein shall have the meanings
ascribed to them in the Underwriting Agreement.

         (i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Oklahoma.

         (ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Disclosure Package and the Prospectus and to enter into and perform its
obligations under the Underwriting Agreement.

         (iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in which
such qualification is required, except for such jurisdictions where the failure
to so qualify or to be in good standing would not, individually or in the
aggregate, result in a Material Adverse Change.

         (iv) To the best of such counsel's knowledge, the Company does not
own an equity interest in any other entity.

         (v) The authorized, issued and outstanding capital stock of the
Company (including the Common Stock) conforms to the descriptions thereof set
forth in the Disclosure Package and the Prospectus. All of the outstanding
shares of Common Stock have been duly authorized and validly issued, are fully
paid and nonassessable and, to the best of such counsel's knowledge, have been
issued in compliance with the registration and qualification requirements of
federal and state securities laws. The form of certificate used to evidence the
Common Stock complies with all applicable requirements of the charter and
by-laws of the Company and the General Corporation Act of the State of Oklahoma.
The description of the Company's stock option, stock bonus and other stock plans
or arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Disclosure Package and the Prospectus accurately
and fairly presents the information required to be shown with respect to such
plans, arrangements, options and rights.

         (vi) No shareholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to subscribe for
or purchase securities of the Company arising (i) by operation of the charter or
by-laws of the Company or the General Corporation Act of the State of Oklahoma
or (ii) to the best knowledge of such counsel, otherwise.

         (vii) The Underwriting Agreement has been duly authorized, executed
and delivered by the Company.

         (viii) The Common Stock included in the Units to be purchased by the
Underwriters from the Company (including units purchasable on exercise of the
Underwriters' overallotment option and the Representative's Warrants) has been
duly authorized and reserved for issuance


                                     EX. A-1



and sale pursuant to this Agreement and, in the case of Common Stock issuable on
exercise of the Representative's Warrants, the terms thereof and, when so issued
and delivered by the Company, will be validly issued, fully paid and
nonassessable. The Class A Warrants and Class B Warrants included in the Units
to be purchased by the Underwriters from the Company have been duly and validly
authorized by all required corporate actions and will, when issued and delivered
by the Company pursuant to this Agreement, be validly executed and delivered by,
and will be valid and binding agreements of, the Company, enforceable in
accordance with their terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles. The Representative's Warrants have been duly and validly
authorized by all required corporate actions and will, when issued and delivered
by the Company pursuant to this Agreement, be validly executed and delivered by,
and will be valid and binding agreements of, the Company, enforceable in
accordance with their terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles. The Common Stock issuable on exercise of Class A Warrants,
Class B Warrants has been duly authorized and reserved for issuance and sale
pursuant to the terms of such warrants and, when issued and delivered by the
Company pursuant to such warrants, will be validly issued, fully paid and
nonassessable.

         (ix) The Warrant Agreement has been duly authorized by the Company.
When duly executed, authenticated, issued and delivered as contemplated in the
Registration Statement and the Warrant Agreement, the Warrant Agreement will
constitute the legally binding agreement of the Company, enforceable against it
in accordance with its terms, except as the enforcement thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.

          (ix) The Registration Statement and the Rule 462(b) Registration
Statement, if any, has been declared effective by the Commission under the
Securities Act. To the best knowledge of such counsel, no stop order suspending
the effectiveness of either of the Registration Statement or the Rule 462(b)
Registration Statement, if any, has been issued under the Securities Act and no
proceedings for such purpose have been instituted or are pending or are
contemplated or threatened by the Commission. Any required filing of the
Disclosure Package and the Prospectus and any supplement thereto pursuant to
Rule 424(b) under the Securities Act has been made in the manner and within the
time period required by such Rule 424(b).

         (x) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus, and each amendment or supplement to the
Registration Statement and the Prospectus, and each document deemed to be part
of the Disclosure Package, as of their respective effective or issue dates
(other than the financial statements and supporting schedules included therein
or in exhibits to or excluded from the Registration Statement, as to which no
opinion need be rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act.

         (xi) The Units, the Common Stock, the Class A Warrants and the
Class B Warrants have been approved for quotation on the Nasdaq Capital Market
under the symbols "_____,"


                                    EX. A-2


"_____," "_____" and "_____," respectively, and on the Boston Stock Exchange
under the symbols "_____," "_____," "_____" and "_____," respectively.

         (xiv) The statements (i) in each of the Disclosure Package and the
Prospectus under the captions "Related Party Transactions", "Description of
Securities" and "Shares Eligible for Future Sale", (ii) under the caption
"Indemnification of Officers and Directors" in Item 24 of the Registration
Statement, (iii) under the caption "Recent Sales of Unregistered Securities in
Item 26 of the Registration Statement, insofar as such statements constitute
matters of law, legal conclusions or summaries of legal matters or documents or
the Company's charter or by-law provisions, have been reviewed by such counsel
and fairly present and summarize, in all material respects, the matters referred
to therein.

         (xv) To the  best  knowledge  of such  counsel,  there  are no legal or
governmental  actions,  suits or  proceedings  pending or  threatened  which are
required  to be  disclosed  in the  Registration  Statement  or  the  Disclosure
Package, other than those disclosed therein.

         (xvi) To the best  knowledge  of such  counsel,  there are no  Existing
Instruments  required  to  be  described  or  referred  to in  the  Registration
Statement  or to be filed as  exhibits  thereto  other than those  described  or
referred to therein or filed as exhibits thereto;  and the descriptions  thereof
and references thereto are correct in all material respects.

         (xvii) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of the
Underwriting Agreement and consummation of the transactions contemplated thereby
and by the Prospectus, except as required under the Securities Act, the
applicable laws of any foreign jurisdiction, applicable state securities or blue
sky laws and from the NASD.

         (xviii) The execution and delivery of the Underwriting Agreement by
the Company and the performance by the Company of its obligations thereunder
(other than performance by the Company of its obligations under the
indemnification section of the Underwriting Agreement, as to which no opinion
need be rendered) (i) have been duly authorized by all necessary corporate
action on the part of the Company; (ii) will not result in any violation of the
provisions of the charter or by-laws of the Company; (iii) will not (A)
constitute a breach of, or Default under any Existing Instrument, or (B) result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to, in the case of each of clauses
(A) and (B), any Existing Instrument filed as an exhibit to the Registration
Statement or, to the best knowledge of such counsel, any other material Existing
Instrument; or (iv) to the best knowledge of such counsel, will not result in
any violation of any law, administrative regulation or administrative or court
decree applicable to the Company.

         (xix) The Company is not, and after receipt of payment for the Units
and the application of the proceeds thereof as contemplated under the caption
"Use of Proceeds" in the Prospectus and in the Disclosure Package will not be,
an "INVESTMENT COMPANY" within the meaning of Investment Company Act.

                                    EX. A-3



         (xx) To the best knowledge of such counsel, there are no persons
with registration or other similar rights to have any equity or debt securities
registered for sale under the Registration Statement or included in the offering
contemplated by the Underwriting Agreement, except for such rights as have been
duly waived.

         (xxi) To the best knowledge of such counsel, the Company is not in
violation of its charter or by-laws or any law, administrative regulation or
administrative or court decree applicable to the Company or is in Default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any material Existing Instrument, except in each such case for such
violations or Defaults as would not, individually or in the aggregate, result in
a Material Adverse Change.

         In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, including the documents incorporated
by reference therein (other than as specified above), and any supplements or
amendments thereto, on the basis of the foregoing, nothing has come to their
attention which has caused them to believe that (i) either the Registration
Statement or any amendments thereto, at the time the Registration Statement or
such amendments became effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) the Prospectus, as
of its date or at the First Closing Date or each Subsequent Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; or (iii)
the items specified in Schedule I, consisting of those included in the
Disclosure Package, contained any untrue statement of a material fact or omitted
to state any material fact necessary in order to make the statements therein, in
the light of circumstances under which they were made, not misleading (it being
understood that such counsel need express no belief as to the financial
statements or schedules or other financial data derived therefrom, included or
incorporated by reference in the Registration Statement or the Prospectus or any
amendments or supplements thereto).

         In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Act of the State of Oklahoma, or the federal law of the United
States, to the extent they deem proper and specified in such opinion, upon the
opinion (which shall be dated the First Closing Date or each Subsequent Closing
Date, as the case may be, shall be satisfactory in form and substance to the
Underwriters, shall expressly state that the Underwriters may rely on such
opinion as if it were addressed to them and shall be furnished to the
Representative) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; provided,
however, that such counsel shall further state that they believe that they and
the Underwriters are justified in relying upon such opinion of other counsel,
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials.


                                    EX. A-4


                                                                       EXHIBIT B



                            FORM OF LOCK-UP AGREEMENT




                                     EX. B-1

EX-3.1

                                                                     Exhibit 3.1

                AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
                                       OF
                               VAUGHAN FOODS, INC.


     Pursuant to the provisions of Sections 1077 and 1080 of Title 18 of the
Business Corporation Act of the State of Oklahoma, VAUGHAN FOODS, INC., an
Oklahoma corporation (the "Corporation"), hereby amends and restates its
Certificate of Incorporation and certifies as follows:

     1. The Corporation was incorporated under the laws of the State of Oklahoma
on April 18, 1989 by filing of its original Certificate of Incorporation with
the Oklahoma Secretary of State.

     2. The Certificate of Incorporation as amended and restated as provided in
Sections 1077 and 1080 of the Oklahoma General Corporation Act of the State of
Oklahoma and shall read in full as follows:


     ARTICLE FIRST: NAME. The name of the Corporation is VAUGHAN FOODS, INC.


     ARTICLE SECOND: REGISTERED OFFICE AND REGISTERED AGENT. The registered
office of the Corporation in the State of Oklahoma shall be located at 216 NE
12th Street, City of Moore, County of Cleveland. The name of the resident agent
in charge thereof is Mark Vaughan.


     ARTICLE THIRD: PURPOSE. The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the
Oklahoma Business Corporation Act as presently in effect or as it may hereafter
be amended.


     ARTICLE FOURTH: AUTHORIZED CAPITAL STOCK.

     SECTION 4.1 AUTHORIZATION. The total number of shares which this
Corporation shall have authority to issue is 55,000,000 shares, consisting of
(i) 50,000,000 shares of common stock, $.001 par value per share and (ii)
5,000,000 shares of preferred stock, $.001 par value per share (the "Preferred
Stock"). The Board of Directors, in the exercise of its discretion, is
authorized to issue the undesignated Preferred Stock in one or mare series, to
determine the powers, preferences and rights, and qualifications, limitations or
restrictions, granted to or imposed upon any wholly unissued series of
undesignated Preferred Stock, and to fix the number os shares constituting any
series and the designation of such series, without any further vote or action by
the stockholders.


                                       1


     ARTICLE FIFTH: STOCKHOLDERS.

     SECTION 5.1 ANNUAL MEETING. The Annual Meeting of the Stockholders of the
Corporation shall be held as provided in the Corporation's Bylaws, as such
Bylaws may be amended from time to time.

     SECTION 5.2 SPECIAL MEETINGS. Special Meetings of the Stockholders of the
Corporation may be called by the Corporation upon the written request of the
holders of record of outstanding shares representing at least 25% of the voting
power of all the shares of the Corporation then entitled to vote on the issue or
issues to be presented, by the Chief Executive Officer of the Corporation, or by
the Board of Directors pursuant to a resolution adopted by the affirmative vote
of a majority of the entire Board of Directors.

     SECTION 5.3 FIRST ANNUAL MEETING. The first Annual Meeting of the
Stockholders of the Corporation following the Effective Date shall take place on
a date designated by the Board of Directors of the Corporation which shall in no
event be more than twelve (12) months after the Effective Date.

     ARTICLE SIXTH: BYLAWS. In furtherance and not in limitation of the powers
conferred by the laws of the State of Oklahoma, the Board of Directors of the
Corporation is authorized and empowered to make, alter, amend and repeal the
Bylaws of the Corporation in any manner not inconsistent with the laws of the
State of Oklahoma.


     ARTICLE SEVENTH: INDEMNIFICATION. The Corporation shall, to the fullest
extent permitted by Section 1031 of the Oklahoma General Corporation Act, as
presently in effect or as it may hereafter be amended, indemnify all persons
whom it may indemnify pursuant thereto and advance expenses of litigation to
Directors and Officers when so requested. To the fullest extent permitted by the
Oklahoma Business Corporation Act, as presently in effect or as it may hereafter
be amended, a Director of this Corporation shall not be liable to the
Corporation or its Stockholders for monetary damages for breach of fiduciary
duty as a Director.

     ARTICLE EIGHTH: AMENDMENT. The Corporation reserves the right to amend,
alter, change or repeal any provision contained in this Amended and Restated
Certificate of Incorporation, in the manner now or hereinafter provided by
statute, and all rights conferred upon Stockholders herein are granted subject
to this reservation.

     IN WITNESS WHEREOF, the Corporation, has caused this Amended and Restated
Certificate of Incorporation to be executed by Mark E. Vaughan, its President,
and attested by its Secretary this 15th day of June, 2006.


                                                     VAUGHAN FOODS, INC.


                                                     By:  /s/ Mark E. Vaughan
                                                        ------------------------
                                                          Mark E. Vaughan
                                                          President

ATTEST:


  /s/ Darian B. Andersen
  --------------------------
  Darian B. Andersen
  Secretary


                                       2

EX-3.2

                                     BYLAWS
                                       OF
                               VAUGHAN FOODS, INC.


                                    ARTICLE I
                                    ---------

                                    OFFICERS

                  Section 1. The registered office shall be in the City of
Oklahoma City, County of Oklahoma, State of Oklahoma.

                  Section 2. The corporation may also have offices at such other
places both within and without the State of Oklahoma as the Board of Directors
may from time to time determine or the business of the corporation may require.

                                   ARTICLE II
                                   ----------

                            MEETINGS OF SHAREHOLDERS

                  Section 1. Meetings of shareholders for any purpose may be
held at such time and place, within or without the State of Oklahoma, as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.

                  Section 2. Annual meetings of shareholders commencing with the
year 1989, shall be held on the 10 day of July, 1989 if not a legal holiday, and
if a legal holiday, then on the next secular day following, at 10 AM at which
they shall elect by a plurality vote by written ballot a board of directors, and
transact such other business as may be properly be brought before the meeting.

                  Section 3. Written notice of the annual meeting, stating the
place, date and hour of such meeting, shall be given to each shareholder
entitled to vote thereat not less than ten (10) days nor more than sixty (60)
days before the date of the meeting unless otherwise required by law.

                  Section 4. The officer who has charge of the stock ledger of
the corporation shall prepare and make, at least ten (10) days before every
meeting of shareholders, a complete list of the shareholders entitled to vote at
the meeting, arranged in alphabetical order, showing the address of and the
number of shares registered in the name of each shareholder. Such list shall be
open to the examination of any shareholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten (10) days
prior to the election, either at a place within the city where the meeting is to
be held and which place shall be specified in the notice of the meeting, or, if
not specified, at the place where the meeting is to be held, and the list shall
be produced and kept at the time and place of the meeting during the whole time
thereof, and subject to the inspection of any shareholder who may be present.



                  Section 5. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by law or by the Certificate of
Incorporation, may be called by the President and shall be called by the
President or Secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of shareholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.

                  Section 6. Written notice of a special meeting of
shareholders, stating the place, date, hour and the purpose or purposes thereof,
shall be given to each shareholder entitled to vote thereat, not less than ten
(10) days before the date fixed for the meeting unless required by law.

                  Section 7. Business transacted at any special meeting of the
shareholders shall be limited to the purposes stated in the notice.

                  Section 8. The holders of a majority of the shares of stock
issued and outstanding and entitled to vote there at, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
shareholders for the transaction of business except as otherwise provided by law
or by the Certificate of Incorporation. If, however, such quorum shall not be
present or represented at any meeting of the shareholders, the shareholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date and hour of the adjourned meeting shall be given in conformity herewith. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted at the meeting as originally notified.

                  Section 9. When a quorum is present at any meeting, the
affirmative vote of the holders of a majority of the shares of stock having
voting power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which, by express
provision of law or of the Certificate of Incorporation, a different vote is
required, in which case such express provision shall govern and control the
decision of such question.

                  Section 10. Each shareholder shall at every meeting of the
shareholders be entitled to one vote in person or by proxy for each share of the
capital stock having voting power held by such shareholders, but no proxy shall
be voted or acted upon after three (3) years from its date unless the proxy
provides for a longer period, and, except where the transfer books of the
corporation have been closed or a date has been fixed as a record date for the
determination of its shareholders entitled to vote, no share of stock shall be
voted on at any election for directors which has been transferred on the books
of the corporation within twenty (20) days preceding such election of directors.



                  Section 11. Any action required to or which may be taken at
any annual or special meeting of the shareholders, may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action by the shareholders without a meeting by less than unanimous
written consent shall be given to those shareholders who have not consented in
writing.

                                   ARTICLE III
                                   -----------

                                    DIRECTORS

                  Section 1. The number of directors which shall constitute the
whole Board shall be not less than one (1) nor more than seven (7). As of July
10, 1989, the Board shall consist of three (3) directors. Thereafter, within the
limits above specified, the number of directors shall be determined by
resolution of the Board of Directors or by the shareholders at the annual or a
special meeting of the shareholders. Except for the election held by the
incorporator(s) and except as provided in Section 2 and in Section 14 of this
Article II, the directors shall be elected at the annual meeting of
shareholders. Each director elected shall hold office until such director's
successor is elected and qualified, or until such director's earlier resignation
or removal. Directors need not be shareholders.

                  Section 2. Except as provided in Section 14 of this Article
II, vacancies and newly created directorships resulting from any increase in the
authorized numbers of directors by the directors may be filled by a majority of
the directors then in office, though less than a quorum, and any director so
chosen shall hold office until the next annual election and until such
director's successor is duly elected and shall qualify, unless such director
resigns or is removed.

                  Section 3. The business of the corporation shall be managed by
its Board of Directors which may exercise all such powers of the corporation and
do all such lawful acts and things as are not by law or by the Certificate of
Incorporation or by these Bylaws directed or required to be exercised or done by
the shareholders.

                  Section 4. The Board of Directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Oklahoma.

                  Section 5. Regular meetings of the Board of Directors may be
held at such time and at such place as shall from time to time be determined by
the Board. Five (5) days' notice of all regular meetings shall be given, and
such notice shall state the place, date, hour and the business to be transacted
at and purpose of such meeting.



                  Section 6. Special meetings of the Board may be called by the
President on three (3) days' notice to each director either personally by mail
or by telegram. Special meetings shall be called by the President or Secretary
in like manner and on like notice on the written request of two (2) directors
unless the corporation has at that time less than three (3) directors, in which
latter event the request of only one (1) director shall be required. Notice of
any special meeting shall state the place, date, hour and the business to be
transacted at and the purpose of such meeting.

                  Section 7. At all meetings of the Board, a majority of the
directors shall constitute a quorum for the transaction of business, and the act
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by law or by the Certificate of Incorporation. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.

                  Section 8. The Board of Directors may , by resolution, passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one (1) or more of the directors of the corporation,
which, to the extent provided in the resolution, shall have and may exercise the
powers of the Board of Directors in the management of the business and affairs
of the corporation and affairs of the corporation and may authorize the seal of
the corporation to be affixed to all papers which may require it. Such committee
or committees shall have such name or names as may be determined from time to
time by resolution adopted by the Board of Directors.

                  Section 9. Each committee shall keep regular minutes of its
minutes of its meetings and report the same to the Board of Directors when
required.

                  Section 10. Members of the Board of Directors, or of any
committee thereof, may participate in a meeting of such Board or committee by
means of conference telephone or similar communications equipment that enables
all persons participating in the meeting to hear each other. Such participation
shall constitute presence in person at such meeting.

                  Section 11. Unless otherwise restricted by the Certificate of
Incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if a written consent to such action is signed by all members
of the Board or of such committee as the case may be, and such written consent
is filed with the minutes of proceedings of the Board or committee.

                  Section 12. The directors may be paid their expenses, if any,
of attendance at such meeting of the Board of Directors and may be paid a fixed
sum for attendance at such meeting of the Board of Directors or a stated salary
as director. No such payment shall preclude any director from serving the



corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.

                  Section 13. The Board of Directors at any time may, by
affirmative vote of a majority of the members of the Board then in office,
remove any officer elected or appointed by the Board of Directors for cause or
without cause.

                  Section 14. Any director may be removed, for cause or without
cause, by a majority vote of the shareholders entitled to vote for the election
of such director at any annual or special meeting of the shareholder. Upon such
removal of a director, the shareholders (and not the remaining directors) shall
elect a director to replace such a removed director at the same shareholders'
meeting at which such removal took place or at a subsequent shareholders'
meeting.

                                   ARTICLE IV
                                   ----------

                                     NOTICES

                  Section 1. Notices to directors and shareholders shall be in
writing and delivered personally or mailed to the directors or shareholders at
their addresses appearing on the books of the corporation. Notice by mail shall
be deemed to be given at the time when the same shall be deposited in the United
States mail, postage prepaid. Notice to directors may also be given by telegram.
Notice by telegram shall be deemed to be given when delivered to the sending
telegraph office.

                  Section 2. Whenever any notice is required to be given under
the provisions of law or the Certificate of Incorporation or of these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice.

                                    ARTICLE V
                                    ---------

                                    OFFICERS

                  Section 1. The officers of the corporation shall be chosen by
the Board of Directors and shall, at a minimum, consist of a President and a
Secretary. The Board of Directors may also choose additional officers, including
a Chairman or Vice-Chairman of the Board of Directors, one or more
Vice-Presidents who may be classified by their specific function, a Secretary, a
Treasurer and one or more Assistant Secretaries and Assistant Treasurers. Two or
more offices may be held by the same person, except the offices of President and
Secretary.

                  Section 2. The Board of Directors at its first meeting and
after each annual meeting of shareholders shall choose a President and a
Secretary, and may choose such other officers and agents as it shall deem
necessary.



                  Section 3. The salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.

                  Section 4. The officers of the corporation shall hold office
until their successors are chosen and qualify, until their earlier resignation
or removal. Any vacancy occurring in any office of the corporation shall be
filled by the Board of Directors.

                  Section 5. The Chairman, or, in the absence of the Chairman, a
Vice-Chairman of the Board of Directors, if chosen, shall preside at all
meetings of the Board of Directors, and shall perform such other duties and have
such other powers as the Board of Directors may from time to time prescribe.

                  Section 6. The President shall be the chief executive officer
of the corporation, shall preside at all meetings of the shareholders and,
unless a chairman or Vice-Chairman of the Board has been chosen, at all meetings
of the Board of Directors, and shall have general and active management of the
business of the corporation and shall see that all orders and resolutions of the
Board of Directors, are carried into effect.

                  Section 7. The President shall execute bonds, mortgages and
other contracts requiring a seal, under the seal of the corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the Board of Directors to some other officer or agent of the corporation.

                  Section 8. The Vice-President, or if there shall be more than
one, the Vice-Presidents in the order determined by the Board of Directors,
shall, in the absence or disability of the President, perform the duties and
exercise the powers of the President and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.

                  Section 9. The Secretary shall attend all meetings of the
Board of Directors and all meeting of the shareholders and record all the
proceedings of the meetings of the corporation and the Board of Directors in a
book to be kept for that purpose and shall perform like duties for the standing
committees when required. The Secretary shall give, or cause to be given, notice
of all meetings of the shareholders and regular and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed by
the Board of Directors or President, under whose supervision the Secretary shall
be. Additionally, the Secretary shall have custody of the corporate seal of the
corporation, and the Secretary or an Assistant Secretary, shall have authority
to affix the same to any instrument requiring it, and when so affixed, it may be
attested by the Secretary's signature or by the signature of such Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by the
Secretary's signature.



                  Section 10. The Assistant Secretary, or if there be more than
one, the Assistant Secretaries in the order determined by the Board of
Directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors from time to time
prescribe.

                  Section 11. The Treasurer, if one is chosen or, if not, the
Secretary, shall have the custody of the corporate funds and securities and
shall keep full and accurate accounts of receipts and disbursements in books
belonging to the corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the corporation in such depositories as
may be designated by the Board of Directors.

                  Section 12. The Treasurer, if one is chosen or, if not, the
Secretary, shall disburse the funds of the corporation as may be ordered by the
Board of Directors' taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors, at its regular meetings, or
when the Board of Directors so requires, an account of all transactions
performed by the Treasurer (or Secretary, as the case may be) and of the
financial condition of the corporation.

                  Section 13. If required by the Board of Directors, the
Treasurer, if one is chosen or, if not, the Secretary, shall give the
corporation a bond (which shall be renewed every six (6) years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of the office of a treasurer and for
the restoration to the corporation, in case of the Treasurer's (or Secretary's,
as the case may be) death, resignation, retirement or removal from office, of
all books, papers, vouchers, money and other property of whatever kind in the
possession or under the control of the Treasurer (or Secretary, as the case may
be) belonging to the corporation.

                  Section 14. The Assistant Treasurer, of if there shall be more
than one, the Assistant Treasurers in the order determined by the Board of
Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers at the Board of Directors may from time to
time prescribe.

                                   ARTICLE VI
                                   ----------

                    CERTIFICATES OF STOCK, TRANSFERS OF STOCK
                          CLOSING OF TRANSFER BOOKS AND

                             REGISTERED SHAREHOLDERS

                  Section 1. Every holder of stock in the corporation shall be
entitled to have a certificate, signed by, or in the name of, the corporation by
the chairman of Vice-Chairman of the Board of Directors, or the President or a
Vice-President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the corporation, certifying the number of shares
owned by the shareholder in the corporation.



                  Section 2. Any or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if the
person who signed the certificate was such officer, transfer agent or registrar
at the date of issue.

                  Section 3. The Board of Directors may direct a new certificate
or certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost or stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or such
owner's legal representative, advertise the same in such manner as the
corporation shall require and/or to give the corporation a bond in such sum as
the corporation may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.

                  Section 4. Subject to transfer restrictions permitted by
Section 1055 of Title 18 of the Oklahoma Statutes and to stop transfer orders
directed in good faith by the corporation to any transfer agent to prevent
possible violations of federal or state securities laws, rules or regulations,
upon surrender to the corporation or the transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.

                  Section 5. The Board of Directors may fix a record date, which
shall not be more than sixty (60) nor less than ten (10) days before the date of
any meeting of shareholders, nor more than sixty (60) days prior to the time for
the other action hereinafter described, as of which there shall be determined
the shareholders who are entitled: to notice of or to vote at any meeting of
shareholders or any adjournment thereof; to express consent to corporate action
in writing without a meeting; to receive payment of any dividend or other
distribution or allotment of any rights; or to exercise any rights with respect
to any change, conversion or exchange of stock or with respect to any other
lawful action.

                  Section 6. The corporation shall be entitled to treat the
person in whose name any share of stock is registered on the books of the
corporation as the owner thereof for all purposes and shall not be bound to
recognize any equitable or other claim or other interest in such shares in the
part of any other person, whether or not the corporation shall have express or
other notice thereof.



                                   ARTICLE VII
                                   -----------

                               GENERAL PROVISIONS

                  Section 1. Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property or in
shares of the corporation's capital stock.

                  Section 2. There may be set apart out of any of the funds of
the corporation available for dividends such amounts as the Board of Directors
deems proper as a reserve or reserves for working capital, depreciation, losses
in value, or for any other proper corporate purpose, and the Board of Directors
may increase, decrease or abolish any such reserve in the manner in which it was
created.

                  Section 3. The Board of Directors shall present at each annual
meeting and at any special meeting of the shareholders when called for by vote
of the shareholders, a full and clear statement of the business and condition of
the corporation.

                  Section 4. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.

                  Section 5. The fiscal year of the corporation shall be as
fixed by the Board of Directors.

                  Section 6. The Board of Directors may provide a suitable seal,
containing the name of the corporation, which seal shall be in charge of the
Secretary. If and when co directed by Board of Directors or a committee thereof,
duplicates of the seal may be kept and used by the Treasurer or by the Assistant
Secretary or Assistant Treasurer. The seal may be used by causing it, or a
facsimile thereof, to be impressed or affixed or in any other manner reproduced.

                  Section 7. The books of account and other records of the
corporation may be kept (subject to any provisions of Oklahoma law) at the
principal place of business and chief executive office of the corporation.

                                  ARTICLE VIII
                                  ------------

                     INDEMNIFICATION OF OFFICERS, DIRECTORS,
                              EMPLOYEES AND AGENTS

                  To the extent and in the manner permitted by the laws of the
State of Oklahoma and specifically as is permitted under Section 1031 of Title
18 of the Oklahoma Statues, the corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the corporation, by
reason of the fact that such person is or was a



director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement.

                                   ARTICLE IX
                                   ----------

                                   AMENDMENTS

                  The Bylaws may be amended or repealed, or new bylaws may be
adopted, by the shareholders or by the Board of Directors at any regular meeting
of the shareholders or of the Board of Directors, or at any special meeting of
the shareholders or of the Board of Directors if notice of such amendment,
repeal, or adoption of new bylaws be contained in the notice of such special
meeting.

         APPROVED AND RATIFIED as of this 10 day of July, 1989, by the
undersigned, constituting all of the directors (whether one or more) of the
corporation.

                           /s/ Eugene Vaughan
                           ------------------
                           EUGENE VAUGHAN, DIRECTOR

                           /s/ Sheila Vaughan
                           ------------------
                           SHEILA VAUGHAN, DIRECTOR

                           /s/ Mark Vaughan
                           ----------------
                           MARK VAUGHAN, DIRECTOR

EX-4.1

                   VAUGHAN FOODS, INC.     CUSIP ------------
                      SEE REVERSE FOR CERTAIN RESTRICTIONS

              INCORPORATED UNDER THE LAWS OF THE STATE OF OKLAHOMA

THIS CERTIFIES THAT

 IS THE OWNER OF

     FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE OF

      ======================== VAUGHAN FOODS, INC. =======================

transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until Countersigned by the Transfer
Agent and Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.

Dated:

                                 FACSIMILE SEAL
                                 TO APPEAR HERE
    FACSIMILE SIGNATURE                                  FACSIMILE SIGNATURE

       SECRETARY                                             CHAIRMAN


                          COUNTERSIGNED AND REGISTERED:
                 CONTINENTAL STOCK TRANSFER & TRUST CORPORATION
                          TRANSFER AGENT AND REGISTRAR

                            BY: AUTHORIZED SIGNATURE




                                                VAUGHAN FOODS, INC.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:



                                     
TEN COM - as tenants in common             UNIF GIFT MIN ACT- ____________________ Custodian_________________
TEN ENT - as tenants by the entireties                               (Cust)                      (Minor)
JT TEN -  as joint tenants with right                         under Uniform Gifts to Minors
          of survivorship and not as                          Act
          tenants in common                                      ____________________________________________
                                                                                   (State)

                                           UNIF TRF MIN ACT- _______________________ Custodian (until age __________)
                                                                       (Cust)

                                                             ________________________________ under Uniform Transfers
                                                                         (Minor)
                                                             to Minors Act __________________________________________
                                                                                           (State)


     Additional abbreviations may also be used though not in the above list.

For Value received, _______________________________________________ hereby sell,
assign and transfer unto

                     PLEASE INSERT SOCIAL SECURITY OR OTHER
                         IDENTIFYING NUMBER OF ASSIGNEE



  (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)



                                     SHARES

of the Common Stock represented by the within Certificate, and do(es) hereby
irrevocably constitute and appoint

                                    ATTORNEY

to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.

                         Dated                                 X
           ------------------------------------ --------------------------------

                                                               X
                                                --------------------------------

                        NOTICE: THE SIGNATURE(S) TO THIS
                         ASSIGNMENT MUST CORRESPOND WITH
                         THE NAME(S) AS WRITTEN UPON THE
                        FACE OF THE CERTIFICATE IN EVERY
                        PARTICULAR WITHOUT ALTERATION OR
                            ENLARGEMENT OR ANY CHANGE
                                    WHATEVER.

SIGNATURES GUARANTEED:

By
- --
 THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.

EX-4.2

                                WARRANT AGREEMENT



                                     BETWEEN



                               VAUGHAN FOODS, INC.

                                       AND

                            ------------------------



                           DATED AS OF _________, 2006






                                WARRANT AGREEMENT

         This Agreement, dated as of ________, 2006, is between Vaughan Foods,
Inc., an Oklahoma corporation (the "COMPANY") and ______________________, a
____________ corporation (the "WARRANT AGENT").

         The Company, at or about the time that it is entering into this
Agreement, proposes to issue and sell to public investors up to 5,750,000 Units
(together with the additional units issuable as provided herein, the "UNITS").
Each Unit consists of one share of common stock, $0.001 par value, of the
Company, one redeemable Class A Warrant and one redeemable Class B Warrants. The
Class A Warrants and the Class B Warrants are herein collectively referred to as
the "WARRANTS." Each Warrant is exercisable to purchase one share of Common
Stock upon the terms and conditions and subject to adjustment in certain
circumstances, all as set forth in this Agreement.

         The Company proposes to issue to the Representative of the Underwriters
in the public offering of Units referred to above warrants to purchase up to
500,000 additional Units.

         The Company wishes to retain the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, transfer, exchange and replacement of the certificates evidencing the
Warrants to be issued under this Agreement (the "WARRANT CERTIFICATES") and the
exercise of the Warrants;

         The Company and the Warrant Agent wish to enter into this Agreement to
set forth the terms and conditions of the Warrants and the rights of the holders
thereof ("WARRANTHOLDERS") and to set forth the respective rights and
obligations of the Company and the Warrant Agent. Each Warrantholder is an
intended beneficiary of this Agreement with respect to the rights of
Warrantholders herein.

         NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:

         1. APPOINTMENT OF WARRANT AGENT. The Company appoints the Warrant Agent
to act as agent for the Company in accordance with the instructions in this
Agreement and the Warrant Agent accepts such appointment.

         2. DATE, DENOMINATION AND EXECUTION OF WARRANT CERTIFICATES.

               (a) The Warrant Certificates (and the Form of Election to
Purchase and the Form of Assignment to be printed on the reverse thereof) shall
be in registered form only and shall be substantially of the tenor and purport
recited in EXHIBIT A hereto with respect to the Class A Warrants and EXHIBIT B
hereto with respect to the Class B Warrants, and may have such letters, numbers
or other marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any law, or with any rule or regulation
made pursuant thereto, or with any rule or regulation of any stock exchange on
which the Common Stock or the Warrants may be listed or any automated quotation
system, or to conform to usage. Each Class A Warrant Certificate shall





entitle the registered holder thereof, subject to the provisions of this
Agreement and of the Warrant Certificate, to purchase, on or after _________,
2006 and on or before the close of business on _________, 2011 (the "EXPIRATION
DATE"), one fully paid and non-assessable share of Common Stock for each Warrant
evidenced by such Warrant Certificate for $_____. Each Class B Warrant
Certificate shall entitle the registered holder thereof, subject to the
provisions of this Agreement and of the Warrant Certificate, to purchase, on or
after _________, 2006 and on or before the close of business on the Expiration
Date, one fully paid and non-assessable share of Common Stock for each Warrant
evidenced by such Warrant Certificate for $______. The exercise price of the
Warrants (the "EXERCISE PRICE") is subject to adjustments as provided in Section
6 hereof. Each Warrant Certificate issued as a part of a Unit offered to the
public as described in the recitals, above, shall be dated _______, 2006; each
other Warrant Certificate shall be dated the date on which the Warrant Agent
receives valid issuance instructions from the Company or a transferring holder
of a Warrant Certificate or, if such instructions specify another date, such
other date.

               (b) For purposes of this Agreement, the term "CLOSE OF BUSINESS"
on any given date shall mean 5:00 p.m., Pacific time, on such date; provided,
however, that if such date is not a business day, it shall mean 5:00 p.m.,
Pacific time, on the next succeeding business day. For purposes of this
Agreement, the term "BUSINESS DAY" shall mean any day other than a Saturday,
Sunday, or a day on which banking institutions in New York, New York or in the
State in which the Warrant Agent maintains the principal office in which it
conducts business related to the Warrants are authorized or obligated by law to
be closed.

               (c) Each Warrant Certificate shall be executed on behalf of the
Company by the Chairman of the Board, its Chief Executive Officer, its President
or a Vice President, either manually or by facsimile signature printed thereon,
and have affixed thereto the Company's seal or a facsimile thereof which shall
be attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. Each Warrant Certificate shall be manually
countersigned by the Warrant Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed any
Warrant Certificate shall cease to be such officer of the Company before
countersignature by the Warrant Agent and issue and delivery thereof by the
Company, such Warrant Certificate, nevertheless, may be countersigned by the
Warrant Agent, issued and delivered with the same force and effect as though the
person who signed such Warrant Certificate had not ceased to be such officer of
the Company.

         3. SUBSEQUENT ISSUE OF WARRANT CERTIFICATES. Subsequent to their
original issuance, no Warrant Certificates shall be reissued except (i) Warrant
Certificates issued upon transfer thereof in accordance with Section 4 hereof,
(ii) Warrant Certificates issued upon any combination, split-up or exchange of
Warrant Certificates pursuant to Section 4 hereof, (iii) Warrant Certificates
issued in replacement of mutilated, destroyed, lost or stolen Warrant
Certificates pursuant to Section 5 hereof, (iv) Warrant Certificates issued upon
the partial exercise of Warrant Certificates pursuant to Section 7 hereof, and
(v) Warrant Certificates issued to reflect any adjustment or change in the
Exercise Price or the number or kind of shares purchasable thereunder pursuant
to Section 22 hereof. The Warrant Agent is hereby irrevocably authorized to
countersign and deliver, in accordance with the provisions of said Sections 4,
5, 7 and 22, the new Warrant Certificates required for purposes thereof, and the
Company, whenever


                                       2


required by the Warrant Agent, will supply the Warrant Agent with Warrant
Certificates duly executed on behalf of the Company for such purposes.

         4. TRANSFERS AND EXCHANGES OF WARRANT CERTIFICATES.

               (a) The Warrant Agent will keep or cause to be kept books for
registration of ownership and transfer of the Warrant Certificates issued
hereunder. Such registers shall show the names and addresses of the respective
holders of the Warrant Certificates and the class and number of Warrants
evidenced by each such Warrant Certificate.

               (b) The Warrant Agent shall, from time to time, register the
transfer of any outstanding Warrants upon the books to be maintained by the
Warrant Agent for that purpose, upon surrender of the Warrant Certificate
evidencing such Warrants, with the Form of Assignment duly filled in and
executed with such signature guaranteed by a banking institution or NASD member
and such supporting documentation as the Warrant Agent or the Company may
reasonably require, to the Warrant Agent at its stock transfer office in
_______, ________ at any time on or before the Expiration Date of such Warrant,
and upon payment to the Warrant Agent for the account of the Company of an
amount equal to any applicable transfer tax. Payment of the amount of such tax
may be made in cash, or by certified or official bank check, payable in lawful
money of the United States of America to the order of the Company.

               (c) Upon receipt of a Warrant Certificate, with the Form of
Assignment duly filled in and executed, accompanied by payment of an amount
equal to any applicable transfer tax, the Warrant Agent shall promptly cancel
the surrendered Warrant Certificate and countersign and deliver to the
transferee a new Warrant Certificate for the number of full Warrants of the same
class transferred to such transferee; provided, however, that in case the
registered holder of any Warrant Certificate shall elect to transfer fewer than
all of the Warrants evidenced by such Warrant Certificate, the Warrant Agent in
addition shall promptly countersign and deliver to such registered holder a new
Warrant Certificate or Certificates for the number of full Warrants not so
transferred.

               (d) Any Warrant Certificate or Certificates may be exchanged at
the option of the holder thereof for another Warrant Certificate or Certificates
of different denominations, of like tenor and representing in the aggregate the
same class and number of Warrants, upon surrender of such Warrant Certificate or
Certificates, with the Form of Assignment duly filled in and executed, to the
Warrant Agent, at any time or from time to time after the close of business on
the date hereof and prior to the close of business on the Expiration Date
relating to such Warrant. The Warrant Agent shall promptly cancel the
surrendered Warrant Certificate and deliver the new Warrant Certificate pursuant
to the provisions of this Section.

         5. MUTILATED, DESTROYED, LOST OR STOLEN WARRANT CERTIFICATES. Upon
receipt by the Company and the Warrant Agent of evidence reasonably satisfactory
to them of the loss, theft, destruction or mutilation of any Warrant
Certificate, and in the case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and reimbursement to them of all
reasonable expenses incidental thereto, and, in the case of mutilation, upon
surrender and cancellation of the Warrant Certificate, the Warrant Agent shall
countersign and deliver a new Warrant Certificate of like tenor for the same
class and number of Warrants.

                                       3



         6. ADJUSTMENTS OF NUMBER AND KIND OF SHARES PURCHASABLE AND EXERCISE
PRICE. The number and kind of securities or other property purchasable upon
exercise of a Warrant shall be subject to adjustment from time to time upon the
occurrence, after the date hereof, of any of the following events:

               (a) In case the Company shall (1) pay a dividend in, or make a
distribution of, shares of capital stock on its outstanding Common Stock, (2)
subdivide its outstanding shares of Common Stock into a greater number of such
shares or (3) combine its outstanding shares of Common Stock into a smaller
number of such shares, the total number of shares of Common Stock purchasable
upon the exercise of each Warrant outstanding immediately prior thereto shall be
adjusted so that the holder of any Warrant Certificate thereafter surrendered
for exercise shall be entitled to receive at the same aggregate Exercise Price
the number of shares of capital stock (of one or more classes) which such holder
would have owned or have been entitled to receive immediately following the
happening of any of the events described above had such Warrant been exercised
in full immediately prior to the record date with respect to such event. Any
adjustment made pursuant to this Subsection shall, in the case of a stock
dividend or distribution, become effective as of the record date therefor and,
in the case of a subdivision or combination, be made as of the effective date
thereof. If, as a result of an adjustment made pursuant to this Subsection, the
holder of any Warrant Certificate thereafter surrendered for exercise shall
become entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive and shall be evidenced by a Board resolution filed with the Warrant
Agent) shall determine the allocation of the adjusted Exercise Price between or
among shares of such classes of capital stock.

               (b) In the event of a capital reorganization or a
reclassification of the Common Stock (except as provided in Subsection (a) above
or Subsection (d) below), any Warrantholder, upon exercise of Warrants, shall be
entitled to receive, in substitution for the Common Stock to which he would have
become entitled upon exercise immediately prior to such reorganization or
reclassification, the shares (of any class or classes) or other securities or
property of the Company (or cash) that he would have been entitled to receive at
the same aggregate Exercise Price upon such reorganization or reclassification
if such Warrants had been exercised immediately prior to the record date with
respect to such event; and in any such case, appropriate provision (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and shall be evidenced by a certified Board resolution filed with
the Warrant Agent) shall be made for the application of this Section 6 with
respect to the rights and interests thereafter of the Warrantholders (including
but not limited to the allocation of the Exercise Price between or among shares
of classes of capital stock), to the end that this Section 6 (including the
adjustments of the number of shares of Common Stock or other securities
purchasable and the Exercise Price thereof) shall thereafter be reflected, as
nearly as reasonably practicable, in all subsequent exercises of the Warrants
for any shares or securities or other property (or cash) thereafter deliverable
upon the exercise of the Warrants.

               (c) Whenever the number of shares of Common Stock or other
securities purchasable upon exercise of a Warrant is adjusted as provided in
this Section 6, the Company will promptly file with the Warrant Agent a
certificate signed by a Chairman or co-Chairman of the Board, the Chief
Executive, the President or a Vice President of the Company and by the Treasurer
or an Assistant Treasurer or the Secretary or an Assistant Secretary of the
Company


                                       4


setting forth the number and kind of securities or other property purchasable
upon exercise of a Warrant, as so adjusted, stating that such adjustments in the
number or kind of shares or other securities or property conform to the
requirements of this Section 6, and setting forth a brief statement of the facts
accounting for such adjustments. Promptly after receipt of such certificate, the
Company, or the Warrant Agent at the Company's request, will deliver, by
first-class, postage prepaid mail, a brief summary thereof (to be supplied by
the Company) to the registered holders of the outstanding Warrant Certificates;
provided, however, that failure to file or to give any notice required under
this Subsection, or any defect therein, shall not affect the legality or
validity of any such adjustments under this Section 6; and provided, further,
that, where appropriate, such notice may be given in advance and included as
part of the notice required to be given pursuant to Section 12 hereof.

               (d) In case of any consolidation of the Company with, or merger
of the Company into, another corporation (other than a consolidation or merger
which does not result in any reclassification or change of the outstanding
Common Stock), or in case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as an entirety, the
corporation formed by such consolidation or merger or the corporation which
shall have acquired such assets, as the case may be, shall execute and deliver
to the Warrant Agent a supplemental warrant agreement providing that the holder
of each Warrant then outstanding shall have the right thereafter (until the
expiration of such Warrant) to receive, upon exercise of such Warrant, solely
the kind and amount of shares of stock and other securities and property (or
cash) receivable upon such consolidation, merger, sale or transfer by a holder
of the number of shares of Common Stock of the Company for which such Warrant
might have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental warrant agreement shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided in this Section. The above provision of this Subsection shall similarly
apply to successive consolidations, mergers, sales or transfers.

         The Warrant Agent shall not be under any responsibility to determine
the correctness of any provision contained in any such supplemental warrant
agreement relating to either the kind or amount of shares of stock or securities
or property (or cash) purchasable by holders of Warrant Certificates upon the
exercise of their Warrants after any such consolidation, merger, sale or
transfer or of any adjustment to be made with respect thereto, but subject to
the provisions of Section 20 hereof, may accept as conclusive evidence of the
correctness of any such provisions, and shall be protected in relying upon, a
certificate of a firm of independent certified public accountants (who may be
the accountants regularly employed by the Company) with respect thereto.

               (e) Irrespective of any adjustments in the number or kind of
shares issuable upon exercise of Warrants, Warrant Certificates theretofore or
thereafter issued may continue to express the same price and number and kind of
shares as are stated in the similar Warrant Certificates initially issuable
pursuant to this Warrant Agreement.

               (f) The Company may retain a firm of independent public
accountants of recognized standing, which may be the firm regularly retained by
the Company, selected by the Board of Directors of the Company or the Executive
Committee of said Board, and not disapproved by the Warrant Agent, to make any
computation required under this Section, and a


                                       5


certificate signed by such firm shall, in the absence of fraud or gross
negligence, be conclusive evidence of the correctness of any computation made
under this Section.

               (g) For the purpose of this Section, the term "COMMON STOCK"
shall mean (i) the Common Stock or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value. In the event that at any time as a result of an adjustment made
pursuant to this Section, the holder of any Warrant thereafter surrendered for
exercise shall become entitled to receive any shares of capital stock of the
Company other than shares of Common Stock, thereafter the number of such other
shares so receivable upon exercise of any Warrant shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained in this Section,
and all other provisions of this Agreement, with respect to the Common Stock,
shall apply on like terms to any such other shares.

               (h) The Company may, from time to time and to the extent
permitted by law, reduce the Exercise Price of the Warrants by any amount for a
period of not less than 20 days. If the Company so reduces the Exercise Price of
such Warrants, it will give not less than 15 days' notice of such decrease,
which notice may be in the form of a press release, and shall take such other
steps as may be required under applicable law in connection with any offers or
sales of securities at the reduced price.

         7. EXERCISE OF WARRANTS; REDEMPTION OF WARRANTS. Except with respect to
Warrants that have been redeemed as provided in this Section 7, the registered
holder of any Warrant Certificate may exercise the Warrants evidenced thereby,
in whole at any time or in part from time to time at or prior to the close of
business, on the Expiration Date, subject to the provisions of Section 9, at
which time the Warrant Certificates shall be and become wholly void and of no
value. Warrants may be exercised by their holders or redeemed by the Company as
follows:

               (a) Exercise of Warrants shall be accomplished upon surrender of
the Warrant Certificate evidencing such Warrants, with the Form of Election to
Purchase on the reverse side thereof duly filled in and executed, to the Warrant
Agent at its stock transfer office in _______, ________, together with payment
to the Company of the Exercise Price (as of the date of such surrender) of the
Warrants then being exercised and an amount equal to any applicable transfer tax
and, if requested by the Company, any other taxes or governmental charges which
the Company may be required by law to collect in respect of such exercise.
Payment of the Exercise Price and other amounts may be made by wire transfer of
good funds, or by certified or bank cashier's check, payable in lawful money of
the United States of America to the order of the Company. No adjustment shall be
made for any cash dividends, whether paid or declared, on any securities
issuable upon exercise of a Warrant.

               (b) Upon receipt of a Warrant Certificate, with the Form of
Election to Purchase duly filled in and executed, accompanied by payment of the
Exercise Price of the Warrants being exercised (and of an amount equal to any
applicable taxes or government charges as aforesaid), the Warrant Agent shall
promptly request from the Transfer Agent with respect to the securities to be
issued and deliver to or upon the order of the registered holder of such Warrant
Certificate, in such name or names as such registered holder may designate, a
certificate


                                       6


or certificates for the number of full shares of the securities to be purchased,
together with cash made available by the Company pursuant to Section 8 hereof in
respect of any fraction of a share of such securities otherwise issuable upon
such exercise. If the Warrant is then exercisable to purchase property other
than securities, the Warrant Agent shall take appropriate steps to cause such
property to be delivered to or upon the order of the registered holder of such
Warrant Certificate. In addition, if it is required by law and upon instruction
by the Company, the Warrant Agent will deliver to each Warrantholder a
prospectus which complies with the provisions of Section 9 of the Securities Act
of 1933 and the Company agrees to supply Warrant Agent with sufficient number of
prospectuses to effectuate that purpose.

               (c) In case the registered holder of any Warrant Certificate
shall exercise fewer than all of the Warrants evidenced by such Warrant
Certificate, the Warrant Agent shall promptly countersign and deliver to the
registered holder of such Warrant Certificate, or to his duly authorized
assigns, a new Warrant Certificate or Certificates evidencing the number and
class of Warrants that were not so exercised.

               (d) Each person in whose name any certificate for securities is
issued upon the exercise of Warrants shall for all purposes be deemed to have
become the holder of record of the securities represented thereby as of, and
such certificate shall be dated, the date upon which the Warrant Certificate was
duly surrendered in proper form and payment of the Exercise Price (and of any
applicable taxes or other governmental charges) was made; provided, however,
that if the date of such surrender and payment is a date on which the stock
transfer books of the Company are closed, such person shall be deemed to have
become the record holder of such shares as of, and the certificate for such
shares shall be dated, the next succeeding business day on which the stock
transfer books of the Company are open (whether before, on or after the
Expiration Date relating to such Warrant) and the Warrant Agent shall be under
no duty to deliver the certificate for such shares until such date. The Company
covenants and agrees that it shall not cause its stock transfer books to be
closed for a period of more than 20 consecutive business days except upon
consolidation, merger, sale of all or substantially all of its assets,
dissolution or liquidation or as otherwise provided by law.

               (e) The Class A Warrants outstanding at the time of a redemption
may be redeemed at the option of the Company, in whole or in part on a pro-rata
basis, by giving not less than 30 days prior notice as provided in Section 7(g)
below, which notice may not be given before, but may be given at any time after,
the later of _________, 2007 and the date on which closing price of the Common
Stock on the principal exchange or trading facility on which it is then traded
has equaled or exceeded $_____ per share on each of five consecutive trading
days. The price at which Class A Warrants may be redeemed (the "REDEMPTION
PRICE") is $0.25 per Class A Warrant. On and after the redemption date the
holders of record of redeemed Class A Warrants shall be entitled to payment of
the Redemption Price upon surrender of such redeemed Class A Warrants to the
Company at the office of the Warrant Agent designated for that purpose.

               (f) The Class B Warrants outstanding at the time of a redemption
may be redeemed at the option of the Company, beginning on ___________, 2006
[six months from the date of this Agreement], in whole or in part on a pro-rata
basis, by giving not less than 30 days' prior notice as provided in Section 7(g)
below, which notice may not be given before, but may be given at any time after,
the Company's gross revenue for any 12-month period preceding the date


                                       7


of the notice, as confirmed by an independent audit, equals or exceeds $100
million. The price at which Class B Warrants may be redeemed (the "REDEMPTION
PRICE") is $0.25 per Class B Warrant. On and after the redemption date the
holders of record of redeemed Class B Warrants shall be entitled to payment of
the Redemption Price upon surrender of such redeemed Class B Warrants to the
Company at the office of the Warrant Agent designated for that purpose.

               (g) Notice of redemption of Warrants shall be given at least 30
days prior to the redemption date by mailing, by registered or certified mail,
return receipt requested, a copy of such notice to the Warrant Agent and to all
of the holders of record of Warrants at their respective addresses appearing on
the books or transfer records of the Company or such other address designated in
writing by the holder of record to the Warrant Agent not less than 40 days prior
to the redemption date.

               (h) From and after the redemption date, all rights of the
Warrantholders with respect to the redeemed Warrants (except the right to
receive the Redemption Price) shall terminate, but only if (i) no later than one
day prior to the redemption date the Company shall have irrevocably deposited
with the Warrant Agent as paying agent a sufficient amount to pay on the
redemption date the Redemption Price for all Warrants called for redemption and
(ii) the notice of redemption shall have stated the name and address of the
Warrant Agent and the intention of the Company to deposit such amount with the
Warrant Agent no later than one day prior to the redemption date.

               (i) On the Redemption Date, the Warrant Agent shall pay to the
holders of record of redeemed Warrants all monies received by the Warrant Agent
for the redemption of Warrants to which the holders of record of such redeemed
Warrants who shall have surrendered their Warrants are entitled. The Warrant
Agent shall have no obligation to pay for the redemption of Warrants except to
the extent that funds for such payment have been provided to it by the Company.

               (j) Any amounts deposited with the Warrant Agent that are not
required for redemption of Warrants may be withdrawn by the Company. Any amounts
deposited with the Warrant Agent that shall be unclaimed after six months after
the redemption date shall be redelivered back to the Company, and thereafter the
holders of the Warrants called for redemption for which such funds were
deposited shall look solely to the Company for payment. The Company shall be
entitled to the interest, if any, on funds deposited with the Warrant Agent and
the holders of redeemed Warrants shall have no right to any such interest. At
the instruction of the Company, the Warrant Agent shall deposit or invest any
and all funds deposited with it by the Company in connection with any redemption
in federally insured, interest bearing accounts with a financial institution or
institutions designated by the Company but shall have no liability with respect
to the performance of any such investments other than, in the case of funds
deposited in accounts maintained by the Warrant Agent, the liability of the
Warrant Agent to its depositors in such accounts, generally.

               (k) If the Company fails to make a sufficient deposit with the
Warrant Agent as provided above, the holder of any Warrants called for
redemption may at the option of the holder (i) by notice to the Company declare
the notice of redemption a nullity as to such holder, or (ii) maintain an action
against the Company for the Redemption Price. If the holder brings


                                       8


such an action, the Company will pay reasonable attorneys' fees of the holder.
If the holder fails to bring an action against the Company for the Redemption
Price within 60 days after the redemption date, the holder shall be deemed to
have elected to declare the notice of redemption to be a nullity as to such
holder and such notice shall be without any force or effect as to such holder.
Except as otherwise specifically provided in this Paragraph 7(k), a notice of
redemption, once mailed by the Company as provided in Paragraph 7(g) shall be
irrevocable.

               (l) Notwithstanding anything to the contrary in this Section 7,
the Company may not provide notice of any redemption pursuant to this Section 7
at any time at which the Warrants are not currently exercisable as a result of
the application of Section 9. If, during the period between notice of redemption
and the Redemption Date, the Warrants become not currently exercisable as a
result of the application of Section 9, the Redemption Date shall be extended to
be the tenth business day after such restriction on exercise lapses.

         8. FRACTIONAL INTERESTS. The Company shall not be required to issue any
Warrant Certificate evidencing a fraction of a Warrant or to issue fractions of
shares of securities on the exercise of the Warrants. If any fraction
(calculated to the nearest one-hundredth) of a Warrant or a share of securities
would, except for the provisions of this Section, be issuable on the exercise of
any Warrant, the Company shall, at its option, either purchase such fraction for
an amount in cash equal to the current value of such fraction computed on the
basis of the closing market price of a Warrant of the same class (as quoted on
the principal exchange or trading facility on which such class of Warrants is
traded) on the trading day immediately preceding the day upon which such Warrant
Certificate was surrendered for exercise in accordance with Section 7 hereof or
issue the required fractional Warrant or share. By accepting a Warrant
Certificate, the holder thereof expressly waives any right to receive a Warrant
Certificate evidencing any fraction of a Warrant or to receive any fractional
share of securities upon exercise of a Warrant, except as expressly provided in
this Section 8.

         9. RESERVATION OF EQUITY SECURITIES. The Company covenants that it will
at all times reserve and keep available, free from any pre-emptive rights, out
of its authorized and unissued equity securities, solely for the purpose of
issue upon exercise of the Warrants, such number of shares of equity securities
of the Company as shall then be issuable upon the exercise of all outstanding
Warrants ("EQUITY SECURITIES"). The Company covenants that all Equity Securities
which shall be so issuable shall, upon such issue, be duly authorized, validly
issued, fully paid and non-assessable.

         The Company covenants that if any equity securities, required to be
reserved for the purpose of issue upon exercise of the Warrants hereunder,
require registration with or approval of any governmental authority under any
federal or state law before such shares may be issued upon exercise of Warrants,
the Company will use all commercially reasonable efforts to cause such
securities to be duly registered, or approved, as the case may be, and, to the
extent practicable, take all such action in anticipation of and prior to the
exercise of the Warrants, including, without limitation, filing any and all
post-effective amendments to the Company's Registration Statement on Form S-1
(Registration No. 333-______) necessary to permit a public offering of the
securities underlying the Warrants at any and all times during the term of this
Agreement, provided, however, that in no event shall such securities be issued,
and the Company is authorized to refuse to honor the exercise of any Warrant, if
such exercise would result in the


                                       9


opinion of the Company's Board of Directors, upon advice of counsel, in the
violation of any law; and provided further that, in the case of a Warrant
exercisable solely for securities listed on a securities exchange or for which
there are at least three independent market makers, in lieu of obtaining such
registration or approval, the Company may elect to redeem Warrants submitted to
the Warrant Agent for exercise for a price equal to the difference between the
aggregate low asked price, or closing price, as the case may be, of the
securities for which such Warrant is exercisable on the date of such submission
and the Exercise Price of such Warrants; in the event of such redemption, the
Company will pay to the holder of such Warrants the above-described redemption
price in cash within 10 business days after receipt of notice from the Warrant
Agent that such Warrants have been submitted for exercise. If, at the Expiration
Date, the Warrants are not currently exercisable as a result of the provisions
of this paragraph, the Expiration Date shall be extended to a date that is 30
calendar days following notice to the holders of Warrants that the Warrants are
again exercisable and references to the Expiration Date herein shall thereafter
refer to such extended Expiration Date.

         10. REDUCTION OF CONVERSION PRICE BELOW PAR VALUE. Before taking any
action that would cause an adjustment pursuant to Section 6 hereof reducing the
portion of the Exercise Price required to purchase one share of capital stock
below the then par value (if any) of a share of such capital stock, the Company
will use its best efforts to take any corporate action which, in the opinion of
its counsel, may be necessary in order that the Company may validly and legally
issue fully paid and non-assessable shares of such capital stock.

         11. PAYMENT OF TAXES. The Company covenants and agrees that it will pay
when due and payable any and all federal and state documentary stamp and other
original issue taxes which may be payable in respect of the original issuance of
the Warrant Certificates, or any shares of Common Stock or other securities upon
the exercise of Warrants. The Company shall not, however, be required (a) to pay
any tax which may be payable in respect of any transfer involved in the transfer
and delivery of Warrant Certificates or the issuance or delivery of certificates
for Common Stock or other securities in a name other than that of the registered
holder of the Warrant Certificate surrendered for purchase or (b) to issue or
deliver any certificate for shares of Common Stock or other securities upon the
exercise of any Warrant Certificate until any such tax shall have been paid, all
such tax being payable by the holder of such Warrant Certificate at the time of
surrender.

         12. NOTICE OF CERTAIN CORPORATE ACTION. In case the Company after the
date hereof shall propose (a) to offer to the holders of Common Stock,
generally, rights to subscribe to or purchase any additional shares of any class
of its capital stock, any evidences of its indebtedness or assets, or any other
rights or options or (b) to effect any reclassification of Common Stock (other
than a reclassification involving merely the subdivision or combination of
outstanding shares of Common Stock) or any capital reorganization, or any
consolidation or merger to which the Company is a party and for which approval
of any shareholders of the Company is required, or any sale, transfer or other
disposition of its property and assets substantially as an entirety, or the
liquidation, voluntary or involuntary dissolution or winding-up of the Company,
then, in each such case, the Company shall file with the Warrant Agent and the
Company, or the Warrant Agent on its behalf, shall mail (by first-class, postage
prepaid mail) to all registered holders of the Warrant Certificates notice of
such proposed action, which notice shall specify the date on which the books of
the Company shall close or a record be taken for such offer of rights or

                                       10


options, or the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, other disposition, liquidation, voluntary
or involuntary dissolution or winding-up shall take place or commence, as the
case may be, and which shall also specify any record date for determination of
holders of Common Stock entitled to vote thereon or participate therein and
shall set forth such facts with respect thereto as shall be reasonably necessary
to indicate any adjustments in the Exercise Price and the number or kind of
shares or other securities purchasable upon exercise of Warrants which will be
required as a result of such action. Such notice shall be filed and mailed in
the case of any action covered by clause (a) above, at least ten days prior to
the record date for determining holders of the Common Stock for purposes of such
action or, if a record is not to be taken, the date as of which the holders of
shares of Common Stock of record are to be entitled to such offering; and, in
the case of any action covered by clause (b) above, at least 20 days prior to
the earlier of the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, other disposition, liquidation, voluntary
or involuntary dissolution or winding-up is expected to become effective and the
date on which it is expected that holders of shares of Common Stock of record on
such date shall be entitled to exchange their shares for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, sale, transfer, other disposition, liquidation, voluntary or involuntary
dissolution or winding-up.

         Failure to give any such notice or any defect therein shall not affect
the legality or validity of any transaction listed in this Section 12.

         13. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANT CERTIFICATES, ETC.
The Warrant Agent shall account promptly to the Company with respect to Warrants
exercised and concurrently pay to the Company all moneys received by the Warrant
Agent for the purchase of securities or other property through the exercise of
such Warrants.

         The Warrant Agent shall keep copies of this Agreement available for
inspection by Warrantholders during normal business hours at its stock transfer
office. Copies of this Agreement may be obtained upon written request addressed
to the Warrant Agent at its stock transfer office in _______, ________.

         14. WARRANTHOLDER NOT DEEMED A SHAREHOLDER. No Warrantholder, as such,
shall be entitled to vote, receive dividends or be deemed the holder of Common
Stock or any other securities of the Company which may at any time be issuable
on the exercise of the Warrants represented thereby for any purpose whatever,
nor shall anything contained herein or in any Warrant Certificate be construed
to confer upon any Warrantholder, as such, any of the rights of a shareholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issuance of
stock, reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger, conveyance or otherwise), or to receive notice
of meetings or other actions affecting shareholders (except as provided in
Section 12 hereof), or to receive dividend or subscription rights, or otherwise,
until such Warrant Certificate shall have been exercised in accordance with the
provisions hereof and the receipt of the Exercise Price and any other amounts
payable upon such exercise by the Warrant Agent.

                                       11


         15. RIGHT OF ACTION. All rights of action in respect to this Agreement
are vested in the respective registered holders of the Warrant Certificates; and
any registered holder of any Warrant Certificate, without the consent of the
Warrant Agent or of any other holder of a Warrant Certificate, may, in his own
behalf for his own benefit, enforce, and may institute and maintain any suit,
action or proceeding against the Company suitable to enforce, or otherwise in
respect of, his right to exercise the Warrants evidenced by such Warrant
Certificate, for the purchase of shares of the Common Stock in the manner
provided in the Warrant Certificate and in this Agreement.

         16. AGREEMENT OF HOLDERS OF WARRANT CERTIFICATES. Every holder of a
Warrant Certificate by accepting the same consents and agrees with the Company,
the Warrant Agent and with every other holder of a Warrant Certificate that:

               (a) the Warrant Certificates are transferable on the registry
books of the Warrant Agent only upon the terms and conditions set forth in this
Agreement; and

               (b) the Company and the Warrant Agent may deem and treat the
person in whose name the Warrant Certificate is registered as the absolute owner
of the Warrant (notwithstanding any notation of ownership or other writing
thereon made by anyone other than the Company or the Warrant Agent) for all
purposes whatever and neither the Company nor the Warrant Agent shall be
affected by any notice to the contrary.

17. CANCELLATION OF WARRANT CERTIFICATES. In the event that the Company shall
purchase or otherwise acquire any Warrant Certificate or Certificates after the
issuance thereof, such Warrant Certificate or Certificates shall thereupon be
delivered to the Warrant Agent and be canceled by it and retired. The Warrant
Agent shall also cancel any Warrant Certificate delivered to it for exercise, in
whole or in part, or delivered to it for transfer, split-up, combination or
exchange. Warrant Certificates so canceled shall be delivered by the Warrant
Agent to the Company from time to time, or disposed of in accordance with the
instructions of the Company.

         18. CONCERNING THE WARRANT AGENT. The Company agrees to pay to the
Warrant Agent from time to time, on demand of the Warrant Agent, reasonable
compensation for all services rendered by it hereunder and also its reasonable
expenses, including counsel fees, and other disbursements incurred in the
administration and execution of this Agreement and the exercise and performance
of its duties hereunder. The Company also agrees to indemnify the Warrant Agent
for, and to hold it harmless against, any loss, liability or expense, incurred
without gross negligence, bad faith or willful misconduct on the part of the
Warrant Agent, arising out of or in connection with the acceptance and
administration of this Agreement.

         19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT. Any
corporation into which the Warrant Agent may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the Warrant Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor warrant agent under
the provisions of Section 21 hereof.


                                       12


In case at the time such successor to the Warrant Agent shall succeed to the
agency created by this Agreement, any of the Warrant Certificates shall have
been countersigned but not delivered, any such successor to the Warrant Agent
may adopt the countersignature of the original Warrant Agent and deliver such
Warrant Certificates so countersigned; and in case at that time any of the
Warrant Certificates shall not have been countersigned, any successor to the
Warrant Agent may countersign such Warrant Certificates either in the name of
the predecessor Warrant Agent or in the name of the successor Warrant Agent; and
in all such cases such Warrant Certificates shall have the full force provided
in the Warrant Certificates and in this Agreement.

         In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrant Certificates shall have been countersigned but
not delivered, the Warrant Agent may adopt the countersignature under its prior
name and deliver Warrant Certificates so countersigned; and in case at that time
any of the Warrant Certificates shall not have been countersigned, the Warrant
Agent may countersign such Warrant Certificates either in its prior name or in
its changed name; and in all such cases such Warrant Certificates shall have the
full force provided in the Warrant Certificates and in this Agreement.

         20. DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrant Certificates,
by their acceptance thereof, shall be bound:

               (a) The Warrant Agent may consult with counsel satisfactory to it
(who may be counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection to the Warrant Agent as to any
action taken, suffered or omitted by it in good faith and in accordance with
such opinion; provided, however, that the Warrant Agent shall have exercised
reasonable care in the selection of such counsel. Fees and expenses of such
counsel, to the extent reasonable, shall be paid by the Company.

               (b) Whenever in the performance of its duties under this
Agreement, the Warrant Agent shall deem it necessary or desirable that any fact
or matter be proved or established by the Company prior to taking or suffering
any action hereunder, such fact or matter (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be conclusively
proved and established by a certificate signed by a Chairman or co-Chairman of
the Board, the Chief Executive Officer, the President or a Vice President or the
Secretary of the Company and delivered to the Warrant Agent; and such
certificate shall be full authorization to the Warrant Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.

               (c) The Warrant Agent shall be liable hereunder only for its own
gross negligence, bad faith or willful misconduct.

               (d) The Warrant Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Warrant Certificates (except its countersignature on the Warrant Certificates
and such statements or recitals as describe the Warrant Agent or action taken or
to be taken by it) or be required to verify the same, but all such statements
and recitals are and shall be deemed to have been made by the Company only.

                                       13



               (e) The Warrant Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Warrant Agent) or in respect of the
validity or execution of any Warrant Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Warrant Certificate;
nor shall it be responsible for the making of any change in the number of shares
of Common Stock for which a Warrant is exercisable required under the provisions
of Section 6 or responsible for the manner, method or amount of any such change
or the ascertaining of the existence of facts that would require any such
adjustment or change (except with respect to the exercise of Warrant
Certificates after actual notice of any adjustment of the Exercise Price); nor
shall it by any act hereunder be deemed to make any representation or warranty
as to the authorization or reservation of any shares of Common Stock to be
issued pursuant to this Agreement or any Warrant Certificate or as to whether
any shares of Common Stock will, when issued, be validly issued, fully paid and
non-assessable.

               (f) The Warrant Agent shall be under no obligation to institute
any action, suit or legal proceeding or take any other action likely to involve
expense unless the Company or one or more registered holders of Warrant
Certificates shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred. All rights of action
under this Agreement or under any of the Warrants may be enforced by the Warrant
Agent without the possession of any of the Warrants or the production thereof at
any trial or other proceeding relative thereto, and any such action, suit or
proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable benefit of
the registered holders of the Warrant Certificates, as their respective rights
or interests may appear.

               (g) The Warrant Agent and any shareholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to or otherwise act as fully and freely as though it were not Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.

               (h) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from a
Chairman or co-Chairman of the Board or President or a Vice President or the
Secretary or the Controller of the Company, and to apply to such officers for
advice or instructions in connection with the Warrant Agent's duties, and it
shall not be liable for any action taken or suffered or omitted by it in good
faith in accordance with instructions of any such officer.

               (i) The Warrant Agent will not be responsible for any failure of
the Company to comply with any of the covenants contained in this Agreement or
in the Warrant Certificates to be complied with by the Company.

               (j) The Warrant Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys, agents or employees and the Warrant Agent shall not be
answerable or accountable for any act,


                                       14


default, neglect or misconduct of any such attorneys, agents or employees or for
any loss to the Company resulting from such neglect or misconduct; provided,
however, that reasonable care shall have been exercised in the selection and
continued employment of such attorneys, agents and employees.

               (k) The Warrant Agent will not incur any liability or
responsibility to the Company or to any holder of any Warrant Certificate for
any action taken, or any failure to take action, in reliance on any notice,
resolution, waiver, consent, order, certificate, or other paper, document or
instrument reasonably believed by the Warrant Agent to be genuine and to have
been signed, sent or presented by the proper party or parties.

               (l) The Warrant Agent will act hereunder solely as agent of the
Company in a ministerial capacity, and its duties will be determined solely by
the provisions hereof. The Warrant Agent will not be liable for anything which
it may do or refrain from doing in connection with this Agreement except for its
own gross negligence, bad faith or willful conduct.

         21. CHANGE OF WARRANT AGENT. The Warrant Agent may resign and be
discharged from its duties under this Agreement upon 30 days' prior notice in
writing mailed, by registered or certified mail, to the Company. The Company may
remove the Warrant Agent or any successor warrant agent upon 30 days' prior
notice in writing, mailed to the Warrant Agent or successor warrant agent, as
the case may be, by registered or certified mail. If the Warrant Agent shall
resign or be removed or shall otherwise become incapable of acting, the Company
shall appoint a successor to the Warrant Agent and shall, within 15 days
following such appointment, give notice thereof in writing to each registered
holder of the Warrant Certificates. If the Company shall fail to make such
appointment within a period of 15 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Warrant Agent, then the Company agrees to perform the
duties of the Warrant Agent hereunder until a successor Warrant Agent is
appointed. After appointment and execution of a copy of this Agreement in effect
at that time, the successor Warrant Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Warrant Agent without further act or deed; but the former Warrant Agent shall
deliver and transfer to the successor Warrant Agent, within a reasonable time,
any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Failure to
give any notice provided for in this Section, however, or any defect therein
shall not affect the legality or validity of the resignation or removal of the
Warrant Agent or the appointment of the successor warrant agent, as the case may
be.

         22. ISSUANCE OF NEW WARRANT CERTIFICATES. Notwithstanding any of the
provisions of this Agreement or the several Warrant Certificates to the
contrary, the Company may, at its option, issue new Warrant Certificates in such
form as may be approved by its Board of Directors to reflect any adjustment or
change in the Exercise Price or the number or kind of shares purchasable under
the several Warrant Certificates made in accordance with the provisions of this
Agreement.

         23. NOTICES. Notice or demand pursuant to this Agreement to be given or
made on the Company by the Warrant Agent or by the registered holder of any
Warrant Certificate shall be


                                       15


sufficiently given or made if sent by first-class or registered mail, postage
prepaid, addressed (until another address is filed in writing by the Company
with the Warrant Agent) as follows:

         Vaughan Foods, Inc.
         216 N.E. 12th Street
         Moore, Oklahoma 73160
         Attention: Chief Financial Officer

         Subject to the provisions of Section 21, any notice pursuant to this
Agreement to be given or made by the Company or by the holder of any Warrant
Certificate to or on the Warrant Agent shall be sufficiently given or made if
sent by first-class or registered mail, postage prepaid, addressed (until
another address is filed in writing by the Warrant Agent with the Company) as
follows:

         --------------------------
         --------------------------
         --------------------------
         --------------------------

         Any notice or demand authorized to be given or made to the registered
holder of any Warrant Certificate under this Agreement shall be sufficiently
given or made if sent by first-class or registered mail, postage prepaid, to the
last address of such holder as it shall appear on the registers maintained by
the Warrant Agent.

         24. MODIFICATION OF AGREEMENT. The Warrant Agent may, without the
consent or concurrence of the Warrantholders, by supplemental agreement or
otherwise, concur with the Company in making any changes or corrections in this
Agreement that the Warrant Agent shall have been advised by counsel (who may be
counsel for the Company) are necessary or desirable to cure any ambiguity or to
correct any defective or inconsistent provision or clerical omission or mistake
or manifest error herein contained, or to make any other provisions in regard to
matters or questions arising hereunder and which shall not be inconsistent with
the provisions of the Warrant Certificates and which shall not adversely affect
the interests of the Warrantholders. As of the date hereof, this Agreement
contains the entire and only agreement, understanding, representation,
condition, warranty or covenant between the parties hereto with respect to the
matters herein, supersedes any and all other agreements between the parties
hereto relating to such matters, and may be modified or amended only by a
written agreement signed by both parties hereto pursuant to the authority
granted by the first sentence of this Section.

         25. SUCCESSORS. All the covenants and provisions of this Agreement by
or for the benefit of the Company or the Warrant Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.

         26. OKLAHOMA CONTRACT. This Agreement and each Warrant Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Oklahoma and for all purposes shall be construed in accordance with the
laws of said State.

                                       16



         27. TERMINATION. This Agreement shall terminate as of the close of
business on the Expiration Date, or such earlier date upon which all Warrants
shall have been exercised or redeemed, except that the Warrant Agent shall
account to the Company as to all Warrants outstanding and all cash held by it as
of the close of business on the Expiration Date.

         28. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement or in the
Warrant Certificates shall be construed to give to any person or corporation
other than the Company, the Warrant Agent, and their respective successors and
assigns hereunder and the registered holders of the Warrant Certificates any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent, their respective successors and assigns hereunder and the
registered holders of the Warrant Certificates.

         29. DESCRIPTIVE HEADINGS. The descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.

         30. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.



      (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS)


                                       17




         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.


                                                     VAUGHAN FOODS, INC.


                                    By:
                                       -----------------------------------------
                                         Name:      Mark E. Vaughan
                                         Title:     Chief Executive Officer


                                    [--------------------------]


                                    By:
                                       -----------------------------------------
                                         Name:
                                         Title:


                                    By:
                                       -----------------------------------------
                                         Name:
                                         Title:



                                       18



                                    EXHIBIT A


                VOID AFTER 5 P.M. PACIFIC TIME ON _________, 2011

                    CLASS A WARRANTS TO PURCHASE COMMON STOCK


Certificate number _______                                    _________ Warrants


                               Vaughan Foods, Inc.

                                CUSIP __________


THIS CERTIFIES THAT




or registered assigns, is the registered holder of the number of Class A
Warrants ("WARRANTS") set forth above. Each Warrant, unless and until redeemed
by the Company as provided in the Warrant Agreement, hereinafter more fully
described (the "WARRANT AGREEMENT") entitles the holder thereof to purchase from
Vaughan Foods, Inc., a corporation incorporated under the laws of the State of
Oklahoma the ("COMPANY"), subject to the terms and conditions set forth
hereinafter and in the Warrant Agreement, at any time on or after _________,
2006 and before the close of business on _________, 2011 ("EXPIRATION DATE"),
one fully paid and non-assessable share of Common Stock of the Company ("COMMON
STOCK") upon presentation and surrender of this Warrant Certificate, with the
instructions for the registration and delivery of Common Stock filled in, at the
stock transfer office in _______, ________, of __________________________,
Warrant Agent of the Company ("WARRANT AGENT") or of its successor warrant agent
or, if there be no successor warrant agent, at the corporate offices of the
Company, and upon payment of the Exercise Price (as defined in the Warrant
Agreement) and any applicable taxes paid either in cash, or by certified or
official bank check, payable in lawful money of the United States of America to
the order of the Company. Each Warrant initially entitles the holder to purchase
one share of Common Stock for $_____. The number and kind of securities or other
property for which the Warrants are exercisable are subject to adjustment in
certain events, such as mergers, splits, stock dividends, splits and the like,
to prevent dilution. The Company may redeem any or all outstanding and
unexercised Warrants by giving not less than 30 days prior notice at any time
after the later of _________, 2007 and the date on which closing price of the
Common Stock on the principal exchange or trading facility on which it is traded
has equaled or exceeded $_____ per share on each of five consecutive trading
days. The Redemption Price is $0.25 per Warrant. All Warrants not theretofore
exercised will expire on the Expiration Date.



         This Warrant Certificate is subject to all of the terms, provisions and
conditions of the Warrant Agreement, dated as of _______, 2006, between the
Company and the Warrant Agent, to all of which terms, provisions and conditions
the registered holder of this Warrant Certificate consents by acceptance hereof.
The Warrant Agreement is incorporated herein by reference and made a part hereof
and reference is made to the Warrant Agreement for a full description of the
rights, limitations of rights, obligations, duties and immunities of the Warrant
Agent, the Company and the holders of the Warrant Certificates. Copies of the
Warrant Agreement are available for inspection at the stock transfer office of
the Warrant Agent or may be obtained upon written request addressed to the
Company at Vaughan Foods, Inc., 216 N.E. 12th Street, Moore, Oklahoma 73160,
Attention: Chief Financial Officer.

         The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractions of Warrants, Common
Stock or other securities, but shall make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in the
Warrant Agreement.

         In certain cases, the sale of securities by the Company upon exercise
of Warrants may violate the securities laws of the United States, certain states
thereof or other jurisdictions. The Company has agreed to use all commercially
reasonable efforts to cause a registration statement to continue to be effective
during the term of the Warrants with respect to such sales under the Securities
Act of 1933, and to take such action under the laws of various states as may be
required to cause the sale of securities upon exercise to be lawful. However,
the Company will not be required to honor the exercise of Warrants if, in the
opinion of the Board of Directors, upon advice of counsel, the sale of
securities upon such exercise would be unlawful. In certain cases, the Company
may, but is not required to, purchase Warrants submitted for exercise for a cash
price equal to the difference between the market price of the securities
obtainable upon such exercise and the exercise price of such Warrants. If the
Warrants would otherwise expire while not exercisable as a result of any such
determination by the Board of Directors, their Expiration Date will be extended
to a date 30 days after the Warrants once again become exercisable.

         This Warrant Certificate, with or without other Certificates, upon
surrender to the Warrant Agent, any successor warrant agent or, in the absence
of any successor warrant agent, at the corporate offices of the Company, may be
exchanged for another Warrant Certificate or Certificates evidencing in the
aggregate the same number of Warrants as the Warrant Certificate or Certificates
so surrendered. If the Warrants evidenced by this Warrant Certificate shall be
exercised in part, the holder hereof shall be entitled to receive upon surrender
hereof another Warrant Certificate or Certificates evidencing the number of
Warrants not so exercised.

         No holder of this Warrant Certificate, as such, shall be entitled to
vote, receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose whatever, nor shall anything contained in the Warrant
Agreement or herein be construed to confer upon the holder of this Warrant
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof or give or withhold consent to any corporate
action (whether upon any matter submitted to shareholders at any meeting
thereof, or give or withhold consent to any merger, recapitalization, issuance
of stock, reclassification of stock, change of par value or change of



stock to no par value, consolidation, conveyance or otherwise) or to receive
notice of meetings or other actions affecting shareholders (except as provided
in the Warrant Agreement) or to receive dividends or subscription rights or
otherwise until the Warrants evidenced by this Warrant Certificate shall have
been exercised and the Common Stock purchasable upon the exercise thereof shall
have become deliverable as provided in the Warrant Agreement.

         If this Warrant Certificate shall be surrendered for exercise within
any period during which the transfer books for the Company's Common Stock or
other class of stock purchasable upon the exercise of the Warrants evidenced by
this Warrant Certificate are closed for any purpose, the Company shall not be
required to make delivery of certificates for shares purchasable upon such
transfer until the date of the reopening of said transfer books.

         Every holder of this Warrant Certificate by accepting the same consents
and agrees with the Company, the Warrant Agent, and with every other holder of a
Warrant Certificate that:

         (a) this Warrant Certificate is transferable on the registry books of
the Warrant Agent only upon the terms and conditions set forth in the Warrant
Agreement, and

         (b) the Company and the Warrant Agent may deem and treat the person in
whose name this Warrant Certificate is registered as the absolute owner hereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone other than the Company or the Warrant Agent) for all purposes whatsoever
and neither the Company nor the Warrant Agent shall be affected by any notice to
the contrary. The Company shall not be required to issue or deliver any
certificate for shares of Common Stock or other securities upon the exercise of
Warrants evidenced by this Warrant Certificate until any tax which may be
payable in respect thereof by the holder of this Warrant Certificate pursuant to
the Warrant Agreement shall have been paid, such tax being payable by the holder
of this Warrant Certificate at the time of surrender.

         This Warrant Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Warrant Agent.

      (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS)






         WITNESS the facsimile signatures of the proper officers of the Company
and its corporate seal.

Dated: _______________

                                          VAUGHAN FOODS, INC.


                                          By: __________________________________
                                               Name: Mark E. Vaughan
                                               Title:   Chief Executive Officer



                                          Attest:  _____________________________
                                                    Secretary

Countersigned:

[--------------------------]


By: ______________________________________
     Authorized Officer





                                    EXHIBIT B


                VOID AFTER 5 P.M. PACIFIC TIME ON _________, 2011

                    CLASS B WARRANTS TO PURCHASE COMMON STOCK


Certificate number _______                                  _________ Warrants


                               Vaughan Foods, Inc.

                              CUSIP ______________


THIS CERTIFIES THAT




or registered assigns, is the registered holder of the number of Class B
Warrants ("WARRANTS") set forth above. Subject to the terms of the Warrant
Agreement, hereinafter more fully described (the "WARRANT AGREEMENT"), each
Warrant entitles the holder thereof to purchase from Vaughan Foods, Inc., a
corporation incorporated under the laws of the State of Oklahoma the
("COMPANY"), subject to the terms and conditions set forth hereinafter and in
the Warrant Agreement, at any time on or after _________, 2006 and before the
close of business on _________, 2011 ("EXPIRATION DATE"), one fully paid and
non-assessable share of Common Stock of the Company ("COMMON Stock") upon
presentation and surrender of this Warrant Certificate, with the instructions
for the registration and delivery of Common Stock filled in, at the stock
transfer office in _______, ________, of __________________________, Warrant
Agent of the Company ("WARRANT AGENT") or of its successor warrant agent or, if
there be no successor warrant agent, at the corporate offices of the Company,
and upon payment of the Exercise Price (as defined in the Warrant Agreement) and
any applicable taxes paid either in cash, or by certified or official bank
check, payable in lawful money of the United States of America to the order of
the Company. Each Warrant initially entitles the holder to purchase one share of
Common Stock for $______. The number and kind of securities or other property
for which the Warrants are exercisable are subject to adjustment in certain
events, such as mergers, splits, stock dividends, splits and the like, to
prevent dilution. Beginning on __________, 2006, the Company may redeem any or
all outstanding and unexercised warrants by giving not less than 30 days' prior
written notice at any time after the Company's gross revenue for any 12-month
period, as confirmed by an independent audit, equals or exceeds $100.0 million.
The Redemption Price is $0.25 per Warrant. All Warrants not theretofore
exercised will expire on the Expiration Date.
                                       1



         This Warrant Certificate is subject to all of the terms, provisions and
conditions of the Warrant Agreement, dated as of _______, 2006, between the
Company and the Warrant Agent, to all of which terms, provisions and conditions
the registered holder of this Warrant Certificate consents by acceptance hereof.
The Warrant Agreement is incorporated herein by reference and made a part hereof
and reference is made to the Warrant Agreement for a full description of the
rights, limitations of rights, obligations, duties and immunities of the Warrant
Agent, the Company and the holders of the Warrant Certificates. Copies of the
Warrant Agreement are available for inspection at the stock transfer office of
the Warrant Agent or may be obtained upon written request addressed to the
Company at Vaughan Foods, Inc., 216 N.E. 12th Street, Moore, Oklahoma 73160,
Attention: Chief Financial Officer.

         The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractions of Warrants, Common
Stock or other securities, but shall make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in the
Warrant Agreement.

         In certain cases, the sale of securities by the Company upon exercise
of Warrants may violate the securities laws of the United States, certain states
thereof or other jurisdictions. The Company has agreed to use all commercially
reasonable efforts to cause a registration statement to continue to be effective
during the term of the Warrants with respect to such sales under the Securities
Act of 1933, and to take such action under the laws of various states as may be
required to cause the sale of securities upon exercise to be lawful. However,
the Company will not be required to honor the exercise of Warrants if, in the
opinion of the Board of Directors, upon advice of counsel, the sale of
securities upon such exercise would be unlawful. In certain cases, the Company
may, but is not required to, purchase Warrants submitted for exercise for a cash
price equal to the difference between the market price of the securities
obtainable upon such exercise and the exercise price of such Warrants. If the
Warrants would otherwise expire while not exercisable as a result of any such
determination by the Board of Directors, their Expiration Date will be extended
to a date 30 days after the Warrants once again become exercisable.

         This Warrant Certificate, with or without other Certificates, upon
surrender to the Warrant Agent, any successor warrant agent or, in the absence
of any successor warrant agent, at the corporate offices of the Company, may be
exchanged for another Warrant Certificate or Certificates evidencing in the
aggregate the same number of Warrants as the Warrant Certificate or Certificates
so surrendered. If the Warrants evidenced by this Warrant Certificate shall be
exercised in part, the holder hereof shall be entitled to receive upon surrender
hereof another Warrant Certificate or Certificates evidencing the number of
Warrants not so exercised.

         No holder of this Warrant Certificate, as such, shall be entitled to
vote, receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose whatever, nor shall anything contained in the Warrant
Agreement or herein be construed to confer upon the holder of this Warrant
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof or give or withhold consent to any corporate
action (whether upon any matter submitted to shareholders at any meeting
thereof, or give or withhold consent to any merger, recapitalization, issuance
of stock, reclassification of stock, change of par value or change of

                                       2


stock to no par value, consolidation, conveyance or otherwise) or to receive
notice of meetings or other actions affecting shareholders (except as provided
in the Warrant Agreement) or to receive dividends or subscription rights or
otherwise until the Warrants evidenced by this Warrant Certificate shall have
been exercised and the Common Stock purchasable upon the exercise thereof shall
have become deliverable as provided in the Warrant Agreement.

         If this Warrant Certificate shall be surrendered for exercise within
any period during which the transfer books for the Company's Common Stock or
other class of stock purchasable upon the exercise of the Warrants evidenced by
this Warrant Certificate are closed for any purpose, the Company shall not be
required to make delivery of certificates for shares purchasable upon such
transfer until the date of the reopening of said transfer books.

         Every holder of this Warrant Certificate by accepting the same consents
and agrees with the Company, the Warrant Agent, and with every other holder of a
Warrant Certificate that:

         (a) this Warrant Certificate is transferable on the registry books of
the Warrant Agent only upon the terms and conditions set forth in the Warrant
Agreement, and

         (b) the Company and the Warrant Agent may deem and treat the person in
whose name this Warrant Certificate is registered as the absolute owner hereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone other than the Company or the Warrant Agent) for all purposes whatsoever
and neither the Company nor the Warrant Agent shall be affected by any notice to
the contrary. The Company shall not be required to issue or deliver any
certificate for shares of Common Stock or other securities upon the exercise of
Warrants evidenced by this Warrant Certificate until any tax which may be
payable in respect thereof by the holder of this Warrant Certificate pursuant to
the Warrant Agreement shall have been paid, such tax being payable by the holder
of this Warrant Certificate at the time of surrender.

         This Warrant Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Warrant Agent.

      (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS)

                                       3




         WITNESS the facsimile signatures of the proper officers of the Company
and its corporate seal.

Dated: _______________

                                        VAUGHAN FOODS, INC.


                                        By: ____________________________________
                                             Name: Mark E. Vaughan
                                             Title:   Chief Executive Officer



                                        Attest:  _______________________________
                                                  Secretary

Countersigned:

[--------------------------]


By: ______________________________________
     Authorized Officer


                                       4

EX-4.3

                                UNIT CERTIFICATE

NO. _________                                                        _____ UNITS

                                                          CUSIP   ____
                                             SEE REVERSE FOR CERTAIN DEFINITIONS

                               VAUGHAN FOODS, INC.

                                UNIT CERTIFICATE



              INCORPORATED UNDER THE LAWS OF THE STATE OF OKLAHOMA


                        EACH UNIT CONSISTING OF ONE SHARE

                        OF COMMON STOCK, $.001 PAR VALUE,

                       ONE REDEEMABLE CLASS A WARRANT AND

                         ONE REDEEMABLE CLASS B WARRANT


THIS CERTIFIES THAT

or registered assigns (the "Registered Holder") is the owner of the number of
Units specified above, each of which consists of one share of common stock,
$.001 par value, of Vaughan Foods, Inc. (the "Common Stock"), one redeemable
Class A warrant, and one redeemable Class B warrant, each warrant to purchase
one share of Common Stock (collectively, the "Warrants"). On or prior to the
Separation Time (as defined herein), the securities evidenced by this
certificate may be combined, exchanged or transferred only as Units, and the
Common Stock and Warrants evidenced by this Certificate may not be split up,
exchanged or traded separately. The Units will separate into shares of Common
Stock and Warrants as of the close of business on               , 2006 [thirty
days after the date of the final prospectus] (the "Separation Time"). The shares
of Common Stock and the Warrants comprising the Units shall be separately
tradeable commencing on the first day after the Separation Time on which The
Nasdaq Capital Market is open for trading. The Warrants comprising part of the
Units are issued under and pursuant to a certain Warrant Agreement dated as of
               , 2006 (the "Warrant Agreement"), between Vaughan Foods, Inc. and
Continental Stock Transfer & Trust Company, as Warrant Agent (the "Warrant
Agent"), and are subject to the terms and provisions contained therein and on
the face of the certificates covered thereby, to all of which terms and
provisions the holder of this Unit Certificate consents by acceptance hereof.
The Warrant Agreement provides for adjustment to the exercise price of the
Warrants evidenced hereby and in the number of shares of Common Stock to be
delivered upon the exercise of Warrants in certain events therein set forth.

Copies of the Warrant Agreement are available for inspection at the stock
transfer office of the Warrant Agent and Registrar or may be obtained upon
written request addressed to Vaughan Foods, Inc., 216 N.E. 12th Street, Moore,
OK 73160, Attention: Chief Financial Officer.

This Unit Certificate is not valid unless countersigned by the Warrant Agent and
Registrar of the Company.

IN WITNESS WHEREOF, Vaughan Foods, Inc. has caused this Unit Certificate to be
duly executed manually or in facsimile by two of its officers thereunto duly
authorized.

Dated:


                            Vaughan Foods, Inc.


                            By:
                               -------------------------------------------------
                               Chairman of the Board and Chief Executive Officer


                            Attest:
                                    --------------------------------------------
                                                  Secretary



- -------------------------------------------
Countersigned

Continental Stock Transfer & Trust Company
17 Battery Place
New York, New York  10004-1125



By:
     -------------------------------
     Authorized Signature







                               VAUGHAN FOODS, INC.

The Registered Holder hereby is entitled, at any time after the Separation Time
(as defined on the face hereof) to exchange the Units represented by this Unit
Certificate for Common Stock Certificate(s) representing one share of Common
Stock for each Unit represented by this Unit Certificate, and Warrant
Certificate(s) representing one redeemable Class A Warrant for each Unit
represented by this Unit Certificate, and one redeemable Class B Warrant for
each unit represented by this Unit Certificate, upon surrender of this Unit
Certificate to the Warrant Agent and Registrar together with any documentation
required by such agent.

REFERENCE IS MADE TO THE WARRANT AGREEMENT REFERRED TO ON THE FACE HEREOF, AND
THE PROVISIONS OF SUCH WARRANT AGREEMENT SHALL FOR ALL PURPOSES HAVE THE SAME
EFFECT AS THOUGH FULLY SET FORTH ON THE FACE OF THIS CERTIFICATE. COPIES OF THE
WARRANT AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST FROM THE WARRANT AGENT
AND REGISTRAR, CONTINENTAL STOCK TRANSFER & TRUST COMPANY.


The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.




                                              
TEN COM -      as tenants in common                 UNIF GIFT MIN ACT - _____ Custodian ____________
TEN ENT -      as tenants by the entireties                             (Cust)            (Minor)
JT TEN -       as joint tenants with rights of                          under Uniform Gifts to Minors
               survivorship and not as tenants                          Act ______________________
               in common                                                            (State)
                                                     UNIF TRF MIN ACT - _____ Custodian ____________
                                                                        (Cust)            (Minor)
                                                                        under Uniform Transfers to Minors
                                                                        Act ________________
                                                                               (State)


Additional abbreviations may also be used though not in the above list.








                               FORM OF ASSIGNMENT

                       (TO BE SIGNED ONLY UPON ASSIGNMENT)

FOR VALUE RECEIVED,
                    ------------------------------------------------------------

hereby sell(s), assign(s), and transfer(s) unto

(PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE)

- -------------------------------

- -------------------------------


- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
        (PLEASE PRINT NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

_________________________________________________________________________ Shares
of the Units represented by the within Certificate, and do(es) hereby
irrevocably constitute and appoint _____________________________________________
Attorney to transfer the said Units on the books of the within named Corporation
with full power of substitution in the premises.


         Dated:


- ----------------------------------------------
(Signature must conform in all respects to the name of Registered Holder as
specified on the face of this Warrant Certificate in every particular, without
alteration or any change whatsoever, and the signature must be guaranteed in the
usual manner.)


Signatures Guaranteed:


- ----------------------------------------------
The signatures should be guaranteed by an eligible institution (banks,
stockbrokers, savings and loan association and credit unions with membership in
an approved signature medallion program), pursuant to S.E.C. Rule 17Ad-15.

EX-4.4

                      THIS WARRANT HAS NOT BEEN REGISTERED
                        UNDER THE SECURITIES ACT OF 1933
                             AND IS NOT TRANSFERABLE
                            EXCEPT AS PROVIDED HEREIN

                               Vaughan Foods, Inc.

                                PURCHASE WARRANT

                                   Issued to:

                        PAULSON INVESTMENT COMPANY, INC.

                             Exercisable to Purchase

                                  500,000 Units


                                       of


                               VAUGHAN FOODS, INC.












                            Void after ________, 2011





     This is to certify that, for value received and subject to the terms and
conditions set forth below, the Warrantholder (hereinafter defined) is entitled
to purchase, and the Company promises and agrees to sell and issue to the
Warrantholder, at any time on or after ________, 2007 and on or before ________,
2011, up to 500,000 Units (hereinafter defined) at the Exercise Price
(hereinafter defined).

     This Warrant Certificate is issued subject to the following terms and
conditions:

     1. DEFINITIONS OF CERTAIN TERMS. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:

          (a) "Act" means the Securities Act of 1933, as amended.

          (b) "Cashless Exercise" means an exercise of Warrants in which, in
lieu of payment of the Exercise Price, the Holder elects to receive a lesser
number of Securities such that the value of the Securities that such Holder
would otherwise have been entitled to receive but has agreed not to receive, as
determined by the closing price of such Securities on the date of exercise or,
if such date is not a trading day, on the next prior trading day, is equal to
the Exercise Price with respect to such exercise. A Holder may only elect a
Cashless Exercise if Securities issuable by the Company on such exercise are
publicly traded securities.

          (c) "Class A Warrant" means a warrant defined as a Class A Warrant in
the Warrant Agreement.

          (d) "Class B Warrant" means a warrant defined as a Class B Warrant in
the Warrant Agreement.

          (e) "Closing Date" means the date on which the Offering is closed.

          (f) "Commission" means the Securities and Exchange Commission.

          (g) "Common Stock" means the common stock, par value $0.001, of the
Company.

          (h) "Company" means Vaughan Foods, Inc., an Oklahoma corporation.

          (i) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in Section
6 hereof, except Warrantholder's Expenses.

          (j) "Corporate Financing Rule" means Rule 2710 of the rules of the
National Association of Securities Dealers, Inc.



                                       2


          (k) "Effective Date" means the date on which the Registration
Statement is declared effective by the Commission.

          (l) "Exercise Price" means the price at which the Warrantholder may
purchase one Unit upon exercise of Warrants as determined from time to time
pursuant to the provisions hereof. The initial Exercise Price is $_____ per
Unit.

          (m) "Offering" means the public offering of Units made pursuant to the
Registration Statement.

          (n) "Participating Underwriter" means any underwriter participating in
the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.

          (o) "Registration Statement" means the Company's registration
statement (File No. 333 -______) as amended on the Closing Date.

     (p) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.

          (q) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange, or conversion of such securities.

          (r) "Unit" means one share of Common Stock, one redeemable Class A
Warrant and one redeemable Class B Warrants.

          (s) "Unit Warrant" means either a Class A Warrant or a Class B
Warrant.

          (t) "Warrant Agreement" means that certain Warrant Agreement, dated as
of _______, 2006, by and between the Company and ___________________ relating to
the issuance of Unit Warrants.

          (u) "Warrant Certificate" means a certificate evidencing the Warrant.

          (v) "Warrantholder" means a record holder of the Warrant or
Securities. The initial Warrantholder is Paulson Investment Company, Inc.

          (w) "Warrantholder's Expenses" means the sum of (i) the aggregate
amount of cash payments made to an underwriter, underwriting syndicate, or agent
in connection with an offering described in Section 6 hereof multiplied by a
fraction the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
the denominator of which is the aggregate sales price of all of the securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
(ii) all out-of-pocket expenses of the Warrantholder, except for the fees and
disbursements of one firm retained as legal counsel for the Warrantholder that
will be paid by the Company.

          (x) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any certificate
obtained upon transfer or partial exercise of the Warrant evidenced by any such
certificate.

     2. EXERCISE OF WARRANT. All or any part of the Warrant represented by this
Warrant Certificate may be exercised commencing 180 days after the Effective
Date and



                                       3


ending at 5 p.m. Pacific Time on the fifth anniversary of the Effective Date
(the "Expiration Date") by surrendering this Warrant Certificate, together with
appropriate instructions, duly executed by the Warrantholder or by its duly
authorized attorney, at the office of the Company, 216 N.E. 12th Street, Moore,
Oklahoma 73160, Attention: Chief Executive Officer; or at such other office or
agency as the Company may designate. The date on which such instructions are
received by the Company shall be the date of exercise. If the Holder has elected
a Cashless Exercise, such instructions shall so state. Subject to the provisions
below, upon receipt of notice of exercise, the Company shall immediately
instruct its transfer agent to prepare certificates for the Securities to be
received by the Warrantholder upon completion of the Warrant exercise. When such
certificates are prepared, the Company shall notify the Warrantholder and
deliver such certificates to the Warrantholder or as per the Warrantholder's
instructions immediately upon payment in full by the Warrantholder, in lawful
money of the United States, of the Exercise Price payable with respect to the
Securities being purchased, if any. If the Warrantholder shall represent and
warrant that all applicable registration and prospectus delivery requirements
for their sale have been complied with upon sale of the Securities received upon
exercise of the Warrant, such certificates shall not bear a legend with respect
to the Act.

     If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver to
the Warrantholder a new Warrant Certificate (dated the date hereof), in form and
tenor similar to this Warrant Certificate, evidencing that portion of the
Warrant not exercised. The Securities to be obtained on exercise of the Warrant
will be deemed to have been issued, and any person exercising the Warrant will
be deemed to have become a holder of record of those Securities, as of the date
of the payment of the Exercise Price.

     Notwithstanding the foregoing, in no event shall such Securities be issued,
and the Company is authorized to refuse to honor the exercise of the Warrant, if
such exercise would result in the opinion of the Company's Board of Directors,
upon advice of counsel, in the violation of any law; and provided further that,
if the Warrant is exercisable solely for Securities listed on a securities
exchange or for which there are at least three independent market makers, the
Company may elect to redeem the Warrant submitted for exercise for a price equal
to the difference between the aggregate low asked price, or closing price, as
the case may be, of the Securities for which the Warrant is exercisable on the
date of exercise and the Exercise Price; in the event of such redemption, the
Company will pay to the holder of the Warrant the above-described redemption
price in cash within 10 business days after receipt of notice of exercise.

     3. ADJUSTMENTS IN CERTAIN EVENTS. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:

          (a) If the outstanding shares of the Company's Common Stock are
divided into a greater number of shares or a dividend in stock is paid on the
Common Stock, the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately increased and the Exercise Price will be
proportionately reduced; and, conversely, if the outstanding shares of Common
Stock are combined into a smaller number of shares of Common Stock, the number
of shares of Common Stock for which the Warrant is then exercisable will be
proportionately reduced and the Exercise Price will be proportionately
increased. The increases and reductions provided for in this Section 3(a) will
be made with the intent and, as nearly as



                                       4


practicable, the effect that neither the percentage of the total equity of the
Company obtainable on exercise of the Warrants nor the price payable for such
percentage upon such exercise will be affected by any event described in this
Section 3(a).

          (b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or other
change in the capital structure of the Company, other than changes in par value,
then, as a condition of such change, lawful and adequate provision will be made
so that the holder of this Warrant Certificate will have the right thereafter to
receive upon the exercise of the Warrant the kind and amount of shares of stock
or other securities or property to which he would have been entitled if,
immediately prior to such event, he had held the number of shares of Common
Stock obtainable upon the exercise of the Warrant. In any such case, appropriate
adjustment will be made in the application of the provisions set forth herein
with respect to the rights and interest thereafter of the Warrantholder, to the
end that the provisions set forth herein will thereafter be applicable, as
nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the exercise of the Warrant. The Company
will not permit any change in its capital structure to occur unless the issuer
of the shares of stock or other securities to be received by the holder of this
Warrant Certificate, if not the Company, agrees to be bound by and comply with
the provisions of this Warrant Certificate.

          (c) When any adjustment is required to be made in the number of shares
of Common Stock, other securities, or the property purchasable upon exercise of
the Warrant, the Company will promptly determine the new number of such shares
or other securities or property purchasable upon exercise of the Warrant and (i)
prepare and retain on file a statement describing in reasonable detail the
method used in arriving at the new number of such shares or other securities or
property purchasable upon exercise of the Warrant and (ii) cause a copy of such
statement to be mailed to the Warrantholder within thirty (30) days after the
date of the event giving rise to the adjustment.

          (d) No fractional shares of Common Stock or other securities will be
issued in connection with the exercise of the Warrant, but the Company will pay,
in lieu of fractional shares, a cash payment therefor on the basis of the mean
between the bid and asked prices of the Common Stock in the over-the-counter
market or the last sale price of the Common Stock on the principal exchange or
other trading facility on which the Common Stock is traded on the day
immediately prior to exercise.

          (e) If securities of the Company or securities of any subsidiary of
the Company are distributed pro rata to holders of Common Stock, such number of
securities will be distributed to the Warrantholder or its assignee upon
exercise of its rights hereunder as such Warrantholder or assignee would have
been entitled to if this Warrant Certificate had been exercised prior to the
record date for such distribution. The provisions with respect to adjustment of
the Common Stock provided in this Section 3 will also apply to the securities to
which the Warrantholder or its assignee is entitled under this Section 3(e).

          (f) Notwithstanding anything herein to the contrary, there will be no
adjustment made hereunder on account of the sale by the Company of the Common
Stock or other Securities purchasable upon exercise of the Warrant.



                                       5


          (g) If, immediately prior to any exercise of Warrants, there shall be
outstanding no securities of a class or series that, but for the provisions of
this Section 3, would be issuable upon such exercise (the "FORMERLY ISSUABLE
SECURITIES"), then, upon such exercise, and in lieu of the Formerly Issuable
Securities, the Company shall issue that number and kind of other securities or
property for which the Formerly Issuable Securities were most recently
exercisable or into which the Formerly Issuable Securities were most recently
convertible, as the case may be.

     4. RESERVATION OF SECURITIES. The Company agrees that the number of shares
of Common Stock or other Securities sufficient to provide for the exercise of
the Warrant upon the basis set forth above will at all times during the term of
the Warrant be reserved for exercise.

     5. VALIDITY OF SECURITIES. All Securities delivered upon the exercise of
the Warrant will be duly and validly issued in accordance with their terms, and
the Company will pay all documentary and transfer taxes, if any, in respect of
the original issuance thereof upon exercise of the Warrant.

     6. REGISTRATION OF SECURITIES ISSUABLE ON EXERCISE OF WARRANT CERTIFICATE.

          (a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of
the Effective Date (the "REGISTRATION PERIOD"). The Company will also file such
applications and other documents necessary to permit the sale of the Securities
to the public during the Registration Period in those states in which the Units
were qualified for sale in the Offering or such other states as to which the
Company and the Warrantholder agree. In order to comply with the provisions of
this Section 6(a), the Company is not required to file more than one
registration statement. No registration right of any kind, "piggyback" or
otherwise, will last longer than five years from the Effective Date.

          (b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.

          (c) Except as specifically provided herein, the manner and conduct of
the registration, including the contents of the registration statement, will be
entirely in the control and at the discretion of the Company. The Company will
file such post-effective amendments and supplements as may be necessary to
maintain the currency of the registration statement during the period of its
use. In addition, if the Warrantholder participating in the registration is
advised by counsel that the registration statement, in their opinion, is
deficient in any material respect, the Company will use its best efforts to
cause the registration statement to be amended to eliminate the concerns raised.

          (d) The Company will furnish to the Warrantholder the number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as it may reasonably request
in order to facilitate the disposition of Securities owned by it.



                                       6


          (e) The Company will, at the request of Warrantholders holding at
least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the
counsel representing the Company for the purposes of the registration pursuant
to this Section 6, addressed to the Warrantholders and any Participating
Underwriter, (ii) furnish an appropriate letter from the independent public
accountants of the Company, addressed to the Warrantholders and any
Participating Underwriter, and (iii) make such representations and warranties to
the Warrantholders and any Participating Underwriter as are customarily given to
underwriters of public offerings of equity securities in connection with such
offerings. A request pursuant to this subsection (e) may be made on three
occasions. The documents required to be delivered pursuant to this subsection
(e) will be dated within ten days of the request and will be, in form and
substance, equivalent to similar documents furnished to the underwriters in
connection with the Offering, with such changes as may be appropriate in light
of changed circumstances.

     7. INDEMNIFICATION IN CONNECTION WITH REGISTRATION.

          (a) If any of the Securities are registered, the Company will
indemnify and hold harmless each selling Warrantholder, any person who controls
any selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or liabilities, joint or
several, to which any Warrantholder, controlling person, or Participating
Underwriter may be subject under the Act or otherwise; and it will reimburse
each Warrantholder, each controlling person, and each Participating Underwriter
for any legal or other expenses reasonably incurred by the Warrantholder,
controlling person, or Participating Underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities, joint or several (or
actions in respect thereof), arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained, on the effective
date thereof, in any such registration statement or any preliminary prospectus
or final prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any case
to the extent that any loss, claim, damage, or liability arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in any registration statement, preliminary prospectus,
final prospectus, or any amendment or supplement thereto, in reliance upon and
in conformity with written information furnished by a Warrantholder for use in
the preparation thereof. The indemnity agreement contained in this subparagraph
(a) will not apply to amounts paid to any claimant in settlement of any suit or
claim unless such payment is first approved by the Company, such approval not to
be unreasonably withheld.

          (b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed any registration statement
or other filing or any amendment or supplement thereto, and any person who
controls the Company within the meaning of the Act, against any losses, claims,
damages, or liabilities to which the Company or any such director, officer, or
controlling person may become subject under the Act or otherwise, and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, or controlling person in connection with investigating
or defending any such loss, claim, damage, liability, or action, insofar as such
losses, claims, damages, or liabilities (or actions in respect



                                       7


thereof) arise out of or are based upon any untrue or alleged untrue statement
of any material fact contained in said registration statement, any preliminary
or final prospectus, or other filing, or any amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in said registration statement, preliminary or final prospectus, or other
filing, or amendment or supplement, in reliance upon and in conformity with
written information furnished by such Warrantholder for use in the preparation
thereof; provided, however, that the indemnity agreement contained in this
subparagraph (b) will not apply to amounts paid to any claimant in settlement of
any suit or claim unless such payment is first approved by the Warrantholder,
such approval not to be unreasonably withheld.

          (c) Promptly after receipt by an indemnified party under subparagraphs
(a) or (b) above of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, notify the indemnifying party of the commencement thereof; but the
omission to notify the indemnifying party will not relieve it from any liability
that it may have to any indemnified party otherwise than under subparagraphs (a)
and (b).

          (d) If any such action is brought against any indemnified party and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party of its election to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.

     8. RESTRICTIONS ON TRANSFER. This Warrant Certificate and the Warrant may
not be sold, transferred, assigned, pledged, or hypothecated, or be the subject
of any hedging, short sale, derivative, put, or call transaction that would
result in the effective economic disposition of the securities by any person for
a period of 180 days immediately following the Effective Date, except as
permitted in subparagraph (g)(2) of the Corporate Financing Rule. The Warrant
may be divided or combined, upon request to the Company by the Warrantholder,
into a certificate or certificates evidencing the same aggregate number of
Warrants.

     9. NO RIGHTS AS A SHAREHOLDER. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to the
Company, be entitled to receive such quarterly or annual reports as the Company
distributes to its shareholders.

     10. NOTICE. Any notices required or permitted to be given hereunder will be
in writing and may be served personally or by mail; and if served will be
addressed as follows:



                                       8


         If to the Company:

                  Vaughan Foods, Inc.
                  216 N.E. 12th Street
                  Moore, Oklahoma 73160
                  Attention:  Chief Executive Officer

         If to the Warrantholder:

                  at the address furnished
                  by the Warrantholder to the
                  Company for the purpose of
                  notice.

     Any notice so given by mail will be deemed effectively given 48 hours after
mailing when deposited in the United States mail, registered or certified mail,
return receipt requested, postage prepaid and addressed as specified above. Any
party may by written notice to the other specify a different address for notice
purposes.

     11. APPLICABLE LAW. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this Warrant
Certificate shall be tried before the courts of Oregon located in Multnomah
County, Oregon to the exclusion of all other courts that might have
jurisdiction.

         Dated as of _______, 2006

                                            VAUGHAN FOODS, INC.


                                            By: ________________________________
                                                Name: Mark E. Vaughan
                                                Title:   Chief Executive Officer


         Agreed and Accepted as of _______, 2006

                                            PAULSON INVESTMENT COMPANY, INC.


                                            By: ________________________________
                                                Name:
                                                Title:


                                        9

EX-4.5

When Recorded Please Return to:   Floyd Law Firm, P.C.
                                  P.O. Box 396
                                  Norman, Oklahoma 73070







- --------------------------------------------------------------------------------


                         ------------------------------

                           MORTGAGE AND LOAN AGREEMENT

                         ------------------------------


                                     Between



             VAUGHAN FOODS, INC., an Oklahoma Corporation, MORTGAGOR

                                       and

        CLEVELAND COUNTY INDUSTRIAL AUTHORITY, a public trust, MORTGAGEE




                         ------------------------------

                          Dated as of December 1, 2004

                         ------------------------------



- --------------------------------------------------------------------------------



                                TABLE OF CONTENTS
                                -----------------

                                                                                                      
ARTICLE I     DEFINITIONS.................................................................................2
ARTICLE II    REPRESENTATIONS, WARRANTIES AND COVENANTS...................................................3
              Representations, Warranties and Covenants by the Issuer.....................................3
              Representations, Warranties and Covenants by the Company....................................4
              Environmental Representations and Covenants.................................................5
ARTICLE III   SECURITY PROVISIONS: TERM OF THE LOAN AGREEMENT.............................................6
              Security Provisions.........................................................................6
              Term .......................................................................................7
ARTICLE IV    FINANCING THE COST OF THE PROJECT: ISSUANCE OF THE SERIES 2004 BONDS .......................8
              Agreement to Complete the Facilities........................................................8
              Agreement to Issue the Series 2004 Bonds; Application of Bond Proceeds......................8
              Disbursements From the Project Fund.........................................................8
              Obligation of the Parties to Cooperate in Furnishing Documents to Trustee...................8
              Investment of Moneys........................................................................8
              Arbitrage and Tax Matters...................................................................9
              Establishment of Completion Date............................................................9
              Completion of the Facilities if Project Fund Insufficient...................................9
              Plans and Specifications....................................................................9
              Surety Bonds; Company to Pursue Remedies Against Contractors and
              Subcontractors and Their Sureties .........................................................10
ARTICLE V     OBLIGATIONS; PROVISIONS FOR PAYMENT........................................................11
              Loan Payments and Other Amounts Payable....................................................11
              Payees of Payments.........................................................................12
              Obligations of Company Hereunder Unconditional.............................................13
ARTICLE VI    MAINTENANCE AND INSURANCE..................................................................14
              Maintenance and Modifications of Facilities by Company.....................................14
              Insurance .................................................................................14
ARTICLE VII   CASUALTY LOSS AND CONDEMNATION.............................................................18
              Insurance and Condemnation Proceeds........................................................18
SPECIAL COVENANTS .......................................................................................19
              No Warranty of Condition or Suitability by the Issuer......................................19
              Further Assurances.........................................................................19
              Annual Audit ..............................................................................19
              Financial Statements; Annual Budgets; Financial Covenants..................................19
              Release and Indemnification Covenants......................................................19
              Company Representative.....................................................................20
              Leases and Operating Contracts.............................................................21
              No Default Certificate.....................................................................21
              Limitations on Creation of Liens...........................................................21
              Limitations on Indebtedness................................................................22
              Parity Indebtedness........................................................................25
              Transfer of Assets.........................................................................26
              Consolidation, Merger, Sale or Conveyance..................................................26



                                       i


                                                                                                     
              Financial Statements; Annual Budgets; Financial Covenants..................................26
ARTICLE IX    ASSIGNMENT AND PLEDGING OF LOAN AGREEMENT, REDEMPTION OF BONDS.............................28
              Assignment by Company......................................................................28
              Assignment and Pledge by Issuer............................................................28
              Redemption of Bonds........................................................................28
ARTICLE X     EVENTS OF DEFAULT AND REMEDIES.............................................................29
              Events of Default Defined..................................................................29
              Remedies on Default........................................................................30
              No Remedy Exclusive........................................................................32
              Agreement to Pay Attorneys' Fees and Expenses..............................................32
              Waiver ....................................................................................32
              Appointment of Receiver....................................................................33
              Remedies Subject to Provisions of Law......................................................33
              Waiver of Appraisement, Valuation, Stay, and Execution Laws................................33
              Purchase of Property by Bondholder or Holder of Parity Indebtedness........................33
ARTICLE XI    PREPAYMENT OF THE LOAN.....................................................................35
              General Option to Prepay the Loan..........................................................35
              Prepayment Credits.........................................................................35
              Notice of Prepayment.......................................................................35
              Use of Prepayment Moneys...................................................................35
ARTICLE XII   MISCELLANEOUS..............................................................................36
              Notices ...................................................................................36
              Binding Effect ............................................................................36
              Severability ..............................................................................36
              Amounts Remaining in Funds.................................................................36
              Amendments, Changes and Modifications......................................................37
              Execution in-Counterparts..................................................................37
              Governing Law .............................................................................37
              Cancellation at Expiration of Term of Agreement............................................37
              Recording .................................................................................37
              No Pecuniary Liability of Issuer...........................................................37
              Partial Release ...........................................................................37
              General Release ...........................................................................38
              Captions ..................................................................................38
              Payments Due on Non-Business Day...........................................................38
              Provision of General Application...........................................................38
EXHIBIT A SITE ...........................................................................................1
EXHIBIT B COSTS OF THE PROJECT............................................................................1
- ------------------------------
EXHIBIT C PERMITTED LIENS...............................................................................C-1



                                       ii


                           MORTGAGE AND LOAN AGREEMENT

         This MORTGAGE AND LOAN AGREEMENT (this "Loan  Agreement"),  dated as of
December 1, 2004,  between  the  CLEVELAND  COUNTY  INDUSTRIAL  AUTHORITY,  (the
"Issuer"), a public trust, as Mortgagee and VAUGHAN FOODS, INC. (the "Company"),
a  corporation  duly  organized  and  existing  under  the laws of the  State of
Oklahoma, as Mortgagor.

                                   WITNESSETH:


         WHEREAS, the Company has requested that the Issuer finance the costs of
acquisition,  construction and equipping of certain manufacturing facilities and
certain solid waste disposal facilities located within Moore,  Cleveland County,
Oklahoma,  in accordance  with this Loan Agreement  which matures on December 1,
2024, and

         WHEREAS,  Title 60  Oklahoma  Statutes  2001  Section  176 et seq.,  as
amended, (the "Act"), authorizes the Issuer to finance such costs; and

         WHEREAS,  in order to  finance  such  costs,  the Issuer has issued its
Cleveland  County  Industrial  Authority  Industrial  Development  Revenue Bonds
(Vaughan Foods,  Inc. Project) Series 2004 (the "Bonds") pursuant to and secured
by an  Indenture  of Trust,  dated as of  December 1, 2004,  (the  "Indenture"),
between the Issuer and J.P. Morgan Trust Company, National Association, Oklahoma
City, Oklahoma, as trustee, (the "Trustee"); and

         WHEREAS,  the  rights of the Issuer in this Loan  Agreement  are hereby
assigned by the Issuer to the Trustee  pursuant to an  Assignment  of  Mortgage,
dated as of December 1, 2004; and

         WHEREAS,  the Issuer  proposes  to loan to the  Company and the Company
desires to borrow  from the Issuer the  proceeds of the Bonds upon the terms and
conditions hereinafter in this Loan Agreement set forth; and

         WHEREAS, the Company has determined that it is in the best interests of
the Company to grant and create the mortgage and security interests with respect
to the real property described in Exhibit A hereto (the "Site"), for the benefit
of the holder of the Bonds, all as defined and more fully set forth herein.

         NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto formally covenant, agree and
bind themselves as follows:

                                       1


                                    ARTICLE I
                                   DEFINITIONS

         All terms not defined  herein shall have the meanings  assigned to such
terms in Article I of the Indenture.

                                       2


                                   ARTICLE II
                    REPRESENTATIONS, WARRANTIES AND COVENANTS

         Section 2.1  REPRESENTATIONS,  WARRANTIES  AND COVENANTS BY THE ISSUER.
The Issuer  represents,  covenants  and warrants for the benefit of the Company,
the Trustee and the Bondholders that:

                  (1) the Issuer is an Oklahoma public trust, duly organized and
existing under the laws of the State of Oklahoma,  is authorized pursuant to the
Act to enter into the  transactions  contemplated by this Loan Agreement and the
Indenture and to carry out its  obligations  hereunder and  thereunder,  and has
duly  authorized  the  execution  and  delivery of this Loan  Agreement  and the
Indenture;

                  (2) consistent with the  understanding  between the Issuer and
the  Company,  the Issuer  will loan the  Company  the  proceeds of the Bonds to
provide for the financing of the Project;

                  (3) the Issuer  hereby finds that the financing of the Project
is in the public interest;

                  (4) to finance the Project, the Issuer will issue the Bonds in
the aggregate  principal  amount of  $5,000,000.  The Bonds shall  mature,  bear
interest,  be subject to redemption prior to maturity,  be secured and have such
other terms and conditions as are set forth in the Indenture;

                  (5) neither the execution and delivery of this Loan  Agreement
or the Indenture,  the consummation of the transactions  contemplated  hereby or
thereby nor the  fulfillment  of or compliance  with the terms and conditions of
this Loan  Agreement or the Indenture  conflicts  with or results in a breach of
any of the terms,  conditions or provisions of any  restriction or any agreement
or  instrument  to which  the  Issuer  is now a party or by which it is bound or
constitutes  a default  under any of the foregoing or results in the creation or
imposition  of  any  prohibited  lien,  charge  or  encumbrance  of  any  nature
whatsoever  upon any of the  property or assets of the Issuer under the terms of
any instrument or agreement;

                  (6) the Issuer hereby  acknowledges the Company's  estimate of
the total Cost of the Project set forth in Exhibit B hereto;

                  (7) the  Bonds  are to be  issued  under  and  secured  by the
Indenture  pursuant  to which  certain  of the  Issuer's  interest  in this Loan
Agreement will be pledged and assigned to the Trustee as security for payment of
the principal of, premium, if any, and interest on the Bonds; and

                  (8) the  issuance of the Bonds was  approved by the  Cleveland
County  Board of County  Commissioners  on behalf of which the Bonds were issued
after a public hearing following reasonable public notice.

                                       3


         Section 2.2  REPRESENTATIONS,  WARRANTIES AND COVENANTS BY THE COMPANY.
The Company  represents,  warrants and  covenants for the benefit of the Issuer,
the Trustee and the Bondholders, that:

                  (1) the Company is a  corporation  duly  organized and in good
standing  under the laws of the State of Oklahoma,  is authorized by the laws of
the State  applicable  as of the date  hereof to provide and operate the Project
has power to enter into and to perform and observe the covenants and  agreements
on its part  contained in this Loan  Agreement and the Tax  Certificates  and by
proper  action has duly  authorized  the  execution  and  delivery  of this Loan
Agreement and the Tax Certificates;

                  (2) neither the execution and delivery of this Loan  Agreement
and the Tax  Certificates,  the  consummation of the  transactions  contemplated
hereby  or  thereby  nor the  fulfillment  of or  compliance  with the terms and
conditions of this Loan Agreement and the Tax  Certificates  violates any law or
conflicts  with or  results  in a  breach  of any of the  terms,  conditions  or
provisions  of any  restriction  or any  agreement  or  instrument  to which the
Company is now a party or by which it is bound or  constitutes  a default  under
any of the  foregoing  or results in the  creation  or  imposition  of any lien,
charge or  encumbrance  of any nature  whatsoever  upon any of the  property  or
assets of the Company under the terms of any instrument or agreement  except for
the Indenture and other Permitted Liens;

                  (3) the total Cost of the Project is hereby  determined  to be
not less than  $5,000,000,  and the  financing  of such cost by the Issuer  will
assist  the  Company  in  providing   manufacturing  and  solid  waste  disposal
facilities;

                  (4) the Company  intends to operate or to cause its Facilities
to be  operated  and to use the  Improvements  in  connection  therewith  to the
expiration of the term of this Loan Agreement pursuant to the Act;

                  (5) as of  the  date  of  this  Loan  Agreement,  there  is no
litigation or legal or governmental action, proceeding, inquiry or investigation
pending or  threatened  by  governmental  authority or to which the Company is a
party or of which any  property  of the  Company is  subject,  which  would,  if
determined   adversely  to  the  Company,   materially   adversely   affect  the
transactions contemplated hereby;

                  (6) the Company has or shall have good and marketable title to
the Site,  free from all  encumbrances  except  Permitted  Liens as set forth in
Exhibit  "C" herein,  and such title shall  remain in the Company so long as the
Bonds remain Outstanding, except as otherwise provided herein;

                  (7) the Company has obtained,  or will obtain on or before the
date required therefor, all licenses, authorizations, permits and approvals from
applicable local, state and federal governmental agencies necessary to construct
the Improvements  and to operate the  Improvements as  manufacturing  facilities
contemplated  by this Loan  Agreement.  The Company knows of no reason that such
licenses, authorizations,  permits and approvals will not be issued or issued in
a timely manner;

                                       4


                  (8) the Company is in possession of a Phase One  Environmental
Assessment which was performed on the Site, and such assessment has not revealed
any  contamination  of the Site or any violation of any rules or  regulations of
the Environmental  Protection Agency or any other environmental  protection rule
or regulation of any federal, state or local agency;

                  (9) no  improvements  located or to be located in the building
set-back shown on the ALTA/ATSM  Land Title Survey  prepared with respect to the
Site are used or shall be used in the business operations of the Company.

         Section 2.3 ENVIRONMENTAL  REPRESENTATIONS AND COVENANTS. Except as may
be described in the Phase I  Environmental  Site  Assessment  dated December 12,
2004, prepared by Greystone  Environmental  Services,  Inc., with respect to the
Site, neither the Company nor, to the Company's knowledge,  any other Person has
ever caused or permitted any Hazardous  Material to be placed,  held, located or
disposed  of on,  under  or at the  Property,  or any  part  thereof  except  in
compliance with  Environmental  Laws. The Company hereby warrants and represents
that, to the best of its  knowledge,  it has complied  and, in the future,  will
comply in all material respects with all applicable  Environmental Laws. None of
the Property, has previously contained, and none of such properties now contain,
any  underground  storage  tanks (other than in compliance  with all  applicable
Environmental  Laws) and none has ever been used by the  Company or by any other
Person as a temporary or permanent  storage or disposal  site for any  Hazardous
Material.  The Company has delivered to the Trustee all  environmental  reports,
studies,  audits and other data and  information in the possession or control of
the Company relating to the Property.

         If the Issuer or the Trustee reasonably  suspects that any violation of
the  Environmental  Laws is occurring  involving  the Property or if an Event of
Default shall have occurred and be continuing which, with the passage of time or
the giving of notice, or both, would constitute an Event of Default,  the Issuer
and the Trustee shall have the right, but no obligation, to conduct any tests or
inspections  of the  Property,  at the  Company's  expense  (including,  without
limitation,  soil and other tests, borings, sampling and monitoring) in order to
determine  compliance with Environmental Laws or the presence thereon or therein
of Hazardous Material and to have access to the Property for such purposes.

                                       5


                                   ARTICLE III
                 SECURITY PROVISIONS: TERM OF THE LOAN AGREEMENT

         Section 3.1 SECURITY PROVISIONS.  In order to secure the payment of the
Bonds and  payment of all sums  advanced  under this Loan  Agreement,  including
advances  which may be made in the future and to secure the  performance  by the
Company of all the covenants expressed or implied by this Loan Agreement (a) the
Company does hereby grant,  bargain,  sell,  convey and mortgage unto the Issuer
its interest in the real property described in Exhibit A hereto (the "Site") and
the improvements  located or to be constructed thereon (the  "Improvements," and
together with the Site, the "Property"),  and any fixtures or appurtenances  now
or  hereafter  erected  thereon;  together  with all rents and leases,  profits,
royalties,  minerals,  geothermal  resources,  oil and gas rights  and  profits,
easements  and access  rights,  now owned or hereafter  acquired by the Company,
used, belonging to, or in any way connected with the Property,  all of which are
declared  to be a part  of  said  Property,  and  all  the  rights,  privileges,
benefits,  hereditaments and  appurtenances in any way belonging,  incidental or
appertaining to the Property (other than equipment hereafter acquired),  subject
to Permitted  Liens as  described  in Section  8.10 hereof,  and (b) the Company
hereby pledges to and grants to the Issuer a present security  interest,  within
the meaning of the Oklahoma Uniform  Commercial Code and to the extent permitted
by law, in (i) the Pledged Revenues,  (ii) all of its right, title and interest,
if any, in the Funds  (other  than the Rebate  Fund),  (iii) any trust  accounts
referred  to in this  Loan  Agreement  or in the  Indenture,  (iv) all  tangible
personal property, furniture,  machinery and equipment of the Company, now owned
by the Company and located on the Site (the  "Equipment"),  and (v) inventory of
the Company  located on the Site,  in each case subject to  Permitted  Liens and
subject to liens and  security  interests  of record as of the date of execution
hereof,   excluding  from  such  pledge  and  security   interest  all  patents,
trademarks,  copyrights,  licenses and similar proprietary rights of the Company
now owned or hereafter acquired, to the extent the same constitute  "collateral"
within the meaning of Section 3.3 hereof ."

         This pledge  shall be valid and binding  from and after the date of the
first delivery of any of the Bonds. To the extent any assets pledged pursuant to
this Loan Agreement consist of rights of action or personal property,  this Loan
Agreement  constitutes  a security  agreement  and  financing  statement  and is
intended when recorded to create a perfected security interest in such assets in
favor of the Issuer.  The Company shall file financing  statements  from time to
time relating to this Loan Agreement in such manner and at such places as may be
required by law fully to protect the security of the  Bondholders and the right,
title  and  interest  of the  Trustee  in and to the  Trust  Estate  or any part
thereof.

         Notwithstanding the foregoing,  the Company shall be entitled to pledge
any accounts receivable or inventory,  or both,, on a basis senior to the pledge
herein  provided,  to  secure  the  payment  of  Indebtedness  in the  form of a
revolving credit or similar agreement in a maximum principal amount equal to 80%
of such accounts receivable.

         In addition,  the Company  shall be entitled to pledge  purchase  order
receipts from Approved  Purchasers and to pledge  inventory with respect thereto
on a basis  senior to the  pledge  herein  provided,  to secure  the  payment of
Indebtedness in a maximum  principal amount equal to 95% of the principal amount
of such purchase orders.

                                       6


         The Trustee, as assignee of the Issuer pursuant to the Assignment, will
execute such subordination or similar agreements as reasonably  requested by the
Company with respect to any such accounts receivable or inventory pledge.

         Section 3.2 TERM.  This Loan  Agreement  shall remain in full force and
effect  from the date of  delivery  hereof  until  such time as all of the Bonds
shall have been fully paid or provision is made for such payment pursuant to the
Indenture  and all  reasonable  and  necessary  fees and expenses of the Trustee
accrued and to accrue through final payment of the Bonds,  all fees and expenses
of the Issuer  accrued and to accrue  through final payment of the Bonds and all
other  liabilities of the Company accrued and to accrue through final payment of
the  Bonds  under  this  Loan  Agreement  and the  Indenture  have  been paid or
provision is made for such payments pursuant to the Indenture.

                                       7


                                   ARTICLE IV
                      FINANCING THE COST OF THE FACILITIES:
                              ISSUANCE OF THE BONDS

         Section 4.1 AGREEMENT TO COMPLETE THE  FACILITIES.  The Company  agrees
that it will acquire,  construct,  improve and equip the Facilities described in
Exhibit B.

         Section 4.2 AGREEMENT TO ISSUE THE BONDS; APPLICATION OF BOND PROCEEDS.
In order to  provide  funds to make the Loan for  payment  of the  Project,  the
Issuer will sell and cause to be delivered to the initial  purchaser thereof the
Bonds.

         Section 4.3 DISBURSEMENTS FROM THE PROJECT FUND. The Issuer has, in the
Indenture, authorized and directed the Trustee to make payments from the Project
Fund to pay (or to  reimburse  the  Company  for the payment of) the Cost of the
Project,   including  costs  related  to  the  design,  planning,   acquisition,
construction,  improvement, equipment and operation of the Facilities. Each such
payment  of the Cost of the  Project  related  thereto  shall be made  only upon
receipt by the Trustee of a  requisition  signed by the  Company  Representative
showing  the  payment  to be  necessary  and  reasonable  and  stating  (i)  the
requisition number, (ii) the name and address of the person, firm or corporation
to whom  payment  is due or was made,  (iii) the  amount to be paid or for which
reimbursement  is sought,  (iv) that none of the items for which the  payment or
reimbursement  is  proposed  to be made has been the  subject of any  payment or
reimbursement  theretofore  made from the Project  Fund,  (v) the nature of each
item for  which the  payment  or  reimbursement  is  proposed  to be made and in
connection with the Facilities described in Exhibit B, if applicable,  that such
item is or was reasonable and necessary in connection with the design, planning,
acquisition, construction, improvement and equipping of the Facilities described
in  Exhibit  B, and in all cases is a proper  Cost of the  Project  and a proper
charge against the Project Fund, and (vi) that upon payment or  reimbursement of
the amount  requested in such  requisition,  the amount remaining in the Project
Fund,  together  with other  legally  available  moneys of the  Company  will be
sufficient to pay the portion of the Cost of the Project relating to the design,
planning, acquisition,  construction,  improving and equipping of the Facilities
then  unpaid.  No  disbursement  requested in any  requisition  (other than with
respect to equipment  or working  capital)  shall be made by the Trustee  unless
there is attached to the  requisition  (a) lien  waivers  covering all work done
and/or materials  furnished in connection with the Improvements  relating to any
prior  disbursement  from  the  Project  Fund  for  payment  to  contractors  or
materialmen.  The Trustee may, but shall be under no obligation,  to review such
lien waivers.

         Section  4.4  OBLIGATION  OF THE  PARTIES TO  COOPERATE  IN  FURNISHING
DOCUMENTS TO TRUSTEE.  The Company and the Issuer  agree to cooperate  with each
other in furnishing to the Trustee the requisitions  referred to in Sections 4.3
hereof.  Such obligation of the Issuer shall not extend beyond the moneys in the
Project Fund available for payment under the terms of the Indenture.

         Section  4.5  INVESTMENT  OF MONEYS.  Any moneys  held as a part of the
Funds  shall be  invested,  reinvested  and  transferred  to other  Funds by the
Trustee as provided in Article VI of the Indenture.

                                       8


         Section 4.6 ARBITRAGE AND TAX MATTERS. The Company hereby covenants and
represents  for the  benefit of each  owner of the Bonds and the Issuer  that it
will not make or permit  any use of the  proceeds  of the Bonds or the moneys in
the Funds or take any other action  which will cause the Bonds to be  "arbitrage
bonds" within the meaning of Section 148 of the Code. The Company covenants that
it will comply with the  applicable  requirements  of Section 148 of the Code so
long as any Bonds are  Outstanding.  The  Company  shall  deliver  to the Issuer
certificates  in such reasonable form as the Issuer shall specify upon which the
Issuer may rely in furnishing  the  certificates  required by Section 6.2 of the
Indenture. The Company covenants and agrees to comply with the provisions of the
Tax Certificates.

         Section 4.7 ESTABLISHMENT OF COMPLETION DATE. The Company covenants and
agrees  that,  unless  otherwise  consented  to by the  holders  of  100% of the
principal  amount of the Bonds it shall either (i) commence  construction of the
Improvements not later than July, 1, 2005, or (ii) provide notice to the Trustee
that Bonds shall be redeemed in accordance with Section 5.2(c) of the Indenture.
The  Company  agrees to provide to the  Trustee a  certificate  with  respect to
completion of the Facilities on the Completion Date. The Company  covenants that
the  acquisition,  construction,  improvement  and  equipping of the  Facilities
described in Exhibit B will be completed no later than September 1, 2006.

         Section 4.8 COMPLETION OF THE FACILITIES IF PROJECT FUND  INSUFFICIENT.
The Company  acknowledges  that the moneys in the  Project  Fund  available  for
payment of the Cost of the Project may not be sufficient to pay the cost thereof
in full,  and agrees to complete the  Facilities  and to pay that portion of the
cost of the Facilities in excess of the moneys available therefor in the Project
Fund from any moneys  legally  available for such  purpose.  The Issuer does not
make any warranty, either express or implied, that the moneys which will be paid
into the Project Fund will be sufficient to pay all the cost of the  Facilities.
The Company shall not be entitled as a result of paying a portion of the Cost of
the Project  pursuant to this  Section to any  reimbursement  therefor  from the
Issuer, the Trustee or from the owners of any Bonds, nor shall it be entitled to
any diminution in or postponement of the payments required to be paid under this
Loan Agreement.

         Section 4.9 PLANS AND  SPECIFICATIONS.  Any Improvements which have not
yet been  completed  shall  be  acquired,  constructed,  improved  and  equipped
substantially in accordance with the plans and  specifications  therefor and any
amendments thereto.  The Company may revise the plans and specifications and the
list of  equipment  to be  acquired  at any  time  prior  to  completion  of the
acquisition, construction, improvement and equipping of the Facilities described
in Exhibit B,  provided that (i) a Company  Representative  shall certify to the
Trustee  that the  Facilities  described  in  Exhibit B in  accordance  with the
revised plans and  specifications  or equipment  list will  constitute a project
permitted pursuant to the Act, (ii) such Facilities when completed in accordance
with  the  revised  plans  and  specifications  or  equipment  list  will not be
materially inconsistent with the description attached as Exhibit B hereto, (iii)
the  Company  shall  comply with the  requirements  of  subparagraph  (a) of the
following  paragraph,  and (iv) if  applicable,  evidence  that the  Company has
sufficient funds to construct and equip such Facilities.

                                       9


         In  addition,   the  Company  may  make  revisions  to  the  plans  and
specifications  or  equipment  list  which  will  cause  the  Facilities  to  be
materially  inconsistent  with the  description  attached hereto as Exhibit B so
long as the Company has obtained the prior written  consent of a majority of the
holders or Beneficial  Owners of the Bonds and has provided the following to the
Trustee and the Issuer:

                  (a) if  applicable,  a  construction  budget and  construction
schedule for the completion of the Improvements;

                  (b) an Opinion of Bond Counsel acceptable to the Issuer to the
effect that such revisions  will not adversely  affect the validity of the Bonds
or the  exclusion of interest on the Bonds from gross income for federal  income
tax purposes;

                  (c) a revised Exhibit B hereto; and

                  (d) if  applicable,  evidence that the Company has  sufficient
funds to complete such Facilities (from any source).

         Section  4.10  SURETY  BONDS;   COMPANY  TO  PURSUE  REMEDIES   AGAINST
CONTRACTORS AND SUBCONTRACTORS AND THEIR SURETIES. The Company shall secure from
each contractor  directly  employed by the Company or from any  subcontractor to
such contractor in connection with the  acquisition,  construction,  improvement
and equipping of the  Improvements  under a contract or contracts  totaling over
$50,000 payment and performance  bonds executed by a responsible  surety company
authorized  to do business in the State of Oklahoma in a sum equal to the entire
amount to become  payable.  Each bond shall be  conditioned on the completion of
the work under the contract with such general  contractor in accordance with the
plans and  specifications  and upon the payment of all claims of  subcontractors
and suppliers. A dual obligee rider in favor of the Issuer and the Trustee shall
be obtained by the  Company for each such bond  obtained  prior to and after the
date of the  delivery  of the Bonds.  Each such bond shall be  delivered  by the
Company to the Trustee  and the Issuer,  promptly  upon  receipt  thereof by the
Company.

         In the event of a material  default of any contractor or  subcontractor
under any contract in connection with the acquisition, construction, improvement
and  equipping  of the  Improvements  or in the  event of a  material  breach of
warranty with respect to any material,  workmanship or performance guaranty, the
Company will promptly proceed to exhaust the remedies of the Company, the Issuer
and the Trustee against the contractor, subcontractor or supplier in default and
against any surety for the  performance  of such  contract.  The  Company  shall
advise the Issuer and the Trustee of the steps it intends to take in  connection
with any  such  default.  Any  amounts  recovered  by way of  damages,  refunds,
adjustments or otherwise in connection with the foregoing shall be paid into the
Project Fund, net of legal fees and other reasonable  collection  costs,  unless
recovered after the Completion Date and full  disposition of the Project Fund in
accordance with the Indenture, in which case such amounts shall first be used to
correct  defects  created by such  default or breach of warranty or to reimburse
the Company for amounts paid by the Company to correct such defects and, second,
any excess shall be deposited in to the Bond Principal Fund.

                                       10


                                    ARTICLE V
                       OBLIGATIONS; PROVISIONS FOR PAYMENT

         Section 5.1  LOAN PAYMENTS AND OTHER AMOUNTS PAYABLE.

                  (a) As repayment of the Loan,  the Company  shall deposit with
the Trustee, on the date of issuance of the Bonds, and thereafter not later than
the 15th day of each month,  commencing  January 15, 2005,  the Monthly  Payment
with respect to the following  calendar month, in accordance with the Indenture,
which  amounts  shall be applied to the payment of the Bonds at the times and in
the manner  provided in the  Indenture.  The Company shall be entitled to credit
with respect to such Monthly  Payments for any  transfers to the Bond  Principal
Fund and Bond Interest Fund pursuant to Section 3.7(b) of the Indenture.

                  (b)  Upon any  acceleration  of  amounts  due  under  the Loan
Agreement,  the Company  shall  immediately  pay as repayment  of the Loan,  for
deposit in the Bond Principal Fund, the Bond Interest Fund and the Reserve Fund,
an amount which,  together with other moneys available under the Loan Agreement,
is sufficient to pay the entire principal of and interest on the Bonds.

                  (c) On or before any  redemption  date  (other  than a sinking
fund  redemption  date) for which a notice of redemption has been given pursuant
to the Indenture, the Company shall pay as repayment of the Loan, for deposit in
the Bond Principal Fund, an amount which,  together with other moneys  available
therefor  in  the  Bond  Principal  Fund  (and,  if all  Bonds  are  called  for
redemption,  the  Reserve  Fund),  is  sufficient  to pay the  principal  of and
premium,  if any, on the Bonds called for optional or mandatory  redemption  and
for deposit into the Bond Interest Fund an amount of money which,  together with
other moneys available  therefor in the Bond Interest Fund, is sufficient to pay
the interest  accrued to the redemption date on the Bonds called for optional or
mandatory redemption.  If on any principal or interest payment date on the Bonds
or the date any other  amounts  are  payable on the Bonds the amount held by the
Trustee in the Bond Principal Fund and the Bond Interest Fund is insufficient to
make the required payments of principal of, premium, if any, and interest on the
Bonds,  the Company shall forthwith pay such deficiency as repayment of the Loan
for deposit in the Bond  Principal  Fund or the Bond Interest  Fund, as the case
may be.

                  (d) At the option of the Company Representative, so long as no
Event of Default has occurred or is occurring,  to be exercised by delivery of a
written  certificate  to the  Trustee  and the Issuer not less than 45 days next
preceding the applicable sinking fund redemption date, it may (i) deliver to the
Trustee for cancellation  Bonds in an aggregate  principal amount desired by the
Company  Representative  or (ii) specify a principal  amount of such Bonds which
prior to said date have been redeemed  (otherwise  than through the operation of
the  applicable  sinking  fund) and canceled by the Trustee and not  theretofore
applied as a credit against the respective  sinking fund redemption  obligation.
Each such Bond so  delivered  or  previously  redeemed  shall be credited by the
Trustee at 100 percent of the principal amount thereof against the obligation of
the Company on such  respective  sinking fund  redemption date for Bonds and any
excess  over  such  amounts  shall  be  credited  against  future  sinking  fund
redemption obligations for such Bonds as directed by the Company Representative.
In the event the Company  Representative shall avail itself of the

                                       11


provisions  of  clause  (i)  of  the  first  sentence  of  this  paragraph,  the
certificate   required  by  the  first  sentence  of  this  paragraph  shall  be
accompanied by the Bonds to be canceled.

                  (e) The Company  shall  deposit the  following  amounts to the
Reserve Fund:

                           (i) on the date of  issuance  of the  Bonds  $500,000
from proceeds of the Bonds; and

                           (ii) in the event any moneys in the Reserve  Fund are
transferred to the Bond Principal Fund or the Bond Interest Fund pursuant to the
Indenture,  or to the Rebate Fund pursuant to the Indenture, or in the event the
valuation of the amounts in the Reserve Fund required by the  Indenture  reveals
there is an amount less than the Reserve  Requirement  on deposit in the Reserve
Fund, the Company shall deposit,  on the first day of each month  following such
transfer or valuation,  substantially  equal  monthly  payments into the Reserve
Fund to  cause  the  total  amount  in the  Reserve  Fund to equal  the  Reserve
Requirement not later than the next succeeding Interest Payment Date.

                  (f) The  Company  agrees to pay to the Trustee and the Issuer,
respectively,  as an Operating  Expense,  the  reasonable and necessary fees and
expenses of the Trustee and the Issuer,  respectively,  including the reasonable
fees and other costs incurred for the services of any paying agent or engineers,
architects, attorneys, management consultants, accountants and other consultants
employed by the Trustee or the Issuer to make examinations and reports,  provide
services and render opinions required under the Loan Agreement or the Indenture,
plus the Company agrees to pay to the appropriate party the fees and expenses of
any rebate analyst selected by the Trustee as provided in the Indenture,  as and
when the same become due, upon submission of a statement therefor.

                  (g) The Company  agrees to pay to the Trustee as an  Operating
Expense all amounts to be  deposited  to the Rebate  Fund,  as and when the same
become due as determined  pursuant to the Indenture,  to the extent there are no
other amounts available to make such deposits, and to cause the Trustee to apply
such funds in compliance with the terms of the Indenture.

                  (h) The  Company  agrees to pay as an  Operating  Expense  all
costs and  expenses  which may be  incurred  in  connection  with any removal or
substitution of the Trustee and the appointment of any successor trustee.

                  (i) The Company agrees to pay annual administration fee to the
Issuer in an amount  equal to  one-eighth  of one percent of the amount of Bonds
outstanding  as of December 1 of each year,  commencing  December 1, 2005.  This
administration  fee  shall be  payable  on or  before  December  31 of each year
commencing December 31, 2005, at the mailing address of the Issuer. In addition,
the Company  agrees to pay the Projects'  pro rata share of the Issuer's  annual
audit  expenses,  same to be remitted  to the Issuer upon  receipt of an invoice
from the Issuer.

         Section 5.2 PAYEES OF PAYMENTS.  The  Payments  provided for in Section
5.1(a),  (b) and (c) hereof shall be paid in funds immediately  available in the
city in which the  designated  office of the Trustee is located  directly to the
Trustee  for the  account  of the  Issuer  and  shall be  deposited  as  therein
provided.  The Payments  provided for in Section  5.1(e) hereof shall be paid in
funds

                                       12


immediately  available in the city in which the designated office of the Trustee
is located  directly to the Trustee for the benefit of the Bondholders and shall
be deposited in the Reserve Fund. The payments to be made under Section  5.1(d),
(g) and (h) hereof shall be paid directly to the payee for its own use.

         Section  5.3  OBLIGATIONS  OF  COMPANY  HEREUNDER  UNCONDITIONAL.   The
obligations  of the Company to make the payments  required in Section 5.1 hereof
and to perform and observe the other  agreements  on its part  contained  herein
shall be  absolute  and  unconditional.  The  Company  (i) will not  suspend  or
discontinue,  or permit  the  suspension  or  discontinuance  of,  any  payments
provided  for in Section  5.1 hereof,  (ii) will  perform and observe all of its
other agreements contained in this Loan Agreement,  and (iii) except as provided
in Article XI  hereof,  will not  terminate  this Loan  Agreement  for any cause
including, without limiting the generality of the foregoing, failure to acquire,
construct,  improve and equip the Improvements,  any acts or circumstances  that
may constitute  failure of  consideration,  eviction or  constructive  eviction,
destruction  of  or  damage  to  its  solid  waste  disposal  or   manufacturing
facilities,  commercial  frustration  of purpose,  or change in the tax or other
laws or administrative rulings of or administrative actions by the United States
of America or the State of Oklahoma or any political  subdivision of either, any
failure of the Issuer to perform and observe any agreement,  whether  express or
implied, or any duty, liability,  or obligation arising out of or connected with
this Loan Agreement,  whether express or implied,  or any failure of the Trustee
to perform and observe any agreement,  whether express or implied,  or any duty,
liability or obligation arising out of or connected with the Indenture,  whether
express or implied.  Nothing  contained  in this  Section  shall be construed to
release the Issuer from the  performance  of any  agreements  on its part herein
contained,  and if the  Issuer  shall fail to perform  any such  agreement,  the
Company may  institute  such  action  against the Issuer as the Company may deem
necessary to compel performance,  provided that no such action shall violate the
agreements  on the  part of the  Company  contained  herein.  The  Company  may,
however,  at its own cost and  expense and in its own name or in the name of the
Issuer,  prosecute or defend any action or  proceeding  or take any other action
involving third persons which the Company deems reasonably necessary in order to
secure or protect its right of possession,  occupancy and use of its solid waste
disposal or manufacturing facilities, and in such event the Issuer hereby agrees
to cooperate fully with the Company (without expense to the Issuer).

                                       13


                                   ARTICLE VI
                            MAINTENANCE AND INSURANCE

         Section 6.1  MAINTENANCE  AND  MODIFICATIONS  . The Company agrees that
during the term of this Loan Agreement its Property,  Plant and Equipment  shall
be operated and maintained in  substantial  compliance  with all laws,  building
codes,  ordinances and regulations and zoning laws as shall be applicable to the
Property,  Plant and Equipment.  The Company agrees that during the term of this
Loan  Agreement  it will at its own  expense  (i) keep the  Property,  Plant and
Equipment in as reasonably safe condition as its operations permit and (ii) keep
the  Property,  Plant  and  Equipment  in  good  repair  and in  good  operating
condition,  making from time to time all necessary  repairs  thereto  (including
external and  structural  repairs) and renewals and  replacements  thereof.  The
Company  may also at its own  expense,  make  from  time to time any  additions,
modifications  or improvements to the Property,  Plant and Equipment it may deem
desirable for its purposes that do not adversely affect the structural integrity
of any building or substantially reduce its value or impair the character of its
use  permitted   pursuant  to  the  Act,   provided  that  all  such  additions,
modifications,  renovations,  repairs and improvements made by the Company shall
become a part of the Property,  Plant and  Equipment;  provided,  however,  that
nothing in this subsection shall prevent the Company from ceasing to operate any
immaterial  portion of the Property,  Plant and  Equipment.  The Company  hereby
covenants and agrees that it shall not construct any improvements or install any
equipment on any portion of the Property,  located within a federally-designated
flood hazard zone unless and until such property  shall be insured  against loss
or damage by flood in accordance with Section 6.2(a) hereof.

         Section 6.2  INSURANCE.

         (a) Throughout the term of this Loan  Agreement,  the Company will keep
the Property,  (or cause the Property to be kept)  continuously  insured against
such risks as are customarily  insured against with respect to property  similar
to the Property by businesses of like size and type,  paying as the same becomes
due all premiums in respect thereto, including but not necessarily limited to:

                  (i)  Insurance to the full  insurable  value of the  Property,
                  Plant  and  Equipment  of the  Company  as  determined  by the
                  Company  sufficient  to  prevent  the  Company  from  being  a
                  co-issuer  (and in no event less than the principal  amount of
                  the Bonds  Outstanding  from time to  time),  against  loss or
                  damage  by fire,  lightning  and  flood  (if the  Property  is
                  located within a  federally-designated  flood hazard zone) and
                  such other risks and matters,  including  without  limitation,
                  rental  loss,  public  liability  and boiler  insurance,  with
                  uniform standard extended coverage endorsement limited only as
                  may be provided  in the  standard  form of  extended  coverage
                  endorsement at that time  customarily  used in the State where
                  such property is located, provided that the insurance required
                  by this  subsection may contain a deductible  provision and be
                  in amounts which in the opinion of an Insurance  Consultant is
                  normal and reasonable.

         (ii)  General  public  liability  insurance  against  claims for bodily
injury,  death or property damage occurring on, in or about the Property and the
adjoining  streets,   sidewalks  and  passageways,   such  insurance  to  afford
protection  of the type and in an amount  which in the  opinion of an  Insurance
Consultant is normal and  reasonable  with respect to bodily injury and property
damage.

                                       14


                  (iii)  Rental  or  business  interruption   insurance  against
                  abatement of rent  resulting from fire or other casualty in an
                  amount not less than  $1,000,000,  with the proceeds from such
                  rental or business interruption insurance being payable to the
                  Company and the  Trustee,  as their  respective  interest  may
                  appear.

                  (iv)  Worker's compensation insurance as required by law.

         (b) In addition,  the Company shall  provide to the Trustee,  within 90
days of the date of issuance of the Bonds,  Key-man  insurance  with  respect to
Mark Vaughan, in the amount of $1,000,000.

         (c) All policies of insurance shall be issued by an insurer  authorized
to do business in the State where the  respective  property is located  having a
rating of at least A:6 in Best's Key Rating Guide.  Not later than 30 days prior
to the  expiration  date of each of the  insurance  policies,  the Company  will
deliver  to the  Trustee  satisfactory  evidence  of the  renewal of each of the
policies.  If at any time the Issuer is not in receipt of written  evidence that
all insurance  required  hereunder is in full force and effect,  the Issuer will
have the right  without  notice to the Company to take such action as the Issuer
deems  necessary  to protect its  interest in the  Property,  including  without
limitation the obtaining of such  insurance  coverage as the Trustee in its sole
discretion  deems  appropriate,  and all  expenses  incurred  by the  Trustee in
connection  with such action or in obtaining  such  insurance  and keeping it in
effect  will  be paid by the  Company  to the  Trustee  upon  demand;  provided,
however,  that if that the Trustee takes any such action,  the Issuer shall give
the Company notice of such action within five Business Days thereof.

         (d) All of the insurance policies required pursuant to this Section 6.2
will (i) contain a standard noncontributory form of mortgage clause (in favor of
the Trustee and  entitling  the Trustee to collect any and all proceeds  payable
under such insurance),  as well as a standard waiver of subrogation endorsement,
and in the case of such  liability  policy,  name the  Trustee as an  additional
insured,  all to be in form and  substance  satisfactory  to the  Trustee;  (ii)
provide,  to the extent  obtainable,  that such  policies may not be canceled or
amended  to  diminish  the  coverage  thereunder  without at least 30 days prior
written  notice to the  Trustee;  and (iii)  provide  that no act,  omission  or
negligence  of the  Company,  or its agents,  servants or  employees,  or of any
tenant under any lease,  which might  otherwise  result in a forfeiture  of such
insurance  or any  part  thereof,  shall  in any  way  affect  the  validity  or
enforceability of such insurance insofar as the Issuer is concerned. The Company
will not carry separate insurance, concurrent in kind or form or contributing in
the event of loss, with any insurance required under this Section 6.2.

         The  Company  shall  retain  an  Insurance  Consultant  to  review  the
insurance  requirements  of the Company at the date of issuance of the Bonds and
from time to time  thereafter (but not less frequently than every two years) and
to cause a certificate to be delivered to the Trustee and to the  Bondholders as
to whether the insurance being maintained is in compliance with the requirements
of this  Section.  If the Insurance  Consultant  makes  recommendations  for the
increase of any coverage,  the Company  shall  increase or cause to be increased
such coverage in accordance  with such  recommendations,  to the extent that the
Governing Body of the Company determines in good faith

                                       15


that such  recommendations  are in the best  interests  of the  Company.  If the
Insurance  Consultant makes  recommendations  for the decrease or elimination of
any coverage,  the Company may decrease or eliminate such coverage in accordance
with such recommendations,  to the extent that the Governing Body of the Company
determines in good faith that such  recommendations  are in the best interest of
the Company.

         Notwithstanding  anything in this Section to the contrary,  the Company
shall have the right,  without giving rise to an Event of Default solely on such
account, (i) to maintain insurance coverage below that most recently recommended
by the Insurance Consultant, if the Company furnishes to the Trustee a report of
the Insurance  Consultant  to the effect that the insurance so provided  affords
either the  greatest  amount of coverage  available  for the risk being  insured
against  at  rates  which  in the  judgment  of  the  Insurance  Consultant  are
reasonable in connection with reasonable and appropriate risk management, or the
greatest amount of coverage  necessary by reason of state or federal laws now or
hereafter in existence;  or (ii) to adopt  alternative risk management  programs
which the Insurance Consultant determines to be reasonable,  including,  without
limitation,  to  self-insure in whole or in part  individually  or in connection
with other  institutions,  to  participate  in  programs  of  captive  insurance
companies,  to  participate  with other solid waste  disposal and  manufacturing
companies  in mutual or other  cooperative  insurance  or other risk  management
programs, to participate in state or federal insurance programs, or to establish
or participate in other  alternative  risk  management  programs;  all as may be
approved  by  the  Insurance  Consultant  as  reasonable  and  appropriate  risk
management  by the  Company.  If the  Company  shall  be  self-insured  for  any
coverage,  the report of the Insurance  Consultant  mentioned  above shall state
whether the anticipated funding of any self-insurance fund is actuarially sound,
and if not, the required  funding to produce such result and such coverage shall
be reviewed by the  Insurance  Consultant  not less  frequently  than  annually.
Notwithstanding  the other  provisions  of this  Section,  the Company shall not
self-insure (other than with respect to reasonable deductibles certified as such
in  an  Officer's  Certificate  of  the  Company  Representative)  or  otherwise
participate  in programs  described in (ii) above with respect to any  insurance
against loss or damage to the Property,  Plant and Equipment by fire, lightning,
vandalism,  malicious  mischief  or other  casualty  or with  respect  to boiler
insurance and provided  further that, the Company shall not  self-insure if such
self-insurance  has a material  adverse effect on  reimbursement  from any third
party  payor  unless its  Governing  Body shall have  determined  in good faith,
evidenced by a resolution of the Governing Body, that such  self-insurance is in
the best interests of the Company and the Company has given prior notice of such
self-insurance to the Trustee and the Bondholders.

         The  Company  Representative  shall  deliver  to the  Trustee  (i) upon
execution and delivery of this Loan Agreement, the originals or certified copies
thereof of all insurance policies (or certificates thereof) which the Company is
required to maintain  pursuant to this Section,  together with a Certificate  of
the Company  Representative  that payment of all  premiums  then due thereon has
been made,  (ii) at least 30 days prior to the  expiration  of any such policies
evidence  as to the renewal  thereof,  if then  required by this  Section or the
terms  of  such   policies,   and  an  Officer's   Certificate  of  the  Company
Representative  that payment of all premiums  then due with respect  thereto has
been made,  and (iii)  promptly  upon  request by the  Trustee,  but in any case
within 90 days after the end of each calendar year, a certificate of the Company
Representative  setting  forth  the  particulars  as to all  insurance  policies
maintained  by the Company  pursuant to this  Section and  certifying  that such

                                       16


insurance policies are in full force and effect,  that such policies comply with
the  provisions of this Section and that all premiums then due thereon have been
paid.

                                       17


                                   ARTICLE VII

                         CASUALTY LOSS AND CONDEMNATION

         Section 7.1  INSURANCE  AND  CONDEMNATION  PROCEEDS.  In the event that
damage or  destruction  to the Property or any portion  thereof occurs such that
claims for loss do not exceed $100,000 or in the event title to or the temporary
use of the Property, or any portion thereof, will be taken under the exercise of
the power of eminent domain and the Net Proceeds from any condemnation award are
less than $100,000,  the Net Proceeds of insurance resulting from such claims or
from any such  condemnation  award will be paid to the  Company and will be used
for such purposes as the Company,  in its discretion,  may deem appropriate.  In
the event  that any  damage or  destruction  is such  that  claims  for loss are
between  $100,000 and $1,000,000,  both inclusive,  or the Net Proceeds from any
condemnation award are between $100,000 and $1,000,000,  both inclusive, the Net
Proceeds of insurance  resulting from such claims or from any such  condemnation
award will be paid to the Company and used by the Company  with the consent of a
Significant Bondholder either to redeem Bonds or to repair, rebuild,  restore or
replace the property.  In the event that any damage or  destruction is such that
claims for loss exceed  $1,000,000,  or the Net Proceeds  from any  condemnation
award  exceed  $1,000,000,  the Net Proceeds of  insurance  resulting  from such
claims or from any such condemnation award will be held by the Trustee,  and the
Company  will  elect to have the Net  Proceeds  received  applied  to either the
redemption of the Bonds or to repair, rebuild,  restore or replace the property.
If the Company elects the latter  option,  then the Net Proceeds will be paid by
the Trustee from a separate  account,  from time to time,  upon  evidence of the
expenditures  therefor,   upon  receipt  of  a  certificate  of  an  Independent
Architect.  The  Company  may elect to redeem less than all of the Bonds only if
(a) the  property  damaged,  destroyed  or  condemned  is not  essential  to the
Company's use or occupancy of the  Property;  (b) the Property has been restored
to a condition substantially equivalent to their condition prior to such damage,
destruction  or  condemnation;  or (c)  suitable  replacement  property has been
acquired for the Company's operations.

                                       18


                                  ARTICLE VIII

                                SPECIAL COVENANTS

         Section 8.1 NO WARRANTY OF CONDITION OR SUITABILITY BY THE ISSUER.  The
Issuer makes no warranty,  either express or implied, as to the condition of the
Facilities,  or that  they will be  suitable  for the  purposes  or needs of the
Company.

         Section 8.2 FURTHER  ASSURANCES.  The Issuer and the Company agree that
they will, from time to time,  execute,  acknowledge and deliver, or cause to be
executed,  acknowledge and delivered,  such supplements  hereto and such further
instruments  as may  reasonably be required for carrying out the intention of or
facilitating the performance of this Loan Agreement.

         Section 8.3 ANNUAL  AUDIT.  The Company will have the books and records
of the Company audited annually, and shall furnish within 120 days after the end
of each Fiscal Year to the Issuer, the Notice Beneficial Owners, the Underwriter
and the  Trustee a copy of the audit  report  certified  by  independent  public
accountants.

         Section 8.4 FINANCIAL  STATEMENTS;  ANNUAL BUDGETS.  The Company agrees
that it will  maintain  proper  books of records and  accounts of its  Property,
Plant and Equipment with full,  true and correct  entries of all of its dealings
in accordance with generally accepted  accounting  principles,  and that it will
furnish to the Trustee,  the Underwriter and Notice  Beneficial Owners quarterly
financial  statements  within 45 days  after  the  close of each  such  quarter,
including a statement of income in comparative form, to the extent  practicable,
with the financial figures from the corresponding period in the preceding Fiscal
Year and a balance  sheet as of the end of each such period and of the preceding
fiscal year.

         Section 8.5 RELEASE AND INDEMNIFICATION  COVENANTS.  The Company agrees
to protect and defend the Issuer,  its former,  present and future  trustees and
each person,  if any, who has the power,  directly or  indirectly,  to direct or
cause the  direction of the  management or policies,  now or  hereafter,  of the
Issuer and to protect and defend the Trustee, its officers, employees and agents
(collectively,  the  "Indemnified  Parties" and  individually,  the "Indemnified
Party")  and further  agrees to  indemnify  and hold  harmless  the  Indemnified
Parties  from and  against  any and all  liabilities,  losses,  damages,  costs,
expenses (including reasonable attorneys' fees and court costs,  including those
for post-judgment and appellate proceedings), judgments, claims, demands, suits,
actions or other  proceedings of whatsoever kind or nature  (including,  without
limitation,  those in any manner  directly or  indirectly  arising or  resulting
from, out of or in connection  with any injury to, or death of any person or and
damage to property but excluding those arising or resulting from any intentional
misrepresentation  or any willful and wanton misconduct of the Indemnified Party
or  Indemnified  Parties)  in any manner  directly or  indirectly  (in any case,
whether or not by the Company,  or its  successors  and assigns,  or directly or
indirectly through the agents, contractors, employees, licensees or otherwise of
the Company,  or its successors and assigns) by any person or entity  whatsoever
except the Issuer or the Trustee,  arising or purportedly arising from this Loan
Agreement,  the Indenture,  the Bonds, the initial and any subsequent offers and
sales of the Bonds, the Tax

                                       19


Certificates or the transactions  contemplated  hereby and thereby,  the Project
and the  ownership or the  operation by the Company of the  Property,  Plant and
Equipment the breach or violation of its or any material  inaccuracy or material
omission in any agreement,  covenant,  representation or warranty of the Company
set forth herein or in any document  delivered  pursuant hereto, the presence of
any Hazardous  Material or  underground  storage tanks on or under the Property,
Plant and  Equipment  or any  escape,  seepage,  leakage,  spillage,  discharge,
emission  or release of any  Hazardous  Material  from the  Property,  Plant and
Equipment,  any liens  against the  Property  permitted  under or imposed by any
Environmental  Laws,  or any  violation  or  actual  or  asserted  liability  or
obligations of the Company under any Environmental  Laws,  regardless of whether
or not caused by, or within the control of, the Company,  any actual or asserted
liability or obligations of the aforesaid  persons under any  Environmental  Law
relating to the  Property,  Plant and  Equipment,  regardless  of whether or not
caused by, or within the control of, the Company or any action or failure to act
by an  Indemnified  Party or  Indemnified  Parties  with  respect  to any of the
foregoing.

         The  Company  releases  the Issuer and all  former,  present and future
trustees and other agents of the Issuer,  and the Trustee from,  agrees that the
Issuer and the Trustee and all former,  present and future  directors,  members,
servants,  officers,  employees  and other  agents of the Issuer and the Trustee
shall not be liable for,  and agrees to hold the Issuer and all former,  present
and future  trustees  and other  agents of the Issuer and the  Trustee  harmless
against,  any expense or damages incurred because of any lawsuit  commenced as a
result of action taken by the Issuer,  and the Trustee or their former,  present
and   future   trustees   or   other   agents   (except   for  any   intentional
misrepresentation  or  willful  and wanton  misconduct  of the  aforesaid)  with
respect to this Loan Agreement,  the Indenture, the Bonds, the Tax Certificates,
the Project or the Property,  Plant and Equipment and the Issuer and the Trustee
shall  promptly  give written  notice to the Company with respect  thereto.  All
covenants,  stipulations,  promises,  agreements  and  obligations of the Issuer
contained  herein shall be deemed to be the covenants,  stipulations,  promises,
agreements  and  obligations  of the  Issuer and not of any  former,  present or
future trustees or other agent of the Issuer in his or her individual  capacity,
and no recourse  shall be had for the payment of the principal of,  premium,  if
any,  or  interest  on the Bonds or for any claim  based  thereon  or  hereunder
against any former,  present or future  trustees or other agent of the Issuer or
any natural person executing the Bonds.

         The  indemnification  arising under this Section shall continue in full
force and effect  notwithstanding the full payment of all obligations under this
Loan Agreement or the termination of this Loan Agreement for any reason.

         Section 8.6 COMPANY REPRESENTATIVE.  Whenever,  under the provisions of
this Loan  Agreement,  the Tax  Certificates  or the Indenture,  the approval or
direction of the Company is  required,  or the Issuer or the Trustee is required
to take some action at the request of the Company, such approval or such request
shall be made by the Company  Representative  unless otherwise specified in this
Loan Agreement, the Tax Certificates or the Indenture. The Issuer or the Trustee
shall be authorized to act on any such approval or request and the Company shall
have no  complaint  against  the  Issuer or the  Trustee as a result of any such
action taken in accordance  with such approval or request.  The execution of any
document or certificate  required  under the provisions of this Loan  Agreement,
the Tax Certificates or the Indenture by the Company  Representative shall be

                                       20


on behalf of the Company and shall not result in any personal  liability of such
Company Representative.

         Section 8.7 LEASES AND OPERATING  CONTRACTS.  The Company may lease (as
lessor) any part of the Property from which it derives  revenues or contract for
the performance by others of operations or services on or in connection with the
Property from which it derives  revenues,  or any part  thereof,  for any lawful
purpose,  provided  that (i) the Trustee shall  receive  written  notice of such
lease or contract if such lease or contract has a value in excess of $250,000 or
a duration longer than six months, (ii) each such lease or contract shall not be
inconsistent with the provisions of the Indenture or this Loan Agreement,  (iii)
the  Company  shall  remain  fully  obligated  and  responsible  under this Loan
Agreement to the same extent as if such lease or contract had not been executed,
and (iv) no such lease or operating contract shall adversely affect the validity
of the Bonds or the  exclusion  of interest  on the Bonds from gross  income for
federal and state income tax purposes.  The Trustee shall request the Company to
deliver an Opinion of Bond  Counsel  addressed  to the  Trustee  relating to the
matters  set  forth in (iv) if the  Company  enters  into a lease  or  operating
contract covered by this Section 8.7.

         Section  8.8 NO DEFAULT  CERTIFICATE.  Within 150 days after the end of
each Fiscal Year,  the Company shall furnish to the Trustee a certificate of the
Company  Representative  stating  that no Event of Default  under  Section  10.1
hereof has occurred and is  continuing  and that he has no knowledge of an event
which,  with the  passage  of time or the  giving  of  notice,  or  both,  would
constitute  an Event of Default  under  Section  10.1 hereof,  respectively,  or
describing any such Event of Default or event known to the Company.

         Section 8.9  [INTENTIONALLY OMITTED]

         Section 8.10  LIMITATIONS ON CREATION OF LIENS.

                  (a) The Company agrees that it will not create or suffer to be
created or permit the existence of any Lien on any tangible or intangible assets
of the Company  mortgaged or pledged pursuant hereto other than Permitted Liens,
as described in clause (b) of this Section.

                  (b) Permitted Liens shall consist of the following:

                           (1) Liens  arising by reason of good  faith  deposits
                  with the Company in  connection  with  leases of real  estate,
                  bids or  contracts  (other than  contracts  for the payment of
                  money),  deposits by the Company to secure public or statutory
                  obligations, or to secure or in lieu of surety, stay or appeal
                  bonds.  and  deposits as security  for the payment of taxes or
                  assessments or other similar charges;

                           (2) any Lien arising by reason of deposits  with,  or
                  the giving of any form of security to, any governmental agency
                  or any  body  created  or  approved  by  law  or  governmental
                  regulation  for any  purpose at any time as required by law or
                  governmental  regulation as a condition to the  transaction of
                  any business or the exercise of any  privilege or license,  or
                  to  enable  the  Company  to  maintain  self-insurance  or  to
                  participate  in any funds  established  to cover any insurance
                  losses   or  in   connection   with   workers'   compensation,
                  unemployment  insurance,  pension or

                                       21


                  profit sharing plans or other social security,  or to share in
                  the   privileges   or   benefits    required   for   companies
                  participating in such arrangements;

                           (3) any judgment  lien against the Company so long as
                  such  judgment is being  contested in good faith and execution
                  thereon is stayed and it will not materially interfere with or
                  materially  impair the  operations  conducted on the Property,
                  Plant and Equipment;

                           (4)  (A)  rights   reserved   to  or  vested  in  any
                  municipality  or public  authority  by the terms of any right,
                  power, franchise,  grant, license, permit or provision of law,
                  affecting its Property,  Plant and Equipment, (B) any liens on
                  the  Property,  Plant and  Equipment  for taxes,  assessments,
                  levies,  fees, water and sewer rents,  and other  governmental
                  and similar  charges and any liens of mechanics,  materialmen,
                  laborers,  suppliers or vendors for work or services performed
                  or materials furnished in connection with the Property,  Plant
                  and  Equipment  which are not due and payable or which are not
                  delinquent or which,  or the amount or validity of which,  are
                  being  contested  and  execution  thereon is stayed  or,  with
                  respect  to  liens  of   mechanics,   materialmen,   laborers,
                  suppliers or vendors, have been due for less than 90 days; (C)
                  easements,  rights-of-way servitude, restrictions, oil, gas or
                  other   mineral   reservations   and  other   minor   defects,
                  encumbrances and  irregularities  in the title to the Property
                  which in the  opinion  of the  Company  Representative  do not
                  materially impair the use of the Property, Plant and Equipment
                  for its intended  purpose or materially  and adversely  affect
                  the value  thereof  provided  that the Company  Representative
                  shall have given the Trustee  written  notice thereof at least
                  120 days before the  imposition  of such Lien;  (D)  statutory
                  landlord's  liens and (E) all exceptions shown on the policies
                  of title insurance delivered pursuant to the Indenture;

                           (5)  any  Lien   securing   Additional   Indebtedness
                  permitted hereby;

                           (6)  any  Lien  permitted  pursuant  to  Section  3.1
                  hereof;

                           (7) any Lien  created by the  Indenture  or this Loan
                  Agreement;

                           (8) any Lien described in Exhibit C hereto; and

                           (9) any Lien in favor of a  creditor  or a trustee on
                  the proceeds of Indebtedness and any earnings thereon prior to
                  the  application of such proceeds and such  earnings,  and any
                  Liens on trust  funds  established  and held by a  trustee  or
                  creditor with respect to Indebtedness properly incurred.

         Section  8.11  LIMITATIONS  ON  INDEBTEDNESS.  The  Company  may  incur
Additional  Indebtedness,  if the Income Available for Debt Service for the four
immediately  preceding  fiscal  quarters of the Company is not less than 150% of
the Long-Term Debt Service Requirements in such period,  taking into account the
Loan and Indebtedness then Outstanding and the Additional  Indebtedness proposed
to be incurred.  Notwithstanding  the foregoing,  Subordinated Debt,

                                       22


Commitment  Indebtedness  and  Nonrecourse  Indebtedness  may be incurred by the
Company  at any  time,  without  limit.  In  addition,  the  Company  may  incur
Additional  Indebtedness  secured  by  accounts  receivable  and  inventory,  as
provided in Section 3.1 of this Loan Agreement.

         Section 8.12.  SUBORDINATED DEBT.  Subordinated Debt shall include only
Indebtedness  of the  Company  incurred  pursuant  to  loan  agreements,  credit
agreements or similar arrangements  ("Subordinate Loan Documents") which contain
provisions substantially to the following effect:

                  (1)  Subordinated  Debt shall, to the extent and in the manner
         hereinafter   set  forth,   be  fully   subordinated  to  the  Superior
         Indebtedness  as herein  defined.  For all purposes of this Section the
         term "Superior  Indebtedness" shall mean all obligations of the Company
         arising under this Loan Agreement (the "Loan  Documents"),  as each may
         be  supplemented  and modified to the date  hereof,  or as the same may
         hereafter  from time to time be further  supplemented  and modified and
         any other obligations secured by or evidencing, directly or indirectly,
         obligations evidenced by such Loan Documents,  including  post-petition
         interest.

                  (2) No action or proceedings, judicial or otherwise (including
         without  limitation the commencement of or joinder in any bankruptcy or
         liquidation),  shall be  instituted  or  pursued  by the  holder of any
         Subordinated Debt (together,  the "Subordinate  Creditors"),  nor shall
         such  Subordinate  Creditors  take steps to enforce other  judgments or
         encumbrances  on assets of the  Company  pledged to the  payment of the
         obligations of the Company arising under any Subordinate  Loan Document
         (an  "Enforcement  Action"),  other  than an action to compel  specific
         performance,  and  other  than an action  with  respect  to  collateral
         pledged to the payment of such Subordinated Debt and not pledged to the
         payment of the Superior Indebtedness, unless all Bondholders shall have
         consented  thereto,  or the Bondholders shall have been paid in full or
         provision therefor shall have been made in accordance with the terms of
         the Indenture.

                  (3) No  payment  on account  of  principal,  premium,  if any,
         sinking funds or interest on Subordinated Debt shall be made, nor shall
         any property or assets pledged to the payment of the obligations of the
         Company  arising  under  any  Subordinate  Loan  Document,  other  than
         collateral  pledged  to the  payment  thereof  and not  pledged  to the
         payment of the  Superior  Indebtedness,  be  applied to the  payment or
         prepayment of Subordinated Debt, unless payment of all amounts then due
         and payable for principal,  premium, if any, sinking funds and interest
         on  Superior  Indebtedness  has  been  made  or  duly  provided  for in
         accordance  with  the  terms  of the  Loan  Documents.  No  payment  of
         principal  of  and  interest  on  and  other   amounts  due  under  any
         Subordinate Loan Document may be made prior to full payment of Superior
         Indebtedness,  (other than payment  derived with respect to  collateral
         pledged to the  payment  of  Subordinated  Debt and not  pledged to the
         payment of the Superior  Indebtedness)  if, at the time of such payment
         or application or immediately  after giving effect  thereto,  (i) there
         shall exist any default in the payment of principal,  premium,  if any,
         sinking  funds or interest  with  respect to the Bonds or any  Superior
         Indebtedness,  or (ii) there  shall have  occurred  an Event of Default
         (other than a default in the  payment of  principal,  premium,  if any,
         sinking  funds or  interest)  with respect to the Bonds or any Superior
         Indebtedness permitting the Trustee to accelerate the maturity thereof,
         and  written  notice of such  occurrence  shall  have been given to the
         Subordinate  Creditors  and such event of  default  shall not have been
         cured or waived or shall not have ceased to exist.

                                       23


                  (4) Upon (i) any  acceleration  of maturity  of the  principal
         amount due on any Subordinated Debt or (ii) any payment or distribution
         of any kind or character, whether in cash, property or securities, upon
         any  dissolution  or  winding-up  or  total  or  partial   liquidation,
         reorganization  or  arrangement  of the Company,  whether  voluntary or
         involuntary  or  in  bankruptcy,  insolvency,   receivership  or  other
         proceedings,  all  principal,  premium,  if any, and interest due or to
         become due upon the Bonds and all Superior  Indebtedness shall first be
         paid in full, or payment  thereof  provided for in accordance  with the
         terms of the  Indenture,  before any  payment is made on account of the
         principal, premium, if any, or interest on the Subordinated Debt (other
         than payment derived with respect to collateral  pledged to the payment
         of  Subordinated  Debt and not pledged to the  payment of the  Superior
         Indebtedness),   and  upon  any  such   dissolution  or  winding-up  or
         liquidation, reorganization or arrangement, any payment or distribution
         of any kind or character,  whether in cash, property or securities,  to
         which the holders of the  Subordinated  Debt would be entitled,  except
         for the  provisions  hereof,  shall  be paid  by the  Company,  or by a
         receiver,  trustee in bankruptcy,  liquidating trustee,  agent or other
         person  making  such  payment or  distribution,  to the  Trustee to the
         extent necessary to pay all Superior  Indebtedness in full,  before any
         payment or distribution is made to the holders of the Subordinate Debt.

                  (5) In the event that,  in violation  of any of the  foregoing
         provisions,  any  payment  or  distribution  of any kind or  character,
         whether in cash,  property  or  securities,  shall be  received  by any
         Subordinate Creditor before all Bonds and Superior Indebtedness is paid
         in full or provision for such payment in  accordance  with the terms of
         the Indenture,  such payment or distribution shall be held in trust for
         the benefit of, and shall be paid over or  delivered to the Trustee for
         application to the payment of all Bonds remaining  unpaid to the extent
         necessary to pay all such Bonds in full in accordance with its terms.

                  (6) Neither  the  Trustee nor any present or future  holder of
         any Bonds shall be prejudiced in any right to enforce  subordination of
         the indebtedness evidenced by the Subordinate Loan Documents by any act
         or  failure  to act on the part of the  Company or anyone in custody of
         its assets or property.

                  (7) The foregoing  subordination  provisions  shall be for the
         benefit of the  holders  of Bonds and may be  enforced  by the  Trustee
         against  the  holders  of  Subordinate   Indebtedness  or  any  trustee
         therefor.

The  foregoing  provisions  are solely for the purpose of defining  the relative
rights of the holders of Superior  Indebtedness  on the one hand and the holders
of the Subordinated Debt on the other hand, and nothing therein shall impair, as
between  the  Company  and the  holders  of the  Subordinate  Indebtedness,  the
obligation of the Company,  which is unconditional  and absolute,  to pay to the
holders thereof the principal thereof,  premium, if any, and interest thereon in
accordance with its terms,  nor shall anything herein prevent the holders of the
Subordinated  Debt or any trustee on their behalf from  exercising  all remedies
otherwise  permitted by applicable  law or thereunder  upon default  thereunder,
subject to the rights set forth above of the holders of Superior Indebtedness to
receive cash,  property or securities  otherwise  payable or  deliverable to the
holders of the  Subordinate

                                       24


Indebtedness.  Upon any payment or  distribution of assets of the Company of the
character  referred to in the fifth paragraph of the foregoing  provisions,  the
holders of Subordinate  Indebtedness shall be entitled to rely upon any order or
decree  of  a  court  of  competent  jurisdiction  in  which  such  dissolution,
winding-up, liquidation,  reorganization or arrangement proceedings are pending,
and upon a  certificate  of the  receiver,  trustee in  bankruptcy,  liquidating
trustee,  agent  or  other  person  making  any such  payment  or  distribution,
delivered  to the  holders  of  Subordinate  Indebtedness  for  the  purpose  of
ascertaining  the persons  entitled to  participate  in such  distribution,  the
holders of  Subordinate  Indebtedness  and other  indebtedness  of Company,  the
amount  thereof or payable  thereon,  the amount or amounts paid or  distributed
thereon and all other facts pertinent thereto or to the foregoing provisions. No
holders of  Subordinate  Indebtedness  shall be charged  with  knowledge  of the
existence of any facts which would  prohibit the making of any payment of moneys
to or by such holders of Subordinate Indebtedness,  unless and until the holders
of  Subordinate  Indebtedness,  as the case may be, have actual  notice or shall
have  received  notice  thereof  from the  Company,  the  Trustee or one or more
holders of Superior  Indebtedness.  The Company  hereby  covenants and agrees in
each case to provide such notice.

         Section 8.13 PARITY INDEBTEDNESS. The Company covenants not to incur or
assume any Parity  Indebtedness  unless the Company has received  consent of the
holders of 100% of the principal amount of the Bonds Outstanding.  Upon issuance
of Parity  Indebtedness,  such debt will be entitled to share on a parity in all
property and rights  securing the Bonds,  except the moneys in the Funds,  which
shall secure only the Bonds.

         Unless  otherwise  consented to by the holders of 100% of the principal
amount of the Bonds  Outstanding,  all  instruments  creating or securing Parity
Indebtedness  shall (i) provide  that the  Trustee  shall have the sole power to
select  remedies to be used to enforce rights  against  common  security for the
Bonds,  subject to the right of the owners of a majority in aggregate  principal
amount of the sum of the Bonds then Outstanding to direct remedies in the manner
provided in the Indenture,  (ii) provide that the holders of Parity Indebtedness
or the trustee  therefor shall undertake such actions as may be requested by the
Trustee that are reasonably  necessary to effectuate the purposes of clause (i),
and  (iii)  contain  cross  default  provisions  with  the Loan  Agreement,  the
Indenture and all other instruments creating Parity Indebtedness.

         All  collateral  given  or to be given to  secure  Parity  Indebtedness
(other than credit enhancement  devices such as letters of credit,  insurance or
surety bonds and other than reserve funds) shall also secure the  obligations of
the Company  under the Loan  Agreement on a parity  basis;  and the  instruments
under which any Parity  Indebtedness  is incurred shall contain  provisions that
all  Parity  Indebtedness  and the  obligations  of the  Company  under the Loan
Agreement shall be secured equally and ratably by all such security provided for
any such Parity Indebtedness.  The Property,  the Pledged Revenues and any other
collateral at any time given to secure the  obligations of the Company under the
Loan Agreement (other than the Funds) shall likewise secure Parity Indebtedness,
and such shall be set forth and so provided in any  instrument  securing  Parity
Indebtedness.  No release by or permission from the Issuer and the Trustee under
the Loan Agreement shall be necessary  (other than the Company's  payment of any
Trustee fees or any fees or expenses of the Trustee) to allow such collateral to
be pledged pursuant to any instrument relating to Parity  Indebtedness,  so long
as the conditions of the Loan Agreement are complied with.

                                       25


         Section 8.14  TRANSFER OF ASSETS.  The Company  agrees that it will not
Transfer  assets without the consent of 100% of the owners of the Bonds,  except
for Transfers of assets:

         (a) to any  Person  if prior to the  sale,  lease or other  disposition
there is  delivered  to the  Trustee an  Officer's  Certificate  of the  Company
Representative  stating  that such assets have or will within the next 24 months
become inadequate, obsolete, worn out, unsuitable, unprofitable,  undesirable or
unnecessary and the sale, lease,  removal or other disposition  thereof will not
impair the structural soundness,  efficiency, or economic value of the remaining
assets of the Company; or

         (b) with respect to any Transfer of non-inventory assets, to any Person
in the  ordinary  course  of  business  and on terms not less  favorable  to the
Company than arm's length,  but not to exceed $100,000 in aggregate  proceeds in
any Fiscal Year unless otherwise  consented to by a majority of the Bondholders;
or

         (c) with  respect to any  Transfer of  inventory,  to any Person in the
ordinary course of business; or

         (d) to any  Person  if the  aggregate  Net  Book  Value  of the  assets
transferred  pursuant to this clause in any five consecutive  Fiscal Years, does
not exceed 5 percent of the Net Book Value of all assets of the Company as shown
in the Audited Financial Statements for the most recent Fiscal Year; or

         (e) to any  Person,  if the  Company  shall  determine  to sell  all or
substantially  all of its assets,  and (i) the Company  exercises  its option to
prepay the Loan,  or (ii) the holders of 100% of the Bonds shall consent to such
transfer, all as provided in section 8.15 hereof.

         Section 8.15  CONSOLIDATION,  MERGER,  SALE OR CONVEYANCE.  The Company
covenants that it will not merge or  consolidate  with, or sell or convey all or
substantially  all of its  assets  to,  any  Person,  unless  (a)  such  merger,
consolidation or sale shall be consented to by the holders of 100% of the Bonds,
or (ii) the  Company  shall  elect to prepay  the Loan and  redeem  the Bonds in
accordance  with  Section  5.1(b)  of  the  Indenture.   In  case  of  any  such
consolidation,  merger,  sale or conveyance and upon any such  assumption by the
successor   corporation,   such  successor  corporation  shall  succeed  to  its
predecessor,  with  the  same  effect  as if it had been  named  herein  as such
predecessor.

         Section 8.16  FINANCIAL COVENANTS.

         (a) The Company shall  calculate  quarterly  the Debt Service  Coverage
Ratio for the four quarters prior to the date of any such calculation, and shall
provide a copy of such  calculation  for such  period to the  Trustee and Notice
Beneficial Owners at the time of delivery of the quarterly financial  statements
delivered in accordance  with Section 8.4 hereof.  If the Debt Service  Coverage
Ratio  computation  delivered  at the time of  delivery  of any  such  statement
indicates that the Long-Term Debt Service Coverage Ratio of the Company for such
previous  four  fiscal  quarters  shall be less than 1.50 to 1.00,  the  Company
covenants to retain a Consultant at the expense of the Company,  within 30 days,
to make  recommendations  to increase such Long-Term Debt Service Coverage Ratio
in the Fiscal Year following delivery of such  recommendations to such level or,
if  in  the  opinion  of  the   Consultant  the  attainment  of  such  level  is
impracticable,  to the  highest  level  attainable  in  such

                                       26


Fiscal  Year.  Any  Consultant  so  retained  shall be  required  to submit such
recommendations  to the Trustee and the Notice  Beneficial Owners within 90 days
after  being  so  retained.  The  Company  agrees  that it will,  to the  extent
permitted by law,  follow the  recommendations  of the  Consultant.  The Company
shall not be obligated  to retain such a Consultant  more often than once during
any twenty-four month period.

         (b) The Company  covenants and agrees that it shall  maintain a Current
Ratio,  calculated as of the last day of each calendar  quarter after January 1,
2006,  of not less than 1.10 to 1.00.  The Company  shall provide a copy of such
calculation to the Trustee and Notice  Beneficial Owners at the time of delivery
of the quarterly financial  statements  delivered in accordance with Section 8.4
hereof.

         (c) The Company  covenants  and agrees  that as of January 1, 2006,  it
shall  maintain a Debt to Equity  Ratio,  calculated  as of the last day of each
quarter, of not more than 4.00 to 1.00. The Company shall provide a copy of such
calculation to the Trustee and Notice  Beneficial Owners at the time of delivery
of the quarterly financial  statements  delivered in accordance with Section 8.4
hereof.

         (d)......The Company covenants and agrees that not more than 10% of its
accounts payable (for the deferred  purchase price of property or services) from
time to time incurred in the ordinary course of operations and activities  shall
be in excess of 75 day past the invoice or billing date,  or, if greater than 75
days, are being contested in good faith by the Company.

         (e) The  Company  covenants  and  agrees  that not more than 20% of its
accounts  receivable  (for the deferred  purchase price of property or services)
from time to time shall be in excess of 90 day past the invoice or billing date,
excluding from such calculation (i) amounts being contested in good faith by the
obligated  party,  and (ii) amounts  which the Company has  determined,  in good
faith,  are not  likely  to be  collected  and are to be  treated  as  losses in
accordance with generally accepted accounting principles.

         (f) Notwithstanding the provisions of Section 10.1 hereof, in the event
that (i) the Long-Term Debt Service Coverage Ratio of the Company reported under
paragraph  (a) above shall be less than 1.50 to 1.00,  or (ii) the Current Ratio
reported under paragraph (b) above shall be less than less than 1.10 to 1.00, or
(iii) the Debt to Equity Ratio  reported  under  paragraph (c) above shall to be
more than 4.00 to 1.00,  the failure to satisfy any such  requirement  shall not
result in an Event of Default  hereunder.  Unless the Company  shall  notify the
Trustee within thirty days following the date of any such reported  failure that
the Company is then in compliance with each of such ratios, the interest rate on
each of the Bonds shall increase one percent (100 basis points) as of the end of
such thirty-day period,  until the date the Company shall certify to the Trustee
that each of such requirements has been satisfied.

         (g)  Under  certain  circumstances  as  set  forth  in  the  Indenture,
including the definition of "Interest Rate Step-up", the Loan Payments due under
Section 5.1 herein may be increased.

                                       27


                                   ARTICLE IX

         ASSIGNMENT AND PLEDGING OF LOAN AGREEMENT; REDEMPTION OF BONDS

         Section 9.1 ASSIGNMENT BY COMPANY.  This Loan Agreement may be assigned
by the Company with the prior written consent of the Bondholders subject to each
of the following conditions:

                  (1) no  assignment  shall  relieve  the Company  from  primary
liability  for any of its  obligations  hereunder,  and in the event of any such
assignment, the Company shall continue to remain primarily liable for payment of
the Loan Payments,  payments on Parity  Indebtedness and other payments required
to be made under Section 5.1 hereof and for  performance  and  observance of the
other covenants and agreements on its part herein provided;

                  (2) no  assignment  shall impair the  exclusion of interest on
the Bonds from gross income for federal income tax purposes;

                  (3) the assignee  shall assume in writing the  obligations  of
the Company hereunder to the extent of the interest assigned, and

                  (4) the  Company  shall,  within 30 days  after  the  delivery
thereof,  furnish or cause to be  furnished to the Issuer and the Trustee a true
and complete copy of each such assumption of obligations and assignment.

         Section 9.2  ASSIGNMENT  AND PLEDGE BY ISSUER.  The Issuer shall assign
certain of its interests in and pledge  certain of the moneys  receivable  under
this Loan Agreement to the Trustee  pursuant to the Indenture and the Assignment
as security for payment of the  principal of,  premium,  if any, and interest on
the Bonds. The Company hereby consents to such assignment and pledge.

         Section 9.3  REDEMPTION OF BONDS.  Upon the agreement of the Company to
deposit  moneys  in the Bond  Principal  Fund and the Bond  Interest  Fund in an
amount  sufficient to redeem Bonds  subject to  redemption,  the Issuer,  at the
request of the Company Representative, shall forthwith take all reasonable steps
consistent  with the  Indenture  and this  Loan  Agreement  necessary  under the
applicable redemption provisions of the Indenture to effect redemption of all or
part of the then Outstanding Bonds on the redemption date.

                                       28


                                    ARTICLE X

                         EVENTS OF DEFAULT AND REMEDIES

         Section 10.1  EVENTS OF DEFAULT DEFINED. The following shall be "events
of default" under this Loan Agreement and the term "event of default" shall mean
any one or more of the following events:

                  (a) failure to pay the Loan Payments required to be paid under
Section  5.1(a) hereof for a period of 15 days after the time such Loan Payments
were required to be paid thereunder;

                  (b)  failure  by  the  Company  to  observe  and  perform  any
covenant,  condition or agreement on its part to be observed or performed, other
than as referred to in subsection  (a) of this Section,  for a period of 30 days
after  written  notice,  specifying  such  failure  and  requesting  that  it be
remedied,  shall  have been given to the  Company by the Issuer or the  Trustee,
provided,  with respect to any such failure  covered by this  subsection  (b) no
event of default  shall be deemed to have occurred so long as a course of action
adequate to remedy such  failure  shall have been  commenced  within such 30-day
period and shall  thereafter  be diligently  prosecuted  to  completion  and the
failure shall be remedied thereby;  provided,  however,  that failure to correct
such default  within 90 days after  receipt of such notice shall  constitute  an
Event of Default;

                  (c)  any  representation  or  warranty  made  by  the  Company
hereunder  or otherwise  in  connection  with the sale and delivery of the Bonds
shall prove to have been incorrect in any material  respect on or as of the date
of issuance of the Bonds or the date of making such  representation  or warranty
and  cannot be cured  within 30 days after  written  notice by the Issuer or the
Trustee,  specifying  such incorrect  representation  or warranty and requesting
that it be cured,  provided no event of default shall be deemed to have occurred
under this  subsection (c) so long as a course of action  adequate to cure shall
have been commenced within such 30-day period and shall thereafter be diligently
prosecuted to completion and remedied thereby;  provided,  however, that failure
to correct  such  default  within 90 days after  receipt  of such  notice  shall
constitute an Event of Default;

                  (d)  an  event  of  default  shall  have  occurred  under  the
Indenture or the Tax Certificates;

                  (e) if the Company  shall file a petition in bankruptcy or for
reorganization  or for an arrangement  pursuant to any present or future federal
bankruptcy  act or  under  any  similar  federal  or  state  law,  or  shall  be
adjudicated a bankrupt or insolvent, or shall make an assignment for the benefit
of its  creditors  or shall  admit in  writing  its  inability  to pay its debts
generally  as  they  become  due,  or if a  petition  or  answer  proposing  the
adjudication  of the  Company  as a  bankrupt  or its  reorganization  under any
present or future  federal  bankruptcy  act or any similar  federal or state law
shall be filed in any court and such  petition or answer shall not be discharged
or denied within 90 days after the filing thereof, or if a receiver,  trustee or
liquidator  of the Company or of all or  substantially  all of the assets of the
Company,  or the  Property,  Plant  and  Equipment  shall  be

                                       29


appointed  in any  proceeding  brought  against  the  Company  and  shall not be
discharged  within 90 day's  after  such  appointment  or if the  Company  shall
consent to or  acquiesce  in such  appointment  if the estate or interest of the
Company in the Property, Plant and Equipment or any part thereof shall be levied
upon or  attached  in any  proceeding  and such  process  shall not be  vacated,
discharged or released  within 60 days after such levy or attachment,  or if the
Property,  Plant and  Equipment  shall have been  abandoned by the Company for a
period  of 30  consecutive  days,  or if  the  Company  shall  be  dissolved  or
liquidated  (other than as a result of a merger or  consolidation of the Company
into or with  another  entity  under  the  conditions  permitting  such  actions
contained in this Loan Agreement); and

                  (f) a final  judgment is entered  against  the Company  which,
together with all unsatisfied final judgments  against the Company,  exceeds the
sum of  $1,000,000  and which is not covered by  insurance  or adequate  Company
reserves and such judgment shall remain  unsatisfied or unstayed for a period of
90 days after the entry thereof.

         The foregoing  provisions of subsection (b) of this Section are subject
to the  following  limitations:  If by reason of force  majeure  the  Company is
unable in whole or in part to carry out its agreements herein  contained,  other
than the  obligations  on the part of the Company  contained in Article V and in
Sections 4.7 and 8.5 hereof,  the Company shall not be deemed in default  during
the  continuance  of such  inability  so long as (i) the  Company  provides  the
Bondholders  written  notice that an Event of Default has  occurred by reason of
force  majeure  within 10 Business Days of the receipt of the notice of an Event
of Default  from the  Trustee  and (ii) a majority  of  Bondholders  consents to
implementation  of  Company's  plan to cure such Event of  Default.  The Company
agrees to  promptly  submit  its plans for  curing  the Event of  Default to the
Bondholders;  provided  that the  settlement  of  strikes,  lockouts  and  other
industrial  disturbances shall be entirely within the discretion of the Company,
and the Company shall not be required to make settlement of strikes, lockouts or
other  industrial  disturbances by acceding to the demands of the opposing party
or  parties  when  such  course is in the  reasonable  judgment  of the  Company
unfavorable to the Company.  The term "force  majeure" as used herein shall mean
the following:  acts of God; strikes, lockouts or other industrial disturbances;
acts of public enemies, insurrections;  riots; epidemics; landslides; lightning;
earthquake;  fire; hurricane;  tornadoes;  storms; floods;  washouts;  droughts;
arrests;   restraint  of  government  and  people;   civil  disturbances;   war,
explosions; or partial or entire failure of utilities.

         Section 10.2   REMEDIES  ON  DEFAULT.  Whenever  any  event of  default
referred to in Section 10.1 hereof shall have  occurred and is  continuing,  the
Issuer,  or the Trustee,  where so provided herein,  may take any one or more of
the following remedial steps:

                  (a) the Trustee (acting as assignee of the Issuer),  as and to
the extent  provided in the Indenture,  or the Issuer (in the event of a failure
of the Trustee to act under this  subsection),  may,  and, at the  direction  of
holders of 25 percent of the aggregate  amount of the Bonds,  the Trustee shall,
declare the Loan  Payments  payable  hereunder  for the remainder of the term of
this Loan Agreement to be immediately due and payable,  whereupon the same shall
become due and payable;

                  (b) the Trustee may, subject to indemnification as provided in
the  Indenture,  and, at the direction of holders of 25 percent of the aggregate
amount of the Bonds,  shall,  take any action permitted under the Indenture with
respect to an Event of Default thereunder;

                                       30


                  (c)  the  Trustee  (acting  as  assignee  of the  Issuer)  may
foreclose  on all or any portion of the  Property or any interest of the Company
therein as and to the extent  permitted  of a mortgagee by the laws of the State
of Oklahoma and exercise all of the rights and remedies of a secured party under
the Uniform Commercial Code of the State of Oklahoma with respect thereto and to
the  tangible  personal  property,  furniture,  machinery  and  equipment of the
Company described in Section 3.1;

                  (d) (Reserved);

                  (e) (Reserved);

                  (f) the Trustee (acting as assignee of the Issuer) may realize
upon the  security  interest in the Pledged  Revenues  and  exercise  all of the
rights and remedies of a secured party under the Uniform  Commercial Code of the
State of Oklahoma and the State of Texas with respect thereto; or

                  (g) the Trustee (acting as assignee of the Issuer),  as and to
the extent  provided in the Indenture,  or the Issuer (in the event of a failure
of the Trustee to act under this  subsection) may take whatever action at law or
in equity as may appear  necessary  or desirable to collect the amounts then due
and  thereafter  to become due, or to enforce  performance  or observance of any
obligations, agreements or covenants of the Company under this Loan Agreement.

         At any time after such a declaration of acceleration has been made, but
before the entry of a judgment or decree to enforce remedies under the Indenture
or this Loan Agreement, such declaration and its consequences shall be rescinded
and  annulled  (unless  the  Trustee is  otherwise  directed by the holders of a
majority of the principal  amount of the Bonds  Outstanding  (excluding Bonds of
any series which are subordinate to any other Series of Bonds)) if:

                  (A) There has been paid to or deposited  with the Trustee,  or
provision  satisfactory  to the  Trustee  has been made for the payment of a sum
sufficient to pay:

                           (i)  all  sums  reasonably  paid or  advanced  by the
                  Trustee (including  reasonable counsel fees and disbursements)
                  under the Indenture or this Loan  Agreement and the reasonable
                  compensation,  expenses,  disbursements  and  advances  of the
                  Trustee (including reasonable counsel fees and disbursements);

                           (ii) all  overdue  installments  of  interest  on the
                  Bonds  payable by the Company  with  interest on such  overdue
                  interest  at the rate of one (1)  percent  per annum above the
                  interest  borne by the Bonds  during the 365 days prior to the
                  date of such payment;

                           (iii) the  principal  of any Bonds  which have become
                  due otherwise  than by such  declaration of  acceleration  and
                  accrued  interest thereon to the date of payment of such Bonds
                  payable  by the  Company  at the rate or  rates  borne by such
                  Bonds;

                                       31


                           (iv) the  amounts  required  to be on  deposit in the
                  Reserve Fund in accordance with the Indenture; and

                           (v) all  sums,  including  the  reasonable  fees  and
                  expenses  of  counsel,  reasonably  paid  or  advanced  by any
                  Bondholder because of the Company's default.

                  (B) All  Events of  Default  of the  Company,  other  than the
nonpayment of the  principal of the Bonds,  which have become due solely by such
declaration  of  acceleration,  have been  cured or waived  as  provided  in the
Indenture and this Loan Agreement.

In the event that the Company  fails to make any payment  required  hereby,  the
payment so in default  shall  continue as an obligation of the Company until the
amount in default  shall have been fully  paid.  Any  proceeds  received  by the
Issuer or the  Trustee  from the  exercise of any of the above  remedies,  after
reimbursement  of any costs  incurred by the Issuer or the Trustee in connection
therewith,  shall be applied by the Trustee in accordance with the provisions of
the Indenture.

         Section 10.3 NO REMEDY  EXCLUSIVE.  No remedy herein  conferred upon or
reserved to the Issuer or the Trustee is intended to be  exclusive  of any other
available remedy or remedies, but each and every such remedy shall be cumulative
and shall be in addition to every other remedy  given under this Loan  Agreement
or now or  hereafter  existing  at law or in equity or by  statute.  No delay or
omission to exercise any right or power  accruing  upon any default shall impair
any such right or power or shall be  construed to be a waiver  thereof,  but any
such  right or power may be  exercised  from time to time and as often as may be
deemed expedient. In order to entitle the Issuer to exercise any remedy reserved
to it in this Article, it shall not be necessary to give any notice,  other than
notice  required herein or by applicable law. Such rights and remedies given the
Issuer  hereunder  shall also extend to the Trustee and the owners of the Bonds,
subject to the Indenture.

         Section 10.4  AGREEMENT TO PAY  ATTORNEYS'  FEES AND  EXPENSES.  In the
event  the  Company  should  default  under any of the  provisions  of this Loan
Agreement,  the  Indenture  or  the  Tax  Certificates,   and  the  Issuer,  any
Significant  Bondholder or the Trustee  should  employ  attorneys or incur other
expenses for the  collection of Loan Payments or the  enforcement of performance
or observance of any  obligation or agreement on the part of the Company  herein
or in the Tax  Certificates  or the  Indenture,  the Company agrees that it will
within  30  days  of a  request  therefor  pay to the  Issuer,  any  Significant
Bondholder  or the  Trustee,  as the case may be,  the  reasonable  fees of such
attorneys  and such  other  reasonable  expenses  incurred  by the  Issuer,  any
Significant Bondholder or the Trustee. This Section shall continue in full force
and effect,  notwithstanding the full payment of all obligations under this Loan
Agreement or the termination of this Loan Agreement for any reason.

         Section 10.5 WAIVER. In the event any agreement  contained in this Loan
Agreement  should be  breached by any party and  thereafter  waived by any other
party,  such waiver shall be limited to the  particular  breach waived and shall
not be deemed to waive any other breach hereunder.  In view of the assignment of
the Issuer's  rights in and under this Loan  Agreement to the Trustee  under the
Indenture,  the  Issuer  shall  have no  power  to waive  any  Event of  Default
hereunder  without  the  written  consent of the  Trustee.  Notwithstanding  the
foregoing,  a waiver of an Event of Default  under the Indenture or a rescission
of a declaration of acceleration of the Bonds and a rescission and

                                       32


annulment of its  consequences  shall  constitute a waiver of the  corresponding
event of default under this Loan Agreement and a rescission and annulment of its
consequences;  provided  that no such waiver or  rescission  shall  extend to or
affect any subsequent or other default  hereunder or impair any right consequent
thereon.

         Section 10.6 APPOINTMENT OF RECEIVER.  Upon the occurrence of any Event
of  Default,  unless  the same shall have been  waived as herein  provided,  the
Trustee,  acting as  assignee  of the  Issuer,  shall be entitled as a matter of
right if it shall  so  elect,  without  notice  or  demand  (such  notice  being
expressly  waived  hereby),  ex parte,  (i) forthwith and without  declaring the
Bonds or Parity  Indebtedness  to be due and payable,  (ii) after  declaring the
same to be due and  payable,  or (iii)  upon the  commencement  of an  action to
enforce  the  specific  performance  hereof  or  in  aid  thereof  or  upon  the
commencement  of any  other  judicial  proceeding  to  enforce  any right of the
Trustee,  the  Bondholders  or  the  holders  of  Parity  Indebtedness,  to  the
appointment  of a receiver or receivers of any or all of the Property  with such
powers as the court making such  appointment  shall confer.  The Company  hereby
consents and agrees,  and will if requested by the Trustee  consent and agree at
the time of  application  by the  Trustee for  appointment  of a receiver of the
Property,  to the  appointment  of such  receiver of the  Property and that such
receiver may be given,  the right,  power and authority,  to the extent the same
may  lawfully  be given to take  possession  of and  operate  and deal  with the
Property and the revenues,  profits and proceeds therefrom,  with like effect as
the Company could do so, and to borrow money and issue evidences of indebtedness
as such receiver.

         Section  10.7  REMEDIES  SUBJECT  TO  PROVISIONS  OF LAW.  All  rights,
remedies and powers provided by this Article may be exercised only to the extent
that the exercise thereof does not violate any applicable  provision of law, and
all the  provisions of this Article are intended to be subject to all applicable
mandatory  provisions of law which may be  controlling  and to be limited to the
extent  necessary so that they will not render this instrument or the provisions
hereof invalid or unenforceable under the provisions of any applicable law.

         Section 10.8 WAIVER OF  APPRAISEMENT,  VALUATION,  STAY,  AND EXECUTION
LAWS. The Company  agrees,  to the extent  permitted by law, that in the case of
the occurrence of an Event of Default,  neither the Company nor anyone  claiming
through or under it shall or will set up, claim or seek to take advantage of any
appraisement,  valuation,  stay or  extension  laws now or hereafter in force in
order to prevent or hinder the  enforcement  or  foreclosure of the lien of this
Loan  Agreement,  or the absolute sale of the  Property,  or any interest of the
Company  therein,  or the final and absolute  putting into  possession  thereof,
immediately  after such sale,  of the  purchasers  thereof,  and the Company for
itself and all who may at any time claim through or under it, hereby waives,  to
the full  extent that it may  lawfully do so, the benefit of all such laws,  and
any and all right to have the estates  comprising  the  security  intended to be
hereby created marshaled upon any foreclosure of the lien hereof and agrees that
the Trustee or any court having jurisdiction to foreclose such lien may sell the
Property, or any interest of the Company therein as an entirety.

         Section  10.9  PURCHASE OF PROPERTY BY  BONDHOLDER  OR HOLDER OF PARITY
INDEBTEDNESS.  Upon  the  occurrence  of an Event of  Default,  the lien  and/or
security  interest on the Property created and vested by this Loan Agreement may
be  foreclosed.  If sold at public sale,  any  Bondholder,  and holder of Parity
Indebtedness  or the  Trustee  may bid  for and  purchase  the  Property  or any
interest of

                                       33


the Company therein and upon compliance with the terms of sale, may hold, retain
and possess and dispose of such Property or interest therein in his own absolute
right without further accountability; and any purchaser at any such sale may, if
permitted by law,  after allowing for the proportion of the total purchase price
required to be paid in cash for the costs and expenses of the sale, compensation
and  other  charges,  in  paying  purchase  money,  surrender  Bonds  or  Parity
Indebtedness then  Outstanding,  as the case may be, in lieu of cash. Said Bonds
or Parity Indebtedness, in case the amount so payable thereon shall be less than
the amount due  thereon,  shall be returned to the holders  thereof  after being
properly stamped to show partial payment.  If the Trustee shall acquire title to
the  Property or any  interest  of the  Company  therein as a result of any such
foreclosure  sale or any proceedings or transaction in lieu of foreclosure,  the
Trustee may  thereafter  take any lawful  action with respect to the Property or
interest  therein  which it shall deem to be in the best interest of the holders
of the Bonds or Parity  Indebtedness,  including  but not  limited  to:  (i) the
enforcement of all rights and remedies set forth in the Indenture and the taking
of all  other  courses  of  action  permitted  herein,  and (ii) the sale of the
Property or any interest therein, or any portion thereof.

                                       34


                                   ARTICLE XI

                             PREPAYMENT OF THE LOAN

         Section 11.1 GENERAL OPTION TO PREPAY THE LOAN. Subject to Section 11.3
hereof,  the Company shall have and is hereby granted the option  exercisable at
any time to prepay all or any portion of the Loan by depositing with the Trustee
an amount of money or Government  Obligations  described in Section 1 (a) of the
definition of such term as set forth in Article I of the Indenture to the extent
permitted by Section 7.1 of the Indenture,  the principal and interest on which,
when due,  will be equal  (giving  effect to the  credit,  if any,  provided  by
Section  11.2  hereof)  to an  amount  sufficient  to pay the  principal  of (in
integral  multiples of $100,000  and in multiples of $5,000 in excess  thereof),
premium, if any, and interest on any portion of the Bonds then Outstanding under
the  Indenture.  The exercise of the option granted by this Section shall not be
cause for redemption of Bonds unless such redemption is permitted or required at
that time under the  provisions of Article V of the  Indenture,  and the Company
Representative specifies the date for such redemption.  In the event the Company
prepays all of the Loan  pursuant to this Section (and the Bonds are defeased in
accordance  with the  Indenture)  and pays all reasonable and necessary fees and
expenses  of the  Trustee  accrued  and  to  accrue  through  final  payment  or
redemption  of  the  Bonds  as a  result  of  such  prepayment  and  all  of its
liabilities  accrued and to accrue hereunder to the Issuer through final payment
or redemption of the Bonds as a result of such  prepayment,  this Loan Agreement
shall terminate except for Sections 5.1 (f), 4.6 and 8.5 hereof.  The Issuer and
the Trustee may certify to the Company prior to payment all  expenses,  fees and
liabilities  due for payment  hereunder.  Payment of moneys or securities to the
Trustee  under  this  Section  11.1 shall be  accompanied  by an Opinion of Bond
Counsel to the effect that the  application  of such payment will not  adversely
affect the tax-exempt status of the Bonds Outstanding.

         Section 11.2  PREPAYMENT  CREDITS.  In the event of  prepayment  by the
Company of the Loan in whole the amounts then  contained in the Funds related to
the Bonds shall be  credited  first to the Rebate Fund so that it shall be fully
funded for any required payment to the federal  government  therefrom,  and then
against the Company's prepayment obligation.

         Section  11.3 NOTICE OF  PREPAYMENT.  In order to  exercise  the option
granted by this Article, the Company shall give written notice to the Issuer and
the Trustee which shall specify therein the date of making the prepayment, which
date  shall be not less  than 60 days  nor more  than 90 days  from the date the
notice is mailed.  In the case of any prepayment  pursuant to this Article,  the
Company  Representative  shall make arrangements with the Trustee for giving the
required notice of redemption of any Bonds to be redeemed.

         Section 11.4 USE OF PREPAYMENT  MONEYS.  By virtue of the assignment of
the rights of the Issuer under this Loan  Agreement to the Trustee,  the Company
agrees to and shall pay any amount  required to be paid by it under this Article
directly to the Trustee (other than amounts to be paid to the Issuer for its own
account or as otherwise  provided in Section 5.3 hereof).  The Trustee shall use
the moneys so paid to it by the Company to pay the  principal of and interest on
the Bonds on regularly scheduled payment or redemption dates.

                                       35


                                   ARTICLE XII

                                  MISCELLANEOUS

         Section 12.1 NOTICES. All notices, certificates or other communications
hereunder shall be  sufficiently  given and shall be deemed given when mailed by
certified mail,  return-receipt  requested,  postage  prepaid,  or dispatched by
telegram or telecopy (if confirmed promptly telephonically and in writing by the
sender of such  telecopy and if receipt of such telecopy is confirmed in writing
by the intended recipient), addressed as follows:

         Issuer:        Cleveland County Industrial Authority
                        c/o Board of Cleveland County Commissioners
                        605 E. Robinson
                        Norman, Oklahoma 73071
                        Attn: Secretary

         With copy to:  R. Lindsay Bailey, Esq.
                        Issuer's Counsel
                        303 E. Eufaula
                        Norman, Oklahoma 73102

         Trustee:       J. P. Morgan Trust Company, National Associaiton
                        1200 N.W. 63rd
                        Oklahoma City, Oklahoma 73116
                        Attn: Brenda Batchelor


         Company:       Vaughan Foods, Inc.
                        216 NE 12th Street
                        Moore, Oklahoma 73160
                        Attn: Stan Gustas, Chief Financial Officer

The Issuer, the Company, and the Trustee may, by notice hereunder, designate any
further or different  addresses to which  subsequent  notices,  certificates  or
other communications shall be sent.

         Section 12.2 BINDING  EFFECT.  This Loan  Agreement  shall inure to the
benefit  of and shall be  binding  upon the  Issuer  and the  Company  and their
respective  successors  and  assigns,   subject,  however,  to  the  limitations
contained in Sections 8.14, 9.1, 9.2 and 12. 10 hereof.

         Section  12.3  SEVERABILITY.  In the event any  provision  of this Loan
Agreement  shall be held  invalid  or  unenforceable  by any court of  competent
jurisdiction,  such holding  shall not  invalidate or render  unenforceable  any
other provision hereof.

         Section  12.4 AMOUNTS  REMAINING IN FUNDS.  It is agreed by the parties
hereto that any amounts  remaining in the Funds upon  expiration  of the term of
this Loan  Agreement  shall be paid by the Trustee as directed in writing by the
Company Representative as provided in the Indenture.

                                       36


         Section 12.5 AMENDMENTS, CHANGES AND MODIFICATIONS. Except as otherwise
provided in this Loan Agreement or in the Indenture, this Loan Agreement may not
be amended, changed, modified, altered or terminated.

         Section 12.6  EXECUTION IN  COUNTERPARTS.  This Loan  Agreement  may be
executed in several counterparts,  each of which shall be an original and all of
which shall constitute but one and the same instrument.

         Section 12.7 GOVERNING  LAW. This Loan Agreement  shall be governed and
construed in accordance with the laws of the State of Oklahoma.

         Section 12.8 CANCELLATION AT EXPIRATION OF TERM OF AGREEMENT.  Upon the
expiration of the term of this Loan  Agreement,  the Issuer shall deliver to the
Company any  documents and take or cause the Trustee to take such actions as may
be  necessary  to  evidence  the  termination  of this  Loan  Agreement  and the
discharge of the lien hereof.

         Section 12.9  RECORDING.  The Company shall cause this Loan  Agreement,
the Assignment and every  assignment and  modification  hereof to be recorded in
the real  estate  records  of the  County  in which  the  Site is  located  (the
"County").  In  accordance  with the  Indenture,  the  Company  shall  cause the
security  interest in the  Pledged  Revenues,  Funds,  the  Equipment  and trust
accounts referred to in Section 3.1 hereof granted to the Issuer, the assignment
of such security  interest to the Trustee and the security interest in this Loan
Agreement  granted to the Trustee to be perfected to the extent permitted by law
by the filing of  financing  statements  which fully  comply  with the  Oklahoma
Uniform Commercial Code in the office of the Secretary of State of Oklahoma, the
office of the County and in such other office as is at the time  provided by law
as the proper place for the filing  thereof.  The parties further agree that all
necessary continuation  statements shall be filed by the Company within the time
prescribed  by the Oklahoma  Uniform  Commercial  Code in order to continue such
security interests.

         Section 12.10 NO PECUNIARY LIABILITY OF ISSUER. No provision,  covenant
or agreement contained in this Loan Agreement, or any obligations herein imposed
upon the Issuer,  or the breach  thereof,  shall  constitute an  indebtedness or
liability  of the Issuer  within  the  meaning  of any  Oklahoma  constitutional
provision  or  statutory  limitation  or  shall  constitute  or  give  rise to a
pecuniary liability of the Issuer or any member,  officer or agent of the Issuer
or a charge against the Issuer's general credit. In making the Loan , the Issuer
has not obligated itself except with respect to the Trust Estate.

         Section  12.11  PARTIAL  RELEASE.  So long as no Event of Default shall
have occurred and be continuing  under this Loan  Agreement,  whenever under the
terms of this Loan  Agreement  any  portion  of the  Property  or  Equipment  is
permitted to be sold,  transferred,  disposed of or released from the provisions
of this Loan Agreement,  including  releases in the event of condemnation of the
Property or  Equipment  in  accordance  with  Article VII hereof,  or  Transfers
permitted  under  Section  8.14  hereof,  the  Trustee  shall  take all  actions
reasonably  necessary  to release  that  portion of the Property or Equipment so
sold,  leased  or  disposed  of from the lien of this Loan  Agreement.  Any such
release   shall  be   requested   of  the  Issuer  in  writing  by  the  Company
Representative  and shall be

                                       37


accompanied  by a  description  of the Property or Equipment to be released,  an
amendment or  supplement  to the  exhibits of this Loan  Agreement to the extent
necessary to provide for such release, a plat or improvement  location survey of
the  Property  after the  release by a  registered  civil  engineer  or surveyor
licensed  in the  state of  Oklahoma  in  accordance  with the  standard  detail
requirements  for land title surveys  adopted by ALTA, and an Opinion of Counsel
to the effect that such  release is  permitted  by the  provisions  of this Loan
Agreement.

         Section 12.12 GENERAL RELEASE. Upon payment of all sums secured by this
Loan Agreement and upon full performance hereof by the Company,  the Trustee, as
assignee of the Issuer,  shall  promptly,  after written notice from the Company
Representative, execute and deliver to the Company a release of the Lien of this
Loan Agreement in form reasonably  acceptable to the Trustee. The Company shall,
however, pay all costs and expenses in connection with the preparation,  review,
recordation and execution of said release.

         Section  12.13  CAPTIONS.  The  captions  and  headings  in  this  Loan
Agreement are for convenience  only and in no way define,  limit or describe the
scope or intent of any provisions or sections of this Loan Agreement.

         Section 12.14 PAYMENTS DUE ON NON-BUSINESS  DAY. If the date for making
any payment or the last date for  performance  of any act or the exercise of any
right,  as provided in this Loan  Agreement  shall not be a Business  Day,  such
payment may be made or act performed or right  exercised on the next  succeeding
business  day with the same  force  and  effect as if done on the  nominal  date
provided in this Loan Agreement, except as otherwise expressly provided herein.

         Section 12.15 PROVISION OF GENERAL APPLICATION. Any consent or approval
of the Issuer  required  pursuant to this Loan Agreement shall be in writing and
shall not be unreasonably withheld.

                                       38


IN WITNESS  WHEREOF,  the Issuer and the Company have caused this Loan Agreement
to be executed in their  respective  corporate  names and attested by their duly
authorized  officers and the Company has caused its corporate seal to be affixed
hereto, all as of the date first above written.

                                    CLEVELAND          COUNTY         INDUSTRIAL
                                    AUTHORITY



                                    By:  /s/ Charles Thompson
                                         --------------------
                                         Charles Thompson
                                         Chairman

ATTEST:


/s/ Donna Roberts
- -----------------
Donna Roberts, Secretary
(SEAL)


                                    VAUGHAN FOODS, INC.


                                    By:  /s/ Mark E. Vaughan
                                         -------------------
                                         Mark Vaughan
                                         President

                                       39


STATE OF OKLAHOMA                   )
                                    ) ss
COUNTY OF OKLAHOMA                  )


         The foregoing  instrument was  acknowledged  before me this 16TH day of
December,  2004, by Charles  Thompson,  Chairman and Donna  Roberts,  Secretary,
Cleveland County Industrial Authority, a public trust, on behalf of the trust.

         WITNESS my hand and official seal.



                                             -----------------------------------
                                             Notary Public

         Commission Expires:
                             ----------------

                                       40


STATE OF OKLAHOMA                   )
                                    ) ss
COUNTY OF OKLAHOMA                  )


         The foregoing  instrument was  acknowledged  before me this 16TH day of
December,  2004, by Mark Vaughan,  President,  Vaughan Foods,  Inc., an Oklahoma
corporation.

         WITNESS my hand and official seal.



                                             -----------------------------------
                                             Notary Public

         Commission Expires:
                             ----------------

                                       41


                                    EXHIBIT A

                            LEGAL DESCRIPTION OF SITE


A tract of land in the  Northeast  Quarter  (NE/4)  of  Section  Fourteen  (14),
Township Ten (10) North, Range Three (3) West of the Indian Meridian.  Cleveland
County,  Oklahoma,  which  tract  is more  particularly  described  as  follows:
Beginning at a point 1628.55 feet West of the Northeast corner of said Northeast
Quarter;  thence West along the North line of said Northeast  Quarter a distance
of 650.09 feet to the centerline of the right-ofway line of the AT & SF Railroad
Company;  thence South along the center line of said  right-of-way a distance of
984.26  feet;  thence East and  parallel  with the North line of said  Northeast
Quarter a distance of 652.83 feet; thence North a distance of 934.26 feet to the
point or place of beginning.

Physical Address: 216 N.E. 12th, Moore, Oklahoma

                                      A-1


                                    EXHIBIT B

                              COSTS OF THE PROJECT

         SOURCES:

                  Series 2004 Bond Proceeds                           $5,000,000
                                                                      ----------

                  Total Estimated Sources                             $5,000,000

         USES:

                  Building Expansion                                  $1,175,000
                  Reimbursements                                         925,000
                  Debt Service Reserve Fund                              500,000
                  Water Treatment Facilities                             900,000
                  Cost of Issuance                                       100,000
                  Production Line                                      1,300,000
                  Tomato Production Line                                 100,000
                                                                      ----------

Total Estimated Uses                                                  $5,000,000

                                      B-1


                                    EXHIBIT C

                                 PERMITTED LIENS

         First Mortgage dated _____________ _____ ______, between Vaughan Foods,
Inc.,  Mortgagor,  and CNL Commercial Finance,  Inc.,  Mortgagee recorded in the
records of the Cleveland County Clerk at Book ______, Pages ______.

                                      B-2

EX-4.6

                    -----------------------------------------

                               INDENTURE OF TRUST

                    -----------------------------------------




                                     Between



                      CLEVELAND COUNTY INDUSTRIAL AUTHORITY

                                       and

                 J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION




                          Dated as of December 1, 2004




                      CLEVELAND COUNTY INDUSTRIAL AUTHORITY
                      INDUSTRIAL DEVELOPMENT REVENUE BONDS
                          (VAUGHAN FOODS, INC. PROJECT)
                                   SERIES 2004



                               INDENTURE OF TRUST

         This INDENTURE OF TRUST, dated as of December 1, 2004, (as supplemented
and amended, this "Indenture"),  is executed by and between the CLEVELAND COUNTY
INDUSTRIAL  AUTHORITY  (the  "Issuer"),  a public trust,  and J.P.  MORGAN TRUST
COMPANY,  NATIONAL  ASSOCIATION,  a  national  banking  association,   having  a
corporate trust office in Oklahoma City,  Oklahoma,  duly organized and existing
under the laws of the State of  Oklahoma,  as  Trustee  (the  "Trustee"),  being
authorized to accept and execute  trusts of the  character  herein set out under
and by virtue of the laws of the State of Oklahoma.

                                   WITNESSETH:

         WHEREAS, Vaughan Foods, Inc., a corporation duly organized and existing
under the laws of the State of  Oklahoma  (the  "Company"),  requested  that the
Issuer  finance  the   acquisition,   construction   and  equipping  of  certain
manufacturing  facilities  and certain solid waste disposal  facilities  located
within Cleveland County,  Oklahoma, in accordance with that certain Mortgage and
Loan  Agreement,   dated  as  of  December  1,  2004,  (as  amended,  the  "Loan
Agreement"), between the Issuer and the Company; and

         WHEREAS,  the provisions of Title 60 Oklahoma Statutes 2001 Section 176
et seq., as amended,  (the "Act"),  authorizes the Issuer to finance such costs;
and

         WHEREAS,  in order to  finance  such  costs,  the Issuer has issued its
Cleveland  County  Industrial  Authority  Industrial  Development  Revenue Bonds
(Vaughan Foods, Inc. Project) Series 2004, (the "Bonds"),  same to be secured by
this Indenture; and

         WHEREAS,  the rights of the Issuer in the underlying  Mortgage and Loan
Agreement dated as of December 1, 2004, between the Company as Mortgagor and the
Issuer as Mortgagee,  pursuant to which the Issuer will loan the proceeds of the
Bonds to the Company and the Company shall obligate itself to repay such loan to
the Issuer; and

         WHEREAS, the Bonds shall be secured additionally as provided herein and
in the Loan Agreement; and

         WHEREAS, the Bonds and the Trustee's authentication  certificate are to
be  substantially  in the following  form,  with such  necessary or  appropriate
variations, omissions and insertions as permitted or required by this Indenture:

                                     - 1 -


                           (FORM OF SERIES 2004 BOND)

**Unless  this  Bond  is  presented  by  an  authorized  representative  of  The
Depository Trust Company, a New York corporation  ("DTC"),  to the Issuer or its
agent for registration of transfer, exchange, or payment, and any Bond issued is
registered in the name of Cede & Co. or in such other name as is requested by an
authorized  representative  of DTC (and any  payment is made to Cede & Co. or to
such other entity as is requested by an authorized  representative  of DTC), ANY
TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the Registered Owner hereof, Cede & Co., has an interest
herein.**

Except as provided in the  Indenture  herein  described,  upon any transfer of a
Beneficial  Ownership  Interest (as defined in the  Indenture) in the Bond,  the
purchaser  thereof  shall  be  deemed  to  have  certified  to the  Trustee  and
acknowledged,  represented  and agreed with the Company and the  Underwriter (as
such terms are defined in the Indenture described herein) that such purchaser is
acquiring  the  Bond  for its  owns  account  and  that  it is (i) a  "qualified
institutional  buyer"  within  the  meaning of Rule 144A  promulgated  under the
Securities  Act of 1933, as amended (the "1933 Act"),  or (ii) an  institutional
"accredited  investor,"  as defined in Rule  501(a)(1),  (2), (3), or (7) of the
1933 Act.



                      CLEVELAND COUNTY INDUSTRIAL AUTHORITY

                      INDUSTRIAL DEVELOPMENT REVENUE BONDS

                          (VAUGHAN FOODS, INC. PROJECT)

                                   SERIES 2004



No.  R-                                                                                       $____________________

- ------------------------------ ---------------------------- --------------------------- ----------------------------
                                                                     Original
        Interest Rate                 Maturity Date                 Issue Date                     CUSIP
        -------------                 -------------                 ----------                     -----
- ------------------------------ ---------------------------- --------------------------- ----------------------------
                                                             
              %                                                 December __, 2004
- ------------------------------ ---------------------------- --------------------------- ----------------------------



REGISTERED OWNER: CEDE & CO.


PRINCIPAL AMOUNT:


         THE CLEVELAND COUNTY INDUSTRIAL  AUTHORITY,  a public trust,  organized
and existing under the laws of the State of Oklahoma (the  "Issuer"),  for value
received,  hereby promises to pay, from the sources hereinafter  described,  the
Principal  Amount stated above, in

                                     - 2 -


lawful money of the United  States of America,  to the  Registered  Owner stated
above or the registered  assigns, on the Maturity Date stated above (unless this
Bond  shall  have  been  called  for  prior  redemption,  in which  case on such
redemption  date),  upon the presentation and surrender hereof at the designated
corporate trust office of J.P. Morgan Trust Company,  National  Association,  as
Trustee (the "Trustee"),  in Oklahoma City, Oklahoma, or at the principal office
of its  successor in trust under an Indenture of Trust,  dated as of December 1,
2004, (the  "Indenture"),  between the Issuer and the Trustee,  and to pay, from
like sources,  to the  Registered  Owner stated above as of the fifteenth day of
the  calendar  month  prior to an Interest  Payment  Date (the  "Regular  Record
Date"),  by check or draft mailed by the Trustee on the Interest Payment Date to
such  Registered  Owner at his  address as it last  appears on the  registration
books kept for that purpose at the office of the  Trustee,  interest on said sum
in like coin or currency  from the Original  Issue Date stated above or from the
most recent date from which  interest has been paid or duly provided for, at the
Interest Rate stated  above,  payable  semiannually  on June 1 and December 1 of
each year,  commencing  June 1, 2005, on the basis of a 360-day year composed of
twelve 30-day  months,  until  payment of the principal  hereof has been made or
provided for.  Such  Interest  Rate shall be subject to adjustment  upon certain
events as described in the  Indenture  and more  specifically  an Interest  Rate
Step-up as defined in the Indenture could be  implemented.  The Trustee may make
payments of principal at maturity or upon  redemption and payment of interest by
wire transfer  within the United  States to any owner of at least  $1,000,000 in
aggregate principal amount of the Bonds requesting the same in writing addressed
to the Trustee as provided in this  Indenture.  Any  interest not timely paid or
duly  provided for shall cease to be payable to the  Registered  Owner hereof at
the close of business on the applicable Regular Record Date and shall be payable
to the Registered Owner hereof at the close of business on a Special Record Date
(as defined in the  Indenture) for the payment of any defaulted  interest.  Such
Special  Record  Date  shall be  fixed by the  Trustee  whenever  monies  become
available  for payment of the  defaulted  interest,  and notice of such  Special
Record Date shall be given to the Registered Owner hereof not less than ten days
prior  thereto.  If the  date  for  making  any  payment  or the  last  day  for
performance  of any act or the exercise of any right,  as provided in this Bond,
shall not be a "Business Day" as defined in this Indenture,  such payment may be
made or act  performed or right  exercised on the next  succeeding  Business Day
with the same force and effect as if done on the nominal  date  provided in this
Bond.  Notwithstanding  anything  herein  to the  contrary,  when  this  Bond is
registered  in the name of a Depository  (as defined in this  Indenture)  or its
nominee,  the principal and redemption  price of and interest on this Bond shall
be  payable  in same  day or  federal  funds  delivered  or  transmitted  to the
Depository or its nominee.

         This Bond is one of a duly  authorized  series  of bonds of the  Issuer
designated as "Cleveland  County  Industrial  Authority  Industrial  Development
Revenue Bonds (Vaughan  Foods,  Inc.  Project)  Series 2004" (the "Bonds").  The
Bonds have been issued under the provisions of Title 60 Oklahoma  Statutes 2001,
Section 176 et seq.,  as amended (the  "Act"),  to finance  costs of  acquiring,
constructing  and equipping  certain  manufacturing  facilities  and solid waste
disposal facilities (the  "Facilities");  to fund a reserve fund with respect to
the Bonds; and to fund certain costs of issuing the Bonds.

                                     - 3 -


         This Bond is a limited obligation of the Issuer payable solely from and
secured by (a) a pledge of certain  rights of the Issuer  under and  pursuant to
the  Mortgage  and Loan  Agreement  dated as of  December  1,  2004,  (the "Loan
Agreement"),  between the Issuer and Vaughan Foods, Inc., (the "Company"); (b) a
pledge of the Funds and  Pledged  Revenues  other than the  Rebate  Fund (all as
defined in the  Indenture);  (c) an assignment  of the Issuer's  mortgage on the
Property  (as  defined  in  the  Indenture)  (including  personal  property  and
equipment)  and of the Issuer's  security  interest in the Pledged  Revenues (as
defined in the Indenture) of the Company; the personal Guaranty of Mark Vaughan,
as an individual;  and benefits payable under a key-man life insurance policy in
the amount of $1,000,000 on the life of Mark Vaughan.

         This Bond shall not constitute or become an  indebtedness,  a debt or a
liability of or a charge against the general credit or taxing power of the State
of Oklahoma or any county,  city, city and county,  town,  school  district,  or
other subdivision of the State of Oklahoma or of any other political subdivision
or body corporate and politic within the State of Oklahoma other than the Issuer
(but only to the extent of the revenues pledged in this Indenture),  and neither
the State of  Oklahoma,  nor any county,  city,  city and county,  town,  school
district or other subdivision of the State of Oklahoma, except the Issuer to the
extent  provided above,  shall be liable hereon;  nor shall this Bond constitute
the  giving,  pledging,  or  loaning  of the  faith  and  credit of the State of
Oklahoma,  or any county,  city, city and county, town, school district or other
subdivision  of the State of Oklahoma or of any other  political  subdivision or
body  corporate and politic  within the State of Oklahoma,  but shall be payable
solely from the funds  pledged  therefor.  The  issuance of this Bond shall not,
directly or  indirectly or  contingently,  obligate the State of Oklahoma or any
subdivision  of the State of Oklahoma  nor empower the Issuer to levy or collect
any form of taxes or assessments  therefor or to create any indebtedness payable
out of taxes or  assessments or make any  appropriation  for the payment of this
Bond, and such  appropriation or levy is prohibited.  The Bonds and the interest
thereon do not  constitute an  indebtedness  of the Issuer within the meaning of
any constitutional or statutory limitation.

         Reference is hereby made to the Indenture and the Loan  Agreement for a
description of the revenues pledged, the nature and extent of the security,  the
rights,  duties and  obligations  of the Issuer,  the Trustee and the Registered
Owners of the Bonds and the terms and  conditions  upon which the Bonds are, and
are to be,  secured,  and a statement  of the  rights,  duties,  immunities  and
obligations of the Issuer and the Trustee.

          The Bonds  maturing  December 1, 2024,  shall be subject to redemption
prior to maturity, in whole or in part, at the written direction of the Company,
on December 1, 2014, and on any date thereafter, at a redemption price set forth
below  (expressed  as a percentage of the  principal  amount so redeemed),  plus
accrued interest to the redemption date:

                        REDEMPTION DATE                REDEMPTION PRICE
                        ----------------               ----------------
                  Dec.1, 2014 to Nov. 30, 2015                102%
                  Dec.1, 2015 to Nov. 30, 2016                101%
                  Dec.1, 2016 and thereafter                  100%

                                     - 4 -


         The Bonds are  subject to  optional  redemption  by the Issuer upon the
written  direction  of the Company  Representative  as a whole or in part at any
time, at a redemption price equal to the principal amount thereof to be redeemed
and  accrued  interest  to the  redemption  date,  in  certain  event of damage,
destruction  or  condemnation  to the property of the Company  located in Moore,
Cleveland County, Oklahoma. The Bonds are also subject to optional redemption by
the Issuer upon the written direction of the Company Representative, as a whole,
but not in part,  at  redemption  prices equal to 110% of the  principal  amount
thereof to be  redeemed  and  accrued  interest  to the  redemption  date,  as a
condition precedent to the acquisition of substantially all of the assets of the
Company  or in the  event of the  merger or  consolidation  of the  Company,  as
provided in the Loan Agreement. The Bonds are also redeemable by the Issuer upon
the direction of the Company Representative at any time after July 1, 2005, at a
redemption  price  equal  to the  principal  amount  of each  Series  2004  Bond
redeemed,  and accrued  interest thereon to the redemption date, from unexpended
proceeds of the Bonds.

         The Bonds are also subject to mandatory  sinking fund redemption by lot
in such manner as the  Trustee may  determine  pursuant to the  Indenture,  at a
redemption  price  equal to 100  percent of the  principal  amount  thereof  and
accrued interest to the redemption date.

         Upon the occurrence of a  Determination  of  Taxability,  as defined in
this  Indenture,  the Bonds are subject to  mandatory  redemption  in whole at a
redemption price equal to 105% of the Outstanding principal amount thereof, plus
interest  accrued to the  redemption  date,  at the  earliest  practicable  date
selected by the Trustee,  after  consultation with the Company,  but in no event
later than 45 days following the Trustee's  notification of the Determination of
Taxability.  The occurrence of a Determination of Taxability with respect to the
Bonds will not  constitute an Event of Default under this Indenture and the sole
remedy of the  Holders  of the Bonds is the  mandatory  redemption  of the Bonds
pursuant to this paragraph.

         In the event  less than all Bonds are to be  redeemed  pursuant  to the
optional  or special  redemption  provisions  of this  Indenture,  they shall be
redeemed in such order of maturity as the Company Representative shall determine
(less than all of the Bonds of a single  maturity  to be selected by lot in such
manner as the Trustee may determine).  Except as hereinafter provided, notice of
the call for redemption  shall be given by the Trustee by mailing by first class
mail a copy of the redemption notice not more than 45 days nor less than 30 days
prior to the redemption date to the Registered Owners of Bonds to be redeemed in
whole or in part at the  address of such  Registered  Owner last  showing on the
registration books.  Failure to give such notice or any defect therein shall not
affect the  validity of any  proceedings  for the  redemption  of such Bonds for
which no such failure or defect  occurs.  All Bonds called for  redemption  will
cease to bear interest after the specified  redemption date,  provided collected
funds for their  payment  are on  deposit at the place of payment at the time of
redemption.

                                     - 5 -


         Notwithstanding  the foregoing,  no additional notice shall be required
with  respect to  mandatory  sinking  fund  redemption  unless  requested by the
holders  of 100% of the  principal  amount of the  Bonds,  and Bonds need not be
presented for mandatory sinking fund redemption payment.

         The Bonds are issuable  only as fully  registered  bonds in the minimum
denominations  of  $100,000  and in any  integral  multiple  of $5,000 in excess
thereof.  The Bonds shall  initially be registered in the name of Cede & Co., as
nominee for The  Depository  Trust Company  ("DTC"),  to be held in a book entry
system  and:  (i) such Bonds shall be  registered  in the name of the DTC or its
nominee,  as  Bondholder,  and  immobilized  in the custody of DTC;  (ii) unless
otherwise  requested by DTC, there shall be a single Bond  certificate  for each
maturity; and (iii) such Bonds shall not be transferable or exchangeable, except
for transfer to another  depository or another nominee of a depository,  without
further  action by the Issuer.  The owners of  beneficial  interest in the Bonds
shall not have any right to receive Bonds in the form of physical  certificates.
If any  depository  determines  not to continue to act as a  depository  for the
Bonds for use in a book entry system, the Issuer may attempt to have established
a securities  depository/book  entry system  relationship with another qualified
depository  under this Indenture.  If the Issuer does not or is unable to do so,
the  Issuer  and  the  Trustee,   after  the  Trustee  has  made  provision  for
notification to the owners of book entry interests by the then depository, shall
permit withdrawal of the Bonds from the depository, and authenticate and deliver
Bond  certificates in fully registered form (in authorized  denominations of not
less than $100,000 in excess  thereof) to the assignees of the depository or its
nominee.

         While a  depository  is the  sole  holder  of the  Bonds,  delivery  or
notation of partial redemption of Bonds shall be effected in accordance with the
provisions of the Letter of Representations, as defined in this Indenture.

         In addition to the words and terms defined  elsewhere in this Bond, the
following terms shall have the following meanings:

         "BENEFICIAL  OWNER" means, with respect to the Bonds, a person owning a
Beneficial  Ownership Interest therein,  as evidenced to the satisfaction of the
Trustee.

         "BENEFICIAL  OWNERSHIP  INTEREST" means the beneficial right to receive
payments  and notices  with  respect to the Bonds which are held by a Depository
under a book entry system.

         "BOOK ENTRY FORM" or "BOOK ENTRY  SYSTEM"  means,  with  respect to the
Bonds, a form or system, as applicable, under which (i) the Beneficial Ownership
Interests  may be  transferred  only through a book entry and (ii) physical Bond
certificates  in  fully  registered  form are  registered  only in the name of a
Depository  or its  nominee  as  holder,  with the  physical  Bond  certificates
"immobilized" in the custody of the Depository. The book entry system maintained
by and the  responsibility  of the  Depository  (and  not  maintained  by or the
responsibility of the

                                     - 6 -


Issuer or the Trustee) is the record that  identifies,  and records the transfer
of the  interests  of, the owners of  beneficial  (book entry)  interests in the
Bonds.

         "DEPOSITORY" means any securities  depository that is a clearing agency
under federal law operating and maintaining, with its participants or otherwise,
a book entry system to record ownership of book entry interests in Bonds, and to
effect  transfers  of book entry  interests  in Bonds,  and  includes  and means
initially The Depository  Trust Company (a limited purpose trust  company),  New
York, New York.

         "DIRECT  PARTICIPANT"  means a Participant  as defined in the Letter of
Representations.

         "INDIRECT  PARTICIPANT"  means a Person utilizing the book entry system
of the Depository by, directly or indirectly,  clearing through or maintaining a
custodial relationship with a Direct Participant.

         NEITHER  THE  ISSUER,  THE  COMPANY,  NOR THE  TRUSTEE  WILL  HAVE  ANY
RESPONSIBILITY OR OBLIGATION TO ANY DIRECT PARTICIPANT,  INDIRECT PARTICIPANT OR
ANY BENEFICIAL OWNER OR ANY OTHER PERSON NOT SHOWN ON THE REGISTRATION  BOOKS OF
THE TRUSTEE AS BEING A HOLDER WITH  RESPECT TO: (1) THE BONDS;  (2) THE ACCURACY
OF  ANY  RECORDS  MAINTAINED  BY  DTC  OR ANY  DIRECT  PARTICIPANT  OR  INDIRECT
PARTICIPANT; (3) THE TIMELY OR ULTIMATE PAYMENT BY DTC OR ANY DIRECT PARTICIPANT
OR INDIRECT  PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF
THE PRINCIPAL OR REDEMPTION  PRICE OF OR INTEREST ON THE BONDS; (4) THE DELIVERY
BY  ANY  DIRECT  PARTICIPANT  OR  INDIRECT  PARTICIPANT  OF  ANY  NOTICE  TO ANY
BENEFICIAL  OWNER  WHICH  IS  REQUIRED  OR  PERMITTED  UNDER  THE  TERMS OF THIS
INDENTURE TO BE GIVEN TO REGISTERED  OWNERS; (5) THE SELECTION OF THE BENEFICIAL
OWNERS TO RECEIVE  PAYMENT IN THE EVENT OF ANY PARTIAL  REDEMPTION OF THE BONDS;
OR (6) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS REGISTERED OWNER.

         Except  for the 15  days  next  preceding  the  mailing  of  notice  of
redemption  of the Bonds (and,  if this Bond or portion  thereof is called,  the
period following the giving of such notice),  this Bond is fully transferable by
the Registered Owner hereof in person or by his duly authorized  attorney on the
registration books kept at the principal office of the Trustee upon surrender of
this  Bond,  together  with a  duly  executed  written  instrument  of  transfer
satisfactory to the Trustee.  Upon such transfer, a new fully registered bond or
bonds  of  authorized  denomination  or  denominations  for the  same  aggregate
principal  amount and  maturity  will be issued to the  transferee  in  exchange
therefor,  all  upon  payment  of the  charges  and  subject  to the  terms  and
conditions set forth in this Indenture.  The Issuer and the Trustee may deem and
treat the person in whose name this Bond is  registered  as the  absolute  owner
hereof,  whether or not this Bond shall be overdue, for the purpose of receiving
payment  (except as provided  above with  respect to

                                     - 7 -


Regular and Special  Record Dates) and for all other  purposes,  and neither the
Issuer nor the Trustee  shall be affected by any notice to the  contrary.  Bonds
which are  reissued  upon  transfer,  exchange or other  replacement  shall bear
interest from the most recent  Interest  Payment Date to which interest has been
paid or duly  provided  for,  or if no  interest  has been  paid,  then from the
Original Issue Date.

         To  the  extent  permitted  by,  and  as  provided  in  the  Indenture,
modifications or amendments of the Indenture,  or of any indenture  supplemental
thereto,  and of the rights and  obligations  of the Issuer and of the owners of
the Bonds may be made with the consent of the Issuer and, in certain  instances,
with  the  consent  of the  owners  of not less  than a  majority  in  aggregate
principal amount of the Bonds then Outstanding;  provided, however, that no such
modification  or amendment  shall be made which will affect the terms of payment
of the principal of, premium,  if any, or interest on any of the Bonds which are
unconditional,  unless consented to by all Bondholders.  Any such consent by the
owner of this Bond shall be conclusive  and binding upon such owner and upon all
future  owners of this Bond and of any bond issued upon the transfer or exchange
of this Bond whether or not notation of such consent is made upon this Bond.

         The owner of this Bond shall have no right to enforce the provisions of
the  Indenture,  the  provisions  of  which  are  incorporated  herein  by  this
reference, or to institute action to enforce the pledge, assignment or covenants
made therein or to take any action with respect to an Event of Default under the
Indenture  or to  institute,  appear  in or  defend  any  suit,  action or other
proceeding at law or in equity with respect thereto,  except as provided in this
Indenture.  In case an Event of Default  under the  Indenture  shall occur,  the
principal of all the Bonds at any such time Outstanding  under the Indenture may
be declared or may become due and payable, upon the conditions and in the manner
and with the effect provided in this Indenture. The Indenture provides that such
declaration may in certain events be rescinded and annulled by the Trustee under
certain circumstances.

         Neither  the  Chairman  and  Secretary  of the  Issuer,  nor any person
executing the Bonds shall be liable personally on the Bonds or be subject to any
personal liability or accountability by reason of the issuance thereof.

         It is hereby certified,  recited and declared that all conditions, acts
and things required by the  Constitution or statutes of the State of Oklahoma or
by the Act or the Indenture to exist, to have happened or to have been performed
precedent to or in the issuance of this Bond exist,  have happened and have been
performed.

         This Bond shall not be entitled to any benefit under this  Indenture or
any  indenture  supplemental  thereto,  or become  valid or  obligatory  for any
purpose until the Trustee shall have signed the  certificate  of  authentication
hereon.

                                     - 8 -


         IN WITNESS  WHEREOF,  the  CLEVELAND  COUNTY  INDUSTRIAL  AUTHORITY has
caused  this Bond to be signed  in its name and on its  behalf by the  manual or
facsimile signature of its Chairman,  and an imprint of its corporate seal to be
affixed  hereon  and  attested  by the  manual  or  facsimile  signature  of its
Secretary.


[SEAL]

                                        CLEVELAND COUNTY INDUSTRIAL
                                        AUTHORITY


                                        By:
                                           -------------------------------------
Attest:                                       Charles Thompson,
                                              Chairman


By:
   -------------------------------------
      Donna Roberts
      Secretary

                                     - 9 -


                              (FORM OF ASSIGNMENT)

FOR VALUE RECEIVED, _________________ the undersigned, hereby sells. assigns and
transfers unto:


- --------------------------------------------------------------------------------
             PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE


- --------------------------------------------------------------------------------
                    TAX IDENTIFICATION OR SOCIAL SECURITY NO.

the within Bond and all rights thereunder,  and hereby  irrevocably  constitutes
and  appoints  attorney  to  transfer  the  within  Bond on the  books  kept for
registration thereof, with full power of substitution in the premises.


Dated:
      ----------------     -----------------------------------------------------
                           NOTICE:   The  signature  to  this   assignment  must
                           correspond  with the name as it appears upon the face
                           of the  within  Bond  in  every  particular,  without
                           alteration  or  enlargement  or any change  whatever.
                           Signature  must  be  guaranteed  by  a  member  of  a
                           Medallion Signature Program.

                (FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION)

 This is one of the Bonds described in the within mentioned Indenture of Trust.


                                        J.P.  MORGAN TRUST COMPANY,
                                        NATIONAL ASSOCIATION


                                        By
                                          --------------------------------------
                                          Authorized Officer

Date of Authentication:


- -----------------------

                                     - 10 -


         WHEREAS,  all things necessary to make the Bonds, when authenticated by
the Trustee and issued as in this  Indenture  provided,  the valid,  binding and
legal  obligations  of the  Issuer and to  constitute  this  Indenture  a valid,
binding and legal  instrument  for the security of the Bonds in accordance  with
its terms, have been done and performed;

         NOW, THEREFORE, THIS INDENTURE WITNESSETH:

         That the Issuer,  in  consideration  of the  premises and of the mutual
covenants  herein  contained and of the purchase and  acceptance of the Bonds by
the owners  thereof  and of the sum of One Dollar to it duly paid by the Trustee
at or before the  execution and delivery of these  presents,  and for other good
and  valuable  consideration,  the receipt of which is hereby  acknowledged,  in
order to secure the payment of the principal of,  premium,  if any, and interest
on all Bonds at any time  Outstanding  under this  Indenture  according to their
tenor and  effect  and to  secure  the  performance  and  observance  of all the
covenants and conditions in the Bonds and herein  contained,  and to declare the
terms and conditions upon and subject to which the Bonds are issued and secured,
has executed and  delivered  this  Indenture and has granted,  bargained,  sold,
alienated, assigned, pledged, set over and confirmed, and by these presents does
grant, bargain,  sell, alienate,  assign, pledge, set over and confirm unto J.P.
Morgan Trust Company,  National  Association,  as Trustee, and to its successors
and  assigns  forever,  all  and  singular  the  following  described  property,
franchises and income:

                  A. The Loan  Agreement,  including  the  rights of the  Issuer
under and  pursuant to the Loan  Agreement  (other than the rights of the Issuer
under  Sections  5.1(f),  8.5 and 10.4 of the Loan  Agreement and other than the
rights of the Issuer to perform  certain  discretionary  acts as reserved in the
Loan Agreement) and the rights, title and interests granted, pledged, bargained,
sold, conveyed and mortgaged by the Company therein,  including Pledged Revenues
(as herein defined).

                  B. All Funds (except the Rebate Fund)  established  under this
Indenture,  except  for monies  deposited  with or paid to the  Trustee  for the
redemption of Bonds,  notice of the  redemption or tender of which has been duly
given,  and all Pledged Revenues payable to the Trustee by or for the account of
the Issuer  pursuant to the Loan Agreement and this  Indenture,  subject only to
the provisions of this  Indenture  permitting  the  application  thereof for the
purposes and on the terms and conditions set forth in this Indenture.

                  C. The Principal Guaranty.

                  D. Key-Man Life Insurance Policy

                  E. Any and all other interests in real or personal property of
every name and nature from time to time  hereafter  by delivery or by writing of
any kind specifically mortgaged, pledged or hypothecated,  as and for additional
security  hereunder by the Issuer or by anyone in its behalf or with its written
consent in favor of the Trustee,  which is hereby  authorized to

                                     - 11 -


receive any and all such property at any and all times and to hold and apply the
same subject to the terms hereof.

         TO HAVE AND TO HOLD the same  with  all  privileges  and  appurtenances
hereby  conveyed and  assigned,  or agreed or intended to be, to the Trustee and
its successors in said trust and assigns forever;

         IN TRUST,  NEVERTHELESS,  upon the terms herein set forth for the equal
and  proportionate  benefit,  security and protection of all owners of the Bonds
issued  under and  secured by this  Indenture  without  privilege,  priority  or
distinction  as to the lien or  otherwise  of any of the Bonds over any other of
the Bonds except as specifically provided herein:

         PROVIDED,  HOWEVER, that if the Issuer, its successors or assigns shall
well and truly  pay,  or cause to be paid,  the  principal  of the Bonds and the
premium, if any, and the interest due or to become due thereon, at the times and
in the manner  mentioned  in the Bonds  according to the true intent and meaning
thereof,  and shall cause the payments to be made into the Bond  Principal  Fund
and the  Bond  Interest  Fund as  hereinafter  required  or  shall  provide,  as
permitted  hereby,  for the payment  thereof by depositing  with the Trustee the
entire  amount due or to become due  thereon,  or certain  securities  as herein
permitted,  and shall well and truly keep, perform and observe all the covenants
and conditions pursuant to the terms of this Indenture to be kept, performed and
observed  by it,  and shall pay or cause to be paid to the  Trustee  all sums of
money due or to become  due to it in  accordance  with the terms and  provisions
hereof,  then upon such final  payments,  this  Indenture  and the rights hereby
granted shall cease, terminate and be void; otherwise,  this Indenture to be and
remain in full force and effect.

         THIS INDENTURE FURTHER WITNESSETH and it is expressly declared that all
Bonds  issued  and  secured  hereunder  are  to  be  issued,  authenticated  and
delivered,  and all said  property,  rights,  interests  and  revenues and funds
hereby pledged and assigned are to be dealt with and disposed of under, upon and
subject to the terms, conditions,  stipulations,  covenants, agreements, trusts,
uses and  purposes  as  hereinafter  expressed,  and the  Issuer  has agreed and
covenanted,  and does hereby  agree and  covenant  with the Trustee and with the
respective owners from time to time of the Bonds as follows:

                                     - 12 -


                                    ARTICLE I

               DEFINITIONS; BOND INDENTURE TO CONSTITUTE CONTRACT

         Section 1.1  DEFINITIONS.  All words and phrases not otherwise  defined
herein  shall have the same  meanings  as  assigned to such words and phrases in
Article I of the Loan Agreement and in Article I of this Indenture. In addition,
the following terms,  except where the context indicates  otherwise,  shall have
the respective meanings set forth below:

         "Act" means,  Title 60 Oklahoma Statutes 2001,  Section 176 et seq., as
amended.

         "Additional  Indebtedness"  means all Indebtedness of the Company other
than the Loan.

         "Assignment" means the Assignment of Mortgage and Loan Agreement, dated
as of December 1, 2004, from the Issuer to the Trustee.

         "Audited  Financial  Statements"  means,  as to the Company,  financial
statements  for a Fiscal  Year,  or for such other period for which an audit has
been  performed,  prepared in  accordance  with  generally  accepted  accounting
principles,  which have been audited and reported upon by independent  certified
public accountants.

         "Balloon  Long-Term   Indebtedness"  means  Long-Term  Indebtedness  20
percent  or more of the  principal  payments  of which  are due in any  12-month
period, which portion of the principal is not required by the documents pursuant
to which such Indebtedness is issued to be amortized by redemption prior to such
date.

         "Beneficial Owner" means, with respect to any Bonds in Book Entry Form,
a Person owning a Beneficial  Ownership  Interest  therein,  as evidenced to the
satisfaction of the Trustee.

         "Beneficial  Ownership  Interest" means the beneficial right to receive
payments  and notices  with  respect to the Bonds which are held by a Depository
under a book entry system.

         "Board" means the Board of Directors of the Company.

         "Bonds"  or "Series  2004  Bonds"  means  Cleveland  County  Industrial
Authority  Industrial  Development  Revenue Bonds (Vaughan Foods,  Inc. Project)
Series 2004.

         "Bond  Interest  Fund"  means the Bond  Interest  Fund  created in this
Indenture.

         "Bond  Principal  Fund" means the Bond  Principal  Fund created in this
Indenture.

         "Bondholder" or "holder" or "owner" of Bonds means the Registered Owner
of any Bond.

                                     - 13 -


         "Book Entry Form" or "book entry  system"  means,  with  respect to any
Bonds, a form or system, as applicable, under which (i) the Beneficial Ownership
Interests  may be  transferred  only through a book entry and (ii) physical Bond
certificates  in  fully  registered  form are  registered  only in the name of a
Depository  or its  nominee  as  Holder,  with the  physical  Bond  certificates
"immobilized" in the custody of the Depository. The book entry system maintained
by and the  responsibility  of the  Depository  (and  not  maintained  by or the
responsibility of the Issuer or the Trustee) is the record that identifies,  and
records the transfer of the interests of, the owners of book entry  interests in
such Bonds.

         "Business  Day"  means any day other than a  Saturday,  a Sunday or any
other day on which  the New York  Stock  Exchange  or banks  are  authorized  or
obligated by law or executive  order to close in New York, New York, or any city
in which the principal corporate trust office of the Trustee is located.

         "Code" means the Internal  Revenue  Code of 1986,  as amended,  and the
regulations issued from time to time thereunder.

         "Commitment  Indebtedness" means the obligation of the Company to repay
amounts  disbursed  pursuant to a  commitment  from a financial  institution  to
refinance when due other  Indebtedness  (including  accrued and unpaid  interest
thereon) of the Company or to purchase  when tendered for purchase by the holder
thereof in  accordance  with the terms  thereof  other  Indebtedness  (including
accrued and unpaid interest  thereon) of the Company,  which other  Indebtedness
was incurred in accordance with the provisions of the Loan  Agreement,  plus any
fees payable to such  financial  institution  for such  commitment and any other
expenses  (including  collection)  thereunder,  including,  without  limitation,
amounts  disbursed and fees and expenses  payable in connection  with any Credit
Facility.

         "Company" or  "Corporation"  means  Vaughan  Foods,  Inc.,  an Oklahoma
corporation, and its successors and assigns.

         "Company  Representative"  or  "Corporation  Representative"  means the
executive director or chief financial officer of the Company or any other person
designated as such by an  instrument in writing  delivered to the Issuer and the
Trustee  by the  chief  executive  officer  of the  Company  or chief  financial
officer.

         "Completion  Date" means the date of the completion of the acquisition,
construction, improvement and equipping of the Facilities described in Exhibit B
to the Loan Agreement, as evidenced by the certificate of the Company filed with
the Trustee as required by the Loan Agreement.

         "Completion  Indebtedness" means any Long-Term Indebtedness incurred by
the Company for the purpose of  financing  the  completion  of the  acquisition,
construction or

                                     - 14 -


equipping of the facilities for which  Long-Term  Indebtedness  has  theretofore
been incurred in accordance  with the provisions of the Loan  Agreement,  to the
extent  necessary to provide a completed  and equipped  facility of the type and
scope  contemplated  at the time that such  Long-Term  Indebtedness  theretofore
incurred  was  originally  incurred,  and,  to the  extent  the  same  shall  be
applicable,  in accordance  with the general plans and  specifications  for such
facility  as  originally  prepared  with only such  changes as have been made in
conformance  with the documents  pursuant to which such  Long-Term  Indebtedness
theretofore incurred was originally incurred.

         "Consultant"  means a firm or firms  designated in a certificate of the
Company  Representative  which is not,  and no  member,  stockholder,  director,
officer,  trustee or  employee  of which is, an  officer,  director,  trustee or
employee of the Company,  and which is a professional  management  consultant of
national  repute  for having the skill and  experience  necessary  to render the
particular  report required by the provision of the Loan Agreement in which such
requirement appears.

         "Cost of  Issuance  Fund"  means  the  Cost of  Issuance  Fund  created
pursuant to this Indenture.

         "Cost  of the  Project"  means  the  sum  total  of all  reasonable  or
necessary costs  incidental to the financing of the Facilities  described in the
Loan Agreement.

         "Credit  Facility"  means a line of credit,  letter of credit,  standby
bond purchase  agreement or similar  credit  enhancement  or liquidity  facility
established in connection with the issuance of Indebtedness to provide credit or
liquidity support for such Indebtedness.

         "Current Assets" means unrestricted cash of the Company or other assets
of the Company  which are expected to be converted  into cash or consumed in the
production  of income  within the  greater of one year and the normal  operating
cycle of the Company,  all  determined  in  according  with  generally  accepted
accounting principles.

         "Current  Liabilities"  means liabilities of the Company expected to be
liquidated  in the  greater  of one year and the normal  operating  cycle of the
Company,  excluding any liability otherwise  classified as current which will be
settled  from other than  Current  Assets,  all  determined  in  according  with
generally accepted accounting principles.

         "Current   Ratio"  means  the  ratio  of  Current   Assets  to  Current
Liabilities.

         "Debt to Equity  Ratio"  means the  ratio of (i)  Indebtedness  to (ii)
excess of total assets of the Company over total liabilities.

         "Depository" means any securities  depository that is a clearing agency
under federal law operating and maintaining, with its participants or otherwise,
a book entry system to record

                                     - 15 -


ownership  of book entry  interests  in bonds,  and to effect  transfers of book
entry  interests in bonds in book entry form,  and includes and means  initially
The Depository  Trust Company (a limited purpose trust  company),  New York, New
York.

         "Determination  of  Taxability"  means and shall  occur  when,  (i) the
Trustee  receives  written notice from the Company or a majority of Bondholders,
supported by an Opinion of Bond Counsel  which shall be a nationally  recognized
firm with  expertise in the area of federal  taxation of municipal  bonds,  that
interest on the Bonds is  includable in the gross income of Holders of the Bonds
of any series for  federal  income tax  purposes  or (ii) the  Internal  Revenue
Service  shall  claim in  writing  that  interest  on the Bonds of any series is
includable  in the gross income of Holders of such Bonds for federal  income tax
purposes.

         "Direct  Participant"  means a Participant  as defined in the Letter of
Representations.

         "Environmental Law" means (i) the Comprehensive Environmental Response,
Compensation and Liability Act of 1976, 42 U.S.C.  ss.ss. 9601 ET SEQ.; (ii) the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by SARA, 42 U.S.C.  ss.ss.  1820 ET SEQ.; (iii) the Hazardous  Materials
Transportation  Act, 49 U.S.C.  ss.ss.  1810 ET SEQ.; (iv) the Toxic  Substances
Control Act, 15 U.S.C.  ss.ss.  2601 ET SEQ.; (v) the Resource  Conservation and
Recovery Act, as amended,  42 U.S.C.  ss.ss.  9601 ET SEQ.; (vi) the Clean Water
Act, 33 U.S.C.  ss.ss.  1251 ET SEQ.; (vii) the Clean Air Act, 42 U.S.C.  ss.ss.
7412 ET SEQ.;  and  (viii);  and any  related  laws of the State of  Oklahoma or
ordinances or resolutions of the Issuer, as any such acts, powers and duties may
be amended, modified or supplemented and any regulations promulgated pursuant to
any of the foregoing statutes.

         "Escrowed  Interest"  means  amounts  (but not  including  any interest
earnings thereon,  except as otherwise provided in the Loan Agreement) deposited
in escrow in connection with the issuance of Long-Term  Indebtedness  and either
held as cash or invested in noncallable  Government  Obligations to pay interest
on such Long-Term  Indebtedness  (but shall not include  capitalized or borrowed
interest).

         "Equipment" means those items of machinery, equipment or other personal
property  installed in the Improvements and pledged to the repayment of the Loan
pursuant to the Loan  Agreement,  and any item of machinery,  equipment or other
personal  property  or  fixtures  acquired  and  installed  in  substitution  or
replacement thereof,  less such machinery,  equipment or other personal property
or fixtures as may be released from such pledge  pursuant to the Loan  Agreement
or taken by  exercise  of the power of eminent  domain as  provided  in the Loan
Agreement, as such items may at any time exist.

         "Event of Default" or "event of default" means those defaults specified
in this Indenture or the Loan Agreement, as appropriate.

                                     - 16 -


         "Facilities" means collectively, the manufacturing facilities and solid
waste  disposal  facilities of the Company  financed with proceeds of the Bonds,
located in Moore, Cleveland County,  Oklahoma, as more particularly described in
Exhibit B to the Loan Agreement.

         "Fiscal Year" means the fiscal year of the Company.

         "Funds"  means the Project  Fund,  the Bond  Principal  Fund,  the Bond
Interest  Fund, the Cost of Issuance Fund, the Reserve Fund and the Rebate Fund,
and  any  account  created  therein,  all as  established  and  created  by this
Indenture.

         "Governing Body" means the Board of Directors of the Company.

         "Government Obligations" means:

                  1.       (a)  Direct  obligations  (other  than an  obligation
subject to variation in principal repayment) of the United States of America;

                           (b) obligations fully and unconditionally  guaranteed
as to timely payment of principal and interest by the United States of America;

                           (c) obligations fully and unconditionally  guaranteed
as to timely payment of principal and interest by any agency or  instrumentality
of the United  States of America  when such  obligations  are backed by the full
faith and credit of the United States of America;

                           (d) evidences of ownership or proportionate interests
in future interest and principal payments on obligations described above held by
a bank or trust company as custodian, under which the owner of the investment is
the  real  party  in  interest  and  has  the  right  to  proceed  directly  and
individually against the obligor and the underlying  government  obligations are
not  available  to any person  claiming  through  the  custodian  or to whom the
custodian may be  obligated,  provided,  however,  that  Government  Obligations
described  in this  subsection  (d)  may  only  be  used  in  connection  with a
defeasance of the Bonds under this Indenture; or

                           (e) securities of or other  interests in any open-end
or closed-end  management type investment company or investment trust registered
under the federal "Investment Company Act of 1940," 15 U.S.C. Section 80(a)-1 ET
SEQ., if the portfolio of such investment company or investment trust is limited
to United States of America  obligations  which are backed by the full faith and
credit of the  United  States of  America  and to  repurchase  agreements  fully
collateralized  by  such  obligations  and if any  such  investment  company  or
investment trust actually takes delivery of such collateral,  either directly or
through an authorized custodian.

                                     - 17 -


                  2. Pre-refunded  municipal obligations rated "AAA" by Standard
& Poor's  Rating  Services and "Aaa" by Moody's  Investors  Service  meeting the
following requirements:

                           (a) the municipal  obligations are (i) not subject to
redemption  prior to maturity or (ii) the bond  trustee  therefor has been given
irrevocable  instructions concerning their call and redemption and the issuer of
the  municipal   obligations   has  covenanted  not  to  redeem  such  municipal
obligations other than as set forth in such instructions;

                           (b) the municipal  obligations are secured by cash or
obligations  described in paragraphs  (1)(a),  (b), (c), (d) or (e) above, which
may be applied only to payment of the principal of, interest and premium on such
municipal obligations;

                           (c) the principal of and interest on the  obligations
described in paragraphs (1)(a), (b), (c), (d) or (e) above (plus any cash in the
escrow)  has  been  verified  by the  report  of  independent  certified  public
accountants  to be  sufficient  to pay in full all  principal  of,  interest and
premium,   if  any,  due  and  to  become  due  to  the  municipal   obligations
("Verification");

                           (d) the cash or  obligations  described  in paragraph
(1) above  serving as  security  for the  municipal  obligations  are held by an
escrow agent or trustee in trust for owners of the municipal obligations;

                           (e) no  substitution  of an  obligation  described in
paragraph (1) above shall be permitted except with another obligation  described
in paragraph (1) above and upon delivery of a new Verification; and

                           (f) the cash or  obligations  described  in paragraph
(1) above are not available to satisfy any other claims,  including  those by or
against the bond trustee or escrow agent.

         "Guarantor"  means  Mark  Vaughan,  as  guarantor  under the  Principal
Guaranty.

         "Guaranty"  means any  obligation  of the Company  guaranteeing  in any
manner,  directly or indirectly,  any obligation of any Person, which obligation
of such other  Person  would,  if such  obligation  were the  obligation  of the
Company,  constitute Indebtedness under the Loan Agreement.  For the purposes of
the Loan  Agreement,  so long as no payments  are required to be made under such
Guaranty and so long as such Guaranty  constitutes a contingent  liability under
generally accepted accounting principles,  the aggregate principal amount of any
indebtedness  in respect of which the Company  shall have executed and delivered
its Guaranty  shall be deemed to be equal to 20 percent of the principal  amount
borrowed  under  such  guaranteed  indebtedness  Outstanding  at  the  time  any
computation  is being made,  and the  aggregate  annual  principal  and interest
payments on any indebtedness in respect of which the Company shall have executed
and  delivered  its  Guaranty  shall be deemed to be equal to 20  percent of the
amount  which  would  be

                                     - 18 -


payable  as  principal  of and the  interest  on the  indebtedness  for  which a
Guaranty shall have been issued during the Fiscal Year for which any computation
is being made,  provided  that if there shall have  occurred a default under the
guaranteed  obligation of any direct or indirect  payment by the Company on such
Guaranty,  then,  during the period  commencing  on the date of such  default of
payment and ending as the case may be on the day on which such  default is cured
or on the day which is two years  after such  other  Person  resumes  making all
payments  on  such  guaranteed  obligation,   100  percent  of  such  guaranteed
indebtedness shall be taken into account.

         "Hazardous  Material" means:  (i) any substances  defined as "hazardous
substances,"  "pollutants,"  "contaminants,"  "hazardous  materials," "hazardous
wastes," or  "hazardous  or toxic  substances"  or related  materials  as now or
hereafter  defined in any  Environmental  Law, (ii) those  substances  listed or
otherwise  identified  as  substances  of the type  referred to in the preceding
subsection  (i)  in  the   regulations   adopted  and  issued  pursuant  to  any
Environmental Law, as the same may be amended,  modified or supplemented;  (iii)
any friable asbestos, airborne asbestos in excess of that generally found in the
atmosphere,  respectively,  where the facilities of the Company are located,  or
any substance or material  containing  asbestos,  excluding  any such  materials
located on the solid waste disposal or  manufacturing  facilities of the Company
prior to the date of the Loan Agreement so long as such materials are contained,
maintained,  abated, or removed in compliance with all applicable  Environmental
Laws;  and (iv) any  substance  the  presence  of  which  on the  Facilities  is
prohibited by any applicable Environmental Law; provided that Hazardous Material
shall not include any such  substances  used in or  resulting  from the ordinary
operation of a facility constituting solid waste recycling facilities or for the
cleaning of the Facilities;  provided that such  substances are stored,  handled
and disposed of in compliance with all applicable  Environmental  Laws and other
applicable laws and regulations.

         "Improvements" means the real property improvements located on the Site
and pledged pursuant to the Loan Agreement.

         "Income  Available  for Debt Service"  means,  as to any Fiscal Year or
other  specified  period,  (i) excess of revenues  over  expenses of the Company
before   depreciation,   amortization   and   interest   expense  on   Long-Term
Indebtedness,  as  determined  from  the  Audited  Financial  Statements  or  as
otherwise  herein  provided,  provided  that  unrealized  gains  and  losses  on
investments  will not be recognized in the  calculation of Income  Available for
Debt  Service,  plus (ii)  capitalized  or  funded  interest  available  for and
scheduled  to be applied to interest  obligations  accrued  during such  period;
provided, however, that (1) no determination thereof shall take into account any
gain or loss resulting from either the  extinguishment  of  Indebtedness  or the
sale,  exchange or other  disposition of capital assets not made in the ordinary
course of  business,  and (2)  revenues  shall  not  include  earnings  from the
investment of Escrowed Interest or earnings constituting Escrowed Interest.

         "Indebtedness"  means (i) all  obligations  of the Company for borrowed
money  including,  but not limited  to, the Loan,  (ii) all  installment  sales,
conditional  sales and  capital  lease  obligations  incurred  or assumed by the
Company as purchaser,  and (iii) all Guaranties,  whether

                                     - 19 -


constituting  Long-Term  Indebtedness or Short-Term  Indebtedness.  Indebtedness
shall not include any other  obligation  incurred by the Company in the ordinary
course of business,  any obligation to contribute to self-insurance,  pension or
other  risk  management  programs,  indemnification  obligations  incurred  with
respect  to  Commitment  Indebtedness,  or  any  fees  or  expenses  payable  in
connection with the incurrence of Indebtedness.

         "Indenture"  means this  Indenture of Trust  between the Issuer and the
Trustee,  including  any  indentures  supplemental  thereto  made in  conformity
therewith, pursuant to which the Bonds are authorized to be issued and secured.

         "Independent  Architect"  means  an  architect,  engineer  or  firm  of
architects and engineers selected by the Company with the approval of a majority
in principal amount of the Bondholders.

         "Indirect  Participant"  means a Person utilizing the book entry system
of the Depository by, directly or indirectly,  clearing through or maintaining a
custodial relationship with a Direct Participant.

         "Initial  Bondholder"  means  Oppenheimer  Limited Term  Municipal Fund
and/or  Oppenheimer  Rochester National  Municipals or any successor  beneficial
holder of the Bonds that is an affiliate of Oppenheimer Funds, Inc.

         "Insurance  Consultant"  means a firm or Person selected by the Company
Representative  and  approved by a majority  of the  Bondholders  or  Beneficial
Owners which is not, and no member,  stockholder,  director, trustee, officer or
employee of which is, an officer,  director,  trustee or employee of the Company
and which is qualified to survey risks and to recommend  insurance  coverage for
solid waste recycling facilities and services and organizations  engaged in such
operations and which may provide insurance coverage for the Company.

         "Interest  Payment  Dates"  means  June 1 and  December 1 of each year,
commencing June 1, 2005.

         "Interest  Rate  Step-up"  means  that,  under  certain   circumstances
relating to compliance with financial covenants set forth in Section 8.16 of the
Loan  Agreement,  the interest rate on the Bonds will increase one per cent (1%)
commencing thirty (30) days following the quarterly report disclosing failure to
maintain the  specified  ratios,  until such time as the Company shall return to
compliance with the required ratios.

         "Issuer" means the Cleveland County Industrial  Authority,  an Oklahoma
public trust.

         "Issuer  Representative"  means the  Chairman  or other  officer of the
Issuer,  and,  when used with  reference to an act or  document,  also means any
other person  authorized by resolution of the Issuer to perform such act or sign
such document.

                                     - 20 -


         "Key-Man Life Insurance  Policy means the Key-Man Life Insurance policy
on the life of Mark Vaughan in an amount of not less than $1,000,000  reflecting
the beneficiary as Trustee herein.

         "Letter of  Representations"  means any Letter of Representations  from
the  Issuer  and the  Trustee to the  Depository  which may be  entered  into in
connection  with  the  issuance  of  the  Bonds  in  a  book  entry  system,  as
supplemented and amended from time to time.

         "Lien"  means  any  mortgage,  deed of trust  or  pledge  of,  security
interest  in, or  encumbrance  on, the assets of the Company or sale of accounts
receivable with recourse of, the Company which secures any Indebtedness.

         "Loan" means the loan by the Issuer to the Company of the proceeds from
the  sale of the  Bonds  (exclusive  of  accrued  interest  paid by the  initial
purchasers of any Bonds) pursuant to the Loan Agreement.

         "Loan  Agreement"  means the  Mortgage and Loan  Agreement  between the
Issuer and the Company,  dated as of December 1, 2004,  and any  amendments  and
supplements thereto made in conformity with the requirements thereof and of this
Indenture.

         "Loan Payments" means those payments required to be paid by the Company
identified as Loan Payments pursuant to the Loan Agreement.

         "Long-Term  Debt Service  Coverage  Ratio"  means,  except as otherwise
provided in the Loan Agreement,  for any Fiscal Year or other specified  period,
the ratio  determined  by  dividing  the Income  Available  for Debt  Service by
Maximum  Annual Debt  Service.  When  calculating  the  Long-Term  Debt  Service
Coverage Ratio,  (i) capitalized  interest shall not be counted as income unless
it will be  available  and applied in the same year as the  Maximum  Annual Debt
Service will occur,  and (ii)  payments to be made in respect of  principal  and
interest on any revolving credit or similar agreement secured solely by a pledge
of accounts  receivable  and  inventory  shall not be  included  in  determining
Maximum Annual Debt Service.

         "Long-Term  Debt  Service  Requirement"  means,  for any Fiscal Year or
other specified  period,  the aggregate of the payments to be made in respect of
principal  and  interest  (whether  or not  separately  stated)  on  Outstanding
Long-Term  Indebtedness  of the  Company  during such  period,  also taking into
account:

                           (i) with respect to Balloon  Long-Term  Indebtedness,
(a) the  amount of  principal  which  would be  payable  in such  period if such
principal were amortized from the date of incurrence thereof over a period of 20
years on a level debt service  basis at an interest rate equal to the rate borne
by  such  Indebtedness  on the  date  calculated,  except  that  if the  date of
calculation is within 12 months of the actual maturity of such Indebtedness, the
full  amount  of  principal  payable  at  maturity  shall  be  included  in such
calculation,  or (b) principal

                                     - 21 -


payments or deposits  with  respect to  Indebtedness  secured by an  irrevocable
letter of credit issued by, or an irrevocable  line of credit with a bank having
a  combined  capital  and  surplus  of at least  $50,000,000,  or  insured by an
insurance policy issued by any insurance company rated at least "A" by Alfred M.
Best Company or its  successors  in BEST'S  INSURANCE  REPORTS or its  successor
publication,  nominally  due in the last Fiscal Year in which such  Indebtedness
matures may, at the option of the Company Representative,  be treated as if such
principal  or interest  payments or deposits  were due as  specified in any loan
agreement  issued in  connection  with such letter of credit,  line of credit or
insurance  policy or  pursuant  to the  repayment  provisions  of such letter of
credit,  line of credit or insurance  policy,  and interest on such Indebtedness
after such Fiscal  Year shall be assumed to be payable  pursuant to the terms of
such loan agreement or repayment provisions;

                           (ii) with respect to Long-Term  Indebtedness which is
Variable  Rate  Indebtedness,   the  interest  on  such  Indebtedness  shall  be
calculated  at the rate which is equal to the  average  of the  actual  interest
rates  which  were in effect  (weighted  according  to the  length of the period
during which each such interest rate was in effect) for the most recent 12-month
period immediately  preceding the date of calculation for which such information
is available  (or such  shorter  period,  but not less than six months,  if such
information is not available for a 12-month period), except that with respect to
new Variable Rate Indebtedness, and Variable Rate Indebtedness issued within the
last  six  months,  the  interest  rate for such  Indebtedness  for the  initial
interest  rate  period  shall be such  interest  rate as  determined  in writing
delivered to the Trustee by a banking,  investment banking or financial advisory
firm,  which  shall be  knowledgeable  in matters  relating to finance for solid
waste recycling facilities; and

                           (iii)  with  respect to any  Commitment  Indebtedness
providing  for  payment of other  Long-Term  Indebtedness,  to the  extent  that
amounts  are not then due and  owing  for  advances  made by the  creditor  with
respect  thereto,  the  principal  and  interest  relating  to  such  Commitment
Indebtedness  shall not be included in any  computations  with respect to Income
Available for Debt Service or the Long-Term Debt Service Requirement;  provided,
however,  that interest  shall be excluded from the  determination  of Long-Term
Debt Service  Requirement  to the extent that Escrowed  Interest is available to
pay such interest (but the amount excluded shall not take into account  interest
earnings on such Escrowed Interest unless there shall have been delivered to the
Trustee a report  of an  independent  firm of  nationally  recognized  certified
public  accountants  verifying  that such amount of interest  can be timely paid
from such escrow).

         "Long-Term  Indebtedness"  means  all  Indebtedness  having a  maturity
longer than one year incurred or assumed by the Company, including:

                           (i) money borrowed for an original term, or renewable
at the option of the  borrower for a period from the date  originally  incurred,
longer than one year;

                                     - 22 -


                           (ii) leases which are required to be  capitalized  in
accordance  with generally  accepted  accounting  principles  having an original
term,  or  renewable  at the  option of the  lessee  for a period  from the date
originally incurred, longer than one year;

                           (iii)  installment sale or conditional sale contracts
incurred  or assumed by the  Company as  purchaser  having an  original  term in
excess of one year;

                           (iv)  Short-Term  Indebtedness  if a commitment  by a
financial  lender  exists  to  provide   financing  to  retire  such  Short-Term
Indebtedness  and such  commitment  provides  for the  repayment of principal on
terms which would,  if such commitment were  implemented,  constitute  Long-Term
Indebtedness; and

                           (v) the current portion of Long-Term Indebtedness.

         "Maximum Annual Debt Service" means the highest  Long-Term Debt Service
Requirement for any current or succeeding Fiscal Year or other specified period.

         "Monthly  Payments"  means  monthly  payments to be made by the Company
pursuant  to the Loan  Agreement  in an  amount  equal to (a) the sum of (i) the
quotient obtained by dividing the amount of principal and redemption premium, if
any,  of the Bonds  due and  payable  on the next  succeeding  payment  date for
principal  (whether  at  their  stated  maturities,  date  called  for  optional
redemption or by mandatory sinking fund redemption) by twelve (12), and (ii) the
quotient  obtained by dividing  the interest due and payable on the Bonds on the
next  succeeding  Interest  Payment Date by six (6), and (b) any deposits to the
Reserve Fund required pursuant to the Loan Agreement as follows:

         (a) for the  period  from  January  15,  2005  through  June 14,  2005,
inclusive, an amount equal to the quotient obtained by dividing the interest due
and payable on the Bonds on the next  succeeding  Interest  Payment Date by five
(5),  plus any  deposits  to the  Reserve  Fund  required  pursuant  to the Loan
Agreement;

         (b) for the  period  from June 15,  2005  through  December  14,  2005,
inclusive, an amount equal to the quotient obtained by dividing the interest due
and payable on the Bonds on the next  succeeding  Interest  Payment  Date by six
(6),  plus any  deposits  to the  Reserve  Fund  required  pursuant  to the Loan
Agreement; and

         (c) for the period from  December 15, 2005 and  thereafter,  the sum of
(i) the quotient  obtained by dividing the amount of  principal  and  redemption
premium,  if any,  of the Bonds due and payable on the next  succeeding  payment
date for principal (whether at their stated  maturities,  date called for option
redemption or by mandatory sinking fund redemption) by twelve (12), and (ii) the
quotient  obtained by dividing  the interest due and payable on the Bonds on the
next  succeeding  Interest  Payment Date by six (6), and (b) any deposits to the
Reserve Fund required pursuant to the Loan Agreement.

                                     - 23 -


         "Net Book  Value"  when used in  connection  with  Property,  Plant and
Equipment or other property means the value of such property, net of accumulated
depreciation  or  amortization,  if applicable  and as the case may be, as it is
carried  on the books of the  Company  in  conformity  with  generally  accepted
accounting principles.

         "Net   Proceeds"   means  the  gross   proceeds  of  any  insurance  or
condemnation  awards  or the  gross  proceeds  received  pursuant  to any  title
insurance  policy with respect to any Property,  Plant and Equipment  pledged to
the  payment  of the Loan  pursuant  to the Loan  Agreement,  less such fees and
expenses incurred in collecting the same.

         "Nonrecourse  Indebtedness" means any Indebtedness  incurred to finance
the  purchase by the Company of tangible  property  secured  solely by a Lien on
such  property,  the liability  for which is limited to the property  subject to
such Lien with no recourse,  directly or indirectly,  to any other assets of the
Company.

         "Notice Beneficial Owners" means those Beneficial Owners who have given
their addresses and facsimile numbers to the Company.

         "Officer's  Certificate"  means a  certificate  signed  by the  Company
Representative.  Each  Officer's  Certificate  presented  pursuant  to the  Loan
Agreement shall state that it is being delivered pursuant to (and shall identify
the section or subsection of), and shall incorporate by reference and use in all
appropriate instances all terms defined in, the Loan Agreement.

         "Operating  Expenses"  shall  mean  all  expenditures  required  in the
operation and  maintenance of the  Improvements  including  those that result in
both current period  expenses as well as current  assets or current  liabilities
under generally accepted  accounting  principles,  and including,  the following
items, without intending to limit the generality of the foregoing:

                           (a)   expenditures   for  operation   (including  all
utilities  and fees  payable  under  management  and/or  operating  agreements),
maintenance, repair, alterations, insurance and inspection;

                           (b)  salaries  and  expenditures  for   professional,
managerial,  supervisory,  administrative,  engineering,  architectural,  legal,
financial,  auditing and consulting  services,  including the reasonable  annual
compensation and expenses of the officers and directors of the Company allocable
to the  Improvements  and including the fees of and other amounts payable to the
Trustee and the Issuer;

                           (c) all taxes or  contributions  or  payments in lieu
thereof,  assessments  and charges,  including,  without  intending to limit the
generality of the foregoing,  income, profits, sales, use, property,  franchise,
and excise taxes;

                                     - 24 -


                           (d)   obligations   under   contracts  for  supplies,
services and pensions and other employee benefits;

                           (e)  purchases  of  merchandise  and other  inventory
items; and

                           (f) rentals  payable under leases not intended by the
Company  to  evidence  the  acquisition  of capital  assets,  as  determined  in
accordance with generally accepted  accounting  principles;  provided,  however,
that rentals  payable under leases which,  under generally  accepted  accounting
principles  would be treated as evidencing  the  acquisition  of a capital asset
shall  be  includable  within  Operating  Expenses,  if  so  designated  by  the
Company,provided,  however, the term "Operating Expenses" shall not be construed
to include (i) depreciation,  (ii) amortization,  and (iii) the annual Long-Term
Debt Service Requirement.

         "Opinion  of Bond  Counsel"  means an opinion  in writing  signed by an
attorney or firm of attorneys  acceptable to the Trustee and  experienced in the
field of municipal bonds whose opinions are generally  accepted by purchasers of
municipal bonds.

         "Opinion of Counsel"  means an opinion in writing signed by an attorney
or firm of  attorneys,  acceptable  to the  Trustee,  who may be counsel for the
Company or other counsel acceptable to the Trustee.

         "Outstanding"  means,  as of any particular  time, all Bonds which have
been duly  authenticated  and  delivered  by the Trustee  under this  Indenture,
except:

                           (a) Bonds  theretofore  canceled  by the  Trustee  or
delivered to the Trustee for  cancellation  after purchase in the open market or
because of payment at or redemption prior to maturity;

                           (b) Bonds for the payment or redemption of which cash
funds (or securities to the extent  described in this Indenture) shall have been
theretofore deposited with the Trustee (whether upon or prior to the maturity or
redemption  date of any such  Bonds);  provided  that,  if such  Bonds are to be
redeemed prior to the maturity  thereof,  notice of such  redemption  shall have
been given or  arrangements  satisfactory  to the  Trustee  shall have been made
therefor,  or waiver of such notice  satisfactory  in form to the Trustee  shall
have been filed with the Trustee; and

                           (c)  Bonds in lieu of which  other  Bonds  have  been
authenticated under this Indenture.

         Bonds which do not pay  interest  currently  in  accordance  with their
terms shall be deemed to be  Outstanding  in an amount  equal to their  accreted
value at the applicable time.

                                     - 25 -


         "Parity  Indebtedness"  means  Indebtedness of the Company secured on a
parity  basis with the Bonds,  except to the extent  provided in Section 8.13 of
the Loan Agreement.

         "Permitted  Investments"  means any of the following  which at the time
are legal  investments  under the laws of the State of Oklahoma  for moneys held
under this Indenture and then proposed to be invested therein:

                           (a) Government Obligations;

                           (b) negotiable  certificates of deposit issued by, or
banker's  acceptances drawn on and accepted by, any bank, including the Trustee,
the certificate of deposit or debt obligations of which (or if such bank, is the
principal bank in a bank holding  company,  debt obligations of the bank holding
company) are rated, at the time such  certificates or acceptances are issued, in
one of the two highest Rating Categories;

                           (c) repurchase  agreements  with any U.S.  commercial
bank, or with any United States Government securities dealer, provided that such
repurchase agreements are fully secured by Government Obligations,  and provided
further  that (i) such  collateral  is held by the  Trustee or any agent  acting
solely for the Trustee during the term of such repurchase  agreement,  (ii) such
collateral  is not  subject to liens or claims of third  parties and the Trustee
has a perfected first security interest in the collateral, (iii) such collateral
has a market  value  (determined  at least once every 14 days) at least equal to
102% of the amount invested in the repurchase agreement, and (iv) the failure to
maintain such  collateral at the level  required in (iii) above will require the
Trustee to liquidate the collateral;

                           (d)  certificates  of  deposit  issued  by any  bank,
savings institution or trust company,  including the Trustee,  and time deposits
in any bank, savings institution or trust company,  including the Trustee, as to
which  principal is fully  insured by a federally  sponsored  deposit  insurance
program; and

                           (e)  guaranteed  investment  contracts  issued  by  a
provider  rated  "AA" or better or "Aa" or better by  Standard  & Poor's  Rating
Services or Moody's Investor's Services, Inc., respectively

                           (f) money market funds which are rated in the highest
Rating Category and are fully collateralized by Government Obligations.

         "Permitted  Liens"  shall have the  meaning  assigned  to it in Section
8.10(b) of the Loan Agreement.

         "Person" means an individual, association, unincorporated organization,
corporation,  partnership,  joint venture,  business trust or a government or an
agency or a political subdivision thereof, or any other entity.

                                     - 26 -


         "Pledged  Revenues"  means the  rights  to  receive  all the  receipts,
revenues,  cash and income of the Company from whatever source derived,  whether
in the form of accounts  receivable,  contract  rights,  chattel paper,  general
intangibles,  profits  and income,  or other  rights,  and the  proceeds of such
rights, whether now owned or held or hereafter coming into existence.

         "Pledged Property" means the Improvements,  the Site and the Equipment,
pledged pursuant to the Loan Agreement.

         "Principal  Guaranty"  means the Guaranty  Agreement,  executed by Mark
Vaughan, dated as of the date hereof.

         "Project"  means  collectively,   the  acquisition,   construction  and
equipping of the Company's  manufacturing  facilities  and solid waste  disposal
facilities located in Moore, Cleveland County, Oklahoma.

         "Project  Fund"  means  the  Project  Fund  created  pursuant  to  this
Indenture.

         "Property" means collectively the Improvements and the Site.

         "Property,  Plant and Equipment" means real and personal,  tangible and
intangible property owned by the Company which is property,  plant and equipment
under generally accepted accounting principles.

         "Rating  Agency" means Moody's  Investors  Service,  Inc. or Standard &
Poor's Ratings  Services,  a Division of the  McGraw-Hill  Companies,  Inc., and
their respective successors and assigns.

         "Rating  Category"  or  "Categories"   means  the  rating  category  or
categories respectively of each Rating Agency.

         "Rebate  Analyst"  means an attorney or firm of attorneys or accountant
or firm of  accountants  or other  Person  hired by the  Company  to assist  the
Company in compliance with the arbitrage  rebate  requirements of Section 4.6 of
the Loan Agreement.

         "Rebate Fund" means the Rebate Fund created in this Indenture.

         "Registered  Owner" or "Registered Owner" means the Registered Owner of
any Bonds, as shown on the registration books of the Trustee.

         "Regular  Record Date" means the  fifteenth  day of the calendar  month
prior to a regularly scheduled Interest Payment Date for the Bonds.

                                     - 27 -


         "Reserve  Fund"  means  the  Reserve  Fund  created  pursuant  to  this
Indenture.

         "Reserve Fund Credit  Enhancement"  means any letter of credit credited
to the Reserve Fund or any account  therein as provided in the Loan Agreement in
lieu of cash or Permitted Investments on deposit in the Reserve Fund.

         "Reserve Requirement" means $500,000.

         "Senior Loan" means the loan to the Company from CNL Commercial Finance
Inc., secured as of the date hereof by an interest in the Pledged Property,  and
any  Indebtedness  of the Company  incurred to pay,  discharge or refinance  the
Senior Loan.

         "Short-Term  Indebtedness"  means Indebtedness with a term of less than
one year.

         "Significant Bondholder" shall mean any one Beneficial Owner of greater
than 50% of the Beneficial Ownership Interest in Bonds then Outstanding,  and if
no one  Beneficial  Owner  owns  greater  than 50% of the  Beneficial  Ownership
Interest  in  Bonds  then  Outstanding,  then  the  provisions  relating  to the
Significant Bondholder shall not apply

         "Site"  means  the  real  property  described  as the  Site in the Loan
Agreement, less any such real property released under the provisions of the Loan
Agreement.

         "Special  Record  Date" means a special  record date fixed to determine
the names and addresses of Registered  Owners for purposes of paying interest on
a special  Interest Payment Date for the payment of defaulted  interest,  all as
further provided in this Indenture.

         "Subordinated  Debt"  means any  Indebtedness  the  payment of which is
specifically  subordinated to the payment of principal and interest on the Bonds
and evidenced by a writing which contains  provisions  substantially as provided
in the Loan  Agreement  and for which the  Company  has  received  an Opinion of
Counsel to the effect that such Indebtedness constitutes Subordinated Debt.

         "Tax Certificates"  means the certificates of the Issuer or the Company
relating to the  tax-exempt  status of the Bonds and including any amendments or
supplements thereto.

         "Transfer"  means  any act or  occurrence  the  result  of  which is to
dispossess any Person of any asset or interest therein,  including specifically,
but  without  limitation,  the  forgiveness  of any debt,  but shall not include
leases and operating contracts governed by the Loan Agreement.

         "Trust  Estate" means the property  pledged,  assigned and mortgaged to
the Trustee pursuant to the granting clauses of this Indenture.

                                     - 28 -


         "Trustee"  means  J.P.  Morgan  Trust  Company,  National  Association,
Oklahoma City, Oklahoma, as trustee, and its successors and assigns.

         "Underwriter" means Gates Capital Corporation,  New York, New York, and
its  successors  and  assigns;  provided  that any  purchaser of a Bond from the
Underwriter shall not be considered as successor or assign thereof.

         "Variable  Rate  Indebtedness"  means any portion of  Indebtedness  the
interest rate on which has not been  established  at a fixed or constant rate to
maturity.

         Section 1.2 INDENTURE TO CONSTITUTE  CONTRACT.  In consideration of the
purchase  and  acceptance  of any or all of the Bonds by those who shall own the
same from time to time, the  provisions of this  Indenture  shall be part of the
contract of the Issuer  with the owners of the Bonds,  and shall be deemed to be
and shall constitute contracts among the Issuer, the Trustee and the owners from
time to time of the Bonds. The pledge made in this Indenture and the provisions,
covenants and agreements herein set forth to be performed by or on behalf of the
Issuer shall be for the equal benefit,  protection and security of the owners of
any and all of the Bonds  except as  specifically  provided  herein.  All of the
Bonds,  regardless of the time or times of their issuance or maturity,  shall be
of equal rank without  preference,  priority or  distinction of any of the Bonds
over any other  thereof,  except as  expressly  provided  in or pursuant to this
Indenture.

                                     - 29 -


                                   ARTICLE II

                              AUTHORIZATION, TERMS,

         Section 2.1  AUTHORIZED  AMOUNT OF BONDS.  No Bonds may be issued under
this  Indenture  except in  accordance  with this Article.  The total  principal
amount of Bonds that may be issued hereunder is hereby expressly limited to, and
the amount hereby authorized to be issued shall be, $5,000,000.

         Section  2.2 ALL BONDS  EQUALLY  AND  RATABLY  SECURED BY TRUST  ESTATE
EXCEPT AS EXPRESSLY  PROVIDED  HEREIN;  LIMITED  OBLIGATION OF BONDS AND PLEDGES
SECURING  THE SAME.  All  Bonds  issued  under  this  Indenture  and at any time
Outstanding shall in all respects be equally and ratably secured hereby, without
preference,  priority or  distinction  as to date or dates or the actual time or
times of the  issue or  maturity  of the  Bonds,  so that all  Bonds at any time
issued and Outstanding  hereunder shall have the same right, lien and preference
under and by virtue of this  Indenture,  and shall all be  equally  and  ratably
secured hereby,  except as otherwise  expressly provided herein. The Bonds shall
be  limited  obligations  of the  Issuer  payable  solely  out  of the  security
specified  in this  Indenture.  The  Bonds  shall  not  constitute  or become an
indebtedness, a debt or a liability of or a charge against the general credit or
taxing power of the State of Oklahoma,  or of any county, city, city and county,
town, school district or other  subdivision of the State of Oklahoma,  or of any
other  political  subdivision  or body corporate and politic within the State of
Oklahoma  other  than  the  Issuer  (but  only to the  extent  provided  in this
Indenture)  and neither the State of Oklahoma,  nor any county,  city,  city and
county,  town,  school  district or other  subdivision of the State of Oklahoma,
except the Issuer to the extent  provided above,  shall be liable  thereon;  nor
shall the Bonds  constitute  the  giving,  pledging  or loaning of the faith and
credit of the State of Oklahoma,  or any county,  city,  city and county,  town,
school  district or other  subdivision  of the State of Oklahoma or of any other
political subdivision or body corporate and politic within the State of Oklahoma
but  shall be  payable  solely  from the funds  herein  provided  therefor.  The
issuance  of the Bonds  shall  not,  directly  or  indirectly  or  contingently,
obligate the State of Oklahoma or any  subdivision  of the State of Oklahoma nor
empower the Issuer to levy or collect any form of taxes or assessments  therefor
or to create any  indebtedness  payable out of taxes or  assessments or make any
appropriation for their payment,  and such  appropriation or levy is prohibited.
Nothing in the Act shall be construed  to authorize  the Issuer to create a debt
of the State of Oklahoma  within the meaning of the  Constitution or statutes of
the State of  Oklahoma  or  authorize  the  Issuer to levy or  collect  taxes or
assessments.  Neither  the  members of the Issuer nor any person  executing  the
Bonds  shall be liable  personally  on the Bonds or be subject  to any  personal
liability  or  accountability  by reason of the issuance  thereof.  The State of
Oklahoma  shall not in any event be liable for the payment of the  principal of,
premium,  if any, or interest on the Bonds or for the performance of any pledge,
mortgage,  obligation  or agreement  of any kind  whatsoever  undertaken  by the
Issuer.  No breach of any such pledge,  mortgage,  obligation or agreement shall
impose any pecuniary liability upon the State of Oklahoma or any charge upon its
general credit or against its taxing power.

                                     - 30 -


         Section 2.3  AUTHORIZATION OF BONDS.  There is hereby  authorized to be
issued  hereunder  and  secured  hereby  an issue of  bonds,  designated  as the
"Cleveland  County Industrial  Authority  Industrial  Development  Revenue Bonds
(Vaughan Foods,  Inc Project) Series 2004." They shall be issuable only as fully
registered bonds in the minimum denomination of $100,000 plus integral multiples
of $5,000 in excess  thereof.  The Bonds shall be  separately  lettered  "R" and
shall be numbered separately from 1 upward.

                  The  Bonds  shall  be  dated  as of  their  date  of  original
issuance,  and shall  mature  serially  on  December 1 in each of the  principal
amounts and years,  and shall bear interest  payable  semiannually on June 1 and
December 1,  commencing  June 1, 2005,  at the interest rate per annum set forth
below:

                Maturity             Principal          Interest Rate
              (December 1)            Amount             (Per Annum)
              ------------            -------            -----------

                  2012              $2,635,000              6.750%
                  2024              $2,365,000              7.100%



         Notwithstanding the foregoing, in the event that (i) the Long-Term Debt
Service  Coverage  Ratio of the Company  reported to the Trustee  under  Section
8.16(a)  of the Loan  Agreement  shall be less  than  1.50 to 1.00,  or (ii) the
Current  Ratio  reported  to the  Trustee  under  Section  8.12(b)  of the  Loan
Agreement  above shall be less than less than 1.10 to 1.00, or (iii) the Debt to
Equity Ratio reported to the Trustee under Section 8.12(c) of the Loan Agreement
shall to be more than 4.00 to 1.00, the failure to satisfy any such  requirement
shall not result in an Event of Default  hereunder.  Unless  the  Company  shall
notify the Trustee  within  thirty days  following the date of any such reported
failure that the Company is then in  compliance  with each of such  ratios,  the
interest rate on each of the Bonds shall increase one percent (100 basis points)
as of the end of such  thirty-day  period,  until  the  date the  Company  shall
certify to the Trustee that each of such requirements has been satisfied.

         Interest  shall be computed on the basis of a 360-day year  composed of
twelve  30-day  months,  payable  semiannually  on June 1 and December 1 of each
year,  with the first interest  payment to be made on June 1, 2005,  except that
Bonds which are reissued upon transfer, exchange or other replacement shall bear
interest from the most recent  Interest  Payment Date to which interest has been
paid, or if no interest has been paid, from the date of the Bonds.

         The Bonds shall be originally  issued in Book Entry Form,  and shall be
registered  in the  name of  Cede & Co.,  as  nominee  of The  Depository  Trust
Company.  While the Bonds are held in Book Entry  Form,  (i) such Bonds shall be
registered in the name of the  Depository  or its nominee,  as  Bondholder,  and
immobilized in the custody of the Depository; (ii) unless otherwise requested by
the Depository, there shall be a single Bond certificate for each Bond maturity;
and

                                     - 31 -


(iii) such Bonds shall not be transferable or exchangeable,  except for transfer
to another Depository or another nominee of a Depository, without further action
by the  Issuer.  While the Bonds are in Book  Entry  Form,  Bonds in the form of
physical certificates shall only be delivered to the Depository.

                  So long as a book entry system is in effect for the Bonds, the
Issuer and Trustee shall recognize and treat the Depository,  or its nominee, as
the Holder of the Bonds for all  purposes,  including  payment of debt  service,
giving of notices,  and  enforcement  of remedies.  The crediting of payments of
debt   service  on  the  Bonds  and  the   transmittal   of  notices  and  other
communications  by the Depository to the Direct  Participant in whose Depository
account the Bonds are  recorded and such  crediting  and  transmittal  by Direct
Participants  to  Indirect  Participants  or  Beneficial  Owners and by Indirect
Participants  to Beneficial  Owners are the respective  responsibilities  of the
Depository and the Direct Participants and the Indirect Participants and are not
the  responsibility of the Issuer or the Trustee;  provided,  however,  that the
Issuer and the Trustee  understand  that neither the  Depository nor its nominee
shall provide any consent  requested of the Registered  Owners of Bonds pursuant
to this Indenture, and that the Depository will mail an omnibus proxy (including
a list  identifying  the Direct  Participants)  to the Issuer which  assigns the
Depository's,  or its  nominee's,  voting rights to the Direct  Participants  to
whose  account at the  Depository  the Bonds are credited (as of the record date
for mailing of requests for such consents).  Upon receipt of such omnibus proxy,
the Issuer  shall  promptly  provide  such  omnibus  proxy  (including  the list
identifying the Direct Participants  attached thereto) to the Trustee, who shall
then  treat  such  owners as  Registered  Owners of the  Bonds for  purposes  of
obtaining any consents pursuant to the terms of this Indenture.

                  As  long  as  the  Bonds  are  registered  in  the  name  of a
Depository,  or its  nominee,  the  Trustee  agrees to comply with the terms and
provisions  of the Letter of  Representations  including  the  provisions of the
Letter of  Representations  with  respect  to any  delivery  of the Bonds to the
Trustee shall supersede the provisions of this Indenture with respect thereto.

                  If  any  Depository  determines  not to  continue  to act as a
Depository for the Bonds held in a book entry system,  the Issuer may attempt to
have established a securities  depository/book  entry system  relationship  with
another Depository under this Indenture.  If the Issuer does not or is unable to
do so, the Issuer and the  Trustee,  after the  Trustee has made  provision  for
notification  of the  Beneficial  Owners  by  appropriate  notice  to  the  then
Depository,  shall permit  withdrawal of the Bonds from the Depository and shall
authenticate  and deliver Bonds  certificates  in fully  registered  form to the
assignees  of the  Depository  or its  nominee or to the  Beneficial  Owners.  A
majority of the  Beneficial  Owners also may request that the Bonds be withdrawn
from  the  Depository  and that  the  Trustee  authenticate  and  deliver  Bonds
certificates in fully registered form to the Beneficial Owners. Such withdrawal,
authentication and delivery shall be at the cost and expense (including costs of
printing or otherwise  preparing and delivering such  replacement  Bonds) of the
Company.  Such replacement Bonds shall be in the denominations  specified in the
first paragraph of this Section 2.3.

                                     - 32 -


                  NEITHER THE ISSUER,  THE COMPANY NOR THE TRUSTEE WILL HAVE ANY
RESPONSIBILITY OR OBLIGATION TO ANY DIRECT PARTICIPANT,  INDIRECT PARTICIPANT OR
ANY BENEFICIAL OWNER OR ANY OTHER PERSON NOT SHOWN ON THE REGISTRATION  BOOKS OF
THE TRUSTEE AS BEING A HOLDER WITH  RESPECT TO: (1) THE BONDS;  (2) THE ACCURACY
OF  ANY  RECORDS  MAINTAINED  BY  DTC  OR ANY  DIRECT  PARTICIPANT  OR  INDIRECT
PARTICIPANT; (3) THE TIMELY OR ULTIMATE PAYMENT BY DTC OR ANY DIRECT PARTICIPANT
OR INDIRECT  PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF
THE PRINCIPAL OR REDEMPTION  PRICE OF OR INTEREST ON THE BONDS; (4) THE DELIVERY
BY  ANY  DIRECT  PARTICIPANT  OR  INDIRECT  PARTICIPANT  OF  ANY  NOTICE  TO ANY
BENEFICIAL  OWNER  WHICH  IS  REQUIRED  OR  PERMITTED  UNDER  THE  TERMS OF THIS
INDENTURE TO BE GIVEN TO REGISTERED  OWNERS; (5) THE SELECTION OF THE BENEFICIAL
OWNERS TO RECEIVE  PAYMENT IN THE EVENT OF ANY PARTIAL  REDEMPTION OF THE BONDS;
OR (6) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS HOLDER.

                  Proceeds  of the Bonds  shall be  applied as  provided  in the
Indenture and the Loan Agreement.

                  The  principal of and  premium,  if any, on the Bonds shall be
payable at the principal corporate trust office of the Trustee currently located
in Oklahoma City, Oklahoma, or at the principal office of its successor in trust
upon  presentation  and surrender of the Bonds.  Payment of interest on any Bond
shall be made to the  Registered  Owner  thereof by check or draft mailed on the
Interest  Payment Date by the Trustee to the Registered  Owner at his address as
it last  appears on the  registration  books kept by the Trustee at the close of
business on the Regular Record Date for such Interest Payment Date, but any such
interest  not so timely paid or duly  provided  for shall cease to be payable to
the Registered Owner thereof at the close of business on the Regular Record Date
and shall be payable to the Registered Owner thereof at the close of business on
a Special  Record  Date for the  payment of any such  defaulted  interest.  Such
Special  Record  Date  shall be  fixed by the  Trustee  whenever  monies  become
available  for payment of the  defaulted  interest,  and notice of such  Special
Record Date shall be given to the  Registered  owners of the Bonds not less than
10 days prior thereto by first-class mail to each such Registered owner as shown
on the Trustee's registration books on the date selected by the Trustee, stating
the date of the  Special  Record Date and the date fixed for the payment of such
defaulted  interest.  Notwithstanding  the  foregoing,  at the  written  request
addressed to the Trustee of any  Bondholder of at least  $1,000,000 in aggregate
principal  amount of the  Bonds,  payments  of  principal  at  maturity  or upon
redemption  and  payments of interest  may be paid by wire  transfer  within the
United States to the bank account  number filed no later than the Regular Record
Date with the Trustee for such purpose.  All payments on the Bonds shall be made
in lawful money of the United States of America upon  collection of  immediately
available funds.

                                     - 33 -


                  The Bonds are subject to prior redemption as herein set forth.
The Bonds shall be substantially in the form and tenor hereinabove  recited with
such  appropriate  variations,  omissions  and  insertions  as are  permitted or
required by this Indenture.

                  Notwithstanding anything herein to the contrary, when any Bond
is  registered  in the name of a Depository  or its nominee,  the  principal and
redemption  price of and  interest  on such Bond shall be payable in same day or
federal funds delivered or transmitted to the Depository or its nominee.

         Section 2.4 EXECUTION OF BONDS. The Bonds shall be executed in the name
and on  behalf  of the  Issuer,  by the  manual or  facsimile  signature  of the
Chairman of the Issuer,  and its corporate seal or a facsimile  thereof shall be
thereunto  affixed,  imprinted,  engraved or  otherwise  reproduced  thereon and
attested by the manual or facsimile signature of the Secretary.  Any Bond may be
signed (manually or by facsimile), sealed or attested on behalf of the Issuer by
any  person  who,  at the  date of such  act,  shall  hold  the  proper  office,
notwithstanding that at the date of authentication,  issuance or delivery,  such
person may have ceased to hold such office.

         Section 2.5  REGISTRATION,  TRANSFER  AND  EXCHANGE  OF BONDS,  PERSONS
TREATED AS OWNER.  The Issuer shall cause books for the registration and for the
transfer of the Bonds as provided  in this  Indenture  to be kept by the Trustee
which is hereby  appointed  the  transfer  agent of the  Issuer  for the  Bonds.
Notwithstanding  such appointment,  the Trustee is hereby authorized to make any
arrangements  with other  institutions  that it deems  necessary or desirable in
order that such  institutions  may perform the duties of transfer  agent for the
Bonds.  Subject to the  provisions  of Section 2.03 hereof,  upon  surrender for
transfer of any Bond at the  designated  corporate  trust office of the Trustee,
duly endorsed for transfer or accompanied by an assignment  duly executed by the
Registered  Owner or his attorney duly  authorized in writing,  the Issuer shall
execute  and the  Trustee  shall  authenticate  and  deliver  in the name of the
transferee  or  transferees  a new  fully  registered  Bond or Bonds  for a like
aggregate principal amount of the same maturity.

                  Bonds  may be  exchanged  at the  designated  corporate  trust
office of the Trustee for a like aggregate  principal amount of fully registered
Bonds of the same maturity in authorized  denominations,  which shall be no less
than $100,000.  The Issuer shall execute and the Trustee shall  authenticate and
deliver Bonds which the  Bondholder  making the exchange is entitled to receive,
bearing numbers not contemporaneously  Outstanding.  The execution by the Issuer
of any fully registered Bond of any  denomination  shall constitute full and due
authorization  of such  denomination and the Trustee shall thereby be authorized
to authenticate and deliver such fully registered Bond.

                  The Trustee  shall not be required to transfer or exchange any
Bond during the period from the Regular  Record Date next  preceding the mailing
of notice of redemption as herein  provided.  After the giving of such notice of
redemption,  the Trustee shall not be required to transfer or exchange any Bond,
which Bond or portion thereof has been called for redemption.

                                     - 34 -


                  Payment  of  either   principal   or  interest  on  any  fully
registered  Bond  shall  be made  only  to or  upon  the  written  order  of the
Registered Owner thereof or his legal representative, on the Regular Record Date
or the Special Record Date but such  registration  may be changed as hereinabove
provided.  All such  payments  shall be valid  and  effectual  to  satisfy,  and
discharge the liability upon such Bond to the extent of the sum or sums paid. As
to any Bond, for all other purposes and on any other date, the Registered  Owner
shall be regarded as the absolute owner hereof.

                  The  Trustee  shall  require  the  payment  by any  Bondholder
requesting exchange or transfer of any tax or other governmental charge required
to be paid with respect to such exchange or transfer.  The Company shall,  under
the Loan Agreement,  be liable to pay all expenses and charges of the Issuer and
of the Trustee in connection with such exchange or transfer.

         Section 2.6 LOST,  STOLEN,  DESTROYED AND MUTILATED BONDS. Upon receipt
by the Issuer and the Trustee of evidence  satisfactory to them of the ownership
of and the loss,  theft,  destruction or mutilation of any Bond and, in the case
of a lost, stolen or destroyed Bond, of indemnity satisfactory to them. and upon
surrender  and  cancellation  of the Bond,  if  mutilated,  (i) the Issuer shall
execute,  and the Trustee shall authenticate and deliver, a new Bond of the same
maturity,  series and  denomination in lieu of such lost,  stolen,  destroyed or
mutilated Bond or (ii) if such lost,  stolen,  destroyed or mutilated Bond shall
have  matured  or have been  called for  redemption,  in lieu of  executing  and
delivering a new Bond as aforesaid,  the Issuer may pay such Bond.  Any such new
Bond shall bear a number not  contemporaneously  Outstanding.  The applicant for
any such new Bond may be required to pay all  expenses and charges of the Issuer
and of the Trustee in connection with the issuance of such Bond. All Bonds shall
be held and owned upon the express  condition  that, to the extent  permitted by
law, the foregoing  conditions are exclusive with respect to the replacement and
payment of mutilated, destroyed, lost or stolen bonds, negotiable instruments or
other securities.

         Section 2.7 DELIVERY OF BONDS.  Upon the execution and delivery of this
Indenture,  the Issuer shall  execute and deliver to the Trustee and the Trustee
shall  authenticate the Bonds and deliver them to the initial purchasers thereof
as directed by the Issuer and as hereinafter in this Section provided.

                  Prior to the delivery by the Trustee of any of the Bonds,  all
conditions  precedent to the disbursal of proceeds of the Bonds from the Project
Fund, as specified in Section 3.9 hereof, shall have been satisfied or waived by
the  holders  of 100% of the  Bonds,  and there  shall  have been  filed with or
delivered to the Trustee the following:

                           (a)  a   resolution   duly  adopted  by  the  Issuer,
certified by the Secretary thereof, authorizing the financing of the Cost of the
Project, the execution and delivery of the Loan Agreement and this Indenture and
the issuance of the Bonds;

                                     - 35 -


                           (b) a duly executed copy of this Indenture;

                           (c) a duly executed copy of the Loan Agreement;

                           (d) a duly executed copy of the Assignment;

                           (e) a duly executed  copy of the Principal  Guaranty;
and

                           (f)  the  written  order  of  the  Issuer  as to  the
delivery of the Bonds signed by an Issuer Representative.

                           (g) a  duly  executed  copy  of the  application  for
key-man life insurance in the amount of $1,000,000 on the life of Mark Vaughan.

         Section  2.8  TRUSTEE'S  AUTHENTICATION   CERTIFICATE.   The  Trustee's
authentication certificate upon the Bonds shall be substantially in the form and
tenor hereinbefore  provided. No Bond shall be secured hereby or entitled to the
benefit  hereof,  or shall be valid or  obligatory  for any purpose,  unless the
certificate  of  authentication,  substantially  in such  form,  has  been  duly
executed by the Trustee; and such certificate of the Trustee upon any Bond shall
be conclusive  evidence and the only competent  evidence that such Bond has been
authenticated   and   delivered   hereunder.   The  Trustee's   certificate   of
authentication  shall be deemed to have been  duly  executed  by it if  manually
signed by an  authorized  officer of the Trustee,  but it shall not be necessary
that the same person sign the signed certificate of authentication on all of the
Bonds issued hereunder.

         Section  2.9  CANCELLATION  AND  DESTRUCTION  OF BONDS BY THE  TRUSTEE.
Whenever  any  Outstanding  Bonds  shall be  delivered  to the  Trustee  for the
cancellation  thereof pursuant to this Indenture,  upon payment of the principal
amount or interest  represented  thereby, or for replacement pursuant to Section
2.6 hereof such Bonds shall be promptly  canceled  and  destroyed by the Trustee
and  counterparts of a certificate of destruction  evidencing  such  destruction
shall be furnished by the Trustee to the Issuer and the Company.

         Section 2.10  TEMPORARY  BONDS.  Pending the  preparation of definitive
Bonds,  the Issuer may execute and the Trustee  shall  authenticate  and deliver
temporary  Bonds.  Temporary Bonds shall be issuable as fully  registered  Bonds
without  coupons,  of any  denomination,  and  substantially  in the form of the
definitive  Bonds but with such  omissions,  insertions and variations as may be
appropriate for temporary Bonds,  all as may be determined by the Issuer.  Every
temporary  Bond shall be  executed  by the Issuer  and be  authenticated  by the
Trustee upon the same conditions and in substantially the same manner,  and with
like effect,  as the definitive  Bonds.  As promptly as  practicable  the Issuer
shall execute and shall furnish  definitive Bonds and thereupon  temporary Bonds
may be surrendered in exchange  therefor at the principal  office of the Trustee
and the Trustee shall  authenticate  and deliver in exchange for such  temporary

                                     - 36 -


Bonds a like aggregate  principal amount of definitive Bonds. Until so exchanged
the temporary  Bonds shall be entitled to the same benefits under this Indenture
as definitive Bonds.

         Section  2.11  TRANSFER  RESTRICTIONS.  Upon a transfer of a Beneficial
Ownership  Interest  in a  Series  2003  Bond  (other  than  a  transfer  by the
Underwriter  pursuant  to the  initial  sale of the  Series  2003  Bonds),  each
purchaser  of  such  Beneficial  Ownership  Interest  shall  be  deemed  to have
certified  to the  Trustee  and  acknowledged,  represented  and agreed with the
Company and the  Underwriter  that such  purchaser is acquiring the Bond for its
own account,  and that it is (i) a "qualified  institutional  buyer"  within the
meaning of Rule 144A  promulgated  under the Securities Act of 1933, as amended,
or (ii) an  institutional  "accredited  investor," as defined in Rule 501(a)(1),
(2),  (3),  or (7) of the  Securities  Act of 1933,  as amended.  The  foregoing
transfer  restrictions  shall  not  apply  if (i) the  Trustee  has  received  a
municipal bond  insurance  policy or other form of credit  enhancement  securing
payment  of  principal  and  interest  on the  Bonds,  provided  that the policy
provider or credit enhancer is rated in one of the three highest categories by a
Rating Agency and such  insurance  policy or credit  enhancement  has a term not
less than the final maturity of the Bonds (or, if shorter,  may be drawn upon in
full upon its  expiration),  or (ii) a Rating  Agency has  assigned  the Bonds a
rating of at least  "Baa3"  or "BBB,"  without  any form of third  party  credit
enhancement.  A legend shall be printed on the face of each Bond  indicating the
foregoing.

                                     - 37 -


                                   ARTICLE III

                               REVENUES AND FUNDS

         Section 3.1 PLEDGE OF TRUST  ESTATE.  Subject only to the rights of the
Issuer to apply  amounts  under the  provisions of this Article III, a pledge of
the Trust Estate to the extent  provided  herein is hereby made, and the same is
pledged to secure the payment of the principal of, premium, if any, and interest
on the  Bonds.  The  Issuer  hereby  covenants  that it has not,  as of the date
hereof,  granted  and shall not grant any  pledge on the Trust  Estate  which is
prior to the pledge in favor of the Bonds. The pledge hereby made shall be valid
and binding  from and after the time of the delivery by the Trustee of the first
Bond  authenticated and delivered under this Indenture.  The security so pledged
and then or thereafter  received by the Issuer shall  immediately  be subject to
the lien of such pledge and the obligation to perform the contractual provisions
hereby  made  shall  have  priority  over  any  or  all  other  obligations  and
liabilities  of the  Issuer,  and the lien of such  pledge  shall  be valid  and
binding as against all parties  having  claims of any kind in tort,  contract or
otherwise  against the Issuer  irrespective  of whether such parties have notice
thereof.

         Section 3.2  ESTABLISHMENT  OF FUNDS AND  ACCOUNTS.  The Issuer  hereby
establishes  and  creates  the  following  Funds for the  Bonds  and may  create
accounts  within  such  Funds,  all of which  shall be special  trust  funds and
accounts held by the Trustee:

                           (a) Bond Principal Fund;

                           (b) Bond Interest Fund;

                           (c) Reserve Fund;

                           (d) Project Fund;

                           (e) Cost of Issuance Fund; and

                           (f) Rebate Fund.

         Section 3.3 PAYMENTS INTO THE BOND PRINCIPAL FUND AND THE BOND INTEREST
FUND. There shall be deposited into the Bond Interest Fund all accrued interest,
if any. In addition,  there shall be deposited  into the Bond  Principal Fund or
the  Bond  Interest  Fund,  as  appropriate,  and as and when  received  (i) all
required  Monthly  Payments  pursuant  to the Loan  Agreement,  (ii) all  moneys
transferred  to the Bond  Interest  Fund and the Bond  Principal  Fund  from the
Project Fund pursuant to this  Indenture,  (iii) all moneys  transferred  to the
Bond Interest Fund and the Bond Principal Fund from the Reserve Fund pursuant to
this Indenture, (iv) all other moneys required

                                     - 38 -


or permitted to be deposited  into the Bond Principal Fund or Bond Interest Fund
pursuant to the Loan Agreement or this  Indenture,  including any supplements to
the Indenture, and (v) all other moneys received by the Trustee when accompanied
by directions  not  inconsistent  with the Loan  Agreement or the Indenture that
such moneys are to be paid into the Bond  Principal  Fund or Bond Interest Fund.
There shall also be retained in the Bond  Principal Fund and Bond Interest Fund,
interest and other income received on investment of moneys in the Bond Principal
Fund and Bond Interest Fund to the extent provided in Section 6.3 hereof.

         Section 3.4  USE OF  MONIES  IN THE  BOND  PRINCIPAL  FUND AND THE BOND
INTEREST FUND.  Except as provided in this Section and in Sections  3.11,  3.16,
6.3 and 8.5 hereof,  monies in the Bond  Principal Fund shall be used solely for
the payment of the principal of and premium, if any, on the Bonds, and monies in
the Bond  Interest  Fund shall be used solely for the payment of the interest on
the Bonds.  Whenever  the total amount in the Bond  Principal  Fund and the Bond
Interest Fund is sufficient  to redeem all of the Bonds  Outstanding  and to pay
interest to accrue thereon prior to such redemption,  and redemption premium, if
any, the Issuer, subject to the requirements of the Loan Agreement, covenants to
take and cause to be taken the necessary steps to redeem all of the Bonds on the
redemption date for which the required redemption notice has been given.

         Section 3.5  CUSTODY OF THE BOND PRINCIPAL  FUND AND THE BOND  INTEREST
FUND. The Bond Principal Fund and the Bond Interest Fund shall be in the custody
of the  Trustee  but in the name of the Issuer,  and the Issuer  authorizes  and
directs the Trustee to withdraw sufficient funds from the Bond Principal Fund to
pay the  principal of and  premium,  if any, on the Bonds as the same become due
and payable, and to withdraw sufficient funds from the Bond Interest Fund to pay
the  interest  on the  Bonds  as the same  becomes  due and  payable  or to make
transfers to the Rebate Fund pursuant to Section 3.16 hereof.

         Section 3.6  PAYMENTS INTO THE RESERVE  FUND.  There shall be deposited
into the Reserve Fund $500,000 of proceeds of the Bonds.

                  There shall also be  deposited  into the Reserve  Fund (i) all
moneys  required to be deposited  therein  pursuant to the Loan Agreement or the
Indenture, and (ii) all other moneys received by the Trustee when accompanied by
directions not inconsistent  with the Loan Agreement or this Indenture that such
moneys are to be paid into such account.

                  Income from  investment  of the Reserve Fund shall be retained
in the Reserve Fund to the extent  described in Section 6.3 hereof.  Anything in
this Indenture to the contrary notwithstanding, moneys on deposit in the Reserve
Fund shall be invested so as not to be in  violation  of the yield  restrictions
set forth in the Tax Certificates.  Permitted  Investments relating to moneys in
the Reserve  Fund shall be valued by the Trustee in the manner  contemplated  in
the Indenture.  If any such  valuation  reveals that the value of such Permitted
Investments is less than the Reserve  Requirement with respect to the Bonds then
Outstanding,  the Trustee shall immediately notify the Company and the Issuer of
the amount of the difference between the

                                     - 39 -


amount derived by such valuation and the Reserve  Requirement,  which difference
shall be  deposited  by the Company in the Reserve  Fund by making the  deposits
required by the Loan Agreement.

         Section 3.7  USE OF MONEYS IN THE RESERVE FUND. Except as required with
respect to Section 3.16 hereof,  moneys in the Reserve Fund shall be used solely
for the payment of the principal of, premium,  if any, and interest on the Bonds
in the  event  moneys  in the Bond  Principal  Fund and Bond  Interest  Fund are
insufficient  to make such  payments  when due,  whether on an Interest  Payment
Date, redemption date, sinking fund redemption date, maturity date or otherwise.
Notwithstanding  the  foregoing,  in  the  event  that  the  Initial  Bondholder
beneficially owns 100% of the Bonds, the Trustee shall apply monies  transferred
from the Debt Service Reserve Fund by the Trustee to satisfy unpaid installments
of interest or principal  due under the Bonds (i) first to the  satisfaction  of
unpaid  installments of interest and then principal due under the bonds maturing
December 1, 2012,  and then, to the extent monies remain  thereafter  available,
(ii) to the  satisfaction of unpaid  installments of interest and then principal
due under the Bonds maturing December 1, 2024.

                  (a) Upon the occurrence of an Event of Default hereunder,  any
moneys in the Reserve Fund shall be  transferred  by the Trustee,  but only upon
the direction of a Significant  Bondholder to the Bond Interest  Fund,  and with
respect to any moneys in excess of the amount  required to be transferred to the
Bond Interest Fund, to the Bond  Principal  Fund and applied in accordance  with
this Indenture,  provided,  however,  that the amounts on deposit in the Reserve
Fund  shall be used to pay only the  respective  series  of Bonds  for which the
Issuer  has  determined  that a deposit  to the  Reserve  Fund  shall be made in
accordance with this Indenture.

                  (b) Any  moneys  in the  Reserve  Fund  may be used to pay the
principal of and interest on such Bonds on the final maturity date.

                  (c) In the event of the redemption of the Bonds in whole,  any
moneys in the Reserve Fund shall be  transferred  to the Bond Principal Fund and
applied to the payment of the principal of and premium, if any, on such Bonds.

         Section 3.8 CUSTODY OF THE RESERVE  FUND.  The Reserve Fund shall be in
the custody of the Trustee but for the benefit of the Bondholders and the Issuer
hereby authorizes and directs the Trustee to withdraw  sufficient funds from the
Reserve Fund to pay the principal of, premium, if any, and interest on the Bonds
and for the purpose  described in Section 3.16 hereof,  which  authorization and
direction the Trustee hereby accepts.

         Section 3.9 PROJECT  FUND.  The proceeds of the Bonds,  after  required
deposits to the Reserve Fund and the Cost of Issuance  Fund,  shall be deposited
in the Project Fund.  In addition,  there shall be deposited in the Project Fund
any moneys  required  to be  transferred  to the  Project

                                     - 40 -


Fund  pursuant to the  investment  provisions of this  Indenture,  and all other
moneys the Company may make available in its discretion to pay the reasonable or
necessary  costs  incidental to the  acquisition,  construction,  improvement or
equipping of the Facilities and all other  necessary and incidental  expenses in
connection with the foregoing.

                  The  Trustee   shall  keep  and  maintain   adequate   records
pertaining to the Project Fund, and all payments therefrom,  which shall be open
to inspection by the Company,  Registered  Owners of the Bonds,  the  Beneficial
Owners or their duly  authorized  agents  during  normal  business  hours of the
Trustee. After the Completion Date, the Trustee shall file a statement of income
and disbursements with respect to the Project Fund with the Company.  Any moneys
then  remaining in the Project Fund shall be  transferred  to the Bond Principal
Fund or Bond Interest Fund and used, at the option and written  direction of the
Company,  (i) to redeem Bonds on the next  succeeding  Interest  Payment Date on
which  the  Bonds  shall  be  subject  to  redemption,  or (ii) to  provide  for
additional solid waste disposal or manufacturing improvements to the Facilities.

                  At or prior to the  initial  disbursement  of  proceeds of the
Series 2004 Bonds from the Project Fund hereof,  the Company  shall  deliver the
following to the Trustee:

                           (a)  a  detailed   estimate   of  the  costs  of  the
Facilities,  indicating  the gross  costs,  including  all hard and soft  costs,
including,  without limitation,  all equipment to be acquired,  showing that the
moneys in the Project Fund,  together with the Company's  reasonable estimate of
the investment earnings to be deposited therein, are sufficient to pay all costs
of completing the  Facilities,  certified by the Company  Representative  to the
best of his or her knowledge and belief, upon due inquiry, to be correct;

                           (b) a  satisfactory  commitment for an ALTA policy of
mortgagee's  title insurance with liability not less than the maximum  principal
amount  of the  Outstanding  Bonds,  showing  the Loan  Agreement  to be a valid
second, junior and inferior lien on the Property subject only to Permitted Liens
in such form,  containing only such exceptions and containing such  endorsements
as are  satisfactory  to the  Trustee.  The expense of such policy  endorsements
shall be borne by the Company;

                           (c) a property survey on the Site;

                           (d) appraisal of the Property;

                           (e) certificates satisfactorily evidencing continuing
compliance with the insurance requirement of the Loan Agreement;

                           (f) Phase One Environmental Survey of the Site; and

                                     - 41 -


                           (g) such  other  certificates  of the  Trustee or the
Company as may  reasonably  be required by Bond  Counsel to evidence  compliance
with the terms of this Indenture.

                           (h) a copy of Mark Vaughan's application from Key-Man
Life Insurance and a copy of the policy when it becomes available,  but no later
than ninety days after delivery of the Bonds.

                  Delivery of any of the  foregoing may be waived by the holders
of 100% of the Bonds.

                  Upon the occurrence of an Event of Default under the Indenture
and the exercise by the Trustee of the remedies  specified in the Loan Agreement
and the  Indenture,  any moneys in the Project Fund shall be  transferred by the
Trustee to the Bond Interest Fund and thereafter,  with respect to any moneys in
excess of the amount required to pay interest on the Bonds, to the Reserve Fund,
and, with respect to any moneys in excess of the Reserve Requirement to the Bond
Principal Fund, and applied in accordance with the Indenture.

         Section 3.10  CUSTODY OF THE PROJECT FUND. The Project Fund shall be in
the  custody  of the  Trustee  but in the  name of the  Issuer,  and the  Issuer
authorizes  and  directs  the  Trustee,   on  the  requisition  of  the  Company
Representative,  to withdraw  sufficient  funds from the Project Fund to pay the
Cost of the Project,  and without such requisition to make required transfers to
the Rebate  Fund  pursuant  to Section  3.16  hereof,  which  authorization  and
direction the Trustee hereby accepts.

         Section 3.11  NONPRESENTMENT OF BONDS. In the event any Bonds shall not
be  presented  for payment when the  principal  thereof  becomes due,  either at
maturity,  the date fixed for  redemption  thereof,  or otherwise,  if collected
funds  sufficient for the payment  thereof shall have been deposited in the Bond
Principal  Fund and the Bond  Interest Fund or otherwise  made  available to the
Trustee for deposit therein,  all liability of the Issuer to the owner or owners
thereof for the payment of such Bonds shall  forthwith  cease,  terminate and be
completely discharged, and thereupon it shall be the duty of the Trustee to hold
such fund or funds in a separate  trust  account for the benefit of the owner or
owners of such Bonds,  who shall  thereafter be restricted  exclusively  to such
fund or funds for any claim of whatever  nature on his,  her or their part under
this  Indenture  with respect to said Bond or on, or with respect to, said Bond.
The  Trustee  shall be under no  obligation  to, and shall not be  required  to,
invest  such  funds  pending  payment  of the  Bonds.  If any Bond  shall not be
presented  for payment  within the period of five years  following the date when
such Bond  becomes  due,  whether by maturity or  otherwise,  the Trustee  shall
return to the Company the funds theretofore held by it for payment of such Bond,
and such Bond  shall,  subject  to the  defense  of any  applicable  statute  of
limitation, thereafter be an unsecured obligation of the Company.

                                     - 42 -


         Section 3.12   MONIES TO BE HELD IN TRUST.  All monies  required  to be
deposited  with or paid to the Trustee  under any  provision  of this  Indenture
shall  be held by the  Trustee  in  trust  for the  purposes  specified  in this
Indenture and,  except for monies  deposited with or paid to the Trustee for the
redemption  of Bonds for which the  notice of  redemption  has been duly  given,
shall,  while held by the Trustee,  constitute  part of the Trust Estate  (other
than the  Rebate  Fund) and be subject  to the lien  hereof  and not  subject to
attachment  or any other lien by any other  creditor in the event of  bankruptcy
nor available for general operations of the Company in the event of bankruptcy.

         Section 3.13  REPAYMENT  FROM THE FUNDS.  Any amounts  remaining in the
Funds after  payment in full of the Bonds (or making  provision for such payment
in accordance  with Article VII), the fees and expenses of the Trustee,  and all
other amounts  required to be paid hereunder and under the Loan Agreement to the
Issuer and all other  amounts  required to be paid  hereunder and under the Loan
Agreement shall, upon the expiration of the term of the Loan Agreement,  be paid
as the Company Representative shall direct in writing.

         Section 3.14 CREATION OF ADDITIONAL ACCOUNTS AND SUBACCOUNTS; TRANSFERS
OF MONIES  AMONG  FUNDS.  The Trustee  may,  and at the  written  request of the
Company  Representative and the Issuer, shall establish such additional accounts
within any of the Funds established under this Indenture, and subaccounts within
any of the accounts  established under this Indenture,  as shall be specified in
such written request,  for the purpose of identifying more precisely the sources
of payments into and  disbursements  from such Funds,  accounts and subaccounts;
but the  establishment of any such additional  accounts or subaccounts shall not
alter or modify any of the  requirements  of this  Indenture with respect to the
deposit or use of the monies in any Fund established hereunder.

         Section 3.15  REBATE FUND. There is hereby created and established with
the Trustee for the benefit of the United States of America a Rebate Fund in the
name of the Issuer  which shall be expended in  accordance  with the  provisions
hereof,  the Tax  Certificates.  The Company shall be responsible for making all
such deposits to the Rebate Fund as required in the Tax Certificates and Section
5.1(g) of the Loan  Agreement.  The Trustee  shall invest the Rebate Fund at the
written direction (or by oral instruction  promptly confirmed in writing) of the
Company   Representative   and  shall  deposit  income  from  said   investments
immediately upon receipt thereof in the Rebate Fund. For purposes of determining
rebate  calculations  that may be required with respect thereto  pursuant to the
Tax Certificates,  the Company may employ, at its own expense, a Rebate Analyst.
The Tax  Certificates  may be  superseded  or  amended by a  certificate  of the
Company, accompanied by an Opinion of Bond Counsel addressed to, the Company and
the  Trustee  to the  effect  that  the use of said  new  certificate  will  not
adversely affect the exclusion of interest on the Bonds from gross income of the
recipients thereof for purposes of federal income taxation.

         Section 3.16 REBATE DEPOSITS. The Trustee shall make the rebate deposit
described in the Tax  Certificates  based upon the written  instructions  of the
Company  Representative.  If a

                                     - 43 -


withdrawal  from the Rebate Fund is  permitted  as a result of such  computation
because no rebate  payments are required to be made, the amount  withdrawn shall
be deposited in the Bond Principal Fund in accordance with written  instructions
furnished to the Trustee.  Record of the determinations required by this Section
must be retained by the Company  Representative  and the Trustee until six years
after the final retirement of the Bonds.

                  If the monies on deposit in the Rebate  Fund are  insufficient
for the purposes  thereof,  the Trustee shall transfer monies to the Rebate Fund
from the following Funds in the following  order of priority:  the Project Fund,
the Reserve Fund, the Bond Principal Fund and the Bond Interest Fund.

         Section  3.17  REBATE  DISBURSEMENTS.  Not later than 60 days after the
last day of the fifth Bond Year, as defined in the Tax  Certificates,  and every
five years thereafter,  the Trustee shall pay to the United States 90 percent of
the amount,  at the written  direction of the Rebate Analyst,  on deposit in the
Rebate  Fund as of such  payment  date.  No later  than 60 days  after the final
retirement of the Bonds,  the Trustee shall pay to the United States 100 percent
of the balance  remaining in the Rebate Fund (or such lesser  amount as shall be
due and owing to the United States). Nothing herein shall relieve the Company of
its obligation to pay the rebate amount in accordance with Section 5.1(g) of the
Loan Agreement.  Each payment  required to be paid to the United States pursuant
to this  Section  shall  be filed  with the  Internal  Revenue  Service  Center,
Philadelphia, Pennsylvania 19255. Each payment shall be accompanied by a copy of
the  Internal  Revenue  Form 8038  originally  filed with  respect to the Bonds,
Internal  Revenue Form 8038-T and, if  necessary,  a statement  summarizing  the
determination of the amount to be paid to the United States.

         Section 3.18  TAX CERTIFICATES. The use and investment of monies in any
of the Funds shall be subject to the provisions of the Tax Certificates, and the
Issuer and the Trustee, in the performance of their duties thereunder,  agree to
comply  with  the  same.   Trustee  shall  have  no  responsibility  for  rebate
calculations  and shall have no liability  for actions taken at the direction of
the Company or Rebate Analyst

         Section 3.19  (Reserved).

         Section 3.20  COST OF ISSUANCE FUND.  The Company  shall deposit to the
Cost of  Issuance  Fund an  amount  sufficient  to pay a  portion  of the  costs
incurred in connection with the  authorization,  issuance and sale of the Bonds,
to the extent the same are approved by the Company.  The Trustee shall  transfer
amounts from the Cost of Issuance  Fund as directed by the Company.  The Trustee
shall keep and  maintain  adequate  records  pertaining  to the Cost of Issuance
Fund,  and all  payments  therefrom,  which shall be open to  inspection  by the
Company,  Registered  Owners of the Bonds,  the Beneficial  Owners or their duly
authorized agents during normal business hours of the Trustee.

                                     - 44 -


         Section 3.21 CUSTODY OF THE COST OF ISSUANCE FUND. The Cost of Issuance
Fund shall be in the custody of the  Trustee but in the name of the Issuer,  and
the Issuer authorizes and directs the Trustee, on the requisition of the Company
Representative,  to withdraw  sufficient funds from the Cost of Issuance Fund to
pay a portion  of the  costs  incurred  in  connection  with the  authorization,
issuance and sale of the Bonds,  which  authorization  and direction the Trustee
hereby accepts.

                                     - 45 -


                                   ARTICLE IV

                             COVENANTS OF THE ISSUER

         Section 4.1 PERFORMANCE OF COVENANTS. The Issuer covenants that it will
faithfully   perform  at  all  times  any  and  all   covenants,   undertakings,
stipulations and provisions  contained in this Indenture,  in any and every Bond
and in all proceedings of the Issuer pertaining  thereto.  The Issuer covenants,
represents, warrants and agrees that it is duly authorized under the laws of the
State of Oklahoma,  including  particularly and without limitation,  the Act, to
issue the Bonds and to execute this Indenture,  to pledge the property described
herein and  pledged  hereby and to pledge the Trust  Estate in the manner and to
the extent  herein  set forth,  that all  actions on its part  required  for the
issuance of the Bonds and the execution and delivery of this Indenture have been
duly and effectively  taken or will be duly taken as provided  herein,  and that
this Indenture is a valid and enforceable  instrument of the Issuer and that the
Bonds in the hands of the owners  thereof are and will be valid and  enforceable
obligations of the Issuer according to the terms thereof.

         Section 4.2 INSTRUMENTS OF FURTHER ASSURANCE. The Issuer covenants that
it will do,  execute,  acknowledge  and  deliver or cause to be done,  executed,
acknowledged and delivered, such indentures supplemental hereto and such further
acts,  instruments  and transfers as the Trustee may reasonably  require for the
better assuring,  transferring,  pledging and hypothecating unto the Trustee all
and singular the Trust Estate to the payment of the  principal of,  premium,  if
any, and interest on the Bonds.

                  Promptly after any filing,  registration  or recording  (other
than  the  filing  of the  Loan  Agreement,  this  Indenture  and any  financing
statements  in  connection  with the  issuance  of the Bonds) or any  re-filing,
re-registration  or  re-recording of this Indenture or the Loan Agreement or any
filing, registration,  recording, re-filing,  re-registration or re-recording of
any  supplement  to either  of said  instruments,  any  financing  statement  or
instrument  of similar  character  relating  to any of said  instruments  or any
instrument  of further  assurance  which is required  pursuant to the  preceding
paragraph,  the Issuer will cause the Company  Representative  to deliver to the
Trustee an  opinion of  independent  counsel  to the  effect  that such  filing,
registration,  recording,  re-filing,  re-registration  or re-recording has been
duly accomplished and setting forth the particulars thereof.

         Section 4.3  PAYMENT OF PRINCIPAL, PREMIUM,  IF ANY, AND INTEREST.  The
Issuer will promptly pay or cause to be paid the principal of, premium,  if any,
and interest on all Bonds issued  hereunder  according to the terms hereof.  The
principal,  premium,  if any, and interest  payments are payable solely from the
Trust Estate, which is hereby specifically pledged to the payment thereof in the
manner  and to the  extent  herein  specified.  Nothing  in the Bonds or in this
Indenture  shall be  considered  or construed as pledging any funds or assets of
the Issuer  other

                                     - 46 -


than those pledged  hereby or creating any  liability of the Issuer's  trustees,
employees or other agents.

         Section 4.4  CONDITIONS PRECEDENT.  Upon the date of issuance of any of
the Bonds,  the Issuer hereby  covenants  that all  conditions,  acts and things
required of the Issuer by the  Constitution or statutes of the State of Oklahoma
or by the Act or by this  Indenture to exist,  to have  happened or to have been
performed  precedent  to or in the  issuance  of the  Bonds  shall  exist,  have
happened and have been performed.

         Section 4.5  SUPPLEMENTAL INDENTURES; RECORDATION OR FILING OF SECURITY
INSTRUMENTS.  As set forth in  Section  12.9 of the Loan  Agreement,  the Issuer
shall cause the Trustee to cause such continuation statements under the Oklahoma
Uniform Commercial Code at all times to be recorded, registered and filed by the
Trustee  and to be kept,  recorded,  registered  and filed in such manner and in
such places as may be required by law in order fully to preserve and protect the
security of the Bondholders and all rights of the Trustee hereunder.

         Section 4.6  RIGHTS UNDER THE LOAN  AGREEMENT.  The Issuer will observe
all of the obligations, terms and conditions required on its part to be observed
or performed  under the Loan  Agreement.  The Issuer agrees that wherever in the
Loan  Agreement it is stated that the Issuer will notify the  Trustee,  whenever
the Loan  Agreement  gives the Trustee  some right or  privilege,  or in any way
attempts  to confer  upon the Trustee the ability for the Trustee to protect the
security for payment of the Bonds, that such part of the Loan Agreement shall be
as though it were set out in this Indenture in full.

                  The Issuer  agrees  that the  Trustee as  assignee of the Loan
Agreement,  to the extent provided  herein,  may enforce,  in its name or in the
name of the  Issuer,  all  rights of the  Issuer  (other  than the rights of the
Issuer under Sections 5.1(f),  8.5 and 10.4 of the Loan Agreement and other than
the rights of the Issuer to perform certain  discretionary  acts reserved in the
Loan  Agreement)  and all  obligations  of the Company under and pursuant to the
Loan Agreement for and on behalf of the  Bondholders,  whether or not the Issuer
is in default hereunder.

                                     - 47 -


                                    ARTICLE V

                      REDEMPTION OF BONDS PRIOR TO MATURITY

                  Section 5.1  Optional REDEMPTION.  Series 2004 Bonds  maturing
December 1, 2024, shall be subject to redemption prior to maturity,  in whole or
in part, at the written  direction of the Company  ("Optional  Redemption"),  on
December 1, 2014, and on any date  thereafter,  at a redemption  price set forth
below  (expressed  as a percentage of the  principal  amount so redeemed),  plus
accrued interest to the redemption date:

                        Redemption Date              Redemption Price
                        ---------------              ----------------

                  Dec.1, 2014 to Nov. 30, 2015              102%
                  Dec.1, 2015 to Nov. 30, 2016              101%
                  Dec.1, 2016 and thereafter                100%


Section 5.2  REDEMPTION OF BONDS UPON OCCURRENCE OF CERTAIN EVENTS.

         (a) The Bonds are  redeemable  by the Issuer upon the  direction of the
Company  Representative  in whole or in part at any time at a  redemption  price
equal to the  principal  amount  of each Bond  redeemed,  and  accrued  interest
thereon to the  redemption  date,  upon the  occurrence  of events  described in
Section 7.1 of the Loan Agreement.

         (b) The Bonds are also  redeemable  by the Issuer upon the direction of
the Company  Representative in whole but not in part at any time at a redemption
price  equal to 110% of the  principal  amount  thereof,  and  accrued  interest
thereon to the redemption  date, as a condition  precedent to the acquisition by
any Person of  substantially  all of the assets of the Company or as a condition
precedent of the merger or consolidation of the Company,  as provided in Section
8.14 of the Loan Agreement.

         (c) The Bonds are  redeemable  by the Issuer upon the  direction of the
Company  Representative in whole or in part at any time after July 1, 2005, at a
redemption  price  equal to the  principal  amount  of each Bond  redeemed,  and
accrued interest thereon to the redemption date, from unexpended proceeds of the
Bonds on deposit in the Project Fund.

         Section 5.3  REDEMPTION OF BONDS UPON A  DETERMINATION  OF  TAXABILITY.
Upon the occurrence of a Determination  of Taxability,  the Bonds are subject to
mandatory  redemption  in  whole  at a  redemption  price  equal  to 105% of the
Outstanding  principal amount thereof, plus interest accrued to redemption date,
at the earliest  practicable  date selected by the Trustee,  after  consultation
with the Company,  but in no event later than 45 days  following  receipt by the
Trustee  of notice of the  Determination  of  Taxability.  The  occurrence  of a
Determination  of

                                     - 48 -


Taxability  with  respect to the Bonds will not  constitute  an Event of Default
under  this  Indenture  and the sole  remedy of the  Holders  will be  mandatory
redemption  of the  Bonds in  accordance  with this  Section  5.2.  Within  five
Business Days after receipt by the Trustee of written notice of a  Determination
of  Taxability,  the Trustee shall give written notice thereof to the Holders of
all Bonds then Outstanding and shall also give written notice to the Company and
the Issuer.

         Section 5.4  SINKING FUND.  The Bonds  maturing  December 1, 2012,  are
subject to mandatory  sinking fund redemption at a redemption price equal to 100
percent of the principal  amount thereof and accrued  interest to the redemption
date. As and for a sinking fund for the redemption of such Bonds, there shall be
deposited pursuant to Section 5.1(a) of the Loan Agreement in the Bond Principal
Fund and Bond Interest Fund a sum which is sufficient to redeem (after credit as
provided  below) the  following  principal  amounts  of such  Bonds and  accrued
interest to the redemption date:

               December 1       Principal      December 1      Principal
               of the Year       Amount        of the Year      Amount
               -----------       ------        -----------      ------

                   2006         $310,000           2010        $400,000
                   2007          325,000           2011         425,000
                   2008          350,000           2012         455,000
                   2009          370,000



         The Bonds maturing  December 1, 2024, are subject to mandatory  sinking
fund  redemption  at a  redemption  price equal to 100 percent of the  principal
amount thereof and accrued interest to the redemption date. As and for a sinking
fund for the  redemption  of such Bonds,  there shall be  deposited  pursuant to
Section  5.1(a)  of the  Loan  Agreement  in the  Bond  Principal  Fund and Bond
Interest  Fund a sum which is  sufficient  to redeem  (after  credit as provided
below) the following principal amounts of such Bonds and accrued interest to the
redemption date:

               December 1       Principal      December 1      Principal
               of the Year       Amount        of the Year      Amount
               -----------       ------        -----------      ------
                   2013         $485,000           2019        $130,000
                   2014          515,000           2020         140,000
                   2015          100,000           2021         150,000
                   2016          105,000           2022         160,000
                   2017          110,000           2023         170,000
                   2018          120,000           2024         180,000

                                     - 49 -


                  Not more than 45 days nor less than 30 days prior to a sinking
fund  payment  date for the  Bonds,  the  Trustee  shall  proceed  to select for
redemption (by lot in such manner as the Trustee may  determine)  from all Bonds
Outstanding  which  are  subject  to  sinking  fund  redemption  on such  date a
principal amount of such Bonds equal to the aggregate  principal amount of Bonds
redeemable with the required sinking fund payment, and shall call such Bonds for
redemption  from the  particular  sinking fund on the next  December 1, and give
notice of such call.

                  At the  option of the  Company  Representative  (so long as no
Event of Default has occurred and is  continuing) to be exercised by delivery of
a written  certificate  to the Trustee and the Issuer not less than 45 days next
preceding  any sinking fund  redemption  date, it may (i) deliver to the Trustee
for cancellation Bonds which are subject to sinking fund redemption on such date
in an aggregate  principal amount designated by the Company  Representative,  or
(ii) specify a principal amount of such Bonds which prior to said date have been
redeemed  (otherwise  than  through  the  operation  of such  sinking  fund) and
canceled  by the  Trustee and not  theretofore  applied as a credit  against any
sinking fund  redemption  obligation  for such Bonds.  Each Bond so delivered or
previously  redeemed  shall be credited by the Trustee at 100% of the  principal
amount  thereof  against  the  obligation  of the Company on such  sinking  fund
redemption date, and any excess shall be so credited against future sinking fund
redemption  obligations for Bonds  proportionately to all remaining sinking fund
payments.  In the event the Company  Representative  shall  avail  itself of the
provisions of clause (i) of the first sentence of this paragraph the certificate
required by the first  sentence of this  paragraph  shall be  accompanied by the
Bonds to be canceled.

                  Notwithstanding   any  provision  of  this  Indenture  to  the
contrary,  in the event all Bonds  are held by a single  holder,  no  additional
notice  shall be required  with respect to  mandatory  sinking  fund  redemption
unless  requested by the holders of 100% of the  principal  amount of the Bonds,
and Bonds need not be presented for mandatory sinking fund redemption payment.

         Section 5.5  METHOD OF SELECTING BONDS. Except in the case of mandatory
sinking fund redemption  pursuant to Section 5.4 hereof,  in the event that less
than all of the Outstanding Bonds shall be redeemed, the Bonds redeemed shall be
redeemed in inverse  order of  maturity  (less than all of the Bonds of a single
maturity to be selected by lot in such manner as the Trustee may determine).

         Section 5.6  NOTICE OF REDEMPTION. Bonds shall be called for redemption
by the Trustee as herein provided but only if funds have been deposited with the
Trustee  on or  before  the date  fixed  for  redemption  sufficient  to pay the
applicable  redemption  price of the Bonds to be  redeemed.  Except as otherwise
herein  provided,  the Company  shall  provide to the Trustee,  at least 45 days
prior to the  redemption  date,  a  Certificate  of the  Company  Representative
specifying the principal  amount of the Bonds to be called for  redemption,  the
applicable  redemption  price or prices and the  provision or provisions of this
Indenture pursuant to which

                                     - 50 -


such Bonds are to be called for redemption, provided that such certificate shall
not be required  with respect to a sinking fund  redemption  pursuant to Section
5.3 hereof and Bonds shall be called for  redemption by the Trustee  pursuant to
such Section  without the  necessity of any action by the Issuer or the Company.
In the case of any  redemption  or tender  other than as provided in Section 5.3
hereof, the Trustee shall cause notice of such redemption to be given by mailing
not more  than 45 days nor less  than 30 days  prior to the  redemption  date by
first class mail a copy of the redemption  notice to the Registered Owner of any
Bonds  designated  for  redemption  in whole or in part, at their address as the
same shall last appear upon the  registration  books;  provided,  however,  that
failure to give such notice or any defect therein, shall not affect the validity
of any proceedings for the redemption of such Bonds for which no such failure or
defect occurs.

                  Notice of any redemption  hereunder with respect to Bonds held
under  a book  entry  system  shall  be  given  by  the  Registrar  only  to the
Depository, or its nominee, as the Holder of such Bonds. Selection of book entry
interests in the Bonds called for  redemption,  and notice of call to the owners
of those interests called, is the  responsibility of the Depository,  the Direct
Participant and the Individual  Participant and any failure of the Depository to
advise any Direct  Participant  and any failure of a Direct  Participant  or any
Indirect  Participant to notify the Beneficial  Owner of any such notice and its
contents  or  effect  will  not  affect  the  validity  of  such  notice  of any
proceedings for the redemption of such Bonds.

                  Each notice of redemption shall specify the name of the Bonds,
the date the Bonds were originally  issued,  the date fixed for redemption,  the
date of mailing of the  notice,  the  redemption  price,  the place or places of
payment  (including  contact person and phone number) the CUSIP numbers of Bonds
being  redeemed,  the rate of  interest  borne by each Bond  being  redeemed  or
tendered,  the  maturity  date of each Bond being  redeemed  or  tendered,  that
payment  will be  made  upon  presentation  and  surrender  of the  Bonds  to be
redeemed, that interest accrued to the date fixed for redemption will be paid as
specified in said notice, any conditions to the redemption  (including,  but not
limited to,  deposit of the applicable  redemption  price) and that on and after
said  date  interest  thereon  will  cease  to  accrue.  If  less  than  all the
Outstanding Bonds are to be redeemed, the notice of redemption shall specify the
Bonds to be  redeemed,  and the numbers of the Bonds or  portions  thereof to be
redeemed.

         Section 5.7 BONDS DUE AND PAYABLE ON REDEMPTION  DATE;  INTEREST CEASES
TO ACCRUE.  On or before any  redemption  pursuant to this Article V,  collected
funds  sufficient  to  redeem  all  the  Bonds  called  for  redemption  at  the
appropriate  redemption price,  including accrued interest to the date fixed for
redemption,  shall be deposited with the Trustee.  On the  redemption  date, the
principal amount of each Bond to be redeemed, together with the accrued interest
thereon to such date,  and  redemption  premium,  if any,  shall  become due and
payable;  from and after such date,  notice of redemption having been given, and
deposit  having been made in accordance  with the  provisions of this Article V,
then,  notwithstanding  that any Bonds called for redemption shall not have been
surrendered,  no further  interest  shall accrue on any of such Bonds.  From and
after such date of  redemption  (such notice  having been given and such deposit
having  been  made), the

                                     - 51 -


Bonds to be redeemed  shall not be deemed to be Outstanding  hereunder,  and the
Issuer shall be under no further liability in respect thereof.

         Section 5.8  CANCELLATION.  All Bonds which have been redeemed shall be
canceled by the Trustee and destroyed as provided in Section 2.9 hereof.

         Section 5.9 PARTIAL REDEMPTION OF BONDS. Upon surrender of any Bond for
redemption  in part only,  the  Issuer  shall  execute,  and the  Trustee  shall
authenticate  and deliver to the owner thereof,  the cost of which shall be paid
by the  Company,  a new Bond or Bonds of the  same  maturity  and of  authorized
denominations,  in an aggregate principal amount equal to the unredeemed portion
of the Bond  surrendered;  provided  that the  Trustee  shall  select  Bonds for
redemption so as to assure that after such  redemption  no  Registered  Owner or
Owner of Beneficial Interests shall retain Bonds in authorized  denominations of
not less  than  $100,000;  and  provided  further  that,  if less than all of an
Outstanding  Bond of one  maturity  in a book  entry  system is to be called for
redemption,  the Trustee  shall give notice to the  Depository or the nominee of
the  Depository  that is the  Holder  of such  Bond,  and the  selection  of the
Beneficial Interests in that Bond to be redeemed shall be at the sole discretion
of the Depository and its participants.  In the case of a partial  redemption of
Bonds by lot, each unit of face value of principal thereof equal to $5,000 (each
such $5,000  unit is  hereinafter  referred to as a "Unit")  shall be treated as
though it were a separate  Bond in the amount of such Unit.  If it is determined
that one or more,  but not all,  of the  Units  represented  by a Bond are to be
called for  redemption,  then upon  notice of  redemption  of a Unit or Units of
Bonds,  the holder of that Bond shall  surrender the Bond to the Trustee (a) for
payment  of the  redemption  price of the Unit or  Units  of  Bonds  called  for
redemption (including without limitation. the interest accrued to the date fixed
for  redemption  and any premium),  and (b) for issuance,  without charge to the
holder thereof,  of a new Bond or Bonds of $100,000 or amounts in excess thereof
in such  integrals as are permitted  hereunder,  aggregating a principal  amount
equal to the unmatured and  unredeemed  portion of, and bearing  interest at the
same rate and maturing on the same date as, the Bond surrendered.

                                     - 52 -


                                   ARTICLE VI

                                   INVESTMENTS

         Section 6.1  INVESTMENT  OF FUNDS.  Subject to the Section 3.18 hereof,
any  monies  held  as part of the  Funds  shall,  on  instructions  signed  by a
Corporation Representative,  be invested by the Trustee in Permitted Investments
(i) with  respect to the  Project  Fund and the  Reserve  Fund  maturing  in the
amounts  and at the times  necessary  to provide  funds to make the  payments to
which such monies are  applicable as estimated in a certificate of a Corporation
Representative from time to time filed with the Trustee and (ii) with respect to
the Bond Principal  Fund, the Bond Interest Fund and the Rebate Fund maturing in
the amounts and at the times  necessary to provide funds to make the payments to
which such monies are  applicable as  determined  by the Trustee.  To the extent
practicable,  all  such  Permitted  Investments  purchased  shall  mature  or be
redeemable on a date or dates prior to the time when the monies so invested will
be required for  expenditure.  Permitted  Investments  in the Reserve Fund shall
have a maturity of not more than one year.  The Trustee shall sell and reduce to
cash a  sufficient  portion of such  investments  whenever the cash balance in a
Fund is insufficient for the purposes of such Fund. The Trustee may make any and
all investments permitted by the provisions of this Section through its trust or
bond department.

                  Investments  in any of the Funds hereof shall be valued by the
Trustee not less often than annually,  on or before  December 1 of each year, at
the market value thereof,  exclusive of interest.  Deficiencies in the amount on
deposit in the Reserve  Fund  resulting  from a decline in market value shall be
restored  by the  Company  beginning  not  later  than  three  months  after the
valuation  date by making the deposits  required by Section  5.1(e)(iii)  of the
Loan Agreement.

                  As to any investment agreement,  the Trustee shall give notice
to any provider of an investment  agreement in accordance  with the terms of the
investment  agreement  so as to receive  funds  thereunder  when  needed with no
penalty or premium paid.

         Section 6.2  ARBITRAGE. In reliance upon the covenant of the Company in
Section 4.6 of the Loan Agreement,  the Issuer hereby  covenants for the benefit
of each owner of the Bonds that no use will be made of the proceeds of the Bonds
or of any monies in the Funds and that no other action shall be taken which will
cause  the Bonds or any  obligations  subsequently  issued  by the  Issuer to be
"arbitrage  bonds"  within  the  meaning  of  Section  148 of the  Code  and the
regulations prescribed thereunder.

                  Unless  otherwise  required  by Section  148 of the Code,  the
Secretary or any other Issuer  Representative having responsibility with respect
to the issuance of the Bonds  shall,  on or prior to the date of issuance of the
Bonds,  if applicable,  either alone or in  conjunction  with any other officer,
employee,  consultant  or  agent  of the  Issuer,  deliver  to the  Trustee  the
certification  required by the regulations  promulgated under Section 148 of the
Code to  evidence  that such

                                     - 53 -


Bonds will not be  "arbitrage  bonds"  within the  meaning of Section 148 of the
Code  and the  regulations  thereunder.  Such  certificates  may  rely  upon the
certificates  of the Company  delivered to the Issuer pursuant to Section 4.6 of
the Loan Agreement.

         Section 6.3   ALLOCATION  AND  TRANSFERS  OF  INVESTMENT   INCOME.  Any
investments  shall be held by or under the  control of the  Trustee and shall be
deemed at all times a part of the Fund from which the  investment  was made. Any
loss resulting from such investments shall be charged to such Fund. Any interest
or other  gain  from  any Fund  from any  investment  or  reinvestment  shall be
allocated and transferred subject to the Tax Certificates, as follows:

                  (a) any  interest  or other gain  realized  as a result of any
investments or  reinvestments of moneys in the Project Fund shall be retained in
or transferred to the Project Fund;

                  (b) any  interest  or other gain  realized  as a result of any
investments or  reinvestments  of moneys in the Bond Principal Fund and the Bond
Interest Fund shall be retained in the respective Fund;

                  (c) any  interest  or other gain  realized  as a result of any
investments or  reinvestments of moneys in the Reserve Fund shall be transferred
to the Project Fund during the  construction of the  Improvements and thereafter
shall be  credited to the  Reserve  Fund if the amount  therein is less than the
Reserve  Requirement.  If the amount in the Reserve  Fund is equal to or greater
than the Reserve Requirement, such interest or other gain realized shall be paid
into the Project Fund, and after the Completion Date, to the Bond Interest Fund;

                  (d) (Reserved);

                  (e) any  interest  or other gain  realized  as a result of any
investment or reinvestment of moneys in the Rebate Fund shall be retained in the
Rebate Fund; and

                  (f) notwithstanding the foregoing,  any interest or other gain
realized  as a result of any  investments  or  reinvestments  of moneys in Funds
pursuant to the  Indenture  shall first be  deposited  in the Rebate Fund to the
extent amounts  required to be deposited  therein pursuant to the Indenture have
not been so deposited.

                                     - 54 -


                                   ARTICLE VII

                             DISCHARGE OF INDENTURE

         Section 7.1  DISCHARGE OF THIS  INDENTURE.  If, when the Bonds  secured
hereby shall be paid in accordance with their terms (or payment of the Bonds has
been provided for in the manner set forth in the following paragraph),  together
with all other sums payable hereunder,  then this Indenture and the Trust Estate
and all rights granted  hereunder  shall thereupon  cease,  terminate and become
void and be discharged and  satisfied.  Also, if all  Outstanding  Bonds secured
hereby shall have been purchased by the Company and delivered to the Trustee for
cancellation,  and all other sums payable hereunder have been paid, or provision
shall have been made for the payment of the same,  then this  Indenture  and the
Trust Estate and all rights granted  hereunder shall thereupon cease,  terminate
and become  void and be  discharged  and  satisfied.  In such  events,  upon the
request of the Issuer,  the Trustee  shall assign and transfer to the Issuer all
property then held by the Trustee  hereunder and shall execute such documents as
may be reasonably required by the Issuer (including  undertakings by the Company
to continue to comply with its  covenants  contained  in Sections  4.6,  5.1(f),
5.1(g),  8.5 and 10.4 of the Loan  Agreement  until all Bonds are actually paid)
and shall turn over any  surplus in any Fund the  Company  Representative  shall
direct in writing, other than the Rebate Fund.

                  Payment of any  Outstanding  Bonds  prior to the  maturity  or
redemption  date  thereof  shall be deemed to have been  provided for within the
meaning and with the effect  expressed in this Section if (i) in case said Bonds
are  to  be  redeemed  on  any  date  prior  to  their  maturity,   the  Company
Representative  shall  have  given to the  Trustee  in form  satisfactory  to it
irrevocable  instructions to give on a date in accordance with the provisions of
Section 5.5 hereof notice of redemption of such Bonds on said  redemption  date,
such notice to be given in accordance with the provisions of Section 5.5 hereof,
(ii) there shall have been  deposited  with the Trustee  Government  Obligations
described  in Section  1(a) of the  definition  of such term as set forth herein
which shall not contain  provisions  permitting  the  redemption  thereof at the
option of the issuer before the date the principal thereof will be required, the
principal of and the  interest on which when due,  and without any  reinvestment
thereof, will provide monies which, together with any other available monies, if
any, deposited with or held by the Trustee at the same time, shall be sufficient
to pay when due the  principal of and  premium,  if any, and interest due and to
become due on said Bonds on and prior to the  redemption  date or maturity  date
thereof,  as the case may be (and if on the date of such deposit,  the Bonds are
not actually  paid in full,  then there shall be provided to the Trustee and the
Issuer (a) report of an  independent  firm of  nationally  recognized  certified
public  accountants  verifying the sufficiency of the escrow  established to pay
the Bonds in full and (b) an opinion of  nationally  recognized  bond counsel to
the effect that the Bonds are no longer  Outstanding under this Indenture),  and
(iii) in the event  said  Bonds are not by their  terms  subject  to  redemption
within the next 45 days, the Company Representative shall have given the Trustee
in  form  satisfactory  to it  irrevocable  instructions  to  give,  as  soon as
practicable  in the same manner as the notice of redemption is given pursuant to

                                     - 55 -


Section  5.5  hereof,  a notice to the  owners of such  Bonds  that the  deposit
required by (ii) above has been made with the  Trustee and that  payment of said
Bonds has been  provided  for in  accordance  with this Section and stating such
maturity  or  redemption  date upon  which  monies are to be  available  for the
payment of the principal of and premium,  if any, and interest on said Bonds. At
such time as payment of any Bonds has been provided for as aforesaid, such Bonds
shall no longer be secured by or  entitled to the  benefits  of this  Indenture.
except for the purpose of any payment from such monies or  securities  deposited
with the  Trustee.  The  Company  will use its best  efforts to obtain  from the
Rating  Agencies the assignment of a rating to the Bonds that have been defeased
pursuant to this Section 7.1.

                  The  release  of the  obligations  of the  Issuer  under  this
Section  shall be  without  prejudice  to the  right of the  Trustee  to be paid
reasonable  compensation  for all services  rendered by it hereunder and all its
reasonable  expenses,  charges and other disbursements  incurred on or about the
administration of the trust hereby created and the performance of its powers and
duties hereunder.

         Section 7.2  LIABILITY OF ISSUER NOT DISCHARGED.  Upon  compliance with
the provisions of Section 7.1 hereof with respect to all Bonds then Outstanding,
this  Indenture  may be discharged  in  accordance  with the  provisions of this
Article  VII,  but the  liability  of the Issuer in respect of such Bonds  shall
continue  provided  that the owners  thereof  shall  thereafter  be  entitled to
payment  only out of the  monies or  securities  deposited  with the  Trustee as
provided in Section 7.1 hereof.

                                     - 56 -


                                  ARTICLE VIII

                              DEFAULTS AND REMEDIES

         Section 8.1  EVENTS OF DEFAULT. Each of the following is hereby defined
as and shall be deemed an "Event of Default":

                  (a) default in the payment of the principal of or premium,  if
any,  on any Bond when the same  shall  become due and  payable,  whether at the
stated maturity thereof, on a sinking fund payment date, or upon proceedings for
redemption;

                  (b) default in the payment of any  installment  of interest on
any Bond when the same shall become due and payable;

                  (c) default shall be made in the  observance or performance of
any covenant,  contract or other provision in the Bonds or this Indenture (other
than as referred to in (a) or (b) of this Section and circumstances resulting in
an Interest Rate Step-up, as defined herein) and such default shall continue for
a period of 30 days after written  notice to the Issuer and the Trustee from the
owners of at least 25 percent in  aggregate  principal  amount of the Bonds then
Outstanding  or to the Issuer  from the  Trustee  specifying  such  default  and
requiring  the same to be remedied;  provided,  with respect to any such failure
covered by this  subsection  (c),  no Event of  Default  shall be deemed to have
occurred so long as a course of action  adequate to remedy  such  failure  shall
have been commenced within such 30-day period and shall thereafter be diligently
prosecuted to completion  and the failure  shall be remedied  thereby;  provided
further,  however,  that failure to correct  such  default  within 90 days after
receipt of such notice shall constitute an Event of Default; and

                  (d) the occurrence of an "event of default" under Section 10.1
of the Loan Agreement.

         Section 8.2  REMEDIES ON EVENTS OF DEFAULT.  Upon the occurrence  of an
Event of Default, the Trustee shall have the following rights and remedies:

                  (a) Upon the  occurrence  of an Event of Default  (as  defined
hereinabove  or as hereinafter  defined) other than an Event of Taxability,  the
rate of  interest  on the Bonds  shall be  adjusted  so that at all times on and
after the occurrence and  continuation of the Event of Default,  the Bonds shall
bear interest at a rate equal to fourteen  percent (14%) per annum (the "Default
Rate") until such Event of Default has been cured.

                  (b)  ACCELERATION.  The  Trustee  may,  and upon  the  written
request of the owners of not less than 25 percent aggregate  principal amount of
the sum of the Bonds then  Outstanding  shall, by notice in writing given to the
Issuer  and  the  Company,  declare  the  principal  amount  of all  Bonds  then
Outstanding  and the interest  accrued thereon to be immediately due

                                     - 57 -


and payable and said principal and interest shall thereupon  become  immediately
due and payable. Upon any declaration of acceleration hereunder,  the Issuer and
the Trustee shall immediately declare all Loan Payments under the Loan Agreement
to be  immediately  due and  payable as  provided  in  Section  10.2 of the Loan
Agreement.

                  (c) LEGAL  PROCEEDINGS.  The Trustee may, by mandamus or other
suit,  action or  proceeding  at law or in  equity,  enforce  the  rights of the
Bondholders and require the Issuer,  the Company or any or both of them to carry
out the Loan Agreement with or for the benefit of the Bondholders and to perform
its or their duties under the Act, the Loan  Agreement and this  Indenture.  The
Trustee may also,  by action or suit in equity,  enjoin any acts or things which
may be unlawful or in violation of the rights of the Bondholders.

                  (d) RECEIVERSHIP. The Trustee shall be entitled as a matter of
right without notice or demand (such notice being expressly  waived hereby),  ex
parte, to the appointment of a receiver or receivers of the Trust Estate, and of
the  rents,  revenues,  income,  products  and  profits  thereof,  pending  such
proceedings,  but,  notwithstanding the appointment of any receiver,  trustee or
other custodian,  the Trustee shall be entitled to the possession and control of
any cash,  securities  or other  instruments  at the time held by, or payable or
deliverable under the provisions of this Indenture to, the Trustee.

                  (e) SUIT FOR  JUDGMENT  ON THE  BONDS.  The  Trustee  shall be
entitled to sue for and recover  judgment,  either before or after or during the
pendency of any  proceedings  for the enforcement of the lien of this Indenture,
for the  enforcement  of any of its  rights,  or the  rights of the  Bondholders
hereunder,  but any such judgment  against the Issuer shall be enforceable  only
against the Trust  Estate.  No recovery of any judgment by the Trustee  shall in
any manner or to any extent  affect the lien of this  Indenture  or any  rights,
powers or remedies  of the Trustee  hereunder,  or any lien,  rights,  powers or
remedies of the owners of the Bonds, but such lien, rights,  powers and remedies
of the Trustee, the Bondholders shall continue unimpaired as before.

                  (f) REMEDIES UNDER AGREEMENT.  The Trustee, as assignee of the
Issuer,  may exercise the remedies  provided  under the Loan  Agreement  upon an
Event of Default.

                  In the event written notice is given by the Bondholders to the
Trustee under  Section  8.1(c) hereof and upon due receipt of such notice by the
Trustee,  the Trustee shall immediately give notice with respect to such default
to the Company.

                  No right or remedy is  intended to be  exclusive  of any other
right or remedy,  but each and every such  right or remedy  shall be  cumulative
with  respect to the Trustee and the  Bondholders,  and in addition to any other
right or remedy given hereunder or now or hereafter existing at law or in equity
or by statute.

                  If any Event of Default  shall have occurred and if instructed
and  directed in writing by the owners of not less than the sum of a majority in
aggregate principal amount of

                                     - 58 -


Bonds then  Outstanding and  indemnified as provided in Section 9.1 hereof,  the
Trustee shall  exercise  such one or more of the rights and powers  conferred by
this Section as the Trustee, being advised by counsel, shall deem most expedient
in the interests of the Bondholders or as may be set forth in such directions.

         Section 8.3  MAJORITY OF BONDHOLDERS AND HOLDERS OF PARITY INDEBTEDNESS
MAY  CONTROL   PROCEEDINGS.   Anything  in  this   Indenture   to  the  contrary
notwithstanding and subject to prior notice to the Issuer, the owners of the sum
of a majority in aggregate principal amount of the Bonds and Parity Indebtedness
then  Outstanding  shall have the right, at any time, to the extent permitted by
law, by an instrument or  instruments  in writing  executed and delivered to the
Trustee,  to direct the time,  method and place of conducting all proceedings to
be taken in connection  with the enforcement of the terms and conditions of this
Indenture,  or for the  appointment  of a  receiver,  or any  other  proceedings
hereunder;  provided  that  such  direction  shall  not  be  otherwise  than  in
accordance with the provisions  hereof. The Trustee shall not be required to act
on any  direction  given to it pursuant to this Section  unless  indemnified  as
provided in Section 9.1 hereof.

         Section 8.4 RIGHTS AND REMEDIES OF BONDHOLDERS. No owner of any Bond or
Parity  Indebtedness  shall  have any right to  institute  any  suit,  action or
proceeding in equity or at law for the  enforcement of this Indenture or for the
execution of any trust hereof or for the  appointment of a receiver or any other
remedy  hereunder,  unless a default has  occurred of which the Trustee has been
notified as provided  in Section 9.1 hereof,  or of which by said  Section it is
deemed to have  notice,  nor unless such  default  shall have become an Event of
Default  and the  owners of the sum of not less  than a  majority  in  aggregate
principal  amount of Bonds then  Outstanding  shall have made written request to
the Trustee  and shall have  offered ten (10) days either to proceed to exercise
the powers hereinbefore  granted or to institute such action, suit or proceeding
in its own name,  nor unless they have also offered to the Trustee  indemnity as
provided in Section 9.1 hereof nor unless the Trustee shall  thereafter  fail or
refuse to exercise the powers hereinbefore granted, or to institute such action,
suit or proceeding in its own name; and such notification,  request and offer of
indemnity  are hereby  declared in every case at the option of the Trustee to be
conditions  precedent  to the  execution  of  the  powers  and  trusts  of  this
Indenture,  and to any  action or cause of action  for the  enforcement  of this
Indenture,  or for  the  appointment  of a  receiver  or for  any  other  remedy
hereunder;  it being  understood  and intended that no one or more owners of the
Bonds  shall  have the right in any  manner  whatsoever  to  affect,  disturb or
prejudice  the lien of this  Indenture by his, her or their action or to enforce
any  right  hereunder  except  in  the  manner  herein  provided  and  that  all
proceedings at law or in equity shall be  instituted,  had and maintained in the
manner herein provided and for the equal benefit of the owners of all Bonds then
Outstanding.  Nothing in this  Indenture  contained  shall,  however,  affect or
impair  the  right  of any  owner  of  Bonds  to  enforce  the  payment,  by the
institution  of any suit,  action  or  proceeding  in  equity or at law,  of the
principal of, premium, if any, or interest on any Bond at and after the maturity
thereof,  or the obligation of the Issuer to pay the principal of,  premium,  if
any, and interest on each of the Bonds to the respective  owners of the Bonds at
the time and place,  from the  source and in the manner  herein and in the Bonds
expressed.

                                     - 59 -


         Section 8.5  APPLICATION OF MONIES.  All monies received by the Trustee
pursuant to any  reasonable  right given or action taken under the provisions of
this Article shall, after payment of the fees of the Trustee, costs and expenses
of the proceedings  resulting in the collection of such monies and the expenses,
liabilities and advances  incurred or made by the Trustee,  first, to the extent
of any  deficiency  of required  amounts in the Rebate Fund be  deposited in the
Rebate Fund, and  thereafter  shall be held in trust and all monies so deposited
in the Bond  Principal  Fund and the Bond  Interest  Fund and all monies held or
deposited  in the Bond  Principal  Fund and the Bond  Interest  Fund  during the
continuance of an Event of Default shall be applied as follows:

                  (a)  Unless  the   principal  of  all  the  Bonds  and  Parity
Indebtedness shall have become or shall have been declared due and payable,  all
such monies shall be applied:

                           FIRST--for   so  long  as  the   Initial   Bondholder
beneficially  owns 100% of the Bonds, to the payment of the beneficial holder of
the Bonds maturing December 1, 2012, in satisfaction of installments of interest
and then to the extent  available,  principal  and  premium,  if any, due to the
beneficial  holder of the Bonds  maturing  December  1, 2012;  otherwise  to the
persons entitled thereto of all installments of interest and Parity Indebtedness
in the order of the maturity of the  installments  of such  interest and, if the
amount  available  shall  not  be  sufficient  to  pay in  full  any  particular
installment,  then to the payment ratably,  according to the amounts due on such
installment,  to the persons entitled  thereto,  without any  discrimination  or
privilege; and

                           SECOND--for   so  long  as  the  Initial   Bondholder
beneficially  owns 100% of the Bonds, to the payment of the beneficial holder of
the Bonds maturing December 1, 2024, in satisfaction of installments of interest
and then  principal  and premium,  if any, due to the  beneficial  holder of the
Bonds  maturing  December  1, 2024;  otherwise  (in the event  that the  Initial
Bondholder is not the  beneficial  owner of 100% of the Bonds) to the payment to
the persons entitled thereto of the unpaid principal of and premium,  if any, on
any of the Bonds and Parity Indebtedness which shall have become due (other than
Bonds called for redemption for the payment of which moneys are held pursuant to
the provisions of the Indenture), in the order of their due dates, with interest
on the  unpaid  principal  of and  premium,  if any,  on  such  Bonds  from  the
respective  dates upon which they became  due,  at the Default  Rate and, if the
amount  available  shall not be  sufficient to pay in full such Bonds due on any
particular  date,  together  with such  interest,  then to the payment  ratably,
according to the amount of principal due on such date,  to the persons  entitled
thereto, without any discrimination or privilege.

                  (b) If the principal of all the Bonds and Parity  Indebtedness
shall have  become due or shall have been  declared  due and  payable,  all such
moneys shall be applied (i) for so long as the Initial  Bondholder  beneficially
owns 100% of the Bonds,  to the  payment of interest  (at the Default  Rate) and
then  principal and premium,  if any, then due to the  beneficial  holder of the
Bonds  maturing  December  1, 2024 and then (ii) to the extent  that sums remain
thereafter available,  to the payment of interest (at the default Rate) and then
principal and premium,  if any,

                                     - 60 -


then due to the  beneficial  holder  of the Bonds  maturing  December  1,  2024;
otherwise (in the event that the Initial  Bondholder is not the beneficial owner
of 100% of the Bonds) to the payment of the  principal and interest then due and
unpaid upon all of the Bonds,  together with interest on overdue installments of
principal  at a rate  which  shall  be  equal  to  the  Default  Rate),  without
preference or priority of principal over interest or of interest over principal,
or of any installment of interest over any other installment of interest,  or of
any such Bond over any other such Bond,  ratably,  according  to the amounts due
respectively for principal and interest, to the persons entitled thereto without
any discrimination or privilege.

                  (c) If the principal of all the Bonds and Parity  Indebtedness
shall  have  been  declared  due  and  payable,  and if such  declaration  shall
thereafter have been rescinded and annulled under the provisions of this Article
then,  subject to the  provisions  of paragraph (b) of this Section in the event
that the principal of all the Bonds and Parity  Indebtedness  shall later become
due or be declared  due and payable,  the monies shall be applied in  accordance
with the provisions of paragraph (a) of this Section.

                  Whenever  monies are to be applied  pursuant to the provisions
of this  Section,  such monies shall be applied at such times,  and from time to
time,  as the Trustee shall  determine,  having due regard to the amount of such
monies  available  for  application  and the  likelihood  of  additional  monies
becoming  available  for such  application  in the future.  Whenever the Trustee
shall  apply  such  funds,  it shall fix the date  (which  shall be an  Interest
Payment Date unless it shall deem another  date more  suitable)  upon which such
application  is to be made,  and upon  such  date  interest  on the  amounts  of
principal to be paid on such dates shall cease to accrue. The Trustee shall give
such notice as it may deem  appropriate of the deposit of any such monies and of
the fixing of any such date,  and shall not be required  to make  payment to the
owner  of  any  Bond  and  Parity   Indebtedness  until  such  Bond  and  Parity
Indebtedness  shall be presented to the Trustee for  appropriate  endorsement or
for cancellation if fully paid.

                  Whenever all of the Bonds and Parity Indebtedness and interest
thereon have been paid under the provisions of this Section and all expenses and
fees of the Trustee and all other amounts to be paid to the Issuer  hereunder or
under the Loan  Agreement  have been paid,  any balance  remaining  in the Funds
shall be paid as provided in Section 3.13 hereof.

         Section 8.6  TRUSTEE MAY ENFORCE RIGHTS  WITHOUT  BONDS.  All rights of
action and claims under this Indenture or any of the Bonds Outstanding hereunder
may be enforced by the Trustee without the possession of any of the Bonds or the
production thereof in any trial or proceedings relative thereto; and any suit or
proceeding  instituted  by the Trustee  shall be brought in its name as Trustee,
without the necessity of joining as  plaintiffs or defendants  any owners of the
Bonds,  and any  recovery  of judgment  shall be for the ratable  benefit of the
owners of the Bonds subject to the provisions of this Indenture.

                                     - 61 -


         Section 8.7 TRUSTEE TO FILE PROOFS OF CLAIM IN RECEIVERSHIP, ETC In the
case of any receivership, insolvency, bankruptcy,  reorganization,  arrangement,
adjustment, composition or other judicial proceedings affecting the Trust Estate
or the Company, the Issuer or the Trustee shall, to the extent permitted by law,
be  entitled  to file  such  proofs  of claims  and  other  documents  as may be
necessary  or  advisable  in  order to have  claims  of the  Trustee  and of the
Bondholders allowed in such proceedings for the entire amount due and payable by
the Issuer under this Indenture,  or by the Company,  as the case may be, at the
date of the institution of such proceedings and for any additional amounts which
may become due and payable by it after such date, without prejudice, however, to
the right of any Bondholder to file a claim in his own behalf.

         Section 8.8  DELAY OR OMISSION  NO WAIVER.  No delay or omission of the
Trustee,  any  Bondholder or any holder to exercise any right or power  accruing
upon any  default  shall  exhaust  or impair any such right or power or shall be
construed to be a waiver of any such default, or acquiescence therein; and every
power and remedy given by this  Indenture may be exercised from time to time and
as often as may be deemed expedient.

         Section 8.9  NO WAIVER OF ONE DEFAULT TO AFFECT  ANOTHER.  No waiver of
any default hereunder, whether by the Trustee, the Bondholders,  shall extend to
or affect any subsequent or any other then existing  default or shall impair any
rights or remedies consequent thereon.

         Section 8.10  DISCONTINUANCE  OF  PROCEEDINGS  ON DEFAULT;  POSITION OF
PARTIES RESTORED. In case the Trustee shall have proceeded to enforce any rights
under  this  Indenture  and such  proceedings  shall have been  discontinued  or
abandoned  for any  reason,  or shall  have  been  determined  adversely  to the
Trustee,  then and in  every  such  case the  Issuer  and the  Trustee  shall be
restored to their  former  positions  and rights  hereunder  with respect to the
Trust Estate, and all rights,  remedies and powers of the Trustee shall continue
as if no such proceedings had been taken.

         Section  8.11  WAIVERS OF EVENTS OF DEFAULT.  Subject to prior  written
notice to and prior  written  consent  of the  Issuer,  the  Trustee  may in its
discretion waive any Event of Default hereunder and its consequences and rescind
any declaration of maturity of principal of and interest on the Bonds, and shall
do so upon  the  written  request  of the  owners  of the sum of a  majority  in
aggregate principal amount of all the Bonds then Outstanding in respect of which
default exists; provided,  however, that there shall not be waived (i) any Event
of Default  in the  payment of the  principal  of or premium on any  Outstanding
Bonds at the date of  maturity  or  redemption  thereof,  or any  default in the
payment when due of the interest on any such Bonds,  unless prior to such waiver
or  rescission,  all arrears of interest or all arrears of payments of principal
and premium, if any (with interest upon such principal and premium, if any, at a
rate which shall be 1 percent per annum above the highest rate of interest borne
by any Bond  during the 365 days prior to the date on which such  principal  and
premium, if any, were due or the maximum rate permitted by law if less than such
rate  aforesaid) and all expenses of the Trustee,  and all amounts to be paid to
the Issuer  hereunder  and under the Loan  Agreement,  in  connection  with such
default  shall have been paid or provided for or (ii) any default in the payment
of

                                     - 62 -


amounts set forth in Section 5.1(d) of the Loan  Agreement.  In case of any such
waiver or rescission, or in case any proceedings taken by the Trustee on account
of any such default  shall have been  discontinued  or  abandoned or  determined
adversely to the Trustee,  then and in every such case the Issuer,  the Trustee,
the  Bondholders  shall  be  restored  to  their  former  positions  and  rights
hereunder,  respectively,  but no such waiver or  rescission  shall extend to or
affect  any  subsequent  or other  default,  or impair  any  rights or  remedies
consequent thereon.

         Section  8.12  TRUSTEE  TO  NOTIFY  PARTIES  OF  DEFAULT  AND  DISCLOSE
INFORMATION RELATING TO DEFAULT. The Trustee shall immediately notify in writing
the  Issuer  and the  Company of any  default  hereunder  of which it has actual
knowledge or the occurrence of any Event of Default. The Trustee shall notify as
within five (5) Business Days in writing all Bondholders  and Notice  Beneficial
Owners of the  occurrence  of any Event of Default and shall make  available  to
such Bondholders  information reasonably requested of the Trustee concerning the
Event of Default, the Bonds, the Company, and such other information relevant to
the Event of Default, subject to the provisions of Section 9.01 hereof.

                                   ARTICLE IX

                             CONCERNING THE TRUSTEE

         Section 9.1  DUTIES OF THE  TRUSTEE.  The  Trustee  hereby  accepts the
trusts imposed upon it by this Indenture and agrees to perform said trusts,  but
only upon and subject to the  following  express  terms and  conditions,  and no
implied  covenants or obligations  shall be read into this Indenture against the
Trustee:

                  (a) The  Trustee,  prior  to the  occurrence  of an  Event  of
Default and after the curing of all Events of Default  which may have  occurred,
undertakes to perform such duties and only such duties as are  specifically  set
forth in this Indenture. In case an Event of Default has occurred (which has not
been cured or waived),  the Trustee shall exercise such of the rights and powers
vested  in it by this  Indenture,  and use the same  degree of care and skill in
their exercise,  as a prudent man would exercise or use under the  circumstances
in the conduct of the affairs of others.

                  (b) The Trustee may execute any of the trusts hereof or powers
hereunder  and  perform  any of its  duties  by or  through  attorneys,  agents,
receivers or employees  but shall be  answerable  for the conduct of the same in
accordance  with the  standard  specified  above,  only if the  Trustee  has not
exercised  reasonable care in the selection thereof and shall be entitled to act
upon an opinion  of  independent  counsel  concerning  all  matters of the trust
hereof  and its  duties  hereunder,  and may in all  cases  pay such  reasonable
compensation  to all such  attorneys,  agents,  receivers  and  employees as may
reasonably be employed in connection with the trusts hereof. The Trustee may act
upon an opinion of independent counsel and shall not be responsible for any loss
or damage resulting from any action or nonaction taken by or omitted to be taken
in good faith in reliance upon such opinion of independent counsel.

                                     - 63 -


                  (c) The  Trustee  shall  not be  responsible  for any  recital
herein or in the Bonds (except in respect to the  certificate of  authentication
of the  Trustee  endorsed  on  the  Bonds),  or for  insuring  the  Property  or
collecting  any  insurance  monies or for the  validity of the  execution by the
Issuer of this Indenture or of any supplements  hereto or instruments of further
assurance, or for the sufficiency of the security for the Bonds issued hereunder
or intended to be secured hereby,  or for the value of or title to the assets of
the Company and the Trustee shall not be bound to ascertain or inquire as to the
performance or observance of any covenants, conditions or agreements on the part
of the Issuer,  except as hereinafter set forth;  but the Trustee may require of
the Issuer or the Company full  information  and advice as to the performance of
the  covenants,  conditions  and agreements as to the condition of the assets of
the Company contained herein or in the Loan Agreement.  The Trustee shall not be
accountable  for the use or  application  by the Issuer or the Company of any of
the Bonds or the proceeds  thereof or the use or  application  of any money paid
over by the Trustee in accordance  with the  provisions of this  Indenture.  The
Trustee  shall have no  obligation  to  perform  any of the duties of the Issuer
under the Loan Agreement; and the Trustee shall not be responsible or liable for
any loss  suffered  in  connection  with any  investment  of funds made by it in
accordance with Section 6.1 hereof.

                  (d) The Trustee  shall not be  accountable  for the use of any
Bonds authenticated or delivered  hereunder.  The Trustee may not hold Bonds for
its own account.

                  (e) The Trustee  shall be protected in acting upon any notice,
request, consent, certificate, order, affidavit, letter, telegram or other paper
or  document  believed to be genuine and correct and to have been signed or sent
by the proper  person or persons.  Any action  taken by the Trustee  pursuant to
this Indenture upon the request or authority or consent of any person who at the
time of making such request or giving such  authority or consent is the owner of
any Bonds shall be  conclusive  and binding  upon all future  owners of the same
Bond and upon Bonds issued in place thereof.

                  (f) As to the existence or  nonexistence  of any fact or as to
the sufficiency or validity of any instrument,  paper or proceeding, the Trustee
shall be entitled to rely upon a  certificate  signed on behalf of the Issuer by
an Issuer  Representative  or such other  person as may be  designated  for such
purpose by the Issuer as sufficient evidence of the facts therein contained, and
prior to the  occurrence  of a default of which the Trustee has been notified as
provided in subsection (h) of this Section, or of which by said subsection it is
deemed to have notice,  shall also be at liberty to accept a similar certificate
to the effect that any particular dealing, transaction or action is necessary or
expedient,  but  may at its  discretion  secure  such  further  evidence  deemed
necessary or advisable, but shall in no case be bound to secure the same.

                  (g)  The  permissive  rights  of  the  Trustee  to  do  things
enumerated  in this  Indenture  shall not be construed as a duty and the Trustee
shall not be  answerable  for other  than its  negligence  or  willful  default,
subject to Section 9.1(a) hereof.

                                     - 64 -


                  (h) The  Trustee  shall not be  required  to take notice or be
deemed to have notice of any default  hereunder  except failure by the Issuer to
cause to be made  any of the  payments  to the  Trustee  required  to be made by
Article III hereof unless the Trustee shall be specifically  notified in writing
of such  default  by the  Issuer  or by the  owners  of at least 25  percent  in
aggregate  principal amount of Bonds then Outstanding,  and all notices or other
instruments  required by this  Indenture to be delivered to the Trustee must, in
order to be effective,  be delivered at the principal  corporate trust office of
the  Trustee;  in the  absence of such  notice so  delivered,  the  Trustee  may
conclusively assume that there is no default except as aforesaid.

                  (i) All monies  received by the Trustee  shall,  until used or
applied or invested as herein  provided,  be held in trust in the manner and for
the purposes for which they were received but need not be segregated  from other
funds except to the extent  required by this Indenture or law. The Trustee shall
not be under any liability for interest on any monies received  hereunder except
such as may be agreed upon.

                  (j) At any and all reasonable times, the Trustee, and its duly
authorized   agents,   attorneys,    experts,    engineers,    accountants   and
representatives, shall have the right, but shall not be required, to inspect any
and all of the Trust  Estate,  including  all books,  papers and  records of the
Issuer pertaining to the Project and the Bonds.

                  (k) The  Trustee  shall  not be  required  to give any note or
surety in respect of the execution of the said trusts and powers or otherwise in
respect of the premises.

                  (l) Notwithstanding  anything in this Indenture contained, the
Trustee shall have the right, but shall not be required,  to demand,  in respect
of the  authentication  of any Bonds, the withdrawal of any cash, the release of
any property, or any action whatsoever within the purview of this Indenture, any
showings, certificates,  opinions, appraisals or other information, or corporate
action or evidence thereof, in addition to that by the terms hereof required, as
a condition of such action by the Trustee  deemed  desirable  for the purpose of
establishing  the right of the Issuer to the  authentication  of any Bonds,  the
withdrawal  of any cash,  the release of any property or the taking of any other
action by the Trustee.

                  (m) Before  taking any action  under  Section  8.2, 8.3 or 8.4
hereof, the Trustee may require that reasonable  indemnity be furnished to it by
the owners of the Bonds and for the  reimbursement  of all expenses which it may
incur and to protect it against all liability, except liability which may result
from its negligence or willful default, by reason of any action so taken.

                  (n) The Trustee may  deposit  the  property  held in the Funds
with a court  of  general  jurisdiction  in the  city in which  the  Trustee  is
located, or the Issuer may file an action to interplead the Trust Estate and the
Company,  the Issuer  and any other  appropriate  parties to such  action in the
event of the  Trustee's  resignation  hereunder  and the  failure of a successor
trustee to succeed to the duties of the Trustee  hereunder within 90 days of the
giving of notice of the

                                     - 65 -


Trustee's  resignation.  Upon the deposit of such  property  and the filing of a
complaint in interpleader,  the Trustee shall be relieved of all liabilities and
duties under the Loan Agreement and this  Indenture.  The Issuer and the Company
shall thereupon submit themselves to the jurisdiction of the District Court.

                  (o) In the event there  occurs a conflict of interest  arising
as the result of the Trustee's  acting as Trustee or in fiduciary  capacity with
respect to other  Indebtedness  of the  Company,  the  Trustee  shall  appoint a
Co-Trustee with respect to the Bonds.

         Section 9.2  FEE AND EXPENSES OF TRUSTEE. The Trustee shall be entitled
to payment and  reimbursement  for its reasonable fees for its services rendered
hereunder  as and when the  same  become  due and all  expenses  reasonably  and
necessarily  made or incurred by the Trustee in connection with such services as
and when the same become due as  provided in Section 5.1 of the Loan  Agreement.
The Trustee  shall not be entitled to payment of any expenses it incurs  related
to such  resignation  upon its  resignation  as Trustee  hereunder  unless  such
resignation  is made in relation to the exercise by the Trustee of its rights of
interpleader hereunder.

                  Notwithstanding  any  provision in this  Indenture or the Loan
Agreement to the contrary, any reference or covenant set forth in this Indenture
or the Loan  Agreement  for the payment or  remuneration  of (i) the  reasonable
fees,  compensation,  charges or remuneration of the Trustee, or the like, shall
be deemed to reference and include  Trustee's fees and  extraordinary  Trustee's
fees  including  reasonable  default fees of Trustee upon the  occurrence  of an
Event of Default incurred as a result of the administration of the duties of the
Trustee hereunder, and (ii) reasonable expenses, costs,  out-of-pocket costs, or
other  reimbursable  charges,  or the like,  shall be deemed  to  reference  and
include reasonable attorney's fees, fees and expenses of independent contractors
or agents  incurred  in the  course of the  administration  of the duties of the
Trustee hereunder, and other customary and reimbursable expenditures.

         Section 9.3  RESIGNATION  OR  REPLACEMENT  OF TRUSTEE.  The Trustee may
resign by giving to the Issuer,  the  Beneficial  Owners and the  Bondholders 90
days' notice of such  resignation,  provided,  however that no such  resignation
shall become effective until a successor has been appointed and has accepted the
duties of Trustee.  The present or any future Trustee may be removed at any time
by the  Bondholders by an instrument in writing,  executed by the Issuer and the
Company, so long as the Company is not in default or by the owners of a majority
in aggregate principal amount of the Bonds then Outstanding;  provided, however,
that no such removal shall become effective until a successor has been appointed
and has accepted the duties of Trustee hereunder.

                  In case the Trustee  shall at any time resign or be removed or
otherwise become  incapable of acting,  subject to the prior written approval of
the  Issuer,  a  successor  may be  appointed  by the  owners of a  majority  in
aggregate  principal  amount  of  the  Bonds  Outstanding  by an  instrument  or
concurrent  instruments signed by such Bondholders,  or their  attorneys-in-fact
duly  appointed;  provided  that the Issuer may appoint a successor  until a new
successor shall

                                     - 66 -


be appointed by the  Bondholders  as herein  authorized.  The Issuer upon making
such  appointment  shall forthwith give notice thereof to the Bondholders and to
the  Company,  which  notice  may be  given  concurrently  with  the  notice  of
resignation  given by any resigning  Trustee.  Any successor so appointed by the
Issuer shall  immediately  and without  further act be superseded by a successor
appointed in the manner above  provided by the owners of a majority in aggregate
principal amount of the Bonds Outstanding.

                  Every  successor shall always be a bank or trust company (or a
subsidiary thereof) in good standing,  qualified to act hereunder,  and having a
combined capital, surplus and undivided profits of not less than $25,000,000. An
successor  appointed  hereunder  shall execute,  acknowledge  and deliver to the
Issuer an instrument  accepting such appointment  hereunder,  and thereupon such
successor shall, without any further act, deed or conveyance, become vested with
all the estates, properties, rights, powers and trusts of its predecessor in the
trust hereunder with like effect as if originally  named as Trustee herein;  but
the  Trustee  retiring  shall,  nevertheless,  on  the  written  demand  of  its
successor,  execute and deliver an instrument conveying and transferring to such
successor,  upon the  trusts  herein  expressed,  all the  estates,  properties,
rights,  powers and trusts of the predecessor,  who shall duly assign,  transfer
and deliver to the  successor  all  properties  and monies held by it under this
Indenture.  Should  any  instrument  in writing  from the  Issuer be  reasonably
required by any  successor  for such  vesting and  confirming,  the Issuer shall
execute,  acknowledge and deliver the said deeds, conveyances and instruments on
the request of such successor.

                  The  notices   herein   provided  for,  to  be  given  to  the
Bondholders,  shall be given by mailing a copy of such  notices  by first  class
mail to the  Bondholders  at their  addresses as the same shall last appear upon
the  registration  books.  The  notice  herein  provided  for to be given to the
Issuer, the Company and the retiring Trustee,  shall be given in accordance with
Section 11.07 hereof.

                  The  instruments  evidencing the resignation or removal of the
Trustee and the  appointment of a successor  hereunder,  together with all other
instruments provided for in this Section,  shall be filed and/or recorded by the
successor  Trustee in each recording office where this Indenture shall have been
filed and/or recorded.

         Section 9.4 CONVERSION, CONSOLIDATION OR MERGER OF TRUSTEE. Any bank or
trust  company  into which the  Trustee or its  successor  may be  converted  or
merged,  or with  which  it may be  consolidated,  or to  which  it may  sell or
transfer  its trust  business as a whole shall be the  successor  of the Trustee
under this Indenture with the same rights,  powers,  duties and  obligations and
subject  to  the  same   restrictions,   limitations   and  liabilities  as  its
predecessor,  all without the  execution  or filing of any papers or any further
act on the part of any of the parties  hereto,  anything  herein to the contrary
notwithstanding. In case any of the Bonds to be issued hereunder shall have been
authenticated,   but  not  delivered,   any  successor  Trustee  may  adopt  the
certificate of any predecessor  Trustee,  and deliver the same as authenticated;
and, in case any of such

                                     - 67 -


Bonds shall not have been authenticated,  any successor Trustee may authenticate
such Bonds in the name of such successor Trustee.

         Section 9.5  TRUSTEE TO RETAIN INFORMATION. So long as any of the Bonds
shall be  Outstanding,  the Trustee  shall  retain all  certificates,  financial
statements and other written information  furnished to it by or on behalf of the
Company, the Issuer or any other Person under this Indenture, the Loan Agreement
and any other  agreement or  instrument  pertaining  to the Bonds and shall make
such  documentation  available for review after reasonable notice during regular
business  hours at the  principal  corporate  trust office of the Trustee to any
Bondholder and to any Beneficial  Owner. The Trustee shall permit such reviewers
to take  copies  of all or any  part of such  documentation,  subject  to  their
payment of such  reasonable  copying  and  handling  charges as the  Trustee may
impose.

                  In  addition,  the  Trustee  shall be  required  to  report to
Bondholders  and  Beneficial  Owners who have  provided  their  addresses to the
Trustee any withdrawals from the Reserve Fund.

         Section 9.6   GUARANTY  AGREEMENT.  The Issuer  hereby  authorizes  and
directs the Trustee to draw on the Principal  Guaranty pursuant to its terms, in
the amounts and at the times  necessary to pay  principal of and interest on the
Bonds  pursuant to this Section 9.6. The Trustee  shall draw upon the  Principal
Guaranty in accordance with the terms thereof as herein provided.

                  (a) On or before  11:00  a.m.,  local  time at the  designated
office of the Trustee on the second  Business Day prior to any Interest  Payment
Date (or the maturity date or any date set for  redemption on Bonds which is not
an Interest  Payment Date),  the Trustee shall determine the amount necessary to
make all required  payments of  principal  and interest on the Bonds on the next
succeeding  Interest  Payment Date,  maturity date, other redemption date, after
giving  effect to any  permitted  transfers  from the  Reserve  Fund,  and shall
present a demand to the  Guarantor  in such amount,  after giving  credit to the
amounts on deposit  therefore in the Bond  Principal Fund or Bond Interest Fund,
subject  to the terms of the  Principal  Guaranty,  so as to permit  the  timely
transfer of funds from the Guarantor to the Trustee for payment of the principal
of and  interest  on the Bonds  when due,  whether  at  maturity  or upon  prior
redemption.

                  (b) The  Trustee  shall  promptly  notify the Company and each
Notice Beneficial Owner by oral or telephonic communication confirmed in writing
if the Guarantor  has not  transferred  funds in  accordance  with the Principal
Guaranty upon the presentment of any such demand.

                  (c) In  calculating  the  amount to be drawn on the  Principal
Guaranty for the payment of  principal of and interest on the Bonds,  whether on
an Interest  Payment Date, at maturity or upon redemption or  acceleration,  the
Trustee  shall take into account the receipt of funds from the Company under the
Loan Agreement.

                                     - 68 -


                  (d) Upon satisfaction of the conditions for the release of the
Principal  Guaranty in  accordance  with the terms  thereof,  the Trustee  shall
execute such releases or similar documents as may be reasonably requested by the
Company or the Guarantor.

                                     - 69 -


                                    ARTICLE X

                             SUPPLEMENTAL INDENTURES
                      AND AMENDMENTS OF THE LOAN AGREEMENT

         Section 10.1   SUPPLEMENTAL  INDENTURES.  The owners of not less than a
majority in aggregate  principal amount of the Bonds then Outstanding shall have
the right,  from time to time,  to consent to and approve the  execution  by the
Issuer and the Trustee of such  indenture or indentures  supplemental  hereto as
shall be  deemed  necessary  or  desirable  by the  Issuer  for the  purpose  of
modifying,  altering,  amending, adding to or rescinding, in any particular, any
of the terms or provisions contained in this Indenture;  provided, however, that
without  the  consent  of the  owners of all the Bonds at the time  Outstanding,
nothing herein contained shall permit, or be construed as permitting:

                  (a) an  extension  of the  maturity  of, or a reduction of the
principal  amount of, or a reduction of the rate of, or extension of the time of
payment of interest on, or a reduction of a premium  payable upon any redemption
of, any Bond;

                  (b) the deprivation of the owner of any Bond then  Outstanding
of the lien created by this Indenture  (other than as permitted hereby when such
Bond was initially issued);

                  (c) a  privilege  or  priority  of any Bond or Bonds  over any
other Bond or Bonds except as specifically permitted by this Indenture; or

                  (d) a reduction in the aggregate principal amount of the Bonds
required for consent to such supplemental indenture.

                  If at any time the Issuer  shall  request the Trustee to enter
into such  supplemental  indenture for any of the purposes of this Section,  the
Trustee shall, upon being reasonably  indemnified by the Company with respect to
expenses,  cause notice of the proposed execution of such supplemental indenture
to be given to the Issuer and the Company in accordance with Section 11.7 hereof
and to the Notice  Beneficial  Owners and the  Bondholders  by mailing a copy of
such notice by first class mail to their addresses as the same shall last appear
upon the registration  books.  Such notice shall briefly set forth the nature of
the proposed  supplemental  indenture and shall state that copies thereof are on
file at the designated  corporate  trust office of the Trustee for inspection by
all Bondholders and Beneficial  Owners.  If, within 60 days following the giving
of such  notice,  the  owners  of the  requisite  principal  amount of the Bonds
Outstanding  at the time of the  execution  of any such  supplemental  indenture
shall have consented to and approved the execution  thereof as herein  provided,
no owner of any Bond  shall  have any  right to  object  to any of the terms and
provisions  contained  therein,  or the operation  thereof,  or in any manner to
question the  propriety of the execution  thereof,  or to enjoin or

                                     - 70 -


restrain  the Trustee or the Issuer from  executing  the same or from taking any
action pursuant to the provisions thereof.

         Section 10.2   EXECUTION  OF  SUPPLEMENTAL  INDENTURES.  The Trustee is
authorized  to join with the Issuer in the  execution  of any such  supplemental
indenture and to make further agreements and stipulations which may be contained
therein,  but the  Trustee  shall  not be  obligated  to  enter  into  any  such
supplemental indenture which affects its rights, duties or immunities under this
Indenture. Any supplemental indenture executed in accordance with the provisions
of this Article shall thereafter form a part of this Indenture and all the terms
and conditions contained in any such supplemental  indenture as to any provision
authorized to be contained  therein shall be deemed to be part of this Indenture
for  any  and  all  purposes.  In case  of the  execution  and  delivery  of any
supplemental indenture, express reference may be made thereto in the text of the
Bonds issued thereafter.

         Section 10.3   AMENDMENTS,  ETC.,  OF THE LOAN  AGREEMENT.  Neither the
Issuer  nor  the  Trustee  shall  consent  to any  other  amendment,  change  or
modification of the Loan Agreement  without the giving of notice and the written
approval  or  consent of the  owners of not less than a  majority  in  aggregate
principal amount of the Bonds at the time  Outstanding.  Such notice and consent
shall be given and procured as provided in Section 10.2 hereof.

         If at any time the Issuer or the Company  shall  request the consent of
the Trustee to any such proposed  amendment,  change or modification of the Loan
Agreement,  the Trustee shall, upon being reasonably  indemnified by the Company
with respect to expenses,  cause notice of such  proposed  amendment,  change or
modification  to be given in the same manner as provided in Section 10.2 hereof.
Such  notice  shall  briefly  set forth the nature of such  proposed  amendment,
change or modification  and shall state that copies of the instrument  embodying
the same are on file at the  principal  office of the Trustee for  inspection by
all Bondholders.

                                     - 71 -


                                   ARTICLE XI

                                  MISCELLANEOUS

         Section 11.1   EVIDENCE OF SIGNATURE OF  BONDHOLDERS  AND  OWNERSHIP OF
BONDS. Any request, consent or other instrument which this Indenture may require
or permit to be signed and  executed  by the  Bondholders  may be in one or more
instruments  and executed by such  Bondholders  in person or by their  attorneys
appointed in writing.  Proof of the execution of any such  instrument,  or of an
instrument  appointing  such  attorney,  or the  ownership  of  Bonds  shall  be
sufficient  (except  as  otherwise  herein  expressly  provided)  if made in the
following manner, but the Trustee may,  nevertheless,  in its discretion require
further or other proof in cases where it deems the same desirable:

                  (a) the fact and date of the  execution by any  Bondholder  or
his attorney of such  instrument may be proved by the certificate of any officer
authorized to take  acknowledgments  in the jurisdiction in which he purports to
act that the person signing such request or other instrument acknowledged to him
the execution thereof,  or by an affidavit of a witness of such execution,  duly
sworn to before a notary public; and

                  (b) the  Ownership  of any Bonds and the amount and numbers of
such Bonds and the date of holding the same shall be proved by the  registration
books of the Issuer kept by the Trustee.

                           Any request or consent of the owner of any Bond shall
bind all future  owners of such Bond in respect of anything  done or suffered to
be done by the Issuer or the Trustee in accordance therewith.

         Section 11.2  PARTIES INTERESTED  HEREIN.  With the exception of rights
herein expressly  conferred on the Company,  nothing in this Indenture expressed
or implied is intended or shall be construed to confer upon,  or to give to, any
person  other than the  Issuer,  the  Trustee  and the owners of the Bonds,  any
right,  remedy or claim under or by reason of this  Indenture  or any  covenant,
condition or stipulation hereof, and all the covenants,  stipulations,  promises
and agreements in this Indenture  contained by and on behalf of the Issuer shall
be for the sole and exclusive benefit of the Issuer, the Trustee, and the owners
of the Bonds.

         Section 11.3   TITLES,  HEADINGS,  ETC The titles and  headings  of the
articles,  sections and subsections of this Indenture have been inserted for the
convenience  of reference only and shall in no way modify or restrict any of the
terms or provisions hereof.

         Section 11.4 SEVERABILITY. In the event any provision of this Indenture
shall be held invalid or unenforceable  by any court of competent  jurisdiction,
such holding shall not invalidate or render  unenforceable  any other  provision
hereof.

                                     - 72 -


         Section 11.5  GOVERNING  LAW. This  Indenture  shall be governed by and
construed in accordance with the laws of the State of Oklahoma.

         Section 11.6  EXECUTION IN COUNTERPARTS. This Indenture may be executed
in several  counterparts,  each of which shall be an  original  and all of which
shall constitute but one and the same instrument.

         Section 11.7  NOTICES.  All notices, certificates,  directions or other
communications  hereunder shall be sufficiently  given and shall be deemed given
when mailed by certified mail, return receipt requested,  postage prepaid, or by
first-class mail, if this Indenture so provides, addressed as follows:

         Issuer:        Cleveland County Industrial Authority
                        c/o Board of Cleveland County Commissioners
                        605 E. Robinson
                        Norman, Oklahoma 73071
                        Attn: Secretary

         With copy to:  R. Lindsay Bailey, Esq.
                        Issuer's Counsel
                        303 E. Eufaula
                        Norman, Oklahoma 73102

         Trustee:       J.P. Morgan Trust Company, National Association
                        Corporate Trust Department
                        1200 N.W. 63rd
                        Oklahoma City, Oklahoma 73116
                        Attn: Brenda Batchelor

         Company:       Vaughan Foods, Inc.
                        216 NE 12th Street
                        Moore, Oklahoma 73160
                        Attn: Stan Gustas, Financial Consultant

         Underwriter:   Gates Capital Corporation
                        100 Park Avenue, 22nd Floor
                        New York, New York 10017

A  duplicate  copy of each  notice,  certificate  or other  communication  given
hereunder by or to the Issuer or the Trustee shall also be given to the Company,
the Underwriter and each Notice  Beneficial Owner.  Alternatively,  all notices,
certificates  or other  communications  hereunder may be given by telegram or by
telecopy (if confirmed  promptly  telephonically and in writing by the sender of
such notice and if receipt of such notice by telecopy is confirmed in writing by
the

                                     - 73 -


intended  recipient).  The Issuer, the Company,  the Underwriter and the Trustee
may, by notice given hereunder,  designate any further or different addresses to
which subsequent notices, certificates or other communications shall be sent.

         Section 11.8  PAYMENTS DUE ON NONBUSINESS  DAYS. If the date for making
any payment or the last day for  performance  of any act or the  exercise of any
right, as provided in this Indenture,  shall not be a Business Day, such payment
may be made or act performed or right exercised on the next succeeding  Business
Day with the same force and effect as if done on the  nominal  date  provided in
this Indenture.

         Section 11.9  SUBORDINATION  TO SENIOR  LOAN.  In the event the Company
shall certify to the Trustee that any Senior Loan shall be  refinanced  pursuant
to the incurrence by the Company of  Indebtedness on terms more favorable to the
Company than terms of the Senior Loan being refinanced,  the Trustee shall, upon
reasonable  indemnification  by the  Company as herein  provided,  execute  such
consents,  subordination  provisions  or similar  documents  with respect to the
Senior Loan to the effect that the Senior Loan shall be secured by a Lien on the
Pledged Property senior in priority to the Lien of the Loan Agreement.

         Section 11.10 PROVISION OF GENERAL APPLICATION. Any consent or approval
of the Issuer or Trustee required pursuant to this Indenture shall be in writing
and shall not be unreasonably withheld. Any direction given to the Trustee shall
be in writing.

                                     - 74 -


         IN WITNESS  WHEREOF,  the  Issuer  and the  Trustee  have  caused  this
Indenture  to be executed in their  respective  corporate  names and attested by
their duly authorized  Officers and the Trustee has caused its corporate seal to
be hereto affixed, all as of the date first above written.

                                        CLEVELAND COUNTY INDUSTRIAL
                                        AUTHORITY



                                        By:  /s/Charles Thompson
                                             -------------------
                                        Title:  Charles Thompson
                                                Chairman

Attest:



By:      /s/Donna Roberts
         ----------------
         Donna Roberts
         Secretary

[SEAL]

                                        J.P. MORGAN TRUST COMPANY, NATIONAL
                                        ASSOCIATION,
                                        as Trustee



                                        By: /s/ Brenda Batchelor
                                            --------------------
                                        Title:  Brenda E. Batchelor
                                                Vice-President

                                     - 75 -


STATE OF OKLAHOMA          )
                           ) ss.
COUNTY OF OKLAHOMA         )

         The foregoing  instrument was  acknowledged  before me this 16th day of
December,  2004, by Charles  Thompson,  Chairman and Donna  Roberts,  Secretary,
Cleveland County Industrial Authority, a public trust, on behalf of the trust.

         Witness my hand and official seal.

         My commission expires:
                                        ---------------------

[SEAL]

                                        ----------------------------------------
                                        Notary Public



STATE OF OKLAHOMA          )
                           ) ss.
COUNTY OF OKLAHOMA         )

         The foregoing  instrument was  acknowledged  before me this 16th day of
December,  2004,  by Brenda E.  Batchelor,  Vice-President,  J.P.  Morgan  Trust
Company, National Association.

         Witness my hand and official seal.

         My commission expires:
                                        ---------------------

[SEAL]

                                        ----------------------------------------
                                        Notary Public

                                     - 76 -

EX-4.7

                                                                          EX-4.7

                                PROMISSORY NOTE

================================================================================

Borrower: Vaughan Foods, Inc.           Lender: CNL Commercial Finance, Inc.,
          216 NE 12th Street                    a Delaware Corporation
          Moore, OK 73160                       26137 La Paz Road, Suite 102
                                                Mission Viejo, CA 92691

================================================================================

Principal Amount:                 Initial Rate:                    Date of Note:
 $3,500,000.00                       5.110%                        July 2, 2003

PROMISE  TO  PAY.  VAUGHAN  FOODS,  INC.  ("BORROWER")  PROMISES  TO  PAY TO CNL
COMMERCIAL FINANCE, INC., A DELAWARE CORPORATION ("LENDER"), OR ORDER, IN LAWFUL
MONEY OF THE UNITED  STATES OF AMERICA,  THE  PRINCIPAL  AMOUNT OF THREE MILLION
FIVE HUNDRED THOUSAND & 00/100 DOLLARS  ($3,500,000.00),  TOGETHER WITH INTEREST
ON THE UNPAID PRINCIPAL BALANCE FROM JULY 2, 2003, UNTIL PAID IN FULL.

PAYMENT.  SUBJECT TO ANY PAYMENT  CHANGES  RESULTING  FROM CHANGES IN THE INDEX,
BORROWER  WILL  PAY  THIS  LOAN IN 300  PAYMENTS  OF  $20,840.14  EACH  PAYMENT.
BORROWER'S  FIRST PAYMENT IS DUE SEPTEMBER 1, 2003, AND ALL SUBSEQUENT  PAYMENTS
ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT.  BORROWER'S FINAL PAYMENT WILL
BE DUE ON AUGUST 1, 2028, AND WILL BE FOR ALL PRINCIPAL AND ALL ACCRUED INTEREST
NOT YET PAID.  PAYMENTS INCLUDE PRINCIPAL AND INTEREST.  UNLESS OTHERWISE AGREED
OR REQUIRED BY  APPLICABLE  LAW,  PAYMENTS  WILL BE APPLIED FIRST TO ANY ACCRUED
UNPAID INTEREST;  THEN TO PRINCIPAL;  THEN TO ANY UNPAID  COLLECTION  COSTS; AND
THEN TO ANY LATE CHARGES.  THE ANNUAL INTEREST RATE FOR THIS NOTE IS COMPUTED ON
A 365/360 BASIS; THAT IS, BY APPLYING THE RATIO OF THE ANNUAL INTEREST RATE OVER
A YEAR OF 360 DAYS, MULTIPLIED BY THE OUTSTANDING PRINCIPAL BALANCE,  MULTIPLIED
BY THE ACTUAL NUMBER OF DAYS THAT  PRINCIPAL  BALANCE IS  OUTSTANDING.  BORROWER
WILL PAY LENDER AT LENDER'S ADDRESS SHOWN ABOVE OR AT SUCH OTHER PLACE AS LENDER
MAY DESIGNATE IN WRITING.

VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the 3 Month LIBOR
(London  Interbank  Offered  Rates) as published in the Wall Street Journal (the
"Index").  The Index is not necessarily the lowest rate charged by Lender on its
loans. If the Index becomes unavailable during the term of this loan, Lender may
designate a substitute index after notice to Borrower. Lender will tell Borrower
the current Index rate upon  Borrower's  request.  The interest rate change will
not occur  more often than each  first day of each  Calendar  Quarter.  Borrower
understands  that Lender may make loans based on other rates as well.  THE INDEX
CURRENTLY  IS 1.110%.  THE INTEREST  RATE TO BE APPLIED TO THE UNPAID  PRINCIPAL
BALANCE  OF THIS  NOTE  WILL BE AT A RATE OF 4.000  PERCENTAGE  POINTS  OVER THE
INDEX,  RESULTING IN AN INITIAL RATE OF 5.110%.  NOTICE:  under no circumstances
will the  interest  rate on this Note be more than the maximum  rate  allowed by
applicable law.  Whenever  increases occur in the interest rate,  Lender, at its
option, may do one or more of the following: (A) increase Borrower's payments to
ensure  Borrower's  loan will pay off by its original  final  maturity date, (B)
increase Borrower's payments to cover accruing interest, (C) increase the number
of Borrower's payments,  and (D) continue Borrower's payments at the same amount
and increase Borrower's final payment.

PREPAYMENT  FEE.  Borrower  agrees that all loan fees and other prepaid  finance
charges  are earned  fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default),  except
as otherwise  required by law. UPON PREPAYMENT OF THIS NOTE,  LENDER IS ENTITLED
TO THE  FOLLOWING  PREPAYMENT  FEE:  BORROWER MAY REPAY  WITHOUT ANY  PREPAYMENT
PREMIUM UP TO TWENTY PERCENT (20%) OF THE THEN  OUTSTANDING  PRINCIPAL AMOUNT OF
THIS NOTE DURING EACH OF THE FIRST FIVE (5) YEARS (EACH A "NOTE YEAR") FOLLOWING
DELIVERY  OF  THIS  NOTE  (ON  A   NONCUMULATIVE   BASIS)   (EACH  A  "PERMITTED
PREPAYMENT"), EXCEPT THAT NO "PERMITTED PREPAYMENT" MAY BE MADE AT THE TIME OF A
FULL REPAYMENT OF THE NOTE WHICH EXCEEDS 20% OF THE THEN  OUTSTANDING  PRINCIPAL
NOTE BALANCE. BORROWER SHALL PAY TO LENDER, IN ADDITION TO ALL OTHER AMOUNTS DUE
UNDER THE NOTE, A  PREPAYMENT  PREMIUM  EQUAL TO THREE  PERCENT (3%) OF THE THEN
OUTSTANDING  PRINCIPAL NOTE BALANCE IF PAID IN FULL OR THREE PERCENT (3%) OF ANY
PRINCIPAL REPAID IN ANY NOTE YEAR IN EXCESS OF THE PERMITTED PREPAYMENT FOR SUCH
NOTE YEAR.  FIVE (5) OR MORE YEARS  AFTER  DELIVERY OF THIS NOTE,  BORROWER  MAY
REPAY THE NOTE IN WHOLE OR IN PART WITHOUT ANY  PREPAYMENT  PREMIUM  WHATSOEVER.
EXCEPT FOR THE  FOREGOING,  BORROWER MAY PAY ALL OR A PORTION OF THE AMOUNT OWED
EARLIER THAN IT IS DUE. Early  payments will not,  unless agreed to by Lender in
writing,  relieve Borrower of Borrower's obligation to continue to make payments
under the Payment  schedule.  Rather,  early  payments will reduce the principal
balance due and may result in Borrower's making fewer payments.  Borrower agrees
not to send  Lender  payments  marked  "paid in full",  "without  recourse",  or
similar language. If Borrower sends such a payment, Lender may accept it without
losing any of  Lender's  rights  under  this  Note,  and  Borrower  will  remain
obligated to pay any further amount owed to Lender.  All written  communications
concerning  disputed  amounts,  including any check or other payment  instrument
that indicates that the payment constitutes "payment in full" of the amount owed
or that is tendered with other conditions or limitations or as full satisfaction
of a disputed  amount must be mailed or delivered  to: CNL  Commercial  Finance,
Inc., a Delaware  Corporation;  26137 La Paz Road,  Suite 102; Mission Viejo, CA
92691.

LATE  CHARGE.  If a payment  is 10 days or more late,  Borrower  will be charged
5.000% of the regularly scheduled payment.

INTEREST AFTER DEFAULT.  Upon default,  the variable  interest rate on this Note
shall  immediately  increase  to 9.000  percentage  points  over the  Index,  if
permitted under applicable law.

DEFAULT.  Each of the following shall  constitute an event of default ("Event of
Default") under this Note:

     PAYMENT  DEFAULT.  Borrower  fails to make any payment  when due under this
     Note.

     OTHER DEFAULTS. Borrower fails to comply with or to perform any other term,
     obligation,  covenant or condition  contained in this Note or in any of the
     related  documents  or to comply with or to perform  any term,  obligation,
     covenant or condition  contained in any other agreement  between Lender and
     Borrower.

     FALSE  STATEMENTS.  Any  warranty,  representation  or  statement  made  or
     furnished to Lender by Borrower or on Borrower's  behalf under this Note or
     the related  documents  is false or  misleading  in any  material  respect,
     either now or at the time made or furnished or becomes  false or misleading
     at any time thereafter.

     INSOLVENCY.  The  dissolution or  termination of Borrower's  existence as a
     going business,  the insolvency of Borrower,  the appointment of a receiver
     for any part of  Borrower's  property,  any  assignment  for the benefit of
     credits,  any  type  of  creditor  workout,  or  the  commencement  of  any
     proceeding under any bankruptcy or insolvency laws by or against Borrower.

     CREDITOR  OR  FORFEITURE   PROCEEDINGS.   Commencement  of  foreclosure  or
     forfeiture   proceedings,   whether  by  judicial  proceeding,   self-help,
     repossession  or any other  method,  by any  creditor of Borrower or by any
     government agency against any collateral securing the loan. This includes a
     garnishment of any of Borrower's accounts, including deposit accounts, with
     Lender.  However,  this Event of Default shall not apply if there is a good
     faith dispute by Borrower as to the validity or reasonableness of the claim
     which is the basis of the creditor or forfeiture proceeding and if Borrower
     gives Lender  written  notice of the creditor or forfeiture  proceeding and
     deposits with Lender monies or a surety bond for the creditor or forfeiture
     proceeding,  in an amount determined by Lender, in its sole discretion,  as
     being an adequate reserve or bond for the dispute.

     EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
     to any  Guarantor  of any of the  indebtedness  or any  Guarantor  dies  or
     becomes  incompetent,  or revokes or disputes the validity of, or liability
     under,  any guaranty of the  indebtedness  evidenced  by this Note.  In the
     event of a death, Lender, at its option, may, but shall not be required to,
     permit the  Guarantor's  estate to assume  unconditionally  the obligations
     arising  under the  guaranty in a manner  satisfactory  to Lender,  and, in
     doing so, cure any Event of Default.

     CHANGE IN OWNERSHIP.  Any change in ownership of twenty-five  percent (25%)
     or more of the common stock of Borrower.

     ADVERSE CHANGE.  A material  adverse change occurs in Borrower's  financial
     condition,  or Lender  believes the prospect of payment or  performance  of
     this Note is impaired.

     CURE PROVISIONS. If any default, other than a default in payment is curable
     and if  Borrower  has not  been  given a  notice  of a  breach  of the same
     provision of this Note within the preceding  twelve (12) months,  it may be
     cured (and no event of  default  will have  occurred)  if  Borrower,  after
     receiving  written notice from Lender  demanding cure of such default:  (1)
     cures the default  within ten (10) days;  or (2) if the cure  requires more
     than ten (10) days,  immediately  initiates  steps  which  Lender  deems in
     Lender's  sole  discretion  to  be  sufficient  to  cure  the  default  and
     thereafter  continues  and  completes all  reasonable  and necessary  steps
     sufficient to produce compliance as soon as reasonably practical.

LENDER'S  RIGHTS.  Upon default,  Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest  immediately  due, and then
Borrower will pay that amount.

ATTORNEYS' FEES;  EXPENSES.  Lender may hire or pay someone else to help collect
this Note if Borrower does not pay.  Borrower will pay Lender that amount.  This
includes,  subject to any limits under applicable law, Lender's  attorneys' fees
and  Lender's  legal  expenses,  whether  or not there is a  lawsuit,  including
attorneys'  fees,  expenses for  bankruptcy  proceedings  (including  efforts to
modify or vacate any automatic stay or injunction),  and appeals.  Borrower also
will pay any court costs, in addition to all other sums provided by law.

GOVERNING  LAW.  THIS  NOTE WILL BE  GOVERNED  BY,  CONSTRUED  AND  ENFORCED  IN
ACCORDANCE  WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA.  THIS NOTE
HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA.

CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts of Cleveland County, State of Oklahoma.

DISHONORED  ITEM FEE.  Borrower  will pay a fee to Lender of $25.00 if  Borrower
makes a payment on Borrower's loan and the check or



                                PROMISSORY NOTE
                                   (Continued)                            Page 2
================================================================================

preauthorized charge with which Borrower pays is later dishonored.

COLLATERAL.  Borrower  acknowledges  this  Note  is  secured  by  the  following
collateral  described in the security instrument listed herein; a Mortgage dated
July 2, 2003, to Lender on real property located in Cleveland  County,  State of
Oklahoma.

UNPAID INTEREST AND ENFORCEMENT COSTS.  Interest and Lender collection  expenses
(including  attorneys'  fees) not paid when due shall be added to principal  and
thereafter bear like interest.

FUNDING DATE INTEREST RATE  ADJUSTMENT.  In the event that Lender has not funded
the  loan  evidenced  by this  Note on or  before  the date  which is seven  (7)
calendar days after the date of this Note as set forth on the first page hereon,
Borrower acknowledges and agrees that Lender may elect (in its sole and absolute
discretion) to cancel and redraw the Note to increase the interest rate accruing
under the Note in accordance with the  increase(s),  if any, in interest rate(s)
then being  offered by Lender on loans  similar  to the loan  evidenced  by this
Note.

FINANCIAL REPORTING. Borrower agrees to furnish Lender with Federal Tax Returns,
as soon as available,  but in no event later than one-hundred-twenty  (120) days
after the applicable filing date for the tax reporting period ended, prepared by
a tax professional  satisfactory to Lender. All financial reports required to be
provided under this Note shall be prepared in accordance with GAAP, applied on a
consistent basis, and certified by Borrower as being true and correct.

SUCCESSOR INTERESTS.  The terms of this Note shall be binding upon Borrower, and
upon Borrower's heirs,  personal  representatives,  successors and assigns,  and
shall inure to the benefit of Lender and its successors and assigns.

GENERAL  PROVISIONS.  Lender may delay or forgo  enforcing  any of its rights or
remedies under this Note without losing them.  Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations,  presentment,  demand for payment, and notice
of  dishonor.  Upon any change in the terms of this Note,  and unless  otherwise
expressly  stated in  writing,  no party who signs this Note,  whether as maker,
guarantor,  accommodation  maker or endorser,  shall be released from liability.
All such parties agree that Lender may renew or extend  (repeatedly  and for any
length of time) this loan or release any party or  guarantor or  collateral;  or
impair,  fail to realize  upon the  perfect  Lender's  security  interest in the
collateral;  and take any other action  deemed  necessary by Lender  without the
consent  of or notice to anyone.  All such  parties  also agree that  Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the  modification is made. The  obligations  under this Note are joint
and several.

PRIOR TO SIGNING THIS NOTE,  BORROWER READ AND  UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE,  INCLUDING THE VARIABLE INTEREST RATE PROVISIONS.  BORROWER AGREES TO
THE TERMS OF THE NOTE.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

BORROWER:

VAUGHAN FOODS, INC.

By: /s/ Mark E. Vaughan                 By: /s/ Andre G. Vaughan
- --------------------------------        --------------------------------
Mark E. Vaughan,                        Andre G. Vaughan,
President of Vaughan Foods, Inc.        Secretary of Vaughan Foods, Inc.





                CORPORATE RESOLUTION TO BORROW / GRANT COLLATERAL

================================================================================

Corporation: Vaughan Foods, Inc.        Lender: CNL Commercial Finance, Inc.,
             216 NE 12th Street                 a Delaware Corporation
             Moore, OK 73160                    26137 La Paz Road, Suite 102
                                                Mission Viejo, CA 92691

================================================================================

WE, THE UNDERSIGNED, DO HEREBY CERTIFY THAT:

THE CORPORATION'S EXISTENCE. The complete and correct name of the Corporation is
Vaughan Foods, Inc. ("Corporation"). The Corporation is a corporation for profit
which is, and at all times shall be, duly organized,  validly  existing,  and in
good  standing  under and by virtue  of the laws of the State of  Oklahoma.  The
Corporation is duly  authorized to  transaction  business in all other states in
which the Corporation is doing business,  having obtained all necessary filings,
governmental  licenses and approvals for each state in which the  Corporation is
doing  business.  Specifically,  the  Corporation is, and at all times shall be,
duly qualified as a foreign corporation in all states in which the failure to so
qualify  would have a  material  adverse  effect on its  business  or  financial
condition.  The  Corporation  has  the  full  power  and  authority  to own  its
properties  and to transact  the  business in which it is  presently  engaged or
presently proposes to engage. The Corporation maintains an office at 216 NE 12th
Street,  Moore, OK 73160.  Unless the  Corporation  has designated  otherwise in
writing,  the principal office is the office at which the Corporation  keeps its
books and records. The Corporation will notify Lender prior to any change in the
location  of the  Corporation's  state  of  organization  or any  change  in the
Corporation's  name. The Corporation  shall do all things  necessary to preserve
and to keep in full force and effect its existence,  rights and privileges,  and
shall  comply with all  regulations,  rules,  ordinances,  statutes,  orders and
decrees of any governmental or quasi-governmental  authority or court applicable
to the Corporation and the Corporation's business activities.

RESOLUTIONS ADOPTED. At a meeting of the Directors of the Corporation, or if the
Corporation  is a close  corporation  having  no  Board of  Directors  then at a
meeting of the Corporation's shareholders, duly called and held on July 2, 2003,
at which a quorum was present and voting,  or by other duly authorized action in
lieu of a meeting, the resolutions set forth in this Resolution were adopted.

OFFICERS. The following named persons are officers of Vaughan Foods, Inc.:

     NAMES                  TITLES         AUTHORIZED      ACTUAL SIGNATURES
     -----                  ------         ----------      -----------------
     Mark E. Vaughan        President           Y         /s/ Mark E. Vaughan
     Andrea G. Vaughan      Secretary           Y         /s/ Andrea G. Vaughan

ACTIONS AUTHORIZED. Any one (1) of the authorized persons listed above may enter
into any agreements of any nature with Lender,  and those  agreements  will bind
the  Corporation.  Specifically,  but  without  limitation,  any one (1) of such
authorized persons are authorized,  empowered,  and directed to do the following
for and on behalf of the Corporation:

     BORROW MONEY. To borrow, as a cosigner or otherwise, from time to time from
     Lender,  on such terms as may be agreed upon  between the  Corporation  and
     Lender,  such sum or sums of money as in their judgment should be borrowed,
     without limitation.

     EXECUTE  NOTES:  To execute  and deliver to Lender the  promissory  note or
     notes, or other evidence of the  Corporation's  credit  accommodations,  on
     Lender's  forms,  at such  rates of  interest  and on such  terms as may be
     agreed  upon,  evidencing  the  sums of  money  so  borrowed  or any of the
     Corporation's  indebtedness  to Lender,  and also to execute and deliver to
     Lender  one or  more  renewals,  extensions,  modifications,  refinancings,
     consolidations,  or substitutions for one or more of the notes, any portion
     of the notes, or any other evidence of credit accommodations.

     GRANT SECURITY. To mortgage,  pledge, transfer,  endorse,  hypothecate,  or
     otherwise  encumber  and deliver to Lender any  property  now or  hereafter
     belonging to the  Corporation or in which the  Corporation now or hereafter
     may have an interest, including without limitation all of the Corporation's
     real property and all of the Corporation's  personal property  (tangible or
     intangible),   as  security   for  the  payment  of  any  loans  or  credit
     accommodations so obtained, any promissory notes so executed (including any
     amendments to or modifications, renewals, and extensions of such promissory
     notes),  or any other or further  indebtedness of the Corporation to Lender
     at any time owing, however the same may be evidenced.  Such property may be
     mortgaged,  pledged, transferred,  endorsed,  hypothecated or encumbered at
     the time such loans are obtained or such  indebtedness  is incurred,  or at
     any other time or times, and may be either in addition to or in lieu of any
     property   theretofore   mortgaged,   pledged,    transferred,    endorsed,
     hypothecated or encumbered.

     EXECUTE SECURITY  DOCUMENTS.  To execute and deliver to Lender the forms of
     mortgage,  deed of trust, pledge agreement,  hypothecation  agreement,  and
     other security agreements and financing statements which Lender may require
     and which shall  evidence  the terms and  conditions  under and pursuant to
     which such liens and  encumbrances,  or any of them, are given; and also to
     execute and deliver to Lender any other  written  instruments,  any chattel
     paper,  or any other  collateral,  of any kind or nature,  which Lender may
     deem necessary or proper in connection  with or pertaining to the giving of
     the liens and encumbrances.  Notwithstanding the foregoing,  any one of the
     above  authorized  persons  may  execute,   deliver,  or  record  financing
     statements.

     NEGOTIATE  ITEMS.  To draw,  endorse,  and discount with Lender all drafts,
     trade  acceptances,  promissory  notes,  or other evidences of indebtedness
     payable to or belonging to the  Corporation or in which the Corporation may
     have an interest,  and either to receive cash for the same or to cause such
     proceeds to be credited to the  Corporation's  account with  Lender,  or to
     cause such other  disposition of the proceeds derived therefrom as they may
     deem advisable.

     FURTHER  ACTS. In the case of lines of credit,  to designate  additional or
     alternate  individuals as being  authorized to request  advances under such
     lines,  and in all cases, to do and perform such other acts and things,  to
     pay any and all fees and  costs,  and to  execute  and  deliver  such other
     documents  and  agreements  as the  officers may in their  discretion  deem
     reasonably necessary or proper in order to carry into effect the provisions
     of this Resolution.

ASSUMED  BUSINESS NAMES.  The Corporation has filed or recorded all documents or
filings  required  by law  relating to all  assumed  business  names used by the
Corporation.  Excluding the name of the Corporation, the following is a complete
list of all assumed  business names under which the  Corporation  does business:
NONE.

NOTICES TO LENDER.  The  Corporation  will promptly  notify Lender in writing at
Lender's  address shown above  (or such other  addresses as Lender may designate
from time to time) prior to any (A) change in the Corporation's name; (B) change
in the Corporation's  assumed business name(s);  (C) change in the management of
the  Corporation;  (D)  change in the  authorized  signer(s);  (E) change in the
Corporation's principal office address; (F) change in the Corporation's state of
organization;  (G)  conversion of the  Corporation to a new or different type of
business  entity;  or (H)  change in any other  aspect of the  Corporation  that
directly or indirectly  relates to any agreements  between the  Corporation  and
Lender. No change in the  Corporation's  name or state of organization will take
effect until after Lender has received notice.

CERTIFICATION CONCERNING OFFICERS AND RESOLUTIONS.  The officers named above are
duly elected,  appointed, or employed by or for the Corporation, as the case may
be,  and  occupy  the  positions  set  opposite  their  respective  names.  This
Resolution  now  stands of record  on the books of the  Corporation,  is in full
force and effect, and has not been modified or revoked in any manner whatsoever.

SHAREHOLDER   APPROVAL.  At  a  special  meeting  of  the  shareholders  of  the
Corporation,  duly  called  and  held  (or by  consent  of the  shareholders  in
accordance  with the laws of the State of Oklahoma),  not less than the required
percentage of shareholders adopted or consented to all the resolutions set forth
in this Resolution.

NO CORPORATE SEAL. The Corporation has no corporate seal, and therefore, no seal
is affixed to this Resolution.

CONTINUING VALIDITY. Any and all acts authorized pursuant to this Resolution and
performed  prior to the  passage  of this  Resolution  are hereby  ratified  and
approved.  This Resolution  shall be continuing,  shall remain in full force and
effect and Lender may rely on it until written  notice of its  revocation  shall
have been  delivered to and received by Lender at Lender's  address  shown above
(or such addresses as Lender may designate  from time to time).  Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.

IN  TESTIMONY  WHEREOF,  WE HAVE  HEREUNTO  SET OUR  HAND  AND  ATTEST  THAT THE
SIGNATURES SET OPPOSITE THE NAMES LISTED ABOVE ARE THEIR GENUINE SIGNATURES.

WE EACH HAVE READ ALL THE PROVISIONS OF THIS RESOLUTION,  AND WE EACH PERSONALLY
AND ON BEHALF OF THE CORPORATION CERTIFY THAT ALL STATEMENTS AND REPRESENTATIONS
MADE IN THIS  RESOLUTION  ARE TRUE AND CORRECT.  THIS  CORPORATE  RESOLUTION  TO
BORROW / GRANT COLLATERAL IS DATED JULY 2, 2003.



               CORPORATE RESOLUTION TO BORROW / GRANT COLLATERAL
                                  (Continued)                             Page 2
================================================================================

                        CERTIFIED TO AND ATTESTED BY:

                        By: /s/ Mark E. Vaughan
                            ----------------------------------------------------
                            Mark E. Vaughan, President of Vaughan Foods, Inc.

                        By: /s/ Andrea G. Vaughan
                            ----------------------------------------------------
                            Andrea G. Vaughan, Secretary of Vaughan Foods, Inc.


NOTE: If the officers  signing this  Resolution  are designated by the foregoing
document as one of the officers  authorized to act on the Corporation's  behalf,
it is advisable to have this  Resolution  signed by at least one  non-authorized
officer of the Corporation.




COMMERCIAL GUARANTY

================================================================================

Borrower:   Vaughan Foods, Inc.            Lender: CNL Commercial Finance, Inc.,
            216 NE 12th Street                     a Delaware Corporation
            Moore, OK 73160                        26137 La Paz Road, Suite 102
                                                   Mission Viejo, CA 92691

Guarantor:  Mark E. Vaughan
            917 NW 39th Street
            Oklahoma City, OK 73118

================================================================================

AMOUNT OF GUARANTY. The amount of this Guaranty is Unlimited.

CONTINUING  UNLIMITED  GUARANTY.  FOR GOOD AND VALUABLE  CONSIDERATION,  MARK E.
VAUGHAN ("GUARANTOR") ABSOLUTELY AND UNCONDITIONALLY  GUARANTEES AND PROMISES TO
PAY TO CNL COMMERCIAL FINANCE,  INC., A DELAWARE  CORPORATION  ("LENDER") OR ITS
ORDER,  IN LEGAL TENDER OF THE UNITED STATES OF AMERICA,  THE  INDEBTEDNESS  (AS
THAT TERM IS DEFINED BELOW) OF VAUGHAN FOODS, INC. ("BORROWER") TO LENDER ON THE
TERMS AND  CONDITIONS  SET  FORTH IN THE  GUARANTY.  UNDER  THIS  GUARANTY,  THE
LIABILITY  OF  GUARANTOR  IS UNLIMITED  AND THE  OBLIGATIONS  OF  GUARANTOR  ARE
CONTINUING.

INDEBTEDNESS  GUARANTEED.  The Indebtedness  guaranteed by the Guaranty includes
any  and all of  Borrower's  Indebtedness  to  Lender  and is  used in the  most
comprehensive   sense  and  means  and  includes  any  and  all  of   Borrower's
liabilities,  obligations  and debts to  Lender,  now  existing  or  hereinafter
incurred  or  created,  including,  without  limitation,  all  loans,  advances,
interest, costs, debts, overdraft indebtedness,  credit card indebtedness, lease
obligations, other obligations, and liabilities of Borrower, or any of them, and
any present or future judgments  against  Borrower,  or any of them; and whether
any such  Indebtedness  is  voluntarily  incurred,  due or not due,  absolute or
contingent,  liquidated or  unliquidated,  determined or  undetermined;  whether
Borrower may be liable  individually  or jointly  with  others,  or primarily or
secondarily, or as guarantor or surety; whether recovery on the Indebtedness may
be or may  become  barred  or  unenforceable  against  Borrower  for any  reason
whatsoever;  and whether the Indebtedness  arises from transactions which may be
voidable on account of infancy, insanity, ultra vires, or otherwise.

DURATION OF GUARANTY.  This  Guaranty  will take effect when  received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower,  and will continue in full force until all Indebtedness incurred or
contracted  before receipt by Lender of any notice of revocation shall have been
fully and finally paid and satisfied and all of  Guarantor's  other  obligations
under this Guaranty  shall have been  performed in full. If Guarantor  elects to
revoke this Guaranty,  Guarantor may only do so in writing.  Guarantor's written
notice of revocation  must be mailed to Lender,  by certified  mail, at Lender's
address  listed  above or such other place as Lender may  designate  in writing.
Written  revocation  of  this  Guaranty  will  apply  only  to  advances  or new
Indebtedness  created  after  actual  receipt by Lender of  Guarantor's  written
revocation. For this purpose and without limitation, the term "new Indebtedness"
does not  include  Indebtedness  which at the time of  notice of  revocation  is
contingent,  unliquidated,  undetermined  or not due  and  which  later  becomes
absolute,  liquidated,  determined  or due.  This Guaranty will continue to bind
Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior
to  receipt  of  Gaurantor's   written  notice  of  revocation,   including  any
extensions,  renewals,  substitutions or modifications of the Indebtedness.  All
renewals,  extensions,  substitutions,  and  modifications  of the  Indebtedness
granted after Guarantor's revocation,  are contemplated under this Guaranty and,
specifically will not be considered to be new Indebtedness.  This Guaranty shall
bind  Guarantor's  estate  as to  Indebtedness  created  both  before  and after
Guarantor's  death or  incapacity,  regardless  of  Lender's  actual  notice  of
Guarantor's   death.   Subject  to  the  foregoing,   Guarantor's   executor  or
administrator or other legal  representative  may terminate this Guaranty in the
same  manner  in which  Guarantor  might  have  terminated  it and with the same
effect.  Release of any other  guarantor or termination of any other guaranty of
the  Indebtedness  shall not  affect  the  liability  of  Guarantor  under  this
Guaranty. A revocation Lender receives from any one or more Guarantors shall not
affect  the  liability  of  any  remaining   Guarantors   under  this  Guaranty.
Guarantor's  obligations  under this  Guaranty  shall be in  addition  to any of
Guarantor's  obligations,  or  any  of  them,  under  any  other  guaranties  of
Borrower's  Indebtedness  or any other person  heretofore or hereafter  given to
Lender unless such other guaranties are modified or revoked in writing; and this
Guarantor shall not, unless provided in this Guaranty,  affect,  invalidate,  or
supersede any such other guaranty. IT IS ANTICIPATED THAT FLUCTUATIONS MAY OCCUR
IN THE AGGREGATE AMOUNT OF INDEBTEDNESS COVERED BY THIS GUARANTY,  AND GUARANTOR
SPECIFICALLY   ACKNOWLEDGES   AND  AGREES  THAT  REDUCTIONS  IN  THE  AMOUNT  OF
INDEBTEDNESS,  EVEN  TO ZERO  DOLLARS  ($0.00),  PRIOR  TO  GUARANTOR'S  WRITTEN
REVOCATION OF THIS GUARANTY SHALL NOT CONSTITUTE A TERMINATION OF THIS GUARANTY.
THIS GUARANTY IS BINDING UPON GUARANTOR AND  GUARANTOR'S  HEIRS,  SUCCESSORS AND
ASSIGNS SO LONG AS ANY OF THE  GUARANTEED  INDEBTEDNESS  REMAINS UNPAID AND EVEN
THOUGH  THE  INDEBTEDNESS  GUARANTEED  MAY  FROM  TIME TO  TIME BE ZERO  DOLLARS
($0.00).

OBLIGATIONS  OF MARRIED  PERSONS.  Any  married  person who signs this  Guaranty
hereby  expressly  agrees that  recourse  under this Guaranty may be had against
both his or her separate property and community property.

GUARANTOR'S  AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before
or after any revocation  hereof,  WITHOUT NOTICE OR DEMAND AND WITHOUT LESSENING
GUARANTOR'S  LIABILITY  UNDER  THIS  GUARANTY,  FROM TIME TO TIME:  (A) prior to
revocation  as set  forth  above,  to make  one or more  additional  secured  or
unsecured loans to Borrower,  to lease equipment or other goods to Borrower,  or
otherwise to extend  additional  credit to Borrower;  (B) to alter,  compromise,
renew,  extend,  accelerate,  or otherwise change one or more times the time for
payment  or other  terms of the  Indebtedness  or any part of the  Indebtedness,
including  increases and decreases of the rate of interest on the  Indebtedness;
extensions  may be repeated and may be for longer than the  original  loan term;
(C) to  take  and  hold  security  for  the  payment  of  this  Guaranty  or the
Indebtedness,  and exchange, enforce, waive, subordinate,  fail or decide not to
perfect, and release any such security,  with or without the substitution of new
collateral; (D) to release,  substitute,  agree not to sue, or deal with any one
or more of Borrower's sureties,  endorsers,  or other guarantors on any terms or
in any manner Lender may choose; (E) to determine how, when and what application
of payments  and credits  shall be made on the  Indebtedness;  (F) to apply such
security  and  direct  the order or manner of sale  thereof,  including  without
limitation,  any  nonjudicial  sale  permitted  by the terms of the  controlling
security  agreement or deed of trust, as Lender in its discretion may determine;
(G) to sell, transfer,  assign or grant participations in all or any part of the
Indebtedness; and (H) to assign or transfer this Guaranty in whole or in part.

GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
Lender that (A) no  representations  or agreements of any kind have been made to
Guarantor  which would  limit or qualify in any way the terms of this  Guaranty;
(B) this  Guaranty is executed at  Borrower's  request and not at the request of
Lender;  (C)  Guarantor  has full power,  right and authority to enter into this
Guaranty;  (D) the provisions of this Guaranty do not conflict with or result in
a default under any agreement or other instrument  binding upon Guarantor and do
not  result  in a  violation  of any  law,  regulation,  court  decree  or order
applicable to Guarantor;  (E) Guarantor has not and will not,  without the prior
written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer,
or otherwise dispose of all or substantially  all of Guarantor's  assets, or any
interest therein;  (F) upon Lender's  request,  Guarantor will provide to Lender
financial and credit  information  in form  acceptable  to Lender,  and all such
financial  information  which  currently  has  been,  and all  future  financial
information  which will be provided to Lender is and will be true and correct in
all material respects and fairly present  Guarantor's  financial condition as of
the dates the financial information is provided;  (G) no material adverse change
has  occurred  in  Guarantor's  financial  condition  since the date of the most
recent financial  statements  provided to Lender and no event has occurred which
may  materially  adversely  affect  Guarantor's  financial  condition;   (H)  no
litigation,  claim,  investigation,  administrative proceeding or similar action
(including  those for unpaid taxes) against  Guarantor is pending or threatened;
(I) Lender has made no representation to Guarantor as to the creditworthiness of
Borrower;  and (J) Guarantor has  established  adequate  means of obtaining from
Borrower  on a  continuing  basis  information  regarding  Borrower's  financial
condition.  Guarantor agrees to keep adequately  informed from such means of any
facts,  events, or circumstances which might in any way affect Guarantor's risks
under this  Guaranty,  and  Guarantor  further  agrees that absent a request for
information,  Lender  shall have no  obligation  to  disclose to  Guarantor  any
information  or documents  acquired by Lender in the course of its  relationship
with Borrower.

GUARANTOR'S  FINANCIAL  STATEMENTS.  Guarantor agrees to furnish Lender with the
following:

     TAX  RETURNS.   As  soon  as   available,   but  in  no  event  later  than
     one-hundred-twenty  (120) days after the applicable filing date for the tax
     reporting  period  ended,  Federal  and  other  governmental  tax  returns,
     prepared by a tax professional satisfactory to Lender.

All  financial  reports  required to be provided  under this  Guaranty  shall be
prepared in accordance with GAAP,  applied on a consistent  basis, and certified
by Guarantor as being true and correct.

GUARANTOR'S  WAIVERS.  Except as prohibited by applicable law,  Guarantor waives
any right to require Lender to (A) make any  presentment,  protest,  demand,  or
notice of any kind,  including notice of change of any terms of repayment of the
Indebtedness,  default by Borrower or any other guarantor or surety,  any action
or nonaction  taken by  Borrower,  Lender,  or any other  guarantor or surety of
Borrower, or the creation of new or additional Indebtedness; (B) proceed against
any person, including Borrower, before proceeding against Guarantor; (C) proceed
against any collateral for the Indebtedness,  including  Borrower's  collateral,
before proceeding against Guarantor; (D) apply any payments or proceeds received
against the Indebtedness in any order;  (E) give notice of the terms,  time, and
place of any sale of the collateral  pursuant to the Uniform  Commercial Code or
any other law  governing  such sale;  (F)  disclose  any  information  about the
Indebtedness, the Borrower, the collateral, or any other guarantor or surety, or
about any action or nonaction  of Lender;  or (G) pursue any remedy or course of
action in Lender's power whatsoever.

Guarantor  also waives any and all rights or  defenses  arising by reason of (H)
any  disability or other defense of Borrower,  any other  guarantor or surety or
any other  person;  (I) the  cessation  from any cause  whatsoever,  other  than
payment in full, of the  Indebtedness;  (J) the  application  of proceeds of the
Indebtedness  by Borrower for purposes  other than the purposes  understood  and
intended by  Guarantor  and Lender;  (K) any act of  omission or  commission  by
Lender which  directly or indirectly  results in or contributes to the discharge
of Borrower or any other guarantor




                                COMMERCIAL GUARANTY
                                   (Continued)                            Page 2
================================================================================

or surety,  or the  Indebtedness,  or the loss or release of any  collateral  by
operation  of law or  otherwise;  (L) any statute of  limitations  in any action
under this Guaranty or on the Indebtedness; or (M) any modification or change in
terms  of  the  Indebtedness,  whatsoever,  including  without  limitation,  the
renewal,  extension,  acceleration,  or other  change in the time payment of the
Indebtedness  is due and any change in the interest rate, and including any such
modification   or  change  in  terms  after   revocation  of  this  Guaranty  on
Indebtedness incurred prior to such revocation.

Guarantor  waives all rights and any  defenses  arising  out of an  election  of
remedies  by  Lender  even  though  that the  election  of  remedies,  such as a
non-judicial  foreclosure with respect to security for a guaranteed  obligation,
has  destroyed  Guarantor's  rights of  subrogation  and  reimbursement  against
Borrower by operation of Section 580d of the California  Code of Civil Procedure
or otherwise.

Guarantor  waives  all rights  and  defenses  that  Guarantor  may have  because
Borrower's  obligation  is secured by real  property.  This  means  among  other
things:  (1) Lender may collect from Guarantor  without first foreclosing on any
real  or  personal  property  collateral  pledged  by  Borrower.  (2) If  Lender
forecloses on any real property  collateral pledged by Borrower;  (a) the amount
of  Borrower's  obligation  may be  reduced  only by the  price  for  which  the
collateral is sold at the foreclosure sale, even if the collateral is worth more
than the sale price.  (b) Lender may collect from Guarantor  even if Lender,  by
forclosing on the real property  collateral,  has destroyed any right  Guarantor
may have to collect from  Borrower.  This is an  unconditional  and  irrevocable
waiver  of any  rights  and  defenses  Guarantor  may  have  because  Borrower's
obligation is secured by real property.  These rights and defenses include,  but
are not limited to, any rights and defenses based upon Section 580a, 580b, 580d,
or 726 of the Code of Civil Procedure.

Guarantor  understands and agrees that the foregoing  waivers are  unconditional
and  irrevocable  waivers of substantive  rights and defenses to which Guarantor
might otherwise be entitled under state and federal law. Guarantor  acknowledges
that  Guarantor  has  provided  these  waivers of rights and  defenses  with the
intention  that  they  be  fully  relied  upon  by  Lender.   Guarantor  further
understands and agrees that this Guaranty is a seperate and independent contract
between  Guarantor and Lender,  given for full and ample  consideration,  and is
enforceable on its own terms. Until all Indebtedness is paid in full,  Guarantor
waives any right to enforce any remedy  Guarantor  may have against the Borrower
or any other guarantor,  surety, or other person, and further,  Guarantor waives
any right to participate in any collateral for the Indebtedness now or hereafter
held by Lender.

In addition to the waivers set forth herein, if now or hereafter  Borrower is or
shall become insolvent and the Indebtedness shall not at all times until paid be
fully secured by collateral pledged by Borrower, Guarantor hereby forever waives
and  gives up in favor of Lender  and  Borrower,  and  Lender's  and  Borrower's
respective  successors,  any claim or right to payment Guarantor may now have or
hereafter have or acquire against Borrower, by subrogation or otherwise, so that
at no time shall  Guarantor  be or become a  "creditor"  of Borrower  within the
meaning of 11 U.S.C.  section 547(b), or any successor  provision of the Federal
bankruptcy laws.

GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees
that each of the waivers set forth above is made with Guarantor's full knowledge
of its significance and consequences and that, under circumstances,  the waivers
are  reasonable  and not contrary to public policy or law. If any such waiver is
determined to be contrary to any applicable  law or public  policy,  such waiver
shall be effective only to the extent permitted by law or public policy.

SUBORDINATION  OF  BORROWER'S  DEBT TO  GUARANTOR.  Guarantor  agrees  that  the
Indebtedness of Borrower to Lender,  whether now existing or hereafter  created,
shall be superior to any claim that Guarantor may now have or hereafter  acquire
against Borrower,  whether or not Borrower becomes  insolvent.  Guarantor hereby
expressly  subordinates any claim Guarantor may have against Borrower,  upon any
account  whatsoever,  to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets of
Borrower,  through bankruptcy, by an assignment for the benefit of creditors, by
voluntary  liquidation,  or otherwise,  the assets of Borrower applicable to the
payment of the claims of both Lender and  Guarantor  shall be paid to Lender and
shall be first  applied by Lender to the  Indebtedness  of  Borrower  to Lender.
Guarantor  does hereby  assign to Lender all claims which it may have or acquire
against  Borrower or against any assignee or trustee in  bankruptcy of Borrower;
provided  however,  that such assignment shall be effective only for the purpose
of assuring  to Lender  full  payment in legal  tender of the  Indebtedness.  If
Lender so requests,  any notes or credit agreements now or hereafter  evidencing
any debts or obligations of Borrower to Guarantor  shall be marked with a legend
that the same are subject to this  Guaranty  and shall be  delivered  to Lender.
Guarantor  agrees,  and Lender is hereby  authorized,  in the name of Guarantor,
from time to time to execute  and file  financing  statements  and  continuation
statements and to execute such other documents and to take such other actions as
Lender  deems  necessary  or  appropriate  to perfect,  preserve and enforce its
rights under this Guaranty.

MISCELLANEOUS  PROVISIONS.  The following miscellaneous provisions are a part of
this Guaranty:

     AMENDMENTS. This Guaranty, together with any Related Documents, constitutes
     the entire understanding and agreement of the parties as to the matters set
     forth in this  Guaranty.  No  alteration  of or amendment to this  Guaranty
     shall be  effective  unless  given in  writing  and  signed by the party or
     parties sought to be charged or bound by the alteration or amendment.

     ATTORNEYS'  FEES;  EXPENSES.  Guarantor  agrees to pay upon  demand  all of
     Lender's  costs  and  expenses,  including  Lender's  attorneys'  fees  and
     Lender's legal expenses, incurred in connection with the enforcement of the
     Guaranty.  Lender  may  hire  or pay  someone  else to  help  enforce  this
     Guaranty,   and  Guarantor  shall  pay  the  costs  and  expenses  of  such
     enforcement.  Costs and expenses include Lender's attorneys' fees and legal
     expenses whether or not there is a lawsuit,  including  attorneys' fees and
     legal expenses for bankruptcy  proceedings  (including efforts to modify or
     vacate any automatic  stay or  injunction),  appeals,  and any  anticipated
     post-judgment collection services. Guarantor also shall pay all court costs
     and such additional fees as may be directed by the court.

     CAPTION  HEADINGS.  Caption  headings in this Guaranty are for  convenience
     purposes only and are not to be used to interpret or define the  provisions
     of this Guaranty.

     GOVERNING LAW. THIS GUARANTY WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN
     ACCORDANCE  WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA.  THIS
     GUARANTY HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA.

     CHOICE OF VENUE.  If there is a lawsuit,  Guarantor  agrees  upon  Lender's
     request to submit to the  jurisdiction  of the courts of Cleveland  County,
     State of Oklahoma.

     INTEGRATON.  Guarantor  further  agrees that  Guarantor  has read and fully
     understands  the terms of this Guaranty;  Guarantor has had the opportunity
     to be advised by Guarantor's  attorney with respect to this  Guaranty;  the
     Guaranty  fully reflects  Guarnator's  intentions and parol evidence is not
     required  to  interpret  the  terms  of  this  Guaranty.  Guarantor  hereby
     indemnifies and holds Lender harmless from all losses, claims, damages, and
     costs (including  Lender's  attorneys' fees) suffered or incurred by Lender
     as a result of any breach by Guarantor of the  warranties,  representations
     and agreements of this paragraph.

     INTERPRETATION.  In all  cases  where  there is more than one  Borrower  or
     Guarantor,  then all words used in the  Guaranty in the  singular  shall be
     deemed to have been used in the plural  where the context and  construction
     so  require;  and  where  there  is more  than one  Borrower  named in this
     Guaranty or when this Guaranty is executed by more than one Guarantor,  the
     words "Borrower" and "Guarantor" respectively shall mean all and any one or
     more of them. The words  "Guarantor,"  "Borrower," and "Lender" include the
     heirs,  successors,  assigns,  and  transferees of each of them. If a court
     finds  that any  provision  of the  Guaranty  is not valid or should not be
     enforced,  that fact by itself will not mean that the rest of this Guaranty
     will not be valid or enforced.  Therefore, a court will enforce the rest of
     the provisions of this Guaranty even if a provision of this Guaranty may be
     found to be invalid or  unenforceable.  If any one or more of  Borrower  or
     Guarantor are corporations,  partnerships,  limited liability companies, or
     similar entities, it is not necessary for Lender to inquire into the powers
     of Borrower or Guarantor or of the officers, directors, partners, managers,
     or other agents acting or  purporting to act on their behalf,  and any Loan
     Indebtedness  made or created in reliance  upon the  professed  exercise of
     such powers shall be guaranteed under this Guaranty.

     NOTICES. Any notice required to be given under this Guaranty shall be given
     in writing,  and,  except for  revocation  notices by  Guarantor,  shall be
     effective when actually delivered,  when actually received by telefacsimile
     (unless  otherwise  required  by law),  when  deposited  with a  nationally
     recognized  overnight courier,  or, if mailed, when deposited in the United
     States mail, as first class,  certified or registered mail postage prepaid,
     directed to the addresses  shown near the beginning of this  Guaranty.  All
     revocation  notices by Guarantor shall be in writing and shall be effective
     upon  delivery  to Lender  as  provided  in the  section  of this  Guaranty
     entitled  "DURATION  OF  GUARANTY."  Any party may change its  address  for
     notices under this Guaranty by giving  formal  written  notice to the other
     parties, specifying that the purpose of the notice is to change the party's
     address.  For notice purposes,  Guarantor agrees to keep Lender informed at
     all times of Guarantor's  current  address.  Unless  otherwise  provided or
     required by law, if there is more than one  Guarantor,  any notice given by
     Lender to any Guarantor is deemed to be notice given to all Guarnators.

     NO WAIVER BY LENDER.  Lender  shall not be deemed to have waived any rights
     under this  Guaranty  unless  such waiver is given in writing and signed by
     Lender.  No delay or omission on the part of Lender in exercising any right
     shall  operate  as a waiver of such right or any other  right.  A waiver by
     Lender of a provision of this Guaranty  shall not prejudice or constitute a
     waiver of Lender's right  otherwise to demand strict  compliance  with that
     provision  or any other  provision  of this  Guaranty.  No prior  waiver by
     Lender,  nor any course of dealing  between  Lender  and  Guarantor,  shall
     constitute  a waiver of any of  Lender's  rights  or of any of  Guarantor's
     obligations as to any future  transactions.  Whenever the consent of Lender
     is required under this Guaranty,  the granting of such consent by Lender in
     any  instance  shall  not  constitute   continuing  consent  to  subsequent
     instances  where such consent is required and in all cases such consent may
     be granted or withheld in the sole discretion of Lender.




                                COMMERCIAL GUARANTY
                                   (Continued)                            Page 3
================================================================================

     SUCCESSORS AND ASSIGNS.  Subject to any limitations stated in this Guaranty
     on transfer of  Guarantor's  interest,  this Guaranty shall be binding upon
     and inure to the benefit of the parties, their successors and assigns.

PAYMENT AND PERFORMANCE GUARANTY.  This is a guaranty of full and timely payment
and/or performances of each and all obligations or Indebtedness now or hereafter
owing by Borrower to Lender.

ADDITIONAL  WAIVER.  In addition  to any and all waivers set forth  hereinabove,
Guarantor hereby waives and relinquishes all of the Guarantor's  rights provided
by 12 Oklahoma  State Section 686, 15 Oklahoma  State Sections 334, 338, 341 and
344,  and all other  statutory  and common law rights,  remedies,  defenses  and
set-off  credits for the fair market value of the property which may be accorded
to Grantor under Oklahoma law.

DEFINITIONS.  The following capitalized words and terms shall have the following
meanings when used in this Guaranty. Unless specifically stated to the contrary,
all  references  to dollar  amounts  shall mean  amounts in lawful  money of the
United States of America. Words and terms used in the singular shall include the
plural,  and the plural shall include the singular,  as the context may require.
Words and terms not otherwise  defined in this Guaranty  shall have the meanings
attributed to such terms in the Uniform Commercial Code:

     BORROWER.  The word "Borrower"  means Vaughan Foods,  Inc. and includes all
     co-signers and co-makers signing the Note.

     GAAP. The word "GAAP" means generally accepted accounting principles.

     GUARANTOR.  The word  "Guarantor"  means  each and  every  person or entity
     signing this Guaranty, including without limitation Mark E. Vaughan.

     GUARANTY.  The word "Guaranty" means the guaranty from Guarantor to Lender,
     including without limitation a guaranty of all or part of the Note.

     INDEBTEDNESS.  The word  "Indebtedness"  means  Borrower's  indebtedness to
     Lender as more particularly described in this Guaranty.

     LENDER.  The word "Lender" means CNL Commercial  Finance,  Inc., a Delaware
     Corporation, its successors and assigns.

     NOTE.  The  word  "Note"  means  and  includes  without  limitation  all of
     Borrower's  promissory notes and/or credit agreements evidencing Borrower's
     loan  obligations  in favor of  Lender,  together  with  all  renewals  of,
     extensions of,  modifications  of,  refinancings of,  consolidations of and
     substitutions for promissory notes or credit agreements.

     RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes,
     credit agreements, loan agreements,  environmental agreements,  guaranties,
     security agreements,  mortgages, deeds of trust, security deeds, collateral
     mortgages, and all other instruments, agreements and documents, whether now
     or hereafter existing, executed in connection with the Indebtedness.

EACH UNDERSIGNED  GUARANTOR  ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION,  EACH GUARANTOR  UNDERSTANDS THAT
THIS  GUARANTY IS  EFFECTIVE  UPON  GUARANTOR'S  EXECUTION  AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE  UNTIL  TERMINATED IN THE
MANNER  SET  FORTH IN THE  SECTION  TITLED  "DURATION  OF  GUARANTY".  NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY
IS DATED JULY 2, 2003.

GUARANTOR:


MARK E. VAUGHAN
- --------------------------------------
Mark E. Vaughan, Individually

EX-4.8

Exhibit 4.7


The registrant hereby agrees and undertakes to furnish to the Securities and
Exchange Commission upon request a copy of the following long-term debt
agreements of the registrant or, where specified, Cimarron Holdings, L.L.C.:


- --------------------- ------------------ ------------------ --------------------
Type of long-term     Interest rate      Due date           Principal balance at
debt                                                        December 31, 2005
- --------------------- ------------------ ------------------ --------------------
- --------------------- ------------------ ------------------ --------------------
Real estate loan      National prime     July 22, 2009      $219,602
                      plus 1.75%
- --------------------- ------------------ ------------------ --------------------
Equipment loan        7.00%              September 15, 2007 $47,200
- --------------------- ------------------ ------------------ --------------------
Aircraft engine loan  8.00%              August 2007        $42,210
(Cimarron Holdings,
L.L.C.)
- --------------------- ------------------ ------------------ --------------------
Vehicle and equipment Various fixed      Various dates      $513,080
loans, various        rates
- --------------------- ------------------ ------------------ --------------------
Loan (Cimarron        Index plus 1.75%,  April 21, 2019     $237,433
Holdings, L.L.C.)     rate of 10% at
                      June 30, 2006
- --------------------- ------------------ ------------------ --------------------


                                         Vaughan Foods, Inc.

                                         By: /s/ Stan Gustas
                                             ---------------
                                             Stan L. Gustas
                                             Chief Financial Officer

                                         Dated:  September 27, 2006

EX-5.1

                                                                     Exhibit 5.1

                       MORSE, ZELNICK, ROSE & LANDER, LLP
                                 405 PARK AVENUE
                            NEW YORK, NEW YORK 10022

                                 (212) 838-1177

                                 October 5, 2006

Vaughan Foods, Inc.
216 N.E. 12th Street
Moore, Oklahoma 73160

Dear Sirs:

We have acted as counsel to Vaughan Foods, Inc., an Oklahoma corporation (the
"Company"), in connection with the preparation of a registration statement on
Form S-1 (the "Registration Statement") filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), to register
the offering by the Company, including securities which may be issued on the
exercise of the over-allotment option, of:


(a) 5,750,000 units (the "Units"), each consisting of one share of the Company's
common stock, $.001 par value (the "Common Stock"), one Class A warrant (a "
Class A Warrant") to purchase one share of Common Stock, and one Class B warrant
(a "Class B Warrant") to purchase one share of Common Stock; (b) 5,750,000
shares of Common Stock included in the Units; (c) 5,750,000 Class A Warrants;
(d) 5,750,000 Class B Warrants; (e) 5,750,000 shares of Common Stock underlying
the Class A Warrants; (f) 5,750,000 shares of Common Stock underlying the Class
B Warrants; (g) the warrants to be issued to the representative of the several
underwriters to purchase up to 500,000 units identical to the Units (the
"Representative's Warrants"); (h)500,000 units underlying the Representative's
Warrants; (i) 500,000 shares of Common Stock underlying the units underlying the
Representative's Warrant; (j) 500,000 Class A warrants underlying the units
underlying the Representative's Warrant; (k) 500,000 Class B warrants underlying
the units underlying the Representative's Warrant; (l) 500,000 shares of Common
Stock underlying the Class A warrants underlying the units underlying the
Representative's Warrant; (m) 500,000 shares of Common Stock underlying the
Class B warrants underlying the units underlying the Representative's Warrant;
and (n) any additional securities issued pursuant to Rule 462(b) of the Act. The
securities described in clauses (a) through (n) above are hereinafter referred
to as the "Securities."

In this regard, we have reviewed the Company's Certificate of Incorporation, as
amended, resolutions adopted by the Company's Board of Directors, the
Registration Statement, the exhibits to the Registration Statement and such
other records, documents, statutes and decisions, as we have deemed relevant in
rendering this opinion. Based upon the foregoing, we are of the opinion that the
Securities (i) have been duly and validly authorized for issuance; (ii) when
issued as contemplated by the Registration Statement and, in the case of those
Securities underlying warrants, when issued in accordance with the terms of the
applicable warrants, will be legally issued, fully paid and non-assessable. All
of the warrants included in the Securities, including without limitation the
warrants referred to in clauses (c), (d), (g), (j) and (k) above will, when
issued as contemplated in the warrant agreement attached as an exhibit to the
Registration Statement, be validly issued and constitute a legally valid and
binding obligation of the Company.




This opinion is limited to (i) the federal laws of the United States of America,
including statutory provisions and reported judicial decisions interpreting
those laws and (ii) the laws of the State of Oklahoma, including statutory
provisions, applicable provisions of the Oklahoma Constitution and reported
judicial decisions interpreting those laws.

We hereby consent to the use of this opinion as Exhibit 5.1 to the Registration
Statement and to the reference to our firm in the related prospectus under the
heading "Legal Matters." In giving such opinion, we do not thereby admit that we
are acting within the category of persons whose consent is required under
Section 7 of the Act or the rules or regulations of the Securities and Exchange
Commission thereunder.

                                        Very truly yours,


                                        /s/ Morse, Zelnick, Rose & Lander
                                        ---------------------------------
                                        Morse, Zelnick, Rose & Lander LLP

EX-10.1

                               Vaughan Foods, Inc.
                              216 East 12th Street
                              Moore, Oklahoma 73160
                                  June 12, 2006

Mark E. Vaughan
Vernon J. Brandt, Jr.
Vaughan Foods, Inc.
216 East 12th Street
Moore, Oklahoma 73160

                 Re: Ownership of Allison's Gourmet Kitchens, LP

Gentlemen:

         This letter sets forth the agreement between Vaughan Foods, Inc., and
Mark E. Vaughan and Vernon J. Brandt, Jr., who own the following limited
partnership interests in Allison's Gourmet Kitchens, LP, an Oklahoma limited
partnership:

         48%      Mark E. Vaughan

         12%      Vernon J. Brandt, Jr.

         Each individual agrees to transfer all of such interest in Allison's
Gourmet Kitchens, LP to Vaughan Foods, Inc. for the purchase price of $1.00,
subject to the condition that the public offering for an amount of at least $20
million underwritten by Paulson Investment Co. as outlined in the Letter of
Intent dated May 8, 2006 between Paulson Investment Company, Inc. and Vaughan
Foods Inc. be completed by December 31, 2006. The transfer will be made
simultaneously with the closing of the public offering.

         Please confirm your agreement by signing below and returning a copy to
Vaughan Foods, Inc. at your early convenience.

                                        Very truly yours,

                                        Vaughan Foods, Inc.

                                        By:  /s/ Mark E. Vaughan
                                             -------------------
                                             Mark E. Vaughan
                                        Its: President
Accepted and agreed:

   /s/ Vernon J. Brandt, Jr.
- ----------------------------
Vernon J. Brandt, Jr., an individual

   /s/ Mark E. Vaughan
- ----------------------------
Mark E. Vaughan, an individual

cc: Stan Gustas

EX-10.2

                               VAUGHAN FOODS INC.
                            216 Northeast 12th Street
                              Moore, Oklahoma 73160



                                                                    May 19, 2006


Braxton Management, Inc.
Mr. Herb Grimes
    and
Mr. Stan Gustas
c/o Vaughan Foods Inc.
216 Northeast 12th Street
Moore, Oklahoma 73160


Dear Herb and Stan:

        This will set forth the agreement pursuant to which we will acquire,
through a wholly owned subsidiary formed for that purpose, all of your current
40% limited partnership interests in Allison's Gourmet Kitchens, LP ("Allisons")
and the general partnership interest in Allison's of Braxton Management, Inc.
("Braxton").

        1.      Simultaneously with the effectiveness of an initial public
offering of our equity securities ("IPO"), we will acquire all of the limited
partnership interests held by you for $3.5 million (the "Purchase Price"), $2.5
million payable in cash and $1 million payable in shares of our Common Stock.
The Purchase Price will be payable immediately after the closing of the IPO. For
this purpose, each share of our Common Stock will have a value equal to the
initial public offering price per share in the IPO. If the IPO consists of units
that include shares of Common Stock and other securities, the value of a share
of Common Stock shall be equal to the initial public offering price of the unit
divided by the number of shares of Common Stock included in the unit plus the
number of shares of Common Stock issuable upon the exercise of any conversion
right with respect to any convertible security included in the unit provided
that such conversion right is not contingent on the payment of any sum of money
or the transfer of any other property by the holder of such convertible
security. The Purchase Price will be divided 12(1)/2% to Stan and 87(1)/2% to
Herb.

        2.      Simultaneously with the transfer of the limited partnership
interests, Braxton will assign to us its general partnership interest in
Allison's in return for our undertaking, as set forth herein, to indemnify and
hold harmless Braxton from all liability as the former general partner of
Allison's other than those liabilities, if any, resulting from Braxton's
criminal conduct or gross negligence.



        3.      The limited partnership interests in Allison's conveyed
hereunder, together with the 60% interest in Allison's currently owned by Mark
E. Vaughan and Vernon J. Brandt, Jr. and to be conveyed under a separate
agreement, will be held in a separate subsidiary that we will organize for that
purpose. Herb will serve as the President and Chief Operating Officer of that
subsidiary and be a member of its Board of Directors and will be compensated in
accordance with the agreement previously reached with us.

         If this letter accurately sets forth our understanding, please sign and
return a copy of this letter to us.

                                        Very truly yours,

                                        VAUGHAN FOODS INC.



                                        By:   /s/ Mark E. Vaughan, President
                                              ------------------------------
                                                 Mark E. Vaughan, President

Accepted and agreed to
this 19th day of May, 2006


    /s/ Herb Grimes
- -------------------
Herb Grimes


   /s/ Stan Gustas
- -------------------
Stan Gustas


Braxton Management, Inc.


By: /s/ Herb Grimes
- --------------------
President


                                       2

EX-10.3

                                                                         EX-10.3

                               VAUGHAN FOODS, INC.
                           2006 EQUITY INCENTIVE PLAN

1. Purpose; Types of Awards; Construction.

The purpose of the Vaughan Foods, Inc. 2006 Equity Incentive Plan (the "Plan")
is to align the interests of officers, other key employees, consultants and
nonemployee directors of Vaughan Foods, Inc. (the "Company") and its affiliates
with those of the stockholders of the Company, to afford an incentive to such
officers, employees, consultants and directors to continue as such, to increase
their efforts on behalf of the Company and to promote the success of the
Company's business. To further such purposes, the Committee may grant options to
purchase shares of the Company's common stock. The provisions of the Plan are
intended to satisfy the requirements of Section 16(b) of the Securities Exchange
Act of 1934 and of Section 162(m) of the Internal Revenue Code of 1986, as
amended, and shall be interpreted in a manner consistent with the requirements
thereof, as now or hereafter construed, interpreted and applied by regulations,
rulings and cases.

2. Definitions.

As used in this Plan, the following words and phrases shall have the meanings
indicated below:

(a) "Agreement" shall mean a written agreement entered into between the Company
and an Optionee in connection with an award under the Plan.

(b) "Board" shall mean the Board of Directors of the Company.

(c) "Cause," when used in connection with the termination of an Optionee's
employment by the Company or the cessation of an Optionee's service as a
consultant or a member of the Board, shall mean (i) the conviction of the
Optionee for the commission of a felony, or (ii) the willful and continued
failure by the Optionee substantially to perform his duties and obligations to
the Company or a Subsidiary (other than any such failure resulting from his
incapacity due to physical or mental illness), or (iii) the willful engaging by
the Optionee in misconduct that is demonstrably injurious to the Company or a
Subsidiary. For purposes of this Section 2(c), no act, or failure to act, on an
Optionee's part shall be considered "willful" unless done, or omitted to be
done, by the Optionee in bad faith and without reasonable belief that his action
or omission was in the best interest of the Company. The Committee shall
determine whether a termination of employment is for Cause for purposes of the
Plan.

(d) "Change in Control" shall mean the occurrence of the event set forth in any
of the following paragraphs:

(i) any Person (as defined below) is or becomes the beneficial owner (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, as amended), directly
or indirectly, of securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired directly from the
Company or its subsidiaries) representing 50% or more of the combined voting
power of the Company's then outstanding securities; or

(ii) the following individuals cease for any reason to constitute a majority of
the number of directors then serving: individuals who, on the date hereof,
constitute the Board and any new director (other than a director whose initial
assumption of office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation, relating to the
election of directors of the Company) whose appointment or election by the Board
or nomination for election by the Company's stockholders was approved or
recommended by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors on the date hereof or whose appointment,
election or nomination for election was previously so approved or recommended;
or

(iii) there is consummated a merger or consolidation of the Company or a direct
or indirect subsidiary thereof with any other corporation, other than (A) a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior to such merger or consolidation continuing



to represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof), in combination with
the ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, at least 50% of the combined voting power
of the securities of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (B) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no Person is or becomes the beneficial owner,
directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities acquired directly
from the Company or its subsidiaries) representing 50% or more of the combined
voting power of the Company's then outstanding securities; or

(iv) the stockholders of the Company approve a plan of complete liquidation or
dissolution of the Company or there is consummated an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or substantially all of
the Company's assets to an entity, at least 50% of the combined voting power of
the voting securities of which are owned by Persons in substantially the same
proportions as their ownership of the Company immediately prior to such sale.

For purposes of this Section 2(d), "Person" shall have the meaning given in
Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and
14(d) thereof, except that such term shall not include (i) the Company or any of
its subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its subsidiaries, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company.

(e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to
time.

(f) "Committee" shall mean a committee established by the Board to administer
the Plan.

(g) "Common Stock" shall mean shares of common stock, no par value, of the
Company.

(h) "Company" shall mean Vaughan Foods, Inc., a corporation organized under the
laws of the State of Oklahoma, or any successor corporation.

(i) "Disability" shall mean an Optionee's inability to perform his duties with
the Company or on the Board by reason of any medically determinable physical or
mental impairment, as determined by a physician selected by the Optionee and
acceptable to the Company.

(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time, and as now or hereafter construed, interpreted and applied by
regulations, rulings and cases.

(k) "Fair Market Value" per share as of a particular date shall mean
(i) if the shares of Common Stock are then listed on a national securities
exchange, the closing sales price per share of Common Stock on the national
securities exchange on which the Common Stock is principally traded for the last
preceding date on which there was a sale of such Common Stock on such exchange,
or (ii) if the shares of Common Stock are then traded in an over-the-counter
market, the closing bid price for the shares of Common Stock in such
over-the-counter market for the last preceding date on which there was a sale of
such Common Stock in such market, or (iii) if the shares of Common Stock are not
then listed on a national securities exchange or traded in an over-the-counter
market, such value as the Committee, in its sole discretion, shall determine.

(l) "Incentive Stock Option" shall mean any option intended to be and designated
as an incentive stock option within the meaning of Section 422 of the Code.

 (m) "Nonemployee Director" shall mean a member of the Board who is not an
employee of the Company.



(n) "Nonqualified Option" shall mean an Option that is not an Incentive Stock
Option.

(o) "Option" shall mean the right, granted hereunder, to purchase shares of
Common Stock. Options granted by the Committee pursuant to the Plan may
constitute either Incentive Stock Options or Nonqualified Stock Options.

(p) "Optionee" shall mean a person who receives a grant of an Option.

(q) "Option Price" shall mean the exercise price of the shares of Common Stock
covered by an Option.

(r) "Parent" shall mean any company (other than the Company) in an unbroken
chain of companies ending with the Company if, at the time of granting an
Option, each of the companies other than the Company owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other companies in such chain.

(s) "Plan" shall mean this Vaughan Foods, Inc. 2006 Equity Incentive Plan.

(t) "Rule 16b-3" shall mean Rule 16b-3, as from time to time in effect,
promulgated by the Securities and Exchange Commission under Section 16 of the
Exchange Act, including any successor to such Rule.

(u) "Subsidiary" shall mean any company (other than the Company) in an unbroken
chain of companies beginning with the Company if, at the time of granting an
Option, each of the companies other than the last company in the unbroken chain
owns stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other companies in such chain.

(v) "Ten Percent Stockholder" shall mean an Optionee who, at the time an
Incentive Stock Option is granted, owns (or is deemed to own pursuant to the
attribution rules of Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or any Parent or Subsidiary.

3. Administration.

The Plan, except as may otherwise be determined by the Board, shall be
administered by the Committee, the members of which shall be "nonemployee
directors" under Rule 16b-3 and "outside directors" under Section 162(m) of the
Code.

The Committee shall have the authority in its discretion, subject to and not
inconsistent with the express provisions of the Plan, to administer the Plan and
to exercise all the powers and authorities either specifically granted to it
under the Plan or necessary or advisable in the administration of the Plan,
including, without limitation, the authority to grant Options; to determine
which Options shall constitute Incentive Stock Options and which Options shall
constitute Nonqualified Stock Options; to determine the purchase price of the
shares of Common Stock covered by each Option; to determine the persons to whom,
and the time or times at which awards shall be granted; to determine the number
of shares to be covered by each award; to interpret the Plan; to prescribe,
amend and rescind rules and regulations relating to the Plan; to determine the
terms and provisions of the Agreements (which need not be identical) and to
cancel or suspend awards, as necessary; and to make all other determinations
deemed necessary or advisable for the administration of the Plan.

The Committee may not delegate its authority to grant Options. The Committee may
employ one or more persons to render advice with respect to any responsibility
the Committee may have under the Plan. The Board shall have sole authority,
unless expressly delegated to the Committee, to grant Options to Nonemployee
Directors. All decisions, determination and interpretations of the Committee
shall be final and binding on all Optionees of any awards under this Plan.

The Board shall have the authority to fill all vacancies, however caused, in the
Committee. The Board may from time to time appoint additional members to the
Committee, and may at any time remove one or more



Committee members. One member of the Committee shall be selected by the Board as
chairman. The Committee shall hold its meetings at such times and places as it
shall deem advisable. All determinations of the Committee shall be made by a
majority of its members either present in person or participating by conference
telephone at a meeting or by written consent. The Committee may appoint a
secretary and make such rules and regulations for the conduct of its business as
it shall deem advisable, and shall keep minutes of its meetings.

No member of the Board or Committee shall be liable for any action taken or
determination made in good faith with respect to the Plan or any award granted
hereunder.

4. Eligibility.

Awards may be granted to officers and other key employees of and consultants to
the Company, and its Subsidiaries, including officers and directors who are
employees, and to Nonemployee Directors. In determining the persons to whom
awards shall be granted and the number of shares to be covered by each award,
the Committee shall take into account the duties of the respective persons,
their present and potential contributions to the success of the Company and such
other factors as the Committee shall deem relevant in connection with
accomplishing the purpose of the Plan.

5. Stock.

The maximum number of shares of Common Stock reserved for the grant of awards
under the Plan shall be 1,650,000, subject to adjustment as provided in Section
9 hereof. Such shares may, in whole or in part, be authorized but unissued
shares or shares that shall have been or may be reacquired by the Company.

If any outstanding award under the Plan should for any reason expire, be
canceled or be forfeited without having been exercised in full, the shares of
Common Stock allocable to the unexercised, canceled or terminated portion of
such award shall (unless the Plan shall have been terminated) become available
for subsequent grants of awards under the Plan.

6. Terms and Conditions of Options.

Each Option granted pursuant to the Plan shall be evidenced by an Agreement, in
such form and containing such terms and conditions as the Committee shall from
time to time approve, which Agreement shall comply with and be subject to the
following terms and conditions, unless otherwise specifically provided in such
Option Agreement:

(a) Number of Shares. Each Option Agreement shall state the number of shares of
Common Stock to which the Option relates.

(b) Type of Option. Each Option Agreement shall specifically state that the
Option constitutes an Incentive Stock Option or a Nonqualified Stock Option.

(c) Option Price. Each Option Agreement shall state the Option Price, which
shall not be less than one hundred percent (100%) of the Fair Market Value of
the shares of Common Stock covered by the Option on the date of grant unless,
with respect to Nonqualified Stock Options, otherwise determined by the
Committee. The Option Price shall be subject to adjustment as provided in
Section 9 hereof. The date as of which the Committee adopts a resolution
expressly granting an Option shall be considered the day on which such Option is
granted, unless such resolution specifies a different date.

(d) Medium and Time of Payment. The Option Price shall be paid in full, at the
time of exercise, in cash.

 (e) Exercise Schedule and Period of Options. Each Option Agreement shall
provide the exercise schedule for the Option as determined by the Committee;
provided, however, that, the Committee shall have the



authority to accelerate the exercisability of any outstanding Option at such
time and under such circumstances as it, in its sole discretion, deems
appropriate. The exercise period shall be ten (10) years from the date of the
grant of the Option unless otherwise determined by the Committee; provided,
however, that, in the case of an Incentive Stock Option, such exercise period
shall not exceed ten (10) years from the date of grant of such Option. The
exercise period shall be subject to earlier termination as provided in Sections
6(f) and 6(g) hereof. An Option may be exercised, as to any or all full shares
of Common Stock as to which the Option has become exercisable, by written notice
delivered in person or by mail to the Secretary of the Company, specifying the
number of shares of Common Stock with respect to which the Option is being
exercised.

(f) Termination. Except as provided in this Section 6(f) and in
Section 6(g) hereof, an Option may not be exercised unless (i) with respect to
an Optionee who is an employee of the Company, the Optionee is then in the
employ of the Company or a Subsidiary (or a company or a Parent or Subsidiary
company of such company issuing or assuming the Option in a transaction to which
Section 424(a) of the Code applies), and unless the Optionee has remained
continuously so employed since the date of grant of the Option and (ii) with
respect to an Optionee who is a Nonemployee Director, the Optionee is then
serving as a member of the Board or as a member of a board of directors of a
company or a Parent or Subsidiary company of such company issuing or assuming
the Option. In the event that the employment of an Optionee shall terminate or
the service of an Optionee as a member of the Board shall cease (other than by
reason of death, Disability, or Cause), all Options of such Optionee that are
exercisable at the time of such termination may, unless earlier terminated in
accordance with their terms, be exercised within ninety (90) days after the date
of such termination or service (or such different period as the Committee shall
prescribe).

(g) Death or Disability of Optionee. If an Optionee shall die while employed by
the Company or a Subsidiary or serving as a member of the Board, or within
ninety (90) days after the date of termination of such Optionee's employment or
cessation of such Optionee's service (or within such different period as the
Committee may have provided pursuant to Section 6(f) hereof), or if the
Optionee's employment shall terminate or service shall cease by reason of
Disability, all Options theretofore granted to such Optionee (to the extent
otherwise exercisable) may, unless earlier terminated in accordance with their
terms, be exercised by the Optionee or by his beneficiary, at any time within
one year after the death or Disability of the Optionee (or such different period
as the Committee shall prescribe). In the event that an Option granted hereunder
shall be exercised by the legal representatives of a deceased or former
Optionee, written notice of such exercise shall be accompanied by a certified
copy of letters testamentary or equivalent proof of the right of such legal
representative to exercise such Option. Unless otherwise determined by the
Committee, Options not otherwise exercisable on the date of termination of
employment shall be forfeited as of such date.

(h) Other Provisions. The Option Agreements evidencing awards under the Plan
shall contain such other terms and conditions not inconsistent with the Plan as
the Committee may determine, including penalties for the commission of
competitive acts.

7. Nonqualified Stock Options.

Options granted pursuant to this Section 7 are intended to constitute
Nonqualified Stock Options and shall be subject only to the general terms and
conditions specified in Section 6 hereof.

8. Incentive Stock Options.

Options granted pursuant to this Section 8 are intended to constitute Incentive
Stock Options and shall be subject to the following special terms and
conditions, in addition to the general terms and conditions specified in Section
6 hereof. An Incentive Stock Option may not be granted to a Nonemployee Director
or a consultant to the Company.

(a) Value of Shares. The aggregate Fair Market Value (determined as of the date
the Incentive Stock



Option is granted) of the shares of Common Stock with respect to which Incentive
Stock Options granted under this Plan and all other option plans of any
subsidiary become exercisable for the first time by each Optionee during any
calendar year shall not exceed $100,000.

(b) Ten Percent Stockholder. In the case of an Incentive Stock Option granted to
a Ten Percent Stockholder, (i) the Option Price shall not be less than one
hundred ten percent (110%) of the Fair Market Value of the shares of Common
Stock on the date of grant of such Incentive Stock Option, and (ii) the exercise
period shall not exceed five (5) years from the date of grant of such Incentive
Stock Option.

9. Effect of Certain Changes.

(a) In the event of any extraordinary dividend, stock dividend,
recapitalization, merger, consolidation, stock split, warrant or rights
issuance, or combination or exchange of such shares, or other similar
transactions, each of the number of shares of Common Stock available for awards,
the number of such shares covered by outstanding awards, and the price per share
of Options, as appropriate, shall be equitably adjusted by the Committee to
reflect such event and preserve the value of such awards.

(b) Upon the occurrence of a Change in Control, each Option granted under the
Plan and then outstanding but not yet exercisable shall thereupon become fully
exercisable.

10. Surrender and Exchange of Awards.

The Committee may permit the voluntary surrender of all or a portion of any
Option granted under the Plan or any option granted under any other plan,
program or arrangement of the Company or any Subsidiary ("Surrendered Option"),
to be conditioned upon the granting to the Optionee of a new Option for the same
number of shares of Common Stock as the Surrendered Option, or may require such
voluntary surrender as a condition precedent to a grant of a new Option to such
Optionee. Subject to the provisions of the Plan, such new Option may be an
Incentive Stock Option or a Nonqualified Stock Option, and shall be exercisable
at the price, during such period and on such other terms and conditions as are
specified by the Committee at the time the new Option is granted.

11. Period During Which Awards May Be Granted.

Awards may be granted pursuant to the Plan from time to time within a period of
ten (10) years from the date the Plan is adopted by the Board, or the date the
Plan is approved by the shareholders of the Company, whichever is earlier,
unless the Board shall terminate the Plan at an earlier date.

12. Nontransferability of Awards.

Except as otherwise determined by the Committee, awards granted under the Plan
shall not be transferable otherwise than by will or by the laws of descent and
distribution, and awards may be exercised or otherwise realized, during the
lifetime of the Optionee, only by the Optionee or by his guardian or legal
representative.

13. Approval of Shareholders.

The Plan shall take effect upon its adoption by the Board and shall terminate on
the tenth anniversary of such date, but the Plan (and any grants of awards made
prior to the shareholder approval mentioned herein) shall be subject to the
approval of Company's shareholders, which approval must occur within twelve
months of the date the Plan is adopted by the Board.

14. Agreement by Optionee Regarding Withholding Taxes.

If the Committee shall so require, as a condition of exercise of a Nonqualified
Stock Option (a "Tax Event"), each Optionee who is not a Nonemployee Director
shall agree that no later than the date of the Tax Event, such Optionee will pay
to the Company or make arrangements satisfactory to the Committee



regarding payment of any federal, state or local taxes of any kind required by
law to be withheld upon the Tax Event. Alternatively, the Committee may provide
that such an Optionee may elect, to the extent permitted or required by law, to
have the Company deduct federal, state and local taxes of any kind required by
law to be withheld upon the Tax Event from any payment of any kind due the
Optionee. The withholding obligation may be satisfied by the withholding or
delivery of Common Stock. Any decision made by the Committee under this Section
15 shall be made in its sole discretion.

15. Amendment and Termination of the Plan.

The Board at any time and from time to time may suspend, terminate, modify or
amend the Plan; provided, however, that, unless otherwise determined by the
Board, an amendment that requires stockholder approval in order for the Plan to
continue to comply with Rule 16b-3, Section 162(m) of the Code or any other law,
regulation or stock exchange requirement shall not be effective unless approved
by the requisite vote of stockholders. Except as provided in Section 9(a)
hereof, no suspension, termination, modification or amendment of the Plan may
adversely affect any award previously granted, unless the written consent of the
Optionee is obtained.

16. Rights as a Shareholder.

An Optionee or a transferee of an award shall have no rights as a shareholder
with respect to any shares covered by the award until the date of the issuance
of a stock certificate to him for such shares. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distribution of other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in Section 9(a)
hereof.

17. No Rights to Employment or Service as a Director or Consultant.

Nothing in the Plan or in any award granted or Agreement entered into pursuant
hereto shall confer upon any Optionee the right to continue in the employ of the
Company or any Subsidiary or as a member of the Board or a consultant to the
Company or any Subsidiary or to be entitled to any remuneration or benefits not
set forth in the Plan or such Agreement or to interfere with or limit in any way
the right of the Company or any such Subsidiary to terminate such Optionee's
employment or service. Awards granted under the Plan shall not be affected by
any change in duties or position of an employee Optionee as long as such
Optionee continues to be employed by the Company or any Subsidiary.

18. Beneficiary.

An Optionee may file with the Committee a written designation of a beneficiary
on such form as may be prescribed by the Committee and may, from time to time,
amend or revoke such designation. If no designated beneficiary survives the
Optionee, the executor or administrator of the Optionee's estate shall be deemed
to be the Optionee's beneficiary.

19. Governing Law.

The Plan and all determinations made and actions taken pursuant hereto shall be
governed by the laws of the State of Oklahoma.

EX-10.4

                                                                         EX-10.4

                 SECURITIES PURCHASE AND SUBSCRIPTION AGREEMENT

         This SECURITIES  PURCHASE AND SUBSCRIPTION  AGREEMENT (the "AGREEMENT")
is made as of July 17,  2006,  by and among  Vaughan  Foods,  Inc.,  an Oklahoma
corporation (the "COMPANY"), and the undersigned (the "PURCHASER").

                                   WITNESSETH:

         WHEREAS:

         A. The Company and the  Purchaser are  executing  and  delivering  this
Agreement in reliance upon the exemption from securities  registration  afforded
by Rule 506 under  Regulation D  ("REGULATION  D") as  promulgated by the United
States  Securities and Exchange  Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 ACT").

         B. The Company desires to issue and sell, upon the terms and conditions
set forth in this  Agreement:  10%  unsecured  promissory  notes of the Company,
substantially  in the  form  attached  hereto  as  EXHIBIT  A, in the  aggregate
principal amount of up to One Million Five Hundred Thousand Dollars ($1,500,000)
(the "NOTES");  and such number and type of equity  securities of the Company as
shall be determined in accordance  with the  provisions of this  Agreement  (the
"ADDITIONAL  SECURITIES"  and  together  with the Notes  hereinafter  called the
"SECURITIES").

         C. Purchaser wishes to purchase,  upon the terms and conditions  stated
in this Agreement,  such principal  amount of Notes as is set forth  immediately
below  its name on the  signature  page  hereto,  together  with the  Additional
Securities obtainable upon such purchase of Notes as provided in this Agreement.

         D. Contemporaneous with the Closing (as defined below), (a) the parties
hereto will execute and deliver a Registration  Rights Agreement,  substantially
in  the  form  attached  hereto  as  EXHIBIT  B-1  (the   "REGISTRATION   RIGHTS
AGREEMENT"),  pursuant to which the  Company has agreed to provide to  Purchaser
(and all other  purchasers that execute  agreements  substantially  identical to
this Agreement)  (collectively,  the "PURCHASERS")  certain  registration rights
under the 1933 Act and the rules and  regulations  promulgated  thereunder,  and
applicable state securities laws for the Additional  Securities (the "PURCHASERS
REGISTRATION  STATEMENT")  and (b) Mark E.  Vaughan  and Vernon J.  Brandt,  Jr.
(collectively, the "PLEDGORS")will execute and deliver Security and Stock Pledge
Agreement,  substantially in the form attached hereto as EXHIBIT B-2 (the "STOCK
PLEDGE AGREEMENT"), pursuant to which they will pledge, on a non-recourse basis,
all of its right,  title and  interest  in and to  Allison's  Gourmet  Kitchens,
Limited  Partnership  ("ALLISON'S") as collateral  security for the repayment of
the Notes.

         NOW THEREFORE, the Company and the Purchaser hereby agree as follows:

                                   ARTICLE ONE

              PURCHASE AND SALE OF NOTES AND ADDITIONAL SECURUITIES
              -----------------------------------------------------

                  1.1      PURCHASE  OF  SECURITIES.  On the  Closing  Date  (as
defined below), the Company shall sell to the Purchaser and the Purchaser agrees
to purchase from the Company;

                  (i) such principal amount of Notes as is set forth immediately
below such  Purchaser's  name on the  signature  pages  hereto  (the  "PURCHASED
NOTE"); and



                  (ii) such  Additional  Securities,  as shall be  determined in
accordance with Section 1.2 hereof.

                  1.2      ADDITIONAL  SECURITIES.  The  Company  hereby  agrees
that, in addition to the Purchased  Note, the Purchaser shall be entitled to the
Additional Securities as follows:

                  (i) If at any time after the date hereof and prior to June 30,
2007 the Company shall have sold any equity  securities  (whether  common stock,
preferred stock,  warrants options or any combination  thereof,  such securities
hereinafter  referred to as the "QUALIFIED SALE SECURITIES") in a transaction or
series of  related  transactions  wherein  the gross  proceeds  received  by the
Company equal or exceed $5,000,000 (a "QUALIFIED  SALE"),  then upon the closing
of the first such  Qualified  Sale,  the Company  shall deliver to the Purchaser
such number or numbers of securities  identical to the Qualified Sale Securities
as shall have a value equal to one-half of the principal amount of the Purchased
Note (such value to be based upon the gross  purchase  price (before  deductions
for fees, commissions,  discounts or expenses) for the Qualified Sale Securities
in such Qualified Sale). Any such securities  issued to Purchaser shall have the
same cusip numbers as the corresponding securities in the Qualified Sale.

                  (ii) If a Qualified  Sale shall not have  occurred on or prior
to June 30, 2007,  but the  Purchased  Note shall have been repaid in full on or
prior  to such  date,  then on July 1,  2007  the  Company  shall  issue  to the
Purchaser  that number of shares of its common stock as shall equal  one-half of
the original principal amount of the Note divided by $4.00.

                  (iii) If a Qualified  Sale shall not have occurred on or prior
to June 30, 2007,  and the Purchased  Note shall not have been repaid in full on
or prior to such  date,  then on July 1,  2007 the  Company  shall  issue to the
Purchaser  that number of shares of its common stock as shall equal the original
principal amount of the Note divided by $4.00.

The number of shares to be delivered pursuant to clause (ii) of this Section 1.2
assumes that the Company has  5,000,000  shares issued and  outstanding.  If the
number of shares actually issued and outstanding on July 1, 2007 is more or less
than  5,000,000,  the $4.00  divisor  shall be  adjusted  up or down so that the
product  of the  number of shares  issued  and  outstanding  and the  divisor is
$20,000,000.

                  1.3      FORM OF PAYMENT. Currently with the execution of this
Agreement the Purchaser  shall remit to Hagen O'Connell LLP (the "ESCROW AGENT")
an amount equal to the  principal  amount of the Purchased  Note (the  "PURCHASE
PRICE") by either (i) wire transfer of immediately available funds to the Escrow
Agent at Wells Fargo Bank, 1300 SW Fifth Avenue,  11th Floor,  Portland  Oregon,
Account Name: Hagen O'Connell LLP (Vaughan  Escrow),  Account No.:  7912-028938,
ABA Routing No.  121000248 or (ii) a check made payable to Hagen  O'Connell LLP,
Bank of America Financial Center, Suite 1500, 121 SW Morrison,  Portland, Oregon
97204 (Vaughan Escrow). The Purchase Price shall be held in escrow by the Escrow
Agent pending the Closing or the termination of this Agreement.  At the Closing,
the Purchase Price shall be released from escrow and paid to the Company and the
interest  earned thereon (if any) shall be distributed to the Purchaser.  If the
Closing shall not have occurred and this Agreement  shall have been  terminated,
the Escrow  Agent shall  return the Purchase  Price  together  with the interest
earned thereon (if any) to the Purchaser and the Company shall  thereafter  have
no further obligation to the Purchaser.

                  1.4      CLOSING.  The  closing  of  the  transactions  to  be
effected  hereunder (the "CLOSING")  shall be held at 10:00 A.M. on the business
day on which the  satisfaction or waiver of the last of the conditions set forth
in Article  Five has  occurred,  or at such other place or at such other time as
the Company and the Purchaser may mutually agree (the "CLOSING DATE");  provided
that if the Closing has

                                       2



not occurred  prior to 5:00 PM Pacific time July 15, 2006 this  Agreement  shall
automatically terminate.

                  1.5      DELIVERY OF PURCHASED SECURITIES. At the Closing, the
Company shall deliver to the  Purchaser  the  Purchased  Note,  duly executed on
behalf of the Company. The Company shall deliver to the Purchaser the Additional
Securities  within  five days  after the  determination  of the type and  number
thereof.

                  1.6      ALLOCATION   OF  PURCHASE   PRICE.   For  income  tax
purposes,  the Purchase  Price will be allocated to the  Purchased  Note and the
Additional Securities based on their relative fair market values.

                  1.7      COMMISSION PAYMENT AND LOAN REPAYMENT.  The Purchaser
is aware that the  Company  has  retained  the  services  of Paulson  Investment
Company,  Inc.  ("PAULSON") to act as a Placement  Agent in connection  with the
sale of the Notes and that  Paulson  shall be entitled  to a selling  commission
equal to 8% of the gross proceeds received by the Company in connection with the
sale of the Notes and  reimbursement  of up to $10,000 of  expenses  incurred in
connection therewith.

                                   ARTICLE TWO

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

         The Company hereby represents and warrants to the Purchaser as follows:

                  2.1.     NO  VIOLATIONS.  The  making and  performance  by the
Company  of this  Agreement  does not  violate  any  provision  of law or of the
Articles  of  Incorporation  or Bylaws of the  Company,  nor does it result in a
breach of or  constitute  a  default  under any  agreement,  indenture  or other
instrument to which the Company is a party or by which the Company may be bound,
where  such  breach or  default  would  have a  material  adverse  effect on the
Company.

                  2.2.     DUE AUTHORIZATION;  VALIDITY. This Agreement has been
duly authorized,  executed and delivered and is a valid and binding Agreement of
the Company and the Promissory  Notes to be issued hereunder by the Company will
be valid and binding obligations of the Company in accordance with their terms.

                  2.3.     CORPORATE   REQUIREMENTS.   The   Company  (i)  is  a
corporation  duly  organized and existing in good standing under the laws of the
State of Oklahoma;  (ii) has the power and authority to own the  properties  and
assets which it purports to own and to carry on its  business as now  conducted;
(iii) has the power and authority to execute and deliver all documents  required
hereunder;  and (iv) to the best of its knowledge,  has complied with all filing
and other  requirements of Federal,  State and local laws,  insofar as such laws
relate to its doing business.

                                  ARTICLE THREE

                                    COVENANTS

                  3.1.     ALLISON'S.  On or  prior  to the  date on  which  the
Additional  Securities  shall be issued (the "ISSUE  DATE"),  the Company  shall
acquire all of the equity interests or all of the operating assets of Allison's.

                  3.2.     CHARTER AMENDMENT. The Purchaser acknowledges that as
of the date hereof,  the Company's  authorized capital consists of 600 shares of
common  stock,  par value $1.00 per share.  On

                                       3



or prior to the  Issue  Date,  the  Company  shall  take  all  corporate  action
necessary to amend its  Articles of  Incorporation  to increase  its  authorized
capital so as to permit the  issuance  of the  Additional  Securities  and shall
reserve a  sufficient  number of shares of its capital  stock to provide for the
issuance  of the  Additional  Securities  (as well as  shares of  capital  stock
underlying  any  options,  warrants or  convertible  securities  included in the
Additional Securities).

                                  ARTICLE FOUR

                                  THE PURCHASER

                  4.1      PURCHASER   REPRESENTATIONS   AND   WARRANTIES.   The
Purchaser represents and warrants to the Company that:

                  (a)      The Purchaser  understands and acknowledges  that the
Securities  are  being  sold  by the  Company  without  registration  under  the
Securities Act of 1933, as amended (the "1933 ACT"),  and state  securities laws
in reliance on the exemptions from  registration  set forth in sections 3(b) and
4(2) of the securities law exemptions.

                  (b)      The  Securities  are being  acquired by the Purchaser
for the Purchaser's own account for long-term  investment and not with a view to
the distribution  thereof, and with no present intention of selling or otherwise
disposing of the Securities or any part thereof. The Purchaser has no present or
contemplated agreement, undertaking,  arrangement,  obligation,  indebtedness or
commitment  providing  for or which is  likely to  compel a  disposition  of the
Securities   in  any  manner.   The  Purchaser  is  not  aware  of  any  present
circumstances  that are likely to promote the Purchaser's  future disposition of
the Securities.

                  (c)      The  Purchaser  is an  "accredited  investor" as such
term is defined in Rule 501 of Regulation D  promulgated  under the 1933 Act, as
indicated  by  the   Purchaser's   responses  to  the   Confidential   Purchaser
Questionnaire attached hereto as EXHIBIT C (the "QUESTIONNAIRE"),  the Purchaser
is able to bear the economic  risk of an investment  in the  Securities  and the
Purchaser   understands  that  because  the  Securities  will  be  sold  without
registration  under  the 1933  Act,  the  Purchaser  must  hold  the  Securities
indefinitely  and  cannot  sell,  exchange,   assign,  transfer,  gift,  pledge,
encumber,  hypothecate or otherwise dispose of the Securities except pursuant to
an  exemption  from  the  registration  provisions  of  the  federal  and  state
securities  laws, the  availability of which must be satisfied to the Company in
its discretion.

                  (d)      The  Purchaser has such  knowledge and  experience in
financial and business  matters that the Purchaser is capable of evaluating  the
merits and risks of the prospective investment in the Company; the Purchaser has
received  and reviewed all  information  requested of the Company and,  based on
such  review,  understands  and  has  evaluated  the  merits  and  risks  of the
prospective  investment  in  the  Company,  and  has  decided  to  purchase  the
Securities.

                  (e)      The  Purchaser  has  had  the   opportunity   to  ask
questions and receive answers  concerning the Company,  as well as the terms and
conditions  of  the  offering  of  the  Securities,  and  to  obtain  additional
information  reasonably  available to the Company and any persons  acting on the
Company's behalf,  necessary to verify the accuracy of any information  provided
to the  Purchaser,  and the  Purchaser has received all of the  information  the
Purchaser  has  requested  to the extent  that such  information  is  reasonably
available to the Company.  The Purchaser  requires no additional  information to
evaluate fully the merits and risks of a prospective investment in the Company.

                  (f)      The Purchaser has received and has read carefully the
Executive Summary,  the

                                       4



Risk Factors,  the audited financial statements for the years ended December 31,
2005 and 2004 and the unaudited  balance sheets and statements of operations for
the three months ended March 31, 2006 and 2005 of the Company and of  Allison's,
copies  of  which  are  annexed  hereto  as  EXHIBIT  D. The  Purchaser  further
understands  that any investment in the Securities may involve material risks in
addition to those  disclosed in the "Risk Factors," which does not purport to be
an  exhaustive  list of all material  risks  involved  with an investment in the
Securities.

                  (g)      The Purchaser understands that the Company is relying
on the accuracy of statements  contained in this Agreement and the Questionnaire
in connection with the sale of the Securities,  and the Securities  would not be
sold to the  Purchaser  if any  statement  contained  in this  Agreement  or the
Questionnaire  were  untrue;  and  all  other  offerees  or  purchasers  of  the
Securities may rely on the accuracy of statement contained in this Agreement and
the  Questionnaire  in connection with any matters relating to the offer or sale
of the Securities.

                  (h)      The  Purchaser  acknowledges  that  the  Company  has
advised the  Purchaser  that in  accordance  with the  provisions of Section 1.6
hereof,  a portion of the Purchase Price will be allocated to the Purchased Note
and the Additional  Securities  based on their relative fair market values,  and
that therefore the Purchaser  will be required to report as interest  income the
difference  between the amount  allocated to the Purchased  Note and 100% of the
principal amount of the Purchased Note. The Purchaser further  acknowledges that
the Company has advised the Purchaser that such allocation is not binding on the
Internal  Revenue  Service  which may take the position  that the portion of the
Purchase  Price to be allocated to the  Purchased  Note should be less,  thereby
increasing the amount of interest income to be recognized by the Purchaser.  The
Purchaser represents to the Company that Purchaser has relied on the Purchaser's
own tax  counsel  as to all tax  matters  with  respect to the  purchase  of its
Securities,  including  without  limitation the application of Internal  Revenue
Code  Sections  1271  et.  seq.,  regarding  "original  issue  discount"  to the
Purchased Note.

                  (i)      The Purchaser  shall  immediately  notify the Company
if,  for  any  reason,  any  of  the  statements  contained  herein  or  in  the
Confidential Purchaser Questionnaire become inaccurate at any time from the date
hereof until the  Closing,  and the  Purchaser  understands  that the  continued
accuracy of the statements  contained herein and in the  Confidential  Purchaser
Questionnaire is of the essence to the sale of the Securities.

                  (j)      The  Purchaser  shall  indemnify  the Company and all
persons  acting  on  their  behalf  and  hold  them  harmless  from  any and all
liability,  damage,  cost or expense,  including  but not limited to  attorneys'
fees,  incurred  on account  of or arising  directly  or  indirectly  out of any
inaccuracy  in  the  subscriber's  representations  in  this  Agreement  or  the
Questionnaire  or  any  disposition  of all or  any  portion  of the  Securities
subscribed for hereunder in violation of his  representations  in this Agreement
and the Questionnaire.

                  (k)      The Purchaser has relied on the Purchaser's own legal
counsel to the extent the Purchaser has deemed necessary as to all legal matters
and  questions  presented  with  reference  to  the  offering  and  sale  of the
Securities.

                  (l)      The  Purchaser  has  relied  on the  Purchaser's  own
accountant or other financial advisor and/or his or her own financial experience
as to all  financial  matters and  questions  presented  with  reference  to the
purchase of the Securities.

                  (m)      The  Purchaser  has  relied  on the  Purchaser's  own
analysis and  evaluation  (or the analysis and  evaluation  of its  professional
advisors) of the  Company,  its products and  services,  the  technology  issues
involved and the market in which the Company intends to operate.

                                       5



                  (n)      The Purchaser fully understands the terms, conditions
and consequences  relating to the offering of the Securities and understands the
Purchaser may have to hold such Securities indefinitely.

                  4.2      PURCHASER   COVENANTS.   In  the  event  the  Company
proposes to complete an underwritten  public offering  subsequent to the Closing
Date, the Purchaser will execute a "lock-up"  agreement  containing  such terms,
conditions and provisions as may be required by the managing underwriter of such
offering,  not to exceed  one year;  PROVIDED,  HOWEVER,  in no event  shall the
Purchaser be subject to a lock-up  agreement that is more  restrictive than that
executed by the Company's officers,  directors, and the holders of 5% or more of
the Company's common stock.

                                  ARTICLE FIVE

                       CONDITIONS PRECEDENT TO THE CLOSING

         The  obligations of the parties  pursuant to this Agreement are subject
to the  satisfaction  at the  Closing  of  each  of  the  following  conditions;
provided, however, that the parties may, in their sole discretion,  waive any of
such conditions and proceed with the transactions contemplated hereby:

                  5.1.     SALE OF  SECURITIES.  The Company shall have received
and accepted  executed  agreements  relating to the sale of Notes (including the
Purchased  Note)  and  Additional  Securities  for a  gross  purchase  price  of
$1,500,000 and shall be prepared to close with respect thereto.

                  5.2      ANCILLARY AGREEMENTS. The Company shall have executed
and  delivered the  Registration  Rights  Agreement and the Pledgors  shall have
executed and delivered the Stock Pledge Agreement to the Purchasers.

                                   ARTICLE SIX

                                  MISCELLANEOUS

                  6.1.     GENDER. The neuter pronoun,  when used herein,  shall
include the masculine and feminine and also the plural.

                  6.2      CHOICE OF LAW. This  Agreement has been  delivered in
the State of Oklahoma  and shall be  construed  in  accordance  with the laws of
Oklahoma.   Wherever   possible  each  provision  of  this  Agreement  shall  be
interpreted  in such manner as to be effective and valid under  applicable  law,
such provision  shall be ineffective to the extent of such  prohibition  without
invalidating the remainder of such provision or the remaining provisions of this
Agreement. With respect to any claim or action arising under this Agreement, the
Company hereby (i) irrevocably  submits to the jurisdiction of the courts of the
state of Georgia and the United  States  District  Court  located in the city of
Moore, State of Oklahoma, and (ii) irrevocably waives any objection which it may
have at any time to the  laying  of  venue of any  suit,  action  or  proceeding
arising  out of or  relating  to  this  Agreement  brought  in any  such  court,
irrevocably waives any claim that any such suit, action or proceeding brought in
any such court has been brought in an inconvenient forum and further irrevocably
waives  the  right to  object,  with  respect  to such  claim,  suit,  action or
proceeding brought in any such court, that such court does not have jurisdiction
over such  party.  Nothing  in this  Agreement  will be deemed to  preclude  the
Purchaser  from bringing an action or proceeding in respect  hereof in any other
jurisdiction.

                                       6



                  6.3      SUCCESSOR  AND  ASSIGNS.   This  Agreement  shall  be
binding  upon and inure to the  benefit  of the  successors  and  assigns of the
parties hereto. The rights and privileges of Purchaser  hereunder shall inure to
the benefit of Purchaser's heirs, legal representatives, successors and assigns.
Notwithstanding  the foregoing,  (i) the Company may not assign its  obligations
under this Agreement without the consent of the Purchaser and (ii) Purchaser may
assign or transfer any of its rights hereunder  subject to providing the Company
with  evidence  reasonably  acceptable  to the Company that such  assignment  or
transfer will not violate or require  registration  under any applicable federal
or state securities law or regulation.

                  6.4.     SEVERABILITY.  If any provision of this  Agreement or
of any of the  documents  executed in  connection  herewith  or the  application
thereof to any party thereto or circumstances  shall be invalid or unenforceable
to any extent,  the remainder of this  Agreement  and of such  documents and the
application of such provisions to any other parry therein or circumstance  shall
not be affected  thereby and shall be enforced to the greatest extent  permitted
by law.

                  6.5.     SURVIVAL.   All   representations,   warranties   and
covenants  made in this  Agreement  shall  survive the execution and delivery of
this Agreement.

                  6.6.     COUNTERPARTS.  This  Agreement may be executed in any
number of  counterparts  each of which shall be deemed to be an original but all
of which, when taken together, shall constitute one and the same instrument.

                  6.7.     ACCREDITED INVESTOR  REPRESENTATION.  Purchaser shall
deliver to the Company,  together  with an executed  copy of this  Agreement,  a
completed Questionnaire,  and by executing this Agreement,  Purchaser represents
and warrants that it is an  "accredited  investor" as that term is defined under
Regulation D of the Securities Act of 1933, as amended. Purchaser further agrees
that notwithstanding  anything else contained in this Agreement,  at the time of
any investment decision by Purchaser, the Company may require, as a condition to
such  investment  decision or  conversion,  that  Purchaser  provide  reasonable
evidence and make reasonable representations and warranties regarding its status
as an "accredited investor" as of the time of the investment decision.

                  6.8.     AMENDMENT AND WAIVER.  This  Agreement may be amended
or modified upon the written  consent of the Company and the Purchaser,  and any
provision may be waived only in writing, by the party waiving such provision.

                  6.9      NOTICES.  All  notices,  requests,  demands and other
communications  which are required to be or may be given under this Agreement to
any party to any of the other parties shall be in writing and shall be deemed to
have been duly given when (a)  delivered  in  person,  or (b) the day  following
dispatch by an overnight  courier service (such as Federal Express or UPS, etc.)
to the party to whom the same is so given or made:

         If to the Company
              addressed to:                 Vaughan Foods, Inc.
                                            216 Northeast 12th Street
                                            Moore, Oklahoma 73160
                                            Attention:  Chief Executive Officer


         If to Purchaser addressed to:      The address set forth on the
                                            signature page hereto.

                                       7



                                    * * * * *

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered under seal, the day and year first above written.



VAUGHAN FOODS, INC.




        /s/ Mark E. Vaughan
- ---------------------------
Name:    Mark E. Vaughan
Title:   Chairman and CEO



PURCHASER:



- -----------------------------------

Print Name of Purchaser:__________________________
Print Title of Purchaser (if Purchaser is not an individual):_________________
Tax I.D. # of Purchaser: _________________________
Aggregate amount invested: _______________________


Address: ______________________________
         ______________________________
         ______________________________


                                       8

EX-10.5

                                                                        EX-101.5

                                    EXHIBIT B

                          REGISTRATION RIGHTS AGREEMENT

         REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"),  dated as of July 17,
2006,  by and among  Vaughan  Foods,  Inc.,  an Oklahoma  corporation,  with its
offices  located  at 216  Northeast  12th  Street,  Moore,  Oklahoma  73160 (the
"COMPANY"),  and  the  undersigned  persons  executing  this  Agreement  (each a
"HOLDER" and collectively, the "HOLDERS").

         WHEREAS:

         A.       Pursuant to one or more Securities  Purchase and  Subscription
Agreements,  dated as of the date hereof (the  "SUBSCRIPTION  AGREEMENTS"),  the
Holders are purchasing  from the Company the Company's 10% unsecured  promissory
notes due June 30, 2007 in the aggregate  principal  amount of $1.5 million (the
"NOTES") and the Additional Securities (as defined below);

         B.       To induce the Holders to execute and deliver the  Subscription
Agreement,  the Company has agreed to provide certain  registration rights under
the Securities Act of 1933, as amended,  or any similar  successor  statute (the
"1933  ACT") and the rules and  regulations  thereunder,  and  applicable  state
securities laws;

         NOW,  THEREFORE,  in  consideration  of the  premises  and  the  mutual
covenants  contained  herein  and other  good and  valuable  consideration,  the
receipt and  sufficiency of which are hereby  acknowledged,  the Company and the
Holders hereby agree as follows:

         1.       DEFINITIONS

         a.       In addition to any other defined terms set forth herein,  when
used in this Agreement, the following terms shall have the following meanings:

                  (i)      "ADDITIONAL  SECURITIES" has the meaning  ascribed to
                           it in the Subscription Agreements.

                  (ii)     "COMMON STOCK" means the Company's  common stock, par
         value $1.00 per share.

                  (iii)    "EFFECTIVE  DATE"  means  the  effective  date  of  a
         Registration Statement relating to a Qualified Sale.

                  (iv)     "EXCHANGE  ACT" means the Securities and exchange Act
         of 1934, as amended.

                  (v)      "HOLDERS"  means the persons and/or  entities  (other
         than the Company) that execute a Subscription Agreement.

                  (vi)     "QUALIFIED  SALE" has the  meaning  ascribed to it in
         the Subscription Agreements.

                  (vii)    "REGISTER," "REGISTERED," and "REGISTRATION" refer to
         a  registration   effected  by  preparing  and  filing  a  Registration
         Statement or Statements in compliance with the 1933 Act and pursuant to
         Rule 415  under  the  1933  Act or any  successor  rule  providing  for
         offering  securities  on a  continuous  basis  ("RULE  415"),  and  the
         declaration or ordering of effectiveness of such Registration Statement
         by the United States Securities and Exchange Commission (the "SEC").

                  (viii)   "REGISTERABLE   SECURITIES"   means  the   Additional
         Securities,  including  any  securities of the Company  underlying  the
         Additional Securities, and any Payment Shares.



                  (ix)     "REGISTRATION   STATEMENT"   means   a   registration
         statement of the Company under the 1933 Act.

                  (x)      "RESALE REGISTRATION  STATEMENT" means a Registration
         Statement   covering  the  resale  of  all,  or  any  portion  of,  the
         Registerable Securities.

         b.       Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Subscription Agreement.

         2.       REGISTRATION

         a.       MANDATORY REGISTRATION. On or prior to the sixtieth (60th) day
following the earlier of (i) the Effective Date and (ii) the first date on which
it is eligible to use a Form S-3 Registration Statement (the "FILING DATE"), the
Company  shall  prepare and file with the SEC a Resale  Registration  Statement,
which Resale Registration  Statement, to the extent allowable under the 1933 Act
and the rules and regulations promulgated thereunder (including Rule 416), shall
state that it also  covers such  indeterminate  number of  additional  shares of
Common Stock as may become  issuable  upon  conversion of and exercise of any of
the  Registerable  Securities to prevent  dilution  resulting from stock splits,
stock dividends or similar transactions;  PROVIDED, HOWEVER, that no such Resale
Registration  Statement  need  be  filed  at  any  time  at  which  all  of  the
Registerable  Securities  can be resold  under  the  provisions  of Rule  144(k)
promulgated under the 33 Act, or any equivalent rule.

         b.       PAYMENTS BY THE COMPANY.  The Company shall use its reasonable
best efforts to obtain  effectiveness  of the Resale  Registration  Statement as
soon as practicable  and after obtaining such  effectiveness  to keep the Resale
Registration  Statement  effective pursuant to Rule 415 until the earlier of (i)
the date on which all of the Registerable Securities have been sold and (ii) the
date on which all the Registerable  Securities are saleable under Rule 144(k) or
any equivalent  rule (the  "REGISTRATION  PERIOD").  If the Resale  Registration
Statement is (i) not filed by the Filing Date, or (ii) not declared effective by
the SEC on or prior to sixty  (60) days  after the  Filing  Date (90 days if the
financial   information  included  in  the  Resale  Registration   Statement  as
originally filed must be updated) or (iii) not continually  effective throughout
the Registration Period (except for an Allowed Delay (as defined in Section 3(e)
below),  then the Company shall pay to each Holder,  as his, her or its sole and
exclusive  remedy for the  damages  incurred by reason of any such delay in such
Holder's ability to sell the Registerable  Securities,  an amount equal to 2% of
the original  outstanding  principal amount of the Note purchased by such Holder
multiplied  by the number of months  (prorated  for  partial  months)  after the
Filing Date and prior to the date on which a Resale  Registration  Statement  is
filed with the SEC or the end of the aforementioned 60-day period (90-day period
if the financial  information  included in the Resale Registration  Statement as
originally filed must be updated) and prior to the date the Resale  Registration
Statement  is  declared  effective  by the SEC or the  period  after the  Resale
Registration  Statement  was  declared  effective  but during  which its use was
suspended (the "LATE FEE"), provided, however, that there shall be excluded from
such period any delays which are solely  attributable to changes required by the
Holders  in the  Resale  Registration  Statement  with  respect  to  information
relating to the Holders, including,  without limitation,  changes to the plan of
distribution,  or to the failure of the Holders to conduct  their  review of the
Registration  Statement  pursuant  to Section  3(g) below  within  seven days of
receipt thereof.  Notwithstanding  anything to the contrary contained herein, in
no event shall the Late Fee (i) continue to accrue after the earliest  date more
than one year from the date of this Agreement that the Company is current in its
reporting  requirements  under the  Exchange  Act and has been  subject  to such
reporting  requirements  for at least 90 days and (ii) exceed an amount equal to
10% percent of the original outstanding  principal amount of the Notes purchased
by such Holder. Any Late Fee may, at the option of the Company,  be paid in cash
or  shares of Common  Stock  ("PAYMENT  SHARES"),  or any  combination  thereof;
provided  that if the  Company  should  elect to make all or any portion of such
payment in Payment  Shares,  such Payment  Shares shall (i) for purposes of such
payment be valued based upon the 4:00 PM (New York time)  closing bid price of a
share of Common

                                       2



Stock.  on the trading day  immediately  prior to the date that such  payment is
due, as reported by Bloomberg  Financial  L.P and (ii) be included in the Resale
Registration Statement.

         3.       OBLIGATIONS OF THE COMPANY

         In connection with the registration of the Registerable Securities, the
Company shall have the following obligations:

         a.       The Company shall prepare promptly,  and file with the SEC not
later than the Filing Date, a Resale Registration  Statement with respect to the
number of Registerable  Securities  provided in Section 2(a), and thereafter use
its best  efforts  to cause  such  Resale  Registration  Statement  relating  to
Registerable  Securities  to become  effective  as soon as  possible  after such
filing but in no event  later than 60 days after the Filing Date (90 days if the
financial information included in the Resale Registraton Statement as originally
filed must be updated),  and keep the Resale  Registration  Statement  effective
pursuant  to Rule 415  until  the  earlier  of (i) the date on which  all of the
Registerable  Securities  have  been  sold and  (ii)  the date on which  all the
Registerable  Securities  are saleable under Rule 144(k)  promulgated  under the
1933  Act (the  "REGISTRATION  Period"),  which  Resale  Registration  Statement
(including  any  amendments or supplements  thereto and  prospectuses  contained
therein)  shall not contain any untrue  statement of a material  fact or omit to
state a material  fact required to be stated  therein,  or necessary to make the
statements therein not misleading.

         b.       The  Company   shall  prepare  and  file  with  the  SEC  such
amendments (including  post-effective  amendments) and supplements to the Resale
Registration  Statement and the  prospectus  used in connection  with the Resale
Registration  Statement  as may be  necessary  to keep the  Resale  Registration
Statement  effective at all times during the  Registration  Period,  and, during
such  period,  comply with the  provisions  of the 1933 Act with  respect to the
disposition of all Registerable Securities.

         c.       The Company  shall furnish the Holders (i) promptly (but in no
event more than five (5) business  days) after the same is prepared and publicly
distributed,  filed with the SEC, or received  by the  Company,  one copy of the
Resale  Registration  Statement and any amendment  thereto and each  preliminary
prospectus and prospectus and each amendment or supplement  thereto,  and (ii) a
reproducible copy of a prospectus,  including a preliminary prospectus,  and all
amendments and  supplements  thereto and such other documents as the Holders may
reasonably  request in order to facilitate the  disposition of the  Registerable
Securities.  The Company will immediately notify each Holder by facsimile of the
effectiveness  of  the  Resale  Registration  Statement  or  any  post-effective
amendment.  The Company will promptly  respond to any and all comments  received
from the SEC, with a view towards causing the Resale  Registration  Statement or
any  amendment  thereto  to  be  declared  effective  by  the  SEC  as  soon  as
practicable,  shall promptly file an acceleration request as soon as practicable
(but in no event more than three (3) business days)  following the resolution or
clearance of all SEC comments or, if applicable,  following  notification by the
SEC that the Resale Registration  Statement or any amendment thereto will not be
subject to review and shall  promptly  file with the SEC a final  prospectus  as
soon as practicable  (but in no event more than two (2) business days) following
receipt  by  the  Company  from  the  SEC  of  an  order  declaring  the  Resale
Registration Statement effective. In the event of a breach by the Company of the
provisions of this Section  3(c),  the Company will be required to make payments
pursuant to Section 2(b) hereof.

         d.       The Company shall use  reasonable  efforts to (i) register and
qualify the  Registerable  Securities  under such other securities or "blue sky"
laws of such  jurisdictions  in the  United  States  as the  Holders  who hold a
majority in interest of the  Registerable  Securities  being offered  reasonably
request, (ii) prepare and file in those jurisdictions such amendments (including
post-effective   amendments)   and   supplements  to  such   registrations   and
qualifications as may be necessary to maintain the effectiveness  thereof during
the  Registration  Period,  (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration  Period,  and (iv) take all other actions  reasonably  necessary or
advisable to qualify the Registerable Securities for sale in such jurisdictions;
PROVIDED,  HOWEVER,  that  the  Company  shall  not be  required  in  connection
therewith  or as a

                                       3



condition  thereto to (a) qualify to do business  in any  jurisdiction  where it
would not  otherwise  be  required  to qualify but for this  Section  3(d),  (b)
subject itself to general taxation in any such jurisdiction,  (c) file a general
consent  to  service  of  process  in any such  jurisdiction,  (d)  provide  any
undertakings  that cause the Company  undue  expense or burden,  or (e) make any
change in its charter or bylaws,  which in each case the Board of  Directors  of
the Company  determines to be contrary to the best  interests of the Company and
its stockholders.

         e.       As promptly as practicable after becoming aware of such event,
the Company shall notify each Holder of the happening of any event, of which the
Company  has  knowledge,  as a result of which the  prospectus  included  in the
Resale Registration  Statement,  as then in effect, includes an untrue statement
of a material  fact or omission to state a material  fact  required to be stated
therein or necessary to make the statements therein not misleading,  and use its
best  efforts  promptly  to  prepare a  supplement  or  amendment  to the Resale
Registration Statement to correct such untrue statement or omission, and deliver
a  reproducible  copy of such  supplement or amendment to each Holder;  provided
that, for not more than thirty (30) consecutive  trading days (or a total of not
more than sixty (60) trading days in any twelve (12) month period),  the Company
may delay the  disclosure  of material  non-public  information  concerning  the
Company the disclosure of which at the time is not, in the good faith opinion of
the  Company,  in the  best  interests  of the  Company  (an  "ALLOWED  DELAY");
provided,  further,  that the Company  shall  promptly (i) notify the Holders in
writing of the existence of (but in no event,  without the prior written consent
of the Holders,  shall the Company  disclose to such Holders any of the facts or
circumstances  regarding)  material  non-public  information  giving  rise to an
Allowed  Delay and (ii)  advise the  Holders in writing to cease all sales under
the Resale  Registration  Statement  until the end of the  Allowed  Delay.  Upon
expiration of the Allowed  Delay,  the Company shall again be bound by the first
sentence  of this  Section  3(e) with  respect to the  information  giving  rise
thereto.

         f.       The Company shall use its best efforts to prevent the issuance
of  any  stop  order  or  other   suspension  of  effectiveness  of  the  Resale
Registration  Statement,  and,  if  such an  order  is  issued,  to  obtain  the
withdrawal  of such order at the  earliest  possible  moment and to notify  each
Holder who holds  Registerable  Securities  being  sold (or,  in the event of an
underwritten  offering, the managing underwriters) of the issuance of such order
and the resolution thereof.

         g.       The Company  shall permit a single firm or counsel  designated
by the Holders to review the Resale  Registration  Statement and all  amendments
and supplements  thereto a reasonable  period of time prior to their filing with
the SEC, and not file any  document in a form to which such  counsel  reasonably
objects. The sections of the Resale Registration  Statement covering information
with respect to the Holders,  the Holder's beneficial ownership of securities of
the  Company or the  Holders  intended  method of  disposition  of  Registerable
Securities  shall conform to the information  provided to the Company by each of
the Holders.

         h.       The  Company  shall  hold  in  confidence  and  not  make  any
disclosure of information  concerning any Holders provided to the Company unless
(i) disclosure of such  information is necessary to comply with federal or state
securities  laws, (ii) the disclosure of such  information is necessary to avoid
or correct a misstatement or omission in any Registration  Statement,  (iii) the
release of such  information  is ordered  pursuant  to a subpoena or other order
from a court  or  governmental  body of  competent  jurisdiction,  or (iv)  such
information  has been made  generally  available  to the  public  other  than by
disclosure in violation of this or any other agreement.  The Company agrees that
it shall, upon learning that disclosure of such information  concerning a Holder
is sought in or by a court or  governmental  body of competent  jurisdiction  or
through  other  means,  give  prompt  notice to such Buyer  prior to making such
disclosure and allow the Holder, at its expense, to undertake appropriate action
to prevent disclosure of, or to obtain a protective order for, such information.

         i.       The  Company  shall  cause  all  the  Registerable  Securities
covered  by the  Resale  Registration  Statement  to be listed on each  national
securities  exchange or Nasdaq  trading  market on which  securities of the same
class or series issued by the Company are then listed, if any, if the listing of
such Registerable  Securities is then permitted under the rules of such exchange
or market, as the case may be.

                                       4



         j.       The  Company  shall  provide a transfer  agent and  registrar,
which may be a single entity, for the Registerable Securities not later than the
effective date of the Resale Registration Statement.

         k.       The Company shall cooperate with the Holders to facilitate the
timely  preparation  and  delivery  of  certificates  representing  Registerable
Securities  to be offered  pursuant  to the Resale  Registration  Statement  and
enable such certificates to be in such denominations or amounts, as the case may
be, or the Holders may  reasonably  request and  registered in such names as the
Holders  may  request,  and,  within  three (3)  business  days after the Resale
Registration Statement is effective,  the Company shall deliver, and shall cause
legal counsel selected by the Company to deliver,  to the transfer agent for the
Registerable   Securities  (with  copies  to  the  Holders  whose   Registerable
Securities are included in such  Registration  Statement) an instruction  and an
opinion of such counsel.

         l.       At the request of the holders of a majority-in-interest of the
Registerable  Securities,  the Company  shall prepare and file with the SEC such
amendments (including  post-effective  amendments) and supplements to the Resale
Registration  Statement and any  prospectus  used in connection  with the Resale
Registration  Statement  as may be  necessary  in  order to  change  the plan of
distribution set forth in such Resale Registration Statement.

         4.       OBLIGATIONS OF THE HOLDERS

         In connection with the registration of the Registerable Securities, the
Holders shall have the following obligations:

         a.       It shall be a condition  precedent to the  obligations  of the
Company to complete the registration  pursuant to this Agreement with respect to
the  Registerable  Securities  of a  particular  Holder that such  Holder  shall
furnish to the Company,  in writing,  such  information  regarding  itself,  the
Registerable Securities held by it and the intended method of disposition of the
Registerable Securities held by it as shall be reasonably required to effect the
registration of such Registerable Securities and shall execute such documents in
connection  with such  registration  as the Company may reasonably  request.  At
least  seven (7) days prior to the first  anticipated  filing date of the Resale
Registration Statement,  the Company shall notify each Holder of the information
the Company requires from each such Holder.

         b.       Each Holder,  by such Holder's  acceptance of the Registerable
Securities,  agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Resale Registration
Statement  hereunder,  unless such Holder has notified the Company in writing of
such Holder's election to exclude all of such Holder's  Registerable  Securities
from the Resale Registration Statements.

         c.       In the event  Holders  holding a  majority-in-interest  of the
Registerable Securities determine to engage the services of an underwriter, each
Holder  agrees to enter into and  perform  such  Holder's  obligations  under an
underwriting  agreement,  in  usual  and  customary  form,  including,   without
limitation,  customary  indemnification and contribution  obligations,  with the
managing  underwriter  of such  offering  and take  such  other  actions  as are
reasonably  required in order to expedite or facilitate  the  disposition of the
Registerable Securities,  unless such Holder has notified the Company in writing
of  such  Holder's  election  to  exclude  all  of  such  Holder's  Registerable
Securities from the Resale Registration Statement.

         d.       Each Holder  agrees that,  upon receipt of any notice from the
Company of the  happening of any event of the kind  described in Section 3(e) or
3(f),  such Holder will  immediately  discontinue  disposition  of  Registerable
Securities  pursuant to the Resale  Registration  Statement  until such Holder's
receipt of the copies of the supplemented or amended prospectus  contemplated by
Section  3(e) or 3(f) and,  if so  directed by the  Company,  such Holder  shall
deliver to the Company (at the expense of the  Company) or destroy  (and deliver
to the  Company a  certificate  of  destruction)  all  copies  in such  Holder's
possession,  of the prospectus covering such Registerable  Securities current at
the time of receipt of such notice.

                                       5



         5.       EXPENSES OF REGISTRATION

         All  reasonable  expenses,   other  than  underwriting   discounts  and
commissions,   incurred   in   connection   with   registrations,   filings   or
qualifications pursuant to Sections 2 and 3, including,  without limitation, all
registration,  listing and qualification fees, printers and accounting fees, the
fees and  disbursements of counsel for the Company,  and the reasonable fees and
disbursements  of one counsel  selected by the Holders  pursuant to Section 3(g)
hereof shall be borne by the Company; PROVIDED,  HOWEVER, the fees of counsel to
the Holders shall not exceed $2,500.

         6.       INDEMNIFICATION

         In the event any  Registerable  Securities  are  included in the Resale
Registration Statement under this Agreement:

         a.       To the extent  permitted by law,  the Company will  indemnify,
hold harmless and defend (i) each Holder who holds such Registerable Securities,
(ii) the directors,  officers,  partners,  employees, agents and each person who
controls any Holder  within the meaning of the 1933 Act or the Exchange  Act, if
any, (iii) any underwriter (as defined in the 1933 Act) for the Holder, and (iv)
the directors,  officers,  partners,  employees and each person who controls any
such underwriter  within the meaning of the 1933 Act or the Exchange Act, if any
(each, an "INDEMNIFIED  PERSON"),  against any joint or several losses,  claims,
damages,   liabilities  or  expenses   (collectively,   together  with  actions,
proceedings  or inquiries by any  regulatory  or  self-regulatory  organization,
whether commenced or threatened,  in respect thereof,  "CLAIMS") to which any of
them may become  subject  insofar as such Claims arise out of or are based upon:
(i) any untrue  statement or alleged untrue  statement of a material fact in the
Resale  Registration  Statement  or the  omission  or alleged  omission to state
therein  a  material  fact  required  to be  stated  or  necessary  to make  the
statements  therein not misleading;  (ii) any untrue statement or alleged untrue
statement of a material  fact  contained in any  preliminary  prospectus if used
prior to the effective date of the Resale Registration  Statement,  or contained
in the final  prospectus (as amended or  supplemented,  if the Company files any
amendment thereof or supplement thereto with the SEC) or the omission or alleged
omission to state  therein any material  fact  necessary to make the  statements
made therein,  in light of the circumstances  under which the statements therein
were made, not  misleading;  or (iii) any violation or alleged  violation by the
Company of the 1933 Act, the Exchange  Act,  any other law,  including,  without
limitation,  any state  securities  law,  or any rule or  regulation  thereunder
relating to the offer or sale of the Registerable Securities (the matters in the
foregoing clauses (i) through (iii) being, collectively,  "VIOLATIONS"). Subject
to the  restrictions  set forth in  Section  6(c) with  respect to the number of
legal counsel,  the Company shall reimburse the Indemnified Person,  promptly as
such  expenses are incurred and are due and payable,  for any  reasonable  legal
fees  or  other  reasonable   expenses  incurred  by  them  in  connection  with
investigating  or  defending  any such  Claim.  Notwithstanding  anything to the
contrary  contained  herein,  the  indemnification  agreement  contained in this
Section  6(a):  (i) shall not apply to a Claim  arising  out of or based  upon a
Violation  which  occurs in reliance  upon and in  conformity  with  information
furnished in writing to the Company by any Indemnified Person or underwriter for
such Indemnified  Person expressly for use in connection with the preparation of
such Registration Statement or any such amendment thereof or supplement thereto,
if such prospectus was timely made available by the Company  pursuant to Section
3(c) hereof;  (ii) shall not apply to amounts paid in settlement of any Claim if
such  settlement is effected  without the prior written  consent of the Company,
which consent shall not be unreasonably  withheld; and (iii) with respect to any
preliminary prospectus, shall not inure to the benefit of any Indemnified Person
if  the  untrue  statement  or  omission  of  material  fact  contained  in  the
preliminary  prospectus  was corrected on a timely basis in the  prospectus,  as
then  amended  or  supplemented,  such  corrected  prospectus  was  timely  made
available by the Company  pursuant to Section 3(c) hereof,  and the  Indemnified
Person was promptly advised in writing not to use the incorrect prospectus prior
to  the  use  giving  rise  to  a  Violation   and  such   Indemnified   Person,
notwithstanding  such advice, used it. Such indemnity shall remain in full force
and  effect  regardless  of  any  investigation  made  by or on  behalf  of  the
Indemnified Person and shall survive the transfer of the Registerable Securities
by the Holders pursuant to Section 9.

                                       6



         b.       In  connection  with  any  Registration  Statement  in which a
Holder is  participating,  each such Holder agrees  severally and not jointly to
indemnify,  hold harmless and defend,  to the same extent and in the same manner
set forth in Section  6(a),  the  Company,  each of its  directors,  each of its
officers who signs the Resale Registration  Statement,  each person, if any, who
controls the Company within the meaning of the 1933 Act or the Exchange Act, any
underwriter  and  any  other  stockholder  selling  securities  pursuant  to the
Registration  Statement  or any of its  directors  or officers or any person who
controls such  stockholder or underwriter  within the meaning of the 1933 Act or
the Exchange Act  (collectively  and together  with an  Indemnified  Person,  an
"INDEMNIFIED PARTY"), against any Claim to which any of them may become subject,
under the 1933 Act, the Exchange Act or otherwise,  insofar as such Claim arises
out of or is based upon any Violation by such Holder, in each case to the extent
(and only to the extent)  that such  Violation  occurs in  reliance  upon and in
conformity  with  written  information  furnished  to the Company by such Holder
expressly for use in connection with such Registration Statement; and subject to
Section 6(c) such Holder will reimburse any legal or other expenses (promptly as
such expenses are incurred and are due and payable)  reasonably incurred by them
in connection with investigating or defending any such Claim; PROVIDED, HOWEVER,
that the indemnity  agreement  contained in this Section 6(b) shall not apply to
amounts paid in settlement of any Claim if such  settlement is effected  without
the  prior  written  consent  of  such  Holder,   which  consent  shall  not  be
unreasonably  withheld;  PROVIDED  FURTHER,  HOWEVER,  that the Holder  shall be
liable under this Agreement (including this Section 6(b) and Section 7) for only
that  amount as does not exceed the net  proceeds  to such Holder as a result of
the  sale  of  Registerable  Securities  pursuant  to  the  Resale  Registration
Statement.  Such indemnity  shall remain in full force and effect  regardless of
any  investigation  made by or on  behalf  of such  Indemnified  Party and shall
survive the transfer of the  Registerable  Securities by the Holder  pursuant to
Section 9.  Notwithstanding  anything  to the  contrary  contained  herein,  the
indemnification  agreement  contained  in this  Section 6(b) with respect to any
preliminary  prospectus shall not inure to the benefit of any Indemnified  Party
if  the  untrue  statement  or  omission  of  material  fact  contained  in  the
preliminary  prospectus  was corrected on a timely basis in the  prospectus,  as
then amended or supplemented.

         c.       Promptly after receipt by an Indemnified Person or Indemnified
Party  under  this  Section  6 of  notice  of the  commencement  of  any  action
(including any  governmental  action),  such  Indemnified  Person or Indemnified
Party  shall,  if a  Claim  in  respect  thereof  is  to  be  made  against  any
indemnifying  party under this  Section 6, deliver to the  indemnifying  party a
written notice of the commencement  thereof,  and the  indemnifying  party shall
have the right to participate in, and, to the extent the  indemnifying  party so
desires,  jointly with any other indemnifying party similarly noticed, to assume
control  of the  defense  thereof  with  counsel  mutually  satisfactory  to the
indemnifying  party and the Indemnified  Person or the Indemnified Party, as the
case may be; PROVIDED,  HOWEVER, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel  with the fees and expenses to be
paid by the  indemnifying  party,  if,  in the  reasonable  opinion  of  counsel
retained by the indemnifying  party, the  representation  by such counsel of the
Indemnified  Person or  Indemnified  Party and the  indemnifying  party would be
inappropriate  due to actual  or  potential  differing  interests  between  such
Indemnified  Person or Indemnified Party and any other party represented by such
counsel  in such  proceeding.  The  indemnifying  party  shall  pay for only one
separate legal counsel for the Indemnified  Persons or the Indemnified  Parties,
as  applicable,  and such legal counsel  shall be selected by Holders  holding a
majority-in-interest  of the  Registerable  Securities  included  in the  Resale
Registration  Statement  to which the Claim  relates  (with  the  approval  of a
majority-in-interest   of  the   Holders),   if  the  Holders  are  entitled  to
indemnification  hereunder,  or the  Company,  if the  Company  is  entitled  to
indemnification  hereunder, as applicable. The failure to deliver written notice
to the  indemnifying  party within a reasonable time of the  commencement of any
such action shall not relieve such  indemnifying  party of any  liability to the
Indemnified  Person or  Indemnified  Party  under this  Section 6, except to the
extent  that the  indemnifying  party is actually  prejudiced  in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by  periodic   payments  of  the  amount   thereof  during  the  course  of  the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.

                                       7



         7.       CONTRIBUTION

         To  the  extent  any   indemnification  by  an  indemnifying  party  is
prohibited or limited by law, the indemnifying  party agrees to make the maximum
contribution  with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; PROVIDED,  HOWEVER, that
(i) no contribution shall be made under  circumstances where the maker would not
have been  liable for  indemnification  under the fault  standards  set forth in
Section  6, (ii) no  seller  of  Registerable  Securities  guilty of  fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registerable  Securities who was not
guilty of such fraudulent  misrepresentation,  and (iii) contribution  (together
with any  indemnification  or other  obligations  under this  Agreement)  by any
seller of Registerable  Securities  shall be limited in amount to the net amount
of  proceeds  received  by such  seller  from  the  sale  of  such  Registerable
Securities.

         8.       REPORTS UNDER THE 1934 ACT

         With a view to making available to the Holders the benefits of Rule 144
promulgated  under the 1933 Act or any other  similar rule or  regulation of the
SEC that may at any time permit the Holders to sell securities of the Company to
the public without registration ("RULE 144") once it is subject to the reporting
requirements of the Exchange Act, the Company agrees to:

         a.       make and keep public information available, as those terms are
understood and defined in Rule 144;

         b.       file with the SEC in a timely  manner  all  reports  and other
documents  required of the Company  under the 1933 Act and the  Exchange  Act so
long as the Company remains subject to such  requirements and the filing of such
reports and other  documents is required for the  applicable  provisions of Rule
144; and

         c.       furnish  to  each   Holder  so  long  as  such   Holder   owns
Registerable  Securities,  promptly upon request, (i) a written statement by the
Company that it has complied  with the reporting  requirements  of Rule 144, the
1933  Act  and the  Exchange  Act,  (ii) a copy of the  most  recent  annual  or
quarterly  report of the  Company,  and (iii) such other  information  as may be
reasonably  requested to permit such Holder to sell such securities  pursuant to
Rule 144 without registration.

         9.       ASSIGNMENT OF REGISTRATION RIGHTS

         The rights under this Agreement shall be automatically  assignable by a
Holder to any  transferee of all or any portion of  Registerable  Securities if:
(i) the Holder agrees in writing with the  transferee or assignee to assign such
rights,  and a copy of such  agreement  is  furnished  to the  Company  within a
reasonable time after such assignment,  (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such  transferee or assignee,  and (b) the  securities  with
respect to which such  registration  rights are being  transferred  or assigned,
(iii)  following  such transfer or assignment,  the further  disposition of such
securities by the  transferee  or assignee is restricted  under the 1933 Act and
applicable  state  securities  laws,  (iv) at or  before  the time  the  Company
receives the written notice  contemplated  by clause (ii) of this sentence,  the
transferee or assignee  agrees in writing with the Company to be bound by all of
the  provisions  contained  herein,  (v) such  transfer  shall have been made in
accordance with the applicable  requirements of the  Subscription  Agreement and
(vi) such transferee  shall be an "accredited  investor" as that term defined in
Rule 501 of Regulation D promulgated under the 1933 Act.

         10.      AMENDMENT OF REGISTRATION RIGHTS

         Provisions of this Agreement may be amended and the observance  thereof
may  be  waived  (either  generally  or  in a  particular  instance  and  either
retroactively  or  prospectively),  only with written consent of

                                       8



the  Company  and  Holders  who hold a  majority  interest  of the  Registerable
Securities.  Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Holder and the Company.

         11.      MISCELLANEOUS

         a.       A person or  entity  is deemed to be a holder of  Registerable
Securities  whenever  such  person or entity  owns of record  such  Registerable
Securities.  If  the  Company  receives  conflicting  instructions,  notices  or
elections  from  two or more  persons  or  entities  with  respect  to the  same
Registerable  Securities,  the Company shall act upon the basis of instructions,
notice or  election  received  from the  registered  owner of such  Registerable
Securities.

         b.       Any notices  required or permitted to be given under the terms
hereof shall be sent by certified or registered mail (return receipt  requested)
or delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile and shall be effective  five days after being placed in
the mail, if mailed by regular United States mail, or upon receipt, if delivered
personally or by courier (including a recognized  overnight delivery service) or
by  facsimile,  in each  case  addressed  to a  party.  The  addresses  for such
communications shall be:

                  (i)      If to the Company:

                                    Vaughan Foods, Inc.
                                    216 Northeast 12th Street
                                    Moore, Oklahoma 73160
                                    Attention: Chief Financial Officer
                                    Facsimile:  405-895-6596

                           With copy to:

                                    Morse, Zelnick, Rose & Lander LLP
                                    405 Park Avenue
                                    New York, New York 10022
                                    Attention: Stephen A. Zelnick, Esq.
                                    Facsimile:  (212) 838-9190

                  (ii)     If  to  any   Holder:   to  the   address  set  forth
         immediately  below such  Holder's  name on the  signature  pages to the
         Subscription Agreement.

         c.       Failure  of any party to  exercise  any right or remedy  under
this  Agreement or otherwise,  or delay by a party in  exercising  such right or
remedy, shall not operate as a waiver thereof.

         d.       THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF OKLAHOMA  APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES
OF  CONFLICT  OF  LAWS.  THE  PARTIES  HERETO  HEREBY  SUBMIT  TO THE  EXCLUSIVE
JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN MOORE, OKLAHOMA WITH
RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED INTO
IN CONNECTION HEREWITH OR THE TRANSACTIONS  CONTEMPLATED HEREBY OR THEREBY. BOTH
PARTIES   IRREVOCABLY  WAIVE  THE  DEFENSE  OF  AN  INCONVENIENT  FORUM  TO  THE
MAINTENANCE OF SUCH SUIT OR PROCEEDING.  BOTH PARTIES FURTHER AGREE THAT SERVICE
OF  PROCESS  UPON A PARTY  MAILED BY FIRST  CLASS  MAIL SHALL BE DEEMED IN EVERY
RESPECT  EFFECTIVE  SERVICE  OF  PROCESS  UPON THE  PARTY  IN ANY  SUCH  SUIT OR
PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN
ANY  OTHER  MANNER   PERMITTED  BY  LAW.   BOTH  PARTIES   AGREE  THAT  A  FINAL
NON-APPEALABLE  JUDGMENT IN ANY SUCH SUIT OR PROCEEDING  SHALL BE CONCLUSIVE AND
MAY BE

                                       9



ENFORCED IN OTHER  JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL
MANNER.  THE PARTY  WHICH DOES NOT  PREVAIL IN ANY  DISPUTE  ARISING  UNDER THIS
AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES,  INCLUDING  ATTORNEYS'
FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.

         e.       In the event that any  provision of this  Agreement is invalid
or  unenforceable  under  any  applicable  statute  or rule of  law,  then  such
provision  shall  be  deemed  inoperative  to the  extent  that it may  conflict
therewith  and shall be deemed  modified to conform with such statute or rule of
law. Any provision hereof which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.

         f.       This  Agreement,  the  Subscription  Agreement  (including all
schedules and exhibits  thereto),  the Notes and all other documents relating to
this  transaction  (collectively,  the "TRANSACTION  DOCUMENTS")  constitute the
entire  agreement  among the parties  hereto with respect to the subject  matter
hereof  and  thereof.  There  are  no  restrictions,   promises,  warranties  or
undertakings,  other than those set forth or referred to herein and therein. The
Transaction  Documents  supersede all prior agreements and understandings  among
the parties hereto with respect to the subject matter hereof and thereof.

         g.       Subject  to  the  requirements  of  Section  9  hereof,   this
Agreement  shall be binding  upon and inure to the  benefit of the  parties  and
their successors and assigns.

         h.       The  headings  in  this  Agreement  are  for   convenience  of
reference only and shall not form part of, or affect the interpretation of, this
Agreement.

         i.       This  Agreement  may be executed in two or more  counterparts,
each of which shall be deemed an original but all of which shall  constitute one
and the same agreement and shall become  effective when  counterparts  have been
signed by each party and  delivered to the other  party.  This  Agreement,  once
executed by a party,  may be  delivered  to the other party  hereto by facsimile
transmission  of a copy of this Agreement  bearing the signature of the party so
delivering this Agreement.

         j.       Each  party  shall  do and  perform,  or  cause to be done and
performed,  all such further acts and things,  and shall execute and deliver all
such other  agreements,  certificates,  instruments and documents,  as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.

         k.       Except as otherwise  provided  herein,  all consents and other
determinations  to be made by the Holders  pursuant to this  Agreement  shall be
made by Holders holding a majority of the Registerable Securities, determined as
if all Derivitive Securities then outstanding have been converted into shares of
Common Stock.

         l.       The  Company   acknowledges   that  a  breach  by  it  of  its
obligations  hereunder will cause  irreparable  harm to each Holder by vitiating
the intent and purpose of the transactions contemplated hereby. Accordingly, the
Company  acknowledges that the remedy at law for breach of its obligations under
this  Agreement  will be  inadequate  and  agrees,  in the  event of a breach or
threatened  breach by the Company of any of the provisions under this Agreement,
that each Holder shall be entitled,  in addition to all other available remedies
in law or in equity,  and in addition to the penalties  assessable herein, to an
injunction or injunctions  restraining,  preventing or curing any breach of this
Agreement and to enforce  specifically the terms and provisions hereof,  without
the necessity of showing  economic  loss and without any bond or other  security
being required.

         m.       The language used in this  Agreement  will be deemed to be the
language  chosen by the parties to express their mutual intent,  and no rules of
strict construction will be applied against any party.

                                       10



         IN WITNESS WHEREOF, the Company and the undersigned Holders have caused
this Agreement to be duly executed as of the date first above written.


                  VAUGHAN FOODS, INC.


                  /s/ Mark E. Vaughan
                  -------------------

                  Chief Executive Officer



                  HOLDER


                  --------------------------------------
                  By:
                  Title:


                  --------------------------------------
                  By:
                  Title:


                                       11

EX-10.6

                                                                    EXHIBIT 10.6


                          LOAN AND SECURITY AGREEMENT

                                                             Loan No. 3700692971

     THIS LOAN AND SECURITY AGREEMENT ("Agreement) is dated as of June 29, 2005,
by and between VAUGHAN FOODS, INC., an Oklahoma  corporation  ("Borrower"),  and
COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK ("Bank").

                                R E C I T A L S:

     BACKGROUND.  Borrower has  requested  that Bank lend to Borrower up to Four
Million Dollars ($4,000,000.00)  ("Loan"), on a revolving credit line basis, and
Bank is willing to do so upon the terms and  conditions  set forth herein and in
other documents and instruments executed on an even date herewith.

     NOW, THEREFORE, in consideration of the promises herein contained, and each
intending to be legally bound thereby, the parties agree as follows:


                                   SECTION I
                          DEFINITIONS AND USED HEREIN

     1.  "Accounts,"  "Chattel Paper,"  "Commercial  Tort Claims,"  "Contracts,"
Contract Rights," "Documents,"  "Equipment,"  "Fixtures,"  "Furniture," "General
Intangibles," "Goods," "Instruments,"  "Intellectual Property," "Inventory," and
"Letter-of-Credit  Rights,"  shall have the same  meanings as are given to those
terms in the Uniform  Commercial Code as presently  adopted and in effect in the
State  of  Oklahoma  or  as  otherwise  defined  by  applicable  law.  The  term
"Instruments"  shall also include all forms of chattel paper, including  chattel
paper  involving  related  software  as well as  electronic  chattel  paper  and
tangible chattel paper.

     2. Accounting  terms used and not otherwise  defined in this Agreement have
the meanings  determined by, and all calculations  with respect to accounting or
financial  matters  unless  otherwise  provided  herein  shall  be  computed  in
accordance with GAAP.

     3.  "Affiliate" means as to any Person, each other Person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by, or
under common control with, such Person.

4. "Agreement" means this Agreement, as the same may from time to time be
amended or supplemented.



                                      -1-



     5.  "Borrowing  Base"  means,  at any time,  the amount  computed  as total
Borrowing Base on the Borrowing Base Certificate most recently delivered to, and
accepted by Bank, in accordance with this Agreement, and equal to the lesser of:

         a.   Four Million Dollars ($4,000,000.00); or

         b.   Eighty  percent (80.00%)  of  Eligible Accounts of Borrower,  plus
     fifty percent  (50.00%) of the Inventory of Borrower at cost, not including
     materials used or consumed in Borrower's  business and except that advances
     on Inventory shall not exceed Five Hundred Thousand Dollars  ($500,000.00).
     In addition,  Bank may in its sole discretion at any time reduce the amount
     that may be advanced on Eligible Accounts to seventy-five  percent (75.00%)
     of  Eligible  Accounts  if at any time the  aggregate  losses  incurred  by
     Borrower  due to unpaid  Accounts  (realized  by  Borrower  utilizing  GAAP
     accounting  principles)  for the then  most  current  consecutive  four (4)
     business  quarters exceed one percent (1.00%) of gross revenues of Borrower
     for the same period,  and shall remain at such limit of l75.00% of Eligible
     Accounts  until  the level of losses  for a four (4)  consecutive  business
     quarter period drops below one percent (1.00%).

     6. "Borrowing Base Certificate" means a fully completed  certificate in the
form of Exhibit  I(6) to this  Agreement  certified  by the  President  or Chief
Financial  Officer or Borrower to be correct and  delivered to, and accepted by,
Bank.

     7. "Business Day" means other than a Saturday,  a Sunday, or a day on which
commercial banks in Oklahoma are authorized to close.

     8. "Closing" has the meaning given to such term in Section III.

     9. "Collateral" has the meaning given to such term in Section IV.

     10. Collateral  Documents" means the Note, financing  statements,  security
agreement,  guaranty agreements, and other documents and instruments required by
Bank as set forth herein.

     11.  "Eligible  Account"  means,  at any time, an Account that conforms and
continues to conform to the following conditions:

         a.   The Account  arose  from a bona  fide  outright  sale of  Goods by
     Borrower or from services  performed by Borrower,  and such Goods have been
     shipped to the appropriate  account debtors or their designees (or the sale
     has otherwise  been  consummated),  or the services have been performed for
     the appropriate account debtors;

         b.   The  Account  is based  upon an  enforceable  order  or  contract,
     written or oral, for Goods shipped or held, or for services performed,  and
     the same were shipped or held, or performed in  accordance  with such order
     or contract;


                                      -2-



         c.   The  title  of  Borrower  to  the  Account  and  except  as to the
     Account  debtor,  to any Goods, is absolute and is not subject to any prior
     assignment, claim, lien, or security interests, except Permitted Liens;

         d.   The amount  shown on the books of Borrower  and on any  invoice or
     statement delivered to Bank is owing to Borrower,  less any partial payment
     that has been made thereon by anyone;

         e.   The Account shall be  eligible  only to the extent  that it is not
     subject to any claim or reduction, counterclaim, setoff, recoupment, or any
     claim or credits,  allowances, or adjustments by the Account debtor because
     of returned,  inferior, or damaged Goods or unsatisfactory services, or for
     any other reason;

         f.   The Account debtor has not returned or otherwise notified Borrower
     of any dispute concerning,  or claimed nonconformity of any of the Goods or
     services from the sale of which the Account arose;

         g.   The Account is due and payable not more than thirty (30) days from
     the statement date, and the statement must be dated contemporaneously  with
     the shipment of goods sold or services performed.

         h.   The  Account  or any portion thereof is  not more than  sixty (60)
     days due from the date of the invoice thereof;

         i.   If more than ten percent (10%) of the amount of all invoices  to a
     particular Account debtor are ineligible, than all invoices to such Account
     debtor shall become ineligible for borrowing purposes;

         j.   Borrower has not received any note,  trade  acceptance, draft,  or
     other  Instrument  with respect to, or in payment of the  Account,  nor any
     Chattel Paper with respect to the Goods giving rise to the Account, unless,
     if any  such  Instrument  or  Chattel  Paper  has been  received,  Borrower
     immediately notified Bank and, at the latter's request, endorses or assigns
     and delivers the same to Bank and Bank agrees to accept an  endorsement  or
     assignment of the same;

         k.   Borrower has  not received any notice of the filing of a  petition
     in bankruptcy or insolvency laws by or against the Account debtor. Upon the
     receipt by  Borrower  of any such  notice,  it will  immediately  give Bank
     written advice thereof;

         l.   The  Account  debtor is not a  subsidiary  or other  Affiliate  of
     Borrower;

         m.   The  Account  is  not  subject to a bond or other  surety  made or
     issued by any third party;



                                      -3-


         n.   The Account is not due from the  United  States  government or any
     agency thereof or related entity thereto:

         o.   The Account  is not  owed by any  foreign  government  or  foreign
     (non-U.S.)  originated business entity, unless the Account is fully secured
     by a letter of credit  acceptable  in all  respects to Bank and issued by a
     creditworthy United States based financial institution acceptable to Bank;

         p.   The  Account  is not  with an Account  debtor (which  for purposes
     hereof  includes all Affiliates of the Account  debtor) that generates more
     than  thirty-five  percent  (35.00%) of the total annual sales  revenues of
     Borrower,  unless Bank is fully advised as to the  circumstances and agrees
     in writing to waive this  condition,  which waiver may be given or withheld
     by Bank in its sole discretion; and

         q.   Bank has not deemed such Account ineligible because of uncertainty
     about the  creditworthiness of the Account debtor or because Bank otherwise
     reasonably considers the Collateral value thereof to Bank to be impaired or
     its ability to realize such value to be insecure.

     In  addition to the  foregoing,  Eligible  Account  shall  mean any  amount
receivable by Borrower  under any insurance  policy  covering  Goods which have,
within the preceding  forty-five (45) days, been damaged or destroyed by fire or
other  direct  casualty  loss,  provided  that a claim  thereof has been made in
compliance  with such  insurance  policy,  to the extent that such claim has not
been in any way  denied or  contested  by the  insurer  and  provided  that such
insurer,  if such  insurer  were an  Account  debtor  of  Borrower,  would  be a
qualified Account debtor under this paragraph.

     In the event of any dispute, under the foregoing criteria, about whether an
Account is or has ceased to be an Eligible  Account, the decision  of Bank shall
control.

     12. "Event of Default" has the meaning provided for in Section VII.

     13.  "Financial  Statements"  means  the  balance  sheet  of  Borrower  and
statements of income and expenses,  stockholders' equity, and statements of cash
flow, and notes thereto, of Borrower for the years or, as appropriate,  month or
quarter end as prepared, audited and/or reviewed by independent certified public
accountants or recognized standing to present fairly the consolidated  financial
position  and  results  of  operations  of  Borrower  at such dates and for such
periods in accordance with GAAP.

     14.  "GAAP"  means  generally   accepted   accounting   principles  applied
consistently  with such  changes or  modifications  hereto as may be approved in
writing by Bank.

     15.  "Indebtedness"  means,  as to  Borrower,  all  items of  indebtedness,
obligation,   or  liability,   whether  matured  or  unmatured,   liquidated  or
unliquidated, direct or contingent, joint or several.



                                      -4-


     16.   "Intellectual   Property"   means  all of  Borrower's  now  owned  or
subsequently  acquired  or  developed  designs,   patents,  patent  rights  (and
applications   therefor),   trademarks  and   registrations   (and  applications
therefor), trade names, inventions,  copyrights, software and computer programs,
license  rights,  trade  secrets,  methods,   processes,   know-how,   drawings,
specifications, descriptions, and all memoranda, notes, and records with respect
to any research and development,  whether now owned or subsequently  acquired or
developed by Borrower and whether in tangible or intangible form.

     17. "Laws" means all  ordinances,  statutes,  rules,  regulations,  orders,
injunctions,  writs, or decrees of any  government or political  subdivision  or
agency thereof, or of any court or similar entity established by any thereof.

     18. "Loan  Termination  Date" means the earliest to occur of the following:
(i) as to the Revolving  Loan--June  28, 2006; (ii) the date the Obligations are
accelerated  pursuant to this  Agreement;  and (iii) the date  Bank receives (a)
notice in writing  from  Borrower  of  Borrower's  election  to  terminate  this
Agreement;  and (b)  indefeasible  payment in full of the  Obligations,  or such
other date or dates as may later be agreed to by Bank and  Borrower in a written
amendment to this Agreement.

     19. "Note" means the promissory note referred to in Section II.

     20. "Obligations" means the obligation of Borrower.

         a.   To pay the principal of, and  interest on the  promissory  note in
     accordance  with  the  terms  thereof  and to  satisfy  all  of  its  other
     liabilities to Bank,  whether hereunder or otherwise,  whether now existing
     or hereafter incurred, matured or unmatured, direct or contingent, joint or
     several,  including any extensions,  modifications,  renewals thereof,  and
     substitutions  therefor  and including  but not limited to, any obligations
     under letter of credit agreements;

         b.   To  repay  to Bank  all  amounts  advanced by  Bank  hereunder  or
     otherwise  on  behalf  of  Borrower,  including,  but  without  limitation,
     advances  for  principal  or interest  payments to prior  secured  parties,
     mortgages, or licensors, or taxes, levies, insurance,  rent, or repairs to,
     or maintenance or storage of, any of the collateral; and

         c.   To  reimburse  Bank, on  demand, for  all  of  Bank's expenses and
     costs,  including  the  reasonable  fees and  expenses of its  counsel,  in
     connection with the preparation,  administration,  amendment, modification,
     or  enforcement  of this  Agreement and the documents  required  hereunder,
     including,  without  limitation,  any proceeding brought or threatened,  to
     enforce  payment of any of the  Obligations  referred  to in the  foregoing
     subparagraphs (a) and (b).

                                      -5-


     21. "Permitted Liens" means:


         a.   Liens for taxes, assessments, or similar charges,  incurred in the
     ordinary course of business that are not yet delinquent;

         b.   Pledges or  deposits  made in the ordinary  course  of business to
     secure payment of workers'  compensation,  or to participate in any fund in
     connection  with workers'  compensation,  unemployment  insurance,  old-age
     pensions or other social security programs;

         c.   Liens of mechanics, materialmen, warehousemen,  carriers, or other
     like  liens,  securing  obligations  incurred  in the  ordinary  course  of
     business that are not yet due and payable; and

         d.   Liens in favor of Bank.

     22. "Person" means any individual, corporation,  partnership,  association,
joint stock company, trust, unincorporated  organization,  joint venture, court,
or government or political subdivision or agency thereof.

         23. "Records" means  correspondence,  memoranda,  tapes, discs, papers,
books and other  documents,  or  transcribed  information  of any type,  whether
expressed in ordinary or machine readable language.


                                   SECTION II
                                    THE LOAN

     1.  REVOLVING  LOAN.  Bank  agrees  to  lend  up to  Four  Million  Dollars
($4,000,000.00) to Borrower pursuant to this facility. Bank will credit proceeds
of this  revolving  loan from  time to time  ("Revolving  Loan") to  "Borrower's
deposit account with Bank.

         a. Subject to the terms hereof,  Bank will lend to Borrower,  from time
     to time until the Revolving Loan  Termination  Date,  such sums in integral
     multiples of One thousand  Dollars  ($1,000.00)  as Borrower may request by
     reasonable  same day notice to Bank,  received by Bank not later than 11:00
     A.M.  of such day,  but which shall not exceed in the  aggregate  principal
     amount at any one time  outstanding,  the  lesser of Four  Million  Dollars
     ($4,000,000.00) ("Loan Commitment") or the Borrowing Base amount.  Borrower
     may borrow, repay without penalty or premium, and re-borrow hereunder, from
     the date of this Agreement until the Loan Termination  Date, up to the full
     amount of the Loan  Commitment,  subject to the limitation of the Borrowing
     Base,  or any lesser sum which is One Thousand  Dollars  ($1,000.00)  or an
     integral  multiple  thereof.  It is the  intention  of the parties that the
     outstanding  principal amount of the Revolving Loan shall at no time exceed
     the  amount of the then  existing  Borrowing  Base and if, at any time,  an
     excess  shall  for any  reason  exist,  the full  amount  of  such  excess,
     together with accrued and unpaid interest thereon as herein provided, shall
     be immediately due and payable in full to Bank.



                                      -6-


         b.   The Loan  Commitment shall be evidenced  by a Note having a stated
     maturity on the Revolving Loan Termination Date. The Note shall specify the
     manner of principal and interest payments and rate of interest accrual.

     4. PAYMENT TO BANK AND COLLECTIONS.

         a.   AMOUNTS PAYABLE TO BANK. All  sums payable to Bank hereunder shall
     be paid directly to Bank in immediately available funds. Bank shall provide
     Borrower statements of all amounts due hereunder, which statements shall be
     considered  correct and  conclusively  binding on Borrower  unless Borrower
     notifies Bank to the contrary within thirty (30) days of its receipt of any
     statement  that  it  deems  to be  incorrect.  Alternatively,  at its  sole
     discretion,  Bank may charge against any deposit account of Borrower all or
     any portion of any amount due hereunder.

         b.   COLLECTION OF ACCOUNTS.

              i.  Borrower  will  take  usual and  customary  steps  to  collect
         Accounts in full,  and will take such other  action with respect to the
         collection  of  Accounts  and of  the  proceeds  thereof  as  Bank  may
         reasonably request.

              ii. Bank shall have at any time or times  hereafter all the rights
         of a secured  creditor  holding  a valid,  and  indefeasibly  perfected
         security   interest  in  accounts  pursuant  to  the  Oklahoma  Uniform
         Commercial  Code,  as well as the rights  conferred  by the  Collateral
         Documents.

              iii. Borrower  hereby  authorizes  Bank  to  endorse, in  the name
         of Borrower,  any item, howsoever received by Bank representing payment
         on or other proceeds of any Collateral or on any of the Accounts.

              iv.  For purposes  of determining  the amount  of the Obligations,
         including,  without limitation, the  computations of interest which may
         from time to time be owing by  Borrower  to Bank,  the  receipt  of any
         check or other item of payment on any Account or otherwise with respect
         to any of the  Collateral  by Bank shall not be treated as a payment on
         account of the liabilities until such check or other item of payment is
         actually paid in cash or cash equivalent.


                                  SECTION III
                              CONDITIONS PRECEDENT

         The  obligations  of Bank to make the Revolving Loan are subject to the
following conditions precedent:






                                      -7-


         1.  DOCUMENTS  REQUIRED FOR CLOSING.  Borrower  shall have delivered to
Bank,  prior  to  the  initial  disbursement  of   the  funds  ("Closing"),  the
following:

             a.   The Collateral  Documents and the financing  statements,  duly
         executed by Borrower.

             b.   Corporate resolutions of authority and incumbency, as Bank may
         require.

             c.   A duly executed  Borrowing Base Certificate acceptable to Bank
         and certifying a Borrowing Base of not less than the initial  principal
         amount requested by Borrower to be advanced by Bank.

             d.   Financial statements of Borrower, prepared  according to GAAP,
         showing  no  material  adverse  change in the  financial  condition  of
         Borrower.

             e.   Hazard, fire and extended coverage  insurance  policies on all
         Collateral,  with Bank named as loss payee and in amounts acceptable to
         Bank in its sole  discretion.  Hazard  insurance shall include coverage
         related to fire,  windstorm, lightning,  hail,  explosion,  riot, civil
         commotion, aircraft, vehicle, marine, smoke, and property damage.

             f.   Evidence of payment of all costs and expenses incurred by Bank
         in  connection  with the  Loan,  including,  but not  limited  to,  all
         attorneys'  fees,   environmental   investigation  and/or  audit  fees,
         appraisal fees, inspection fee, and filing fees.

             g.   Evidence of  worker's  compensation  coverage  in  amounts and
         types as required by the laws of the State of Oklahoma.

             h.   A  fully  executed  lockbox  control agreement,  in  form  and
         content acceptable to Bank in all respects.

             i.   A detailed listing, certified by Borrower as true and  correct
         in all material respects, of all  Account  debtors,  including  current
         addresses,  showing the status of the Account  and amount  owed,  which
         list  shall  include  all  Accounts,  whether  or not the same are also
         Eligible Accounts.

         2.  CERTAIN  EVENTS.  At the time of, and as a condition to Closing and
each  disbursement  of any part of the  Revolving  Loan to be made by Bank at or
subsequent to Closing:

             a.   No Event of Default shall have occurred and be continuing, and
         no event shall have occurred and be continuing that, with the giving of
         notice or passage of time or both, would be an Event of Default;

             b.   No material adverse change shall have occurred in the business
         prospects,  financial  condition,  or results of operations of Borrower
         since the dates of any financial statements provided by Borrower at any
         time; and



                                      -8-


             c.  All of the  Collateral  Documents  shall be in full  force  and
         effect.


                                   SECTION IV
                              COLLATERAL SECURITY

     1. COMPOSITION OF THE COLLATERAL. The property in which a security interest
is granted  pursuant to the provisions of this Agreement is herein  collectively
called  "Collateral." The term "Collateral" shall mean all Accounts,  Inventory,
General Intangibles,  Chattel Paper, Commercial Tort Claims, Contracts, Contract
Rights,   Documents,   Furniture,   Equipment,   Fixtures,  Goods,  Instruments,
Intellectual  Property,  rights  as  seller of  goods,  rights  to  returned  or
repossessed  goods,  Letter of Credit  Rights and all other assets and rights of
any  nature or type  owned by  Borrower  or as to which  Borrower  may  exercise
control or rights. The Collateral,  together with all other property of Borrower
of any kind held by Bank,  shall  stand as one  general,  continuing  collateral
security for all  Obligations  and may be retained by Bank until all Obligations
have been satisfied in full.  This security  interest and Agreement are intended
by the parties to include all  Obligations of Borrower to Bank which have arisen
in the  past or  which  arise  in the  future,  regardless  of form or  purpose,
including,  without  limitation,  loans for  consumer,  agricultural or business
purposes;  Obligations which are primary or secondary,  absolute or  contingent,
sole  or  joint;  and  credit  evidence  by  promissory  notes,  open  accounts,
overdrafts or letters of credit.

     2. RIGHTS IN PROPERTY HELD BY BANK. As security for the prompt satisfaction
of all Obligations Borrower hereby assigns, transfers, and sets over to Bank all
of its right,  title,  and  interest  in and to, and grants Bank a lien on and a
security  interest in, all amounts that may be owing, from time to time, by Bank
to Borrower in any capacity,  including, but without limitation,  any balance or
share belonging to Borrower in any capacity,  including, but without limitation,
any balance or share belonging to Borrower, or any deposit or other account with
Bank, which lien and security  interest shall be independent of, and in addition
to, any right of setoff that Bank has under applicable Laws or otherwise.

     3.  RIGHTS IN  PROPERTY  HELD  EITHER BY  BORROWER  OR BY BANK.  As further
security for the prompt satisfaction of all Obligations, Borrower hereby assigns
to Bank all of its right,  title, and interest in and to, and grants Bank a lien
upon and a security interest in, all Collateral, wherever located, whether owned
or hereafter  acquired,  together  with all  replacements  therefor and proceeds
(including without limitation, insurance proceeds) and products thereof.

     4.  PRIORITY OF LIENS. The  foregoing  liens shall be first and prior liens
except for Permitted Liens to Persons other than Bank.

     5.  FINANCING STATEMENTS.

         a.   Borrower:

              i.  Authorized  Bank  to  file   such   Uniform   Commercial  Code
         Financing  Statements  (which,  together with  amendments  thereto  and
         continuation statements



                                      -9-


         thereof are called "Financing Statements") in form satisfactory to Bank
         as Bank, from time to time, may determine;

              ii.  Shall pay, or reimburse Bank for paying,  all costs and taxes
         of  filing  or  recording  the same in such  public offices as Bank may
         designate; and

              iii. Shall take such other steps as Bank,  from time to  time, may
         direct,  including the noting of Bank's lien on the  Collateral  and on
         any  certificates of title therefor, all to perfect to the satisfaction
         of Bank, Bank's interest in the Collateral.

         b.   In addition to the foregoing, and not in limitation thereof;

              i.   A  carbon,  photographic, or   other  reproduction   of  this
         Agreement shall be sufficient as a financing statement and may be filed
         in any appropriate office in lieu thereof; and

              ii. To  the extent  lawful, Borrower hereby  appoints Bank  as its
         attorney-in-fact (without requiring Bank to act as such) to prepare and
         file any  financing  statement in the name of Borrower,  and to perform
         all other acts that Bank deems  appropriate to perfect and continue its
         security interest in, and to protect and preserve, the Collateral.


                                   SECTION V
                         REPRESENTATIONS AND WARRANTIES

     1.  REPRESENTATIONS AND WARRANTIES BY BORROWER.  To  induce  Bank  to enter
into this Agreement, Borrower represents and warrants to Bank as follows:

         a.   Borrower is a corporation, duly  organized, validly existing,  and
     in good standing under the Laws of the State of Oklahoma;  Borrower  has no
     subsidiaries;  Borrower has the lawful power to own its  properties  and to
     engage in the  businesses  it conducts  and is duly  qualified  and in good
     standing as a foreign company in the  jurisdictions  wherein the  nature of
     the  business  transacted  by  it  or  property  owned  by  it   make  such
     qualification  necessary;  the states in which Borrower is qualified to  do
     business are  disclosed to Bank in writing;  the addresses of all places of
     business of Borrower are disclosed to Bank in writing; and Borrower has not
     changed its name,  been the  surviving  company in a merger,  acquired  any
     business, or changed its principal  executive  office within five (5) years
     and one (1) month prior to the date hereof,  nor acquired any assets from a
     transferor  which  remain  subject to a security  interest  granted by such
     transferor  within  one (1) year  prior to the date  hereof,  nor moved any
     Collateral to its present  location from another state where it was subject
     to a security interest granted to another entity;






                                      -10-


            b.    Borrower  is not  directly  or  indirectly  controlled  by, or
      acting on behalf of, any Person which is an  "Investment  Company"  within
      the meaning of the Investment Company Act of 1940, as amended;

            c.    Borrower  is  the  sole  and  exclusive  owner  of  all of the
      Collateral  and no Affiliate  or any other Person has any right,  claim or
      interest in any of the Collateral;

            d.    Borrower is not in default  with respect to any of its debt to
      anyone,  and  the  making  and  performance  of  this  Agreement  and  the
      Collateral  Documents will not  (immediately  or with the passage of time,
      the giving of notice, or both):

                  i.    Violate the  organizational  documents and agreements of
            Borrower,  or  violate  any laws or result  in a  default  under any
            contract,  agreement,  or instrument to which Borrower is a party or
            by which Borrower or its property is bound; or

                  ii.   Result in the  creation or  imposition  of any  security
            interest  in,  or lien or  encumbrance  upon,  any of the  assets of
            Borrower except in favor of Bank;

            e.    Borrower has the power and authority to enter into and perform
      this Agreement,  the Note, and the Collateral Documents,  and to incur the
      obligations  herein and therein  provided  for,  and has taken all actions
      necessary to authorize the execution,  delivery,  and  performance of this
      Agreement, the Note, and the Collateral Documents;

            f.    This Agreement, the Note, and the Collateral Documents are, or
      when delivered will be, valid, binding, and enforceable in accordance with
      their respective terms;

            g.    There is no  pending  order,  notice,  claim,  litigation,  or
      proceeding  against  or  affecting  Borrower,  whether  or not  covered by
      insurance,  that  would  materially  or  adversely  affect  the  financial
      condition or business prospects of Borrower if adversely determined;

            h.    Borrower has good and  marketable  title to all of its assets,
      none of which is subject to any security interest, encumbrance or lien, or
      claim of any third Person except for Permitted Liens;

            i.    The  Financial   Statements  of  Borrower  that  Borrower  has
      previously provided to Bank,  including any schedules and notes pertaining
      thereto,  have,  to the best  knowledge  of  Borrower,  been  prepared  in
      accordance  with GAAP,  and to the best  knowledge of Borrower,  fully and
      fairly  present the  financial  condition of Borrower at the dates thereof
      and the results of operations for the periods covered thereby,  and to the
      best knowledge of Borrower, there have been no material adverse changes in
      the consolidated financial condition or business of Borrower from the date
      of such statements to the date hereof;

                                      -11-


            j.    As of the date hereof Borrower has no material Indebtedness of
      any nature,  including but without  limitation,  liabilities for taxes and
      any interest or penalties  relating thereto except to the extent reflected
      (in a  footnote  or  otherwise)  in the  financial  statements  previously
      provided to Bank or as disclosed in, or permitted by this  Agreement;  and
      Borrower does not know or have reasonable  ground to know of any basis for
      the  assertion  against  it of any  such  Indebtedness  as of the  date of
      Closing;

            k.    Except as otherwise  permitted herein,  Borrower has filed all
      federal,  state,  and local tax returns and other  reports  required by an
      applicable  Laws to have been filed prior to the date  hereof, has paid or
      caused to be paid all taxes,  assessments,  and other governmental charges
      that are due and payable  prior to the date hereof,  and has made adequate
      provisions  for the payment of such taxes,  assessments,  or other charges
      accruing but not yet payable;  Borrower has no knowledge of any deficiency
      or additional  assessment in a materially  important  amount in connection
      with any taxes, assessments, or charges not provided for on its books;

            l.    Except to the  extent  that the  failure  to comply  would not
      materially  interfere  with  the  conduct  of the  business  of  Borrower,
      Borrower has  complied  with all  applicable  Laws with respect to (i) any
      restrictions, specifications, or other requirements pertaining to products
      that it  manufactures  or sells or to the services it  performs;  (ii) the
      conduct of its business; and (iii) the use, maintenance,  and operation of
      the real and personal  properties  owned or leased by it in the conduct of
      its business;

            m.    No  representation  or warranty by or with respect to Borrower
      contained  herein or in any  certificate  or other  document  furnished by
      Borrower  pursuant hereto contains any untrue statement of a material fact
      or omits to state a material fact necessary to make such representation or
      warranty not misleading in light of the  circumstances  under which it was
      made;

            n.    Each  consent,   approval  or  authorization  of,  or  filing,
      registration or qualification  with, any Person required to be obtained or
      effected by Borrower in connection with the execution and delivery of this
      Agreement,  the Note, and the Collateral  Documents or the  undertaking or
      performance  of any  obligation  hereunder  or  thereunder  has been  duly
      obtained or effected;

            o.    Except as  disclosed  to Bank in writing (1)  Borrower  has no
      material leases, contracts, or commitments of any kind (including, without
      limitation,   employment  agreements,  collective  bargaining  agreements,
      powers of attorney, distribution arrangements,  patent license agreements,
      contracts  for  future  purchase  or  delivery  of goods or  rendering  of
      services,  bonuses,  pension,  and retirement  plans accrued vacation pay,
      insurance  and  welfare  agreements);  (2) to the  best of the  Borrower's
      knowledge,  all parties to all such material  leases,  contracts and other
      commitments to which Borrower is a party have complied with the provisions
      of such leases,  contracts, and other commitments;  and (3) to the best of
      Borrower's knowledge, no party is in default under


                                      -12-


       any  provisions  thereof  and no event has  occurred  which,  but for the
       giving of notice or the  passage of time,  or both,  would  constitute  a
       default;

            p.    Borrower has not made any  agreement or taken any action which
      may cause anyone to become  entitled to a commission  or finder's fee as a
      result of or in connection with the making of this Agreement;

            q.    Any Employee  Pension Benefit Plans as defined in the Employee
      Retirement Income Security Act of 1974, as amended ("ERISA"),  of Borrower
      meet, as of the date hereof,  the minimum  funding  standards of 29 U.S.C.
      ss. 1082  (Section 302 of ERISA),  and no  Reportable  Event or Prohibited
      Transaction as defined in ERISA, has occurred with respect to any Employee
      Benefit Plans, as defined in ERISA, of Borrower;

            r.    The liens and  security  interests  created  pursuant  to this
      Agreement,  including any separate real estate liens granted in connection
      herewith,  are in all cases  first and prior  liens  except for  Permitted
      Liens;

            s.    Borrower  warrants  (and this shall be a  continuing  warranty
      which shall survive until all of the  Obligations of Borrower to Bank have
      been fully  satisfied) that it is in compliance  with all federal,  state,
      and  local  environmental  laws  and  regulations  and  has  obtained  all
      environmental  permits  necessary  or  appropriate  to the  conduct of its
      business.  There is not  pending or, to the best of  Borrower's  knowledge
      after due  inquiry,  are there any  threatened  environmental  enforcement
      actions,   suits,  or   proceedings   before  any  court,   tribunal,   or
      administrative  body or  official.  Responsible  officers  and  agents  of
      Borrower have made an extensive  investigation  and have  determined  that
      Borrower has not, nor has any former owner of any real  property  occupied
      by Borrower,  stored, used or disposed of any toxic or hazardous substance
      on its  properties  or  transported  any  such  substance  to or from  its
      properties in violation of any presently  existing or previously  existing
      laws, regulations or policies. Borrower will not store, use, or dispose of
      such  substances on its  properties,  except in accordance with applicable
      laws.

            t.    Borrower is not a party to any stock  repurchase or redemption
      agreement,  or any similar type of agreement concerning potential transfer
      of shares of stock in Borrower;

            u.    Borrower  shall permit Bank to conduct such  inspection of the
      Collateral as and when Bank shall require.

      2.    SURVIVAL.  All of the  representations  and  warranties set forth in
this  Agreement  shall survive until all  Obligations  are satisfied in full and
there remain no outstanding commitments hereunder.

                                      -13-


                                   SECTION VI
                             COVENANTS OF BORROWER

      1.    AFFIRMATIVE COVENANTS.  Borrower does hereby covenant and agree with
Bank that, so long as any portion of the Obligations  remain  unsatisfied or any
commitments  hereunder remain outstanding,  it will comply at all times with the
following covenants:

            a.    Borrower will furnish to Bank:

                  i.    Within  forty-five  (45)  days  after  the close of each
            quarterly accounting period in each fiscal year, commencing with the
            quarter  ending  June 30,  2005,  an  accountant  prepared  compiled
            financial  statement  that includes an income  statement and balance
            sheet of Borrower for such quarter in reasonable  detail as required
            by Bank,  subject to normal year end audit adjustments and certified
            by  Borrower's  President  or Chief  Financial  Officer to have been
            prepared in  accordance  with GAAP and being true and correct in all
            material respects.

                  ii.   Within  thirty  (30) days  after the close of each month
            (and  at any  additional  time in the  discretion  of Bank or if any
            material  deterioration  in the  Borrowing  Base would be  disclosed
            thereby) a Borrowing  Base  Certificate as of the end of such month.
            Each Borrowing Base Certificate  shall be effective only as accepted
            by Bank (and with such  revisions,  if any, as Bank may require as a
            condition  to such  acceptance),  and shall be  accompanied  by such
            detailed Account and Inventory information as Bank shall require.

                  iii.  Within one hundred  twenty (120) days after the close of
            each fiscal year, year end financial  statements  including,  income
            statements,  balance sheets,  and statement of cash flow of Borrower
            for such fiscal year. These financial statements shall be audited by
            independent  certified public accountants of recognized  standing to
            present fairly the  consolidated  financial  position and results of
            operations of Borrower in accordance  with GAAP; and  accompanied by
            such  accountants'  opinion  thereof that such  documents  have been
            reviewed in  compliance  with the  American  Institute  of Certified
            Public Accountants  Statements of Auditing Standards in effect as of
            the execution hereof;  such  accountants'  opinion and certification
            shall be directed to Bank, providing that the client  representation
            of the  accountants  extends to Bank and shall also be  certified by
            Borrower's  President or Chief  Financial  Officer as being true and
            correct in all material respects.

                  iv.   Within  forty-five (45) days  after  the close  of  each
            quarter,  commencing  with the quarter  ending June 30, 2005,  (a) a
            trial  balance  reflecting  an  aging  of all  accounts  payable  of
            Borrower,  and (b) a list containing the names and current addresses
            of all Account  debtors (i.e.  customers  owing payment to Borrower,
            whether or not the Accounts are Eligible Accounts).

                  v.   Annual federal tax returns,  with  all schedules,  within
            thirty  (30)  days  after  submission  of the  same to the  Internal
            Revenue Service.

                                      -14-


                  iv.   within  forty-five  (45)  days  after  the close of each
            quarter, commencing with the quarter ending June 30, 2005, a written
            certification  to Bank by Borrower's  President  that Borrower is in
            strict compliance with the requirements of all city,  county,  state
            and federal laws and regulations applicable to Borrower,  including,
            but not limited to, worker's compensation and occupational safety.

                  vii.  Inventory  reports in such  detail and when  required by
            Bank from time to time in Bank's discretion.

                  viii. A  detailed  report of any failure of Borrower to comply
            with any audit  standards  of any  state or  federal  government  or
            agency,  including,  but not limited to, the United  States Food and
            Drug Administration or the United States Department of Agriculture.

                  ix.   Commencing March 31, 2006,  and annually  thereafter,  a
            written  certification  by Borrower's  President that Borrower is in
            compliance  with all  covenants and  obligations  of Borrower to the
            Cleveland County Bond Authority (or similar agency).

                  x.    Within ninety (90) days  after the end of each  calendar
            year,  updated  and signed  personal  financial  statements  of each
            guarantor  of the  obligations  of the Note,  certified  as true and
            correct in all material respects by each respective  guarantor,  and
            each  guarantor's  annual  federal tax returns,  with all schedules,
            within  thirty (30) days after  submission  to the Internal  Revenue
            Service.

                  xi.   Such other interim financial statements, projections and
            other information as Bank may reasonably request from time to time.

            b.    Borrower will  maintain a Borrowing  Base such that the amount
      of Borrower's outstanding Revolving Loan will not, at any time, exceed the
      lesser of its Borrowing Base or the maximum amount of the Revolving Loan.

            c.    Borrower will maintain a debt service  coverage  ratio of 1.50
      to 1.00 or  better,  tested and  measured  quarterly,  beginning  with the
      quarter  ended as of March 31,  2006,  with such ratio  defined by Bank in
      accordance with GAAP.

            d.    Borrowing  will  maintain a Long Term Debt to Net Worth Ratio,
      as  defined in  accordance  with GAAP and  computed  as of the end of each
      calendar  quarter,  which  shall not be greater  than 4.00 to 1.00 for any
      quarter, commencing with the quarter ended as of March 31, 2006.


                                      -15-


            e.    Borrower shall maintain a minimum Current Ratio, as defined in
      accordance with GAAP, and computed quarterly,  commencing with the quarter
      ended March 31, 2006, of at least 1.10 to 1.00.

            f.    Borrower will take all necessary steps to preserve its company
      existence  and business  relationships  and to comply with all present and
      future laws  applicable  to it in the  operation  of its  business and all
      material agreements to which it is subject.

            g.    Borrower  will  give  immediate  notice  to  Bank  of (i)  any
      litigation  or  proceeding  in which it is a party if an adverse  decision
      therein would  require it to pay more than  Twenty-Five  Thousand  Dollars
      ($25,000.00)  or  deliver  assets  the  value  of which  exceeds  such sum
      (whether or not the claim is considered to be covered by  insurance);  and
      (ii) the  institution  of any other suit or  proceeding  involving it that
      might materially and adversely affect its operations, financial condition,
      property, or business prospects.

            h.    Borrower will pay when due all of its  Indebtedness  due third
      persons except when the amount thereof is being contested in good faith by
      appropriate  proceedings  and with adequate  reserves  therefor  being set
      aside on its books.

            i.    Borrower will notify Bank  immediately if (i) it becomes aware
      of the  occurrence of any Event of Default or of any fact,  condition,  or
      event  that only with the  giving  of notice or  passage  of time or both,
      could  become an Event of Default;  (ii) it becomes  aware of any material
      adverse change in the business prospects,  financial condition (including,
      without   limitation,    proceedings   in   Bankruptcy,   insolvency,   or
      reorganization),  or results of operations of Borrower;  or (iii) upon the
      failure  of  Borrower  to  observe  any  of  its  respective  undertakings
      hereunder or under the Collateral Documents.

            j.    Borrower  will (i) fund any of its  Employee  Pension  Benefit
      Plans in accordance with no less than the minimum funding  standards of 29
      U.S.C. ss. 1082 (Section 302 of ERISA);  (ii) furnish Bank, promptly after
      the filing of the same,  with  copies of any  reports or other  statements
      filed with the United States  Department of Labor or the Internal  Revenue
      Service with respect to any such Plan; and (iii)  promptly  advise Bank of
      the  occurrence of any  Reportable  Event or Prohibited  Transaction  with
      respect to any Employee Benefit Plan.

            k.    Borrower  shall  establish  and  maintain  Borrower's  primary
      depository business accounts with Bank.

            l.    If  Borrower  causes new  business  entities  to be created to
      conduct business  activities similar to, or related to, Borrower's current
      business  activities,  such new entities shall  immediately  upon creation
      execute  guaranty  agreements  as to the  Note,  in form  and  content  as
      required by Bank.

                                      -16-


            m.    Borrower  shall  remain  bound at all times to Bank  under the
      terms of a lockbox  control  agreement  acceptable to Bank  and shall take
      all  actions  required by Bank in its sole  discretion  to maintain at all
      times  Bank's  immediate  access  to the post  office  box  maintained  by
      Borrower as the sole  designated  delivery  address for  payments  made on
      Accounts  owed to  Borrower.  Borrower  shall not change  such  designated
      address and shall  immediately  deliver to Bank all  payments  received by
      Borrower through any other method on any Accounts.

      2.    NEGATIVE  COVENANTS.  Borrower  does hereby  covenant and agree with
Bank that, so long as any portion of the Obligations  remain  unsatisfied or any
commitments  hereunder remain outstanding,  it will comply at all times with the
following  negative  covenants,  unless  Bank  shall  otherwise  have  agreed in
writing:

            a.    Borrower will not mortgage,  pledge, grant, or permit to exist
      a security interest in, or a lien upon, any of its assets of any kind, now
      owned  or  hereafter  acquired,  except  for  liens  in  favor  of Bank or
      Permitted Liens;

            b.    Borrower will not become liable,  directly or  indirectly,  as
      guarantor or otherwise for any Obligation of any other person;

            c.    Borrower  will not declare or pay any  dividends,  or make any
      other payment or distribution on account of its capital stock, or make any
      assignment or transfer of Accounts or ownership of Inventory,  than in the
      ordinary course of business of sale of Inventory to customers of Borrower;

            d.    Borrower will not form or have any entity or subsidiary  which
      will be the  transferee of any Accounts or Inventory from Borrower or make
      any loan in the nature of an investment of any person;

            f.    Borrower  will not make any loan or  advance  to any  officer,
      shareholder, director, or employee of Borrower, except for business travel
      and similar temporary advances in the ordinary course of business;

            g.    Borrower  will not make payments on account of the purchase or
      lease  of  fixed  assets  that,  in  the  aggregate,  in any  fiscal  year
      (commencing  with the current  fiscal  year) will exceed the  depreciation
      taken or to be taken with respect to fixed assets during such year;

            h.    Borrower  will not  redeem,  purchase,  or  retire  any of its
      capital  stock  or  grant  or  issue,   or  purchase  or  retire  for  any
      consideration,  any warrant, right or option pertaining thereto, or permit
      any  redemption,  retirement  or  other  acquisition  by  Borrower  of the
      ownership of capital stock of Borrower;

            i.    Borrower  shall not furnish to Bank any  certificate  or other
      document that contains any untrue statement of material fact or that omits
      to state a material fact

                                      -17-


      necessary to make it not  misleading in light of the  circumstances  under
      which it was furnished;

            j.    Borrower will not directly or indirectly apply any part of the
      proceeds of the  Obligations  to the purchasing or carrying of any "margin
      stock" within the meaning of Regulation U of the Board of Governors of the
      Federal Reserve System,  or any regulations,  interpretations,  or rulings
      thereunder;

            k.    Borrower  shall  not  suffer  or permit  majority  control  of
      Borrower to be sold, assigned or otherwise transferred,  or make or permit
      any  change  in  its  current  management,   or  otherwise  dispose  of  a
      substantial part of its assets or properties;

            l.    Borrower  shall  not  violate  in  any  material  respect  any
      federal,  state,  county or city  statutes,  orders,  rules or regulations
      concerning occupational safety;

            m.    The  Collateral  shall not be  situated at any time within any
      federal or state designated flood zone;

            n.    Borrower shall not compensate officers and owners more than an
      amount that, when taken together,  will not adversely affect the repayment
      ability of Borrower  with respect to the  Obligations  and the Note.  This
      amount may not be increased  year to year unless (i) an  after-tax  profit
      was made in the preceding fiscal year; (ii) Borrower is and will remain in
      compliance with covenants of this Agreement; (iii) all of Borrower's debts
      are paid on a current  status;  and (iv)  Borrower  has obtained the prior
      written consent of Bank.


                                  SECTION VII
                                    DEFAULT

      1.    EVENTS  OF  DEFAULT.  The  occurrence  of  any  one or  more  of the
following events shall constitute an Event of Default hereunder:

            a.    Borrower  shall  fail to perform  any  covenant,  promise,  or
      payment obligation made in this Agreement or any Collateral Documents, and
      fails to cure such default within any applicable  grace and/or cure period
      as provided in the Note;

            b.    Any  financial   statement,   representation,   warranty,   or
      certificate  made or  furnished  by or with respect to Borrower to Bank in
      connection with this Agreement,  or as an inducement to Bank to enter into
      this Agreement,  or in any separate  statement or document to be delivered
      to Bank hereunder,  shall be materially  false,  incorrect,  or incomplete
      when made.

      2.    ACCELERATION. At the option of Bank upon the occurrence of any Event
of Default, the Obligations,  whether hereunder or otherwise,  shall immediately
become due and payable.

                                      -18-


      3.    REMEDIES.  After any  acceleration,  Bank shall have, in addition to
the rights and remedies given it by this Agreement and the Collateral Documents,
all those allowed by all applicable Laws, including, but without limitation, the
Uniform  Commercial Code as enacted in the applicable  jurisdiction in which any
Collateral  may be  located.  The  rights of Bank under  this  Agreement  are in
addition to the other rights and remedies (including,  without limitation, other
rights of setoff) which Bank may have.

      4.    RIGHT OF SETOFF.  Upon the occurrence of any Event of Default,  Bank
may, and is hereby authorized by Borrower, at any time and from time to time, to
the fullest  extent  permitted by applicable  Laws,  without  advance  notice to
Borrower (any such notice being expressly waived by Borrower),  setoff and apply
any and all deposits (general or special, time or demand,  provisional or final)
at any time held and any other  indebtedness at any time owing by Bank to or for
the credit or the account of, Borrower  against any or all of the Obligations of
Borrower now or hereafter existing, whether or not such Obligations have matured
and  irrespective  of whether Bank has exercised any other rights that it has or
may have with respect to such  Obligations,  including  without  limitation  any
acceleration  rights.  Bank agrees  promptly to notify  Borrower  after any such
setoff and application,  provided that the failure to give such notice shall not
affect the  validity  of such setoff and  application.  The rights of Bank under
this  Agreement  are in addition to the other  rights and  remedies  (including,
without limitation, other rights of setoff) which Bank may have.


                                  SECTION VIII
                                 MISCELLANEOUS

      1.    CONSTRUCTION.  Nothing  herein  contained  shall  prevent  Bank from
enforcing any or all guaranty, pledge, or security agreements, notes, mortgages,
deeds of trust, other evidences of liability,  or other Collateral  Documents in
accordance with their respective terms.

      2.    ENFORCEMENT  AND  WAIVER BY BANK.  Bank  shall have the right at all
times to enforce the provisions of this  Agreement and the Collateral  Documents
in strict  accordance  with the terms  hereof and thereof,  notwithstanding  any
conduct or custom on the part of Bank in refraining from so doing at any time or
times to enforce its rights under such  provisions,  strictly in accordance with
the same, shall not be construed as having created a custom in any way or manner
contrary to specific  provisions  of this  Agreement  or as having in any way or
manner  modified  or waived  the  same.  All  rights  and  remedies  of Bank are
cumulative  and  concurrent and the exercise of one right or remedy shall not be
deemed a waiver or release of any other right or remedy.

      3.    EXPENSE OF BANK.  Borrower  will, on demand,  reimburse Bank for all
expenses,  including the reasonable fees and expenses of legal counsel for Bank,
incurred by Bank in connection with the preparation, administration,  amendment,
modification,  or enforcement of this Agreement,  the Collateral Documents,  and
the collection or attempted collection of the Obligations.

                                      -19-


      4.    NOTICES.  Any  notice or  consents  required  or  permitted  by this
Agreement  shall be in writing and shall be deemed  delivered  if  delivered  in
person or if sent by certified mail, postage prepaid,  return receipt requested,
or facsimile transmission, as follows, unless such address is changed by written
notice hereunder:

                  If to Borrower:     Vaughan Foods, Inc.
                                      216 Northest 12th Street
                                      Moore, Oklahoma 73160
                                      Attention: Mark E. Vaughan
                                      Fax No.: __________________

                  If to Bank:         Commercial Federal Bank
                                      777 N.W. Grand Boulevard, Suite 650,
                                      Oklahoma City, Oklahoma 73118
                                      Attention: Alan Schaefer
                                      Fax No.: ___________________


      5.    WAIVER AND RELEASE BY BORROWER.  To the maximum extent  permitted by
applicable laws, Borrower:

            a.    Waives notice of acceleration  and of intention to accelerate;
      and notice and opportunity to be heard,  after  acceleration in the manner
      provided in this  Agreement,  before  exercise by Bank of the  remedies of
      self-help,  setoff, or  of  other  summary  procedures  permitted  by  any
      applicable  laws or by any  agreement  with  Borrower,  and,  except where
      required  hereby or by any applicable law notice of any other action taken
      by Bank; and

            b.    Releases  Bank  and  its  officers,   attorneys,  agents,  and
      employees from all claims for loss or damage caused by any act or omission
      on the part of any of them except willful misconduct or gross negligence.

      6.    APPLICABLE  LAW. This  Agreement is entered into and  performable in
Oklahoma City,  Oklahoma,  and shall be subject to and construed and enforced in
accordance with the laws of the State of Oklahoma.

      7.    BINDING EFFECT,  ASSIGNMENT,  AND ENTIRE  AGREEMENT.  This Agreement
shall  inure to the  benefit  of,  and shall be  binding  upon,  the  respective
successors and permitted assigns of the parties hereto. Borrower has no right to
assign any of its rights or  Obligations  hereunder  without  the prior  written
consent of Bank. This Agreement, including the exhibits hereto, all of which are
hereby  incorporated  herein  by  reference,  and  the  documents  executed  and
delivered  pursuant hereto,  constitute the entire agreement between the parties
and may be amended only by a writing signed on behalf of each party.

                                      -20-


      8.    SEVERABILITY.  If any  provision  of this  Agreement  shall  be held
invalid under any  applicable  law, such  invalidity  shall not affect any other
provision  of this  Agreement  that  can be given  effect  without  the  invalid
provision, and, to this end the provisions hereof are severable.

      IN WITNESS  WHEREOF,  the parties hereto have duly executed this Agreement
as of the day and first year above written.


                                 COMMERCIAL FEDERAL BANK, A FEDERAL
                                 SAVINGS BANK

                                 By: /s/ Alan Shaefer
                                     ------------------------------
                                 Its: Vice President
                                      -----------------------------


                                 VAUGHAN FOODS, INC., an Oklahoma
                                 corporation, Borrower


                                 By: /s/ Mark E. Vaughan, President
                                     ------------------------------
                                     Mark E. Vaughan



                                      -21-



[graphic omitted] Commercial
                  Federal Bank


                                EXHIBIT "I (6)"
                           BORROWING BASE CERTIFICATE


To:    Commercial Federal Bank, a FSB ("Bank")
From:  Vaughan Foods, Inc.                           ("Borrower")
       ---------------------------------------------

This Borrowing Base Certificate is delivered pursuant to the Loan and Security
Agreement dated 6/28/2005, between the Borrower and the Bank and accurately
reflects values of the following Collateral as of __________________________.

ACCOUNTS RECEIVABLE
Total Accounts Receivable as of this date
SUBTRACT--INELIGIBLE ACCOUNTS-
(Per attached)                                       LESS        ___________

ELIGIBLE Accounts Receivable Subtotal

Borrowing Base Factor (Receivables)                            X _______80%_
(maximum advance)

TOTAL ELIGIBLE ACCOUNTS RECEIVABLE VALUE                (1)      ___________

INVENTORY
Total Inventory Book Value as of this date
SUBTRACT--INELIGIBLE Inventory
(Obsolete, Inventory with offsetting claims)                LESS ___________

ELIGIBLE Inventory Subtotal


Borrowing Base Factor                                 X          _______50%_


TOTAL ELIGIBLE INVENTORY VALUE                       (2)         ___________

(ELIGIBLE INVENTORY (2) MAY NOT EXCEED $500,000)
AVAILABLE CREDIT BASE (1+2)



CURRENT BALANCE ON REVOLVING LINE OF CREDIT     LESS ___________ INITIAL ADVANCE

TOTAL AVAILABLE OR (OVER) LINE
  (MAXIMUM ALLOWED $4,000,000)                       ___________

AMOUNT REQUESTED                                     ___________

The undersigned represents and warrants that the foregoing is true complete and
correct and that the information reflected in this Borrowing Base complies with
the representations and warranties set forth in the Security Agreement and in
the Loan Agreement between the undersigned and Commercial Federal Bank, a FSB
dated __________ . The undersigned also represents and warrants that all the
payroll taxes are current.

By: _____________________
Mark Vaughan - President



                        AMENDMENT OF PROMISSORY NOTE AND
                         ACKNOWLEDGMENT OF CROSS-DEFAULT
                        --------------------------------

                                                             Loan No. 3700692743

        THIS AMENDMENT OF PROMISSORY NOTE AND ACKNOWLEDGMENT OF CROSS-DEFAULT is
entered  into by and  between  VAUGHAN  FOODS,  INC.,  an  Oklahoma  corporation
("Borrower"), and COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK ("Lender").


                                R E C I T A L S:
                                ----------------

        A.      On or about March 22, 2005,  Borrower  executed and delivered to
Lender  a  Promissory  Note  in  the  original  principal  sum  of  Two  Hundred
Twenty-Four Thousand One Hundred Dollars  ($224,100.00) which provided financing
to Borrower  related to Borrower's  acquisition  of certain  truck  trailers and
related refrigeration units ("March Note"); and

        B.      On or about an even date herewith, Lender is entering into a new
revolving  credit  line  loan made or to be made by  Lender  to  Borrower  in an
original maximum principal amount of up to Four Million Dollars  ($4,000,000.00)
("Revolving Note"); and

        C.      As an inducement to Lender to enter into the Revolving Note, and
in consideration of Lender actually entering into the same,  Borrower is willing
to modify the March Note to cross-default it with the Revolving Note.

        NOW, THEREFORE, the parties agree as follows:

        1.      The "Default"  section of the March Note is modified by adding a
new subsection, which provides as follows:

                DEFAULT UNDER  REVOLVING NOTE. A default occurs and is not cured
        within the  applicable  cure period under the Revolving  Note or related
        loan documents  with Lender in the original  principal sum of up to Four
        Million Dollars ($4,000,000.00).

        Default  under the March Note that is  produced as a result of a default
in the  Revolving  Note shall  constitute  an  immediate  acceleration,  without
further  notice or right to cure, of the  obligations of the March Note and will
authorize Lender to exercise any and all remedies available with respect to such
default, including, but not limited to, those remedies available to Lender under
Oklahoma law and under the documents and instruments securing the March Note.

        2.      Except as amended herein, the March Note and all other documents
evidencing  and/or securing the  obligations  thereof shall remain in full force
and effect as written.

                                      -1-

EX-10.7

                       PROMISSORY NOTE EXTENSION AGREEMENT
                       -----------------------------------

         THIS  PROMISSORY  NOTE EXTENSION  AGREEMENT  ("Agreement")  is made and
entered into effective as of June 28, 2006, by and among VAUGHAN FOODS, INC., an
Oklahoma  corporation  ("Borrower"),  MARK E. VAUGHAN and VERNON J. BRANDT,  JR.
(collectively  "Guarantors"),  and  BANK  OF  THE  WEST,  a  California  banking
corporation,  successor by merger to Commercial  Federal Bank, a Federal Savings
Bank ("Lender").


                                R E C I T A L S:
                                ----------------

         A.       Borrower  and Lender are  parties to a  Promissory  Note dated
June  29,  2005,  in the  original  principal  amount  of Four  Million  Dollars
($4,000,000.00)  ("Note").  By the terms of Unconditional  Guaranties of Payment
dated June 29, 2005, Guarantors  unconditionally guaranteed to Lender Borrower's
payment and performance under the Note.

         B.       The Note matured on June 28, 2006, and the parties hereto have
entered into this  Agreement  for purposes of extending the maturity date of the
Note.

         NOW, THEREFORE, for valuable consideration, the parties hereto agree as
follows:

         1.       PRINCIPAL BALANCE. The outstanding  principal amount due under
the Note is currently Two Million Eight  Hundred  Fourteen  Thousand Two Hundred
Ninety-Three  and 75/100  Dollars  ($2,814,293.75). In  addition,  interest  has
accrued and  continues  to accrue  under the terms of the Note.  Borrower  shall
continue to pay monthly interest  payments to Lender under the terms of the Note
until the Due Date, as amended hereby.

         2.       DUE  DATE.  The Due  Date as  defined  in the  Note is  hereby
extended to October 31, 2006, on which date all principal and interest remaining
outstanding shall be paid in full without further notice or demand.

         3.       MISCELLANEOUS.  Borrower covenants and agrees with Lender that
it has no defenses to the payment of the Note and the  performance of Borrower's
obligations thereunder. Except as expressly modified herein, all other terms and
provisions of the Note shall remain in full force and effect.


                                        VAUGHAN FOODS, INC., an Oklahoma
                                        corporation, Borrower

Date: JULY 19, 2006                     By: /s/ MARK E. VAUGHAN
                                            ------------------------------------
                                            Mark E. Vaughan, President

                                      -1-


Date: JULY 19, 2006                         /s/ MARK E. VAUGHAN
                                            ------------------------------------
                                            MARK E. VAUGHAN, Guarantor


Date: JULY 19, 2006                         /s/ VERNON J. BRANDT, JR.
                                            ------------------------------------
                                            VERNON J. BRANDT, JR., Guarantor


                                            BANK OF THE WEST, a California
                                            banking corporation, successor by
                                            merger to Commercial Federal Bank, a
                                            Federal Savings Bank, Lender


Date: JULY 21, 2006                         By: /s/ MICHAEL A. WARREN
                                                --------------------------------
                                                    Its: BBC MANAGER
                                                         -----------------------



             PROMISSORY NOTE (REVOLVING) - ADJUSTABLE INTEREST RATE
             ------------------------------------------------------

$4,000,000.00                                                Loan No. 3700692971
                                                                      ----------


         1.       BORROWER'S  PROMISE TO PAY PRINCIPAL  AND INTEREST.  For value
received,  the  undersigned  Maker  ("Borrower"),  promises to pay to COMMERCIAL
FEDERAL BANK, A FEDERAL SAVINGS BANK, its successors or assigns  ("Lender"),  at
its office at 777 N.W.  Grand  Boulevard,  Suite 650,  Oklahoma  City,  Oklahoma
73118, or at such other place as Lender may from time to time designate, without
offset or deduction,  the principal sum of Four Million Dollars  ($4,000,000.00)
or so much thereof as may be  outstanding  from time to time hereunder and under
the Loan and  Security  Agreement  of even date  herewith  between  Borrower and
Lender  ("Loan  Agreement"),  with  interest  from the date hereof on the unpaid
principal balance at the initial interest rate of six and three-fourths  percent
(6.75%) per annum, interest only payable monthly to Lender beginning on July 28,
2005,  and  continuing on the  twenty-eighth  (28th) day of each and every month
thereafter  (subject to  adjustment as provided  hereafter)  until June 28, 2006
("Due Date"),  on which date any unpaid  principal,  interest and all other sums
due under this Note shall be paid in full.  Advances of principal  shall be made
in accordance with the terms of the Loan Agreement.  This is a revolving line of
credit  loan and  Borrower  shall be  entitled  to  borrow,  repay and  reborrow
principal  under  this  Note,  subject  to the  terms of this  Note and  related
documents and agreements,  including the "Borrowing Base" limitations  contained
in the Loan Agreement.

         Interest payable  under this Note shall be calculated on the basis of a
three hundred  sixty (360) day year with  interest  charged on a daily basis for
the  actual  number  of days  that  principal  is  outstanding  from the date of
disbursement until paid.

         2.       ADJUSTABLE   INTEREST  RATE  PROVISIONS   (MULTIPLE   REQUIRED
ADJUSTMENTS).  Borrower  agrees  that the  interest  rate on this Note  shall be
adjusted on each Interest Rate  Adjustment  Date, as defined below, to be equal,
following such date until the next Interest Rate Adjustable  Date, to the sum of
(i) the Prime Rate of interest quoted periodically by THE WALL STREET JOURNAL as
the  base  rate on  corporate  loans  posted  by at least  seventy-five  percent
(75.00%) of the nation's  thirty (30) largest  banks (such rate being  hereafter
referred to as the "Index");  plus (ii)  three-fourths  of one percentage  point
(0.75%) (or 75 basis points).

                  a.       INTEREST  RATE  ADJUSTMENTS.  Changes in the interest
         rate on this Note will  become  effective  on the date of any change in
         the Index  during the term of this Note,  each of which dates is called
         an "Interest Rate Adjustment Date."

                  b.       NON-WAIVER OF ADJUSTMENTS. If Lender, due to delay or
         oversight,  does not give  Borrower  prompt  notice of an interest rate
         adjustment  following an Interest Rate  Adjustment  Date, this will not
         constitute a waiver of Lender's right and option to make an adjustment,
         and Lender may still at any time within ninety (90) days  following the
         Interest Rate Adjustment Date notify Borrower of such  adjustment.  Any
         interest rate  adjustment  made within  ninety (90) days  following the
         Interest Rate Adjustment Date shall be effective  retroactively  to the
         Interest Rate Adjustment Date, and Borrower agrees

                                      -1-


         to reimburse  Lender on demand for any interest and  principal due as a
         result of such retroactive adjustment.

                  c.       ALTERNATIVE INDEX. If, at any time during the term of
         this  Note,   the  Index  is  no  longer   available  or  is  otherwise
         unpublished,  Lender may  select an  alternative  published  index over
         which Lender has no control,  in which case such alternative index will
         become the Index provided in this Note. The alternative  index selected
         by Lender  shall be  reasonably  comparable  to the  former  Index with
         respect to rate levels and frequency of fluctuation.

                  d.       NOTICES.  Notice of any change in the  interest  rate
         shall be deemed  given by Lender when such notice is  deposited  in the
         United States mail, postage prepaid, addressed to Borrower.

         3.       NOTICE. Except as may be otherwise specified in this Note, any
notices required to be given hereunder shall be given in the manner specified in
the Loan Agreement executed by Borrower and Lender on an even date herewith.

         4.       CREDITING OF PAYMENTS.  Each installment payment in any amount
received by Lender shall be credited as of its date of receipt by Lender,  first
to interest then due and the remainder to  principal,  and interest  shall cease
upon the principal so credited as of the date that such credit is made.

         5.       DEFAULT BY BORROWER.  Should  Borrower fail to make payment of
any  installment  or other sum within ten (10) days after the date when due,  or
should  Borrower fail to perform any other  provision or condition  contained in
this Note or in any instrument securing this Note, within twenty (20) days after
written notice of default is given by Lender, this Note shall be in default, and
the whole sum of principal  and interest  shall  become  immediately  due at the
option of Lender and regardless of any prior forbearance.  Interest shall accrue
following  any event of  default  hereunder  at the rate set forth in this Note,
plus  five  percentage  points  (5.00%).  As used in this  Note  and in the Loan
Documents (as hereinafter  defined) an event of default shall include, but shall
not be limited to:

                  a.       Any payment or sum required by this  Note or the Loan
         Documents is not received by Lender  within ten (10) days after its due
         date; or

                  b.       Borrower  fails  to  perform  any  other   obligation
         required  under  this  Note or the Loan  Documents,  or does any act or
         allows any condition to occur or exist which is  prohibited  under this
         Note or the Loan Documents,  which is not cured within twenty (20) days
         after written notice of default by Lender; or

                  c.       Borrower fails to comply with any other  agreement in
         any of the documents and agreements  forming a part of the  transaction
         of which this Note is a part,  including the Loan  Documents,  which is
         not cured within  twenty (20) days after  written  notice of default by
         Lender; or

                                      -2-



                  d.       Any  representation or warranty made herein or in any
         of the Loan Documents,  or otherwise in connection with the application
         for or making  of this  loan,  proves to be  untrue,  or  Borrower  has
         omitted or failed to  disclose  a  material  fact to Lender at any time
         prior to the date of this  Note  which if  disclosed  would  have had a
         significant  impact on  Lender's  decision  whether to approve the loan
         evidenced by this Note and the Loan Documents; or

                  e.       The  commencement  by  or  against  Borrower  of  any
         proceedings  under any  bankruptcy  or  similar  law for the  relief of
         debtors of the  United  States or any state or the  appointment  of any
         receiver, trustee, assignee for the benefit of creditors,  conservators
         or similar  parties for the Borrower or any of its  property,  which in
         the  case  of  proceedings  commenced  against  the  Borrower  are  not
         dismissed within sixty (60) days after commencement; or

                  f.       An    assignment,     transfer,     conveyance,    or
         relinquishment  by Borrower of any of the rights or  obligations  under
         this Note; or

                  g.       The Collateral (as defined in the Loan  Agreement) is
         impaired,  pledged,  or  transferred  in whole or in part such that the
         first lien security of Lender in such  Collateral,  including,  but not
         limited to, the inventory,  accounts receivable or general intangibles,
         is diminished,  altered, impaired or encumbered,  such as by failure of
         Borrower to pay any taxes and  assessments  prior to delinquency or the
         filing of any lien which takes priority over any lien of Lender; or

                  h.       A  material   adverse  change  occurs  in  Borrower's
         financial  condition,  Lender  believes  the  prospect  of  payment  or
         performance of this Note is impaired,  or Lender in good faith believes
         itself insecure;

                  i.       Any of the  preceding  events  occurs with respect to
         any  Guarantor  of  this  Note,  or  any  Guarantor   dies  or  becomes
         incompetent,  or revokes or  disputes  the  validity  of, or  liability
         under, any guaranty of this Note;

                  j.       A  default  occurs  that  is  not  cured  within  any
         applicable  notice  and/or  cure  period  under  any other  note,  loan
         agreement, or obligation of Borrower to Lender, whether now existing or
         hereafter  created,  or to any of Borrower's  affiliates,  whether such
         loan is now existing or hereafter created,  including,  but not limited
         to a term loan made to  Borrower  on or about  March 22,  2005,  in the
         original  principal  amount of Two  Hundred  Twenty-Four  Thousand  One
         Hundred Dollars ($224,100.00) and known as Loan No. 3700692743, and any
         renewal or replacement of such loan; or

                  k.       The death of Mark E.  Vaughan,  provided  that Lender
         will not  exercise  its right to declare this loan to be in default due
         to such death  provided  that (a) at date of death,  Borrower is not in
         default of any of its payment and performance obligations of this Note,
         (b)  Borrower  does not  cause any Event of  Default  specified  in (2)
         through  (i)  inclusive  above to occur,  (c) within  ninety  (90) days
         following  such  death,  Borrower  provides  to Lender a detailed  plan
         for business succession and loan repayment, and (d)

                                       -3-



         such  plan  is  determined  by  Lender  in its  sole  discretion  to be
         acceptable.  If any of the foregoing conditions is not satisfied,  then
         the unpaid  principal and all accrued  interest and other charges under
         this Note will automatically be fully due and payable,  without written
         notice or demand required of and by Lender.

         6.       LATE CHARGE. Borrower agrees: (a) to pay immediately to Lender
without  demand in the  event any  installment  or other  payment  or sum is not
actually received by Lender within ten (10) days after its due date, and without
regard to the date as of which such payment is credited, an amount equal to five
percent  (5.00%) of the  installment  or other  payment or sum due;  (b) that it
would be  impractical or extremely  difficult to fix Lender's  actual damages in
the event that any  installment,  payment or sum shall not be paid when due; and
(c) that such amount shall be presumed to be the amount of damages for such late
payment.  This  paragraph  and the  amount  which it  provides  shall  not limit
Lender's right under this Note, the Loan Agreement,  or any instrument  securing
this Note, or otherwise, to compel prompt performance hereunder and thereunder.

         7.       PREPAYMENT PRIVILEGE. This Note may be prepaid, in whole or in
part,  at any time without  penalty.  Prepayments  shall be applied  against the
outstanding  principal  balance of the Note and shall not extend or postpone the
due date of any  subsequent  monthly  installments  or change the amount of such
installments, unless Lender shall agree otherwise in writing.

         8.       NOTE PAYABLE IN U.S.  DOLLARS.  Principal,  interest,  and all
charges are payable in lawful money of the United States.

         9.       OBLIGATIONS  OF PERSONS  UNDER THIS  NOTE.  In this Note,  the
singular shall include the plural,  and this Note shall be the joint and several
obligation  of each Maker as Borrower,  in the event that there is more than one
Maker.

         10.      SECURITY/ACCELERATION CLAUSE. This Note is secured by the Loan
Agreement,  a Security Agreement,  one or more Financing  Statements,  and other
instruments,  agreements  and documents or even date herewith which grant Lender
security interests in certain property (the foregoing are collectively  referred
to as "Loan  Documents" and the  collateral  encumbered by the Loan Documents is
referred to as the "Property" or the "Collateral").  The obligations,  covenants
and agreements of each and every of the Loan Documents are hereby made a part of
this Note to the same  extent and with the same effect as if they were fully set
forth herein,  and Borrower does hereby agree to perform and keep each and every
obligation,  covenant and agreement set forth in this Note and in the other Loan
Documents.  This Note shall evidence,  and the Loan Documents shall secure,  the
indebtedness  described herein, any future loans or advances that may be made to
or on behalf of Borrower by Lender at any time or times hereafter under the Loan
Documents,  and any other amounts required to be paid by Borrower under the Loan
Documents,  and any  such  loans,  advances  or  amounts  shall  be added to the
indebtedness  evidenced  by this Note,  and shall bear  interest at the interest
rate then  effective,  unless a greater rate is  expressly  provided for in this
Note or the other Loan Documents.

         11.      ASSUMABILITY OF THIS NOTE. If this Note, any Loan Documents or
any Property encumbered by such Loan Documents is assumed,  assigned or conveyed
by Borrower in whole

                                       -4-



or in part, or upon a sale,  assignment or conveyance of any ownership  interest
in Borrower,  or upon a sale or conveyance (whether voluntary or involuntary) of
all or a portion of the Property  described in the Loan  Documents,  or upon the
occurrence of any other  transaction  or event  referenced and prohibited in the
Loan  Agreement,  or if any plan or attempt is made to do or perform  any of the
foregoing,  this Note shall  automatically  and  without  notice  from Lender at
Lender's  option be deemed to be in  default,  and Lender may declare all unpaid
principal,  interest  and other sums under this Note to be  immediately  due and
payable in full. The foregoing  acceleration shall not be applicable in the case
of:

                  a.       Transfers by devise or descent or by operation of law
         upon  the  death  of an  individual  owning a  beneficial  interest  in
         Borrower;

                  b.       Sales  of  inventory   in  the  ordinary   course  of
         Borrower's business operations; and

                  c.       Sales or transfers for fair market  consideration  of
         fixtures or any routine personal  property used in the operation of the
         Borrower's  business,   provided  that  such  sales  or  transfers  are
         incidental to the replacement of like fixtures and personal property of
         newer and better quality and condition.

         If Lender  consents  (which  consent may be  withheld in Lender's  sole
discretion)  to an  assignment,  conveyance  or assumption of this Note, or to a
sale or  conveyance  of all or a portion of the  Property,  or to a transfer  or
conveyance of any ownership interest in Borrower except as permitted above, said
consent shall be  conditioned  upon  compliance  with the  following  terms (and
others  as  determined  by  Lender in its sole  discretion):  (a) the  ownership
entity,  acquisition  terms,  financial  condition,  and credit  and  management
expertise  of  buyer or  assignee  are  approved  by  Lender  in  Lender's  sole
discretion;  (b) buyer or assignee  executes a written  assumption  agreement in
form and  content as prepared  by Lender;  (c) buyer or assignee  pays Lender an
assumption fee equal to one percent (1.00%) of the outstanding principal balance
of this Note as of the date of transfer; (d) Borrower, buyer or assignee pays to
Lender on demand all costs and expenses  including,  but not limited to,  credit
report fees, recording fees and attorneys' fees incurred by Lender in connection
with  the  transaction;  and (e)  buyer or  assignee  complies  with  all  other
requirements reasonably deemed necessary by Lender.

         12.      MAXIMUM  INTEREST.  In no event  whatsoever  shall the  amount
paid, or agreed to be paid, to Lender for the use,  forbearance  or retention of
the  money  to be  loaned  hereunder  ("Interest")  exceed  the  maximum  amount
permissible  under  applicable  law. If the  performance  or  fulfillment of any
provision  hereof or of the Loan  Agreement or any other Loan Documents or other
agreement  between  Lender and Borrower  shall result in Interest  exceeding the
limit for interest  prescribed by law, then the amount of such Interest shall be
reduced to the  maximum  rate which may  lawfully  be  charged or  collected  by
Lender. If, from any circumstances whatsoever, Lender should receive as Interest
an amount which would exceed the highest  lawful rate, the amount which would be
excessive  Interest  shall be applied to the reduction of the principal  balance
owing hereunder (or, at the option of Lender,  be paid over to Borrower) and not
to the payment of Interest.

                                       -5-



         13.      COSTS OF COLLECTION  AND/OR  ENFORCEMENT.  Borrower,  together
with all sureties,  endorsers,  and guarantors of this Note, if any, jointly and
severally  promise to pay: (a) all reasonable  costs and expenses of enforcement
and/or collection, including without limitation,  reasonable attorneys' fees, in
the event this Note or any  portion of this Note after  default is placed in the
hands of attorneys for enforcement  and/or  collection and such is effected with
or without suit; (b) reasonable  attorneys'  fees, as determined by the judge of
the court if such  determination  is required by law,  and all other  reasonable
costs,  expenses and fees  incurred by Lender in the event suit is instituted to
collect or enforce  this Note or any  portion of this Note;  (c) all  reasonable
costs and expenses  provided for in the Loan Agreement and other Loan Documents,
or in any other instrument given as security for this Note and/or incurred by or
on behalf of Lender in connection  with  collecting or otherwise  enforcing  any
right of Lender under this Note, the Loan Agreement,  the Loan Documents, or any
other  instrument  given as security for this Note; and (d) all reasonable costs
and expenses, including, without limitation, reasonable attorneys' fees incurred
by  Lender in  connection  with any  bankruptcy,  insolvency  or  reorganization
proceeding or  receivership  in which Borrower is involved,  including,  without
limitation, reasonable attorneys' fees incurred in making any appearances in any
such  proceeding or in seeking  relief from any stay or injunction  issued in or
arising out of any such proceeding.

         14.      CERTAIN WAIVERS. Except to the extent provided to the contrary
in this Note,  Borrower and all co-makers,  sureties and endorsers of this Note,
if any, jointly and severally waive diligence,  grace,  demand,  presentment for
payment,  exhibition  of this  Note,  protest,  notice  of  protest,  notice  of
dishonor,  notice of demand,  notice of  nonpayment,  and any and all  exemption
rights against the indebtedness evidenced by this Note, and agree to any and all
extensions  or  renewals  from time to time  without  notice and to any  partial
payments of this Note made before or after maturity and that no such  extension,
renewal  or  partial  payment  shall  release  any one or all of them  from  the
obligation of payment of this Note or any  installment of this Note, and consent
to offsets of any sums owed to any one or all of them by Lender at any time.

         15.      EXERCISE OF RIGHTS.  No single or partial  exercise by Lender,
or delay or omission in the  exercise  by Lender,  of any right or remedy  under
this Note,  Loan  Agreement,  or other Loan Documents or authorized by law shall
preclude,  waive or limit the exercise  thereof,  any other or further  exercise
thereof, or the exercise of any right or remedy.  Lender shall at all times have
the right to  proceed  against  Borrower  and/or  any  portion  of the  Property
securing  this Note in such manner as Lender may deem fit,  without  waiving any
other rights or remedies with respect to the Property,  any portion thereof,  or
interest therein.

         16.      NO  MODIFICATIONS.  This Note may not be  changed,  amended or
modified,  except in a writing expressly  intended for such purpose and executed
by Borrower and Lender.

         17.      GOVERNING   LAW.  The  loan  contract   between  the  parties,
including  this  Note,  the Loan  Agreement  and other Loan  Documents,  is made
pursuant to and shall be construed and governed by the laws of the United States
and the rules and  regulations  promulgated  thereunder,  and, to the extent the
laws of a state are applicable  (including laws regarding usury), by the laws of
the State of Oklahoma.

                                       -6-



         18.      CONSTRUCTION.  The  words  "Borrower"  and  "Lender"  shall be
deemed to include the respective heirs, personal representatives, successors and
assigns of each, and shall denote and singular and/or plural,  and the masculine
and/or feminine,  and natural and/or artificial  persons,  whenever and wherever
the context so requires.  The captions  herein are inserted only for convenience
of reference and in no way define, limit or describe the scope or intent of this
Note or any particular  paragraph or section hereof, or the proper  construction
thereof.

         19.      TIME OF THE ESSENCE. Time shall be of the essence in this Note
with respect to all of Borrower's obligations hereunder.

         20.      CONSENT TO RELIEF FROM STAV.  Borrower  hereby  agrees that in
the event on or  before  the date all sums  under  this Note are paid in full to
Lender,  Borrower (by Borrower's  own action or the action of any  shareholders,
officers,  directors  or  creditors),  (i) files  with any  bankruptcy  court of
competent  jurisdiction or is the subject of any petition for relief under Title
11 of the U.S.  Code,  as  amended,  (ii) is the subject of any order for relief
issued under such Title 11 of the U.S.  Code, as amended,  (iii) files or is the
subject of any petition seeking any  reorganization,  arrangement,  composition,
readjustment,  liquidation,  dissolution, or similar relief under any present or
future federal or state act or law relating to bankruptcy,  insolvency, or other
relief for debtors, (iv) seeks, consents to, or acquiesces in the appointment of
any trustee, receiver,  conservator, or liquidator, or (v) is the subject of any
order,  judgment,  or  decree  entered  by any court of  competent  jurisdiction
approving  a  petition   filed  against  such  party  for  any   reorganization,
arrangement,  composition,  readjustment,  liquidation,  dissolution, or similar
relief  under any  present  or future  federal or state act or law  relating  to
bankruptcy,  insolvency,  or  relief  for  debtors,  which  in  the  case  of an
involuntary  proceeding  brought against  Borrower is not dismissed within sixty
(60) days after  commencement,  then all sums under this Note shall thereupon be
deemed to be immediately  due and payable in full, and Lender shall thereupon be
entitled to relief from any  automatic  stay imposed by Section 362 and Title 11
of the U.S.  Code, as amended,  or otherwise,  on or against the exercise of the
rights and remedies  otherwise  available to Lender as provided in this Note and
in all other  documents made to secure the  obligations  under this Note, and as
otherwise  provided by law,  and  Borrower  hereby  waives the  benefits of such
automatic stay and consents and agrees to raise no objection to such relief.

         21.      SEVERABILITY.   If  any   provision   hereof  should  be  held
unenforceable  or void, then such provision  shall be deemed  separable from the
remaining  provisions  and shall in no way  affect  the  validity  of this Note,
except that if such  provision  relates to the payment of any monetary sum, then
Lender may, at is options, declare the indebtedness evidenced hereby immediately
due and payable.

         EXECUTED this 29th day of June, 2005.

                                        VAUGHAN FOODS, INC., an Oklahoma
                                        corporation, Borrower

                                        By: /s/ Mark E. Vaughan
                                        ----------------------------------------
                                        Mark E. Vaughan, President

                                       -7-



                                        BORROWER'S ADDRESS:
                                        216 Northeast 12th Street
                                        Moore, Oklahoma 73160

STATE OF OKLAHOMA  )
                   )SS.
COUNTY OF OKLAHOMA )

         The foregoing  instrument was executed and acknowledged  before me this
29th day of June,  2005,  by Mark E. Vaughan,  the  President of VAUGHAN  FOODS,
INC., an Oklahoma corporation, Borrower, for and on behalf of Borrower.

                                        /s/ TARA CHAVEZ
                                        ----------------------------------------
                                        Notary Public


                                          -----------------------------------
                                                      TARA CHAVEZ
                                                     NOTARY PUBLIC
                                                   STATE OF OKLAHOMA
                                                   CLEVELAND COUNTY
                                              COMMISSION NUMBER: 02020623
                                          -----------------------------------
                                          My Commission Expires Dec. 19, 2006

                                      -8-

EX-10.8

                                                                         EX-10.8


                                 PROMISSORY NOTE


$1,000,000                                                    SEPTEMBER 25, 2006
                                                                PORTLAND, OREGON


                  FOR VALUE  RECEIVED,  Vaughan  Foods,  Inc.  ("Maker"  herein)
promises to pay to the order of Paulson Investment Company, Inc. ("Holder"), the
principal  sum  of  One  Million  and  no/100ths  Dollars  ($1,000,000.00)  (the
"Obligation").  Interest on the Obligation  shall accrue until the Obligation is
paid in full at the rate of ten  percent  (10%) per annum.  The  Obligation  and
interest  shall be payable in lawful  money of the United  States,  at Portland,
Oregon or such other place as the Holder hereof may designate.

                  Interest  shall be computed on monthly basis of a 365-day year
or 366-day year,  as  applicable,  and actual days lapsed.  Maker shall have the
right to prepay at any time in advance of maturity,  without premium or penalty,
all or any part of the  principal  amount of this  Promissory  Note or  interest
thereon.  Payments shall be first applied to outstanding interest and thereafter
to the principal.

         This Promissory Note shall be payable as follows:

         1. When a registration  statement for an initial  public  offering (the
"Offering")  of Maker is filed  with the  SEC,  this  Promissory  Note  shall be
payable on the following schedule:

                  09/28/06------$250,000
                  10/04/06------$250,000
                  10/11/06------$100,000
                  10/18/06------$100,000
                  10/25/06------$100,000
                  11/01/06------$100,000
                  11/08/06------$100,000


  At the option of the Holder,  the Holder may deduct such  payment from the net
proceeds  otherwise  payable  by the  Holder  to the  Maker at the  closing  the
Offering.

         2. In the event the  Offering  has not closed on or before the close of
business on March 31, 2007,  this  Promissory  Note shall  thereafter be payable
thirty (30) days after demand for payment by the Holder.

         Maker waives diligence, presentment, demand, protest, and notice of any
kind whatsoever.  The non-exercise by Holder of any of Holder's rights hereunder
in any instance  shall not constitute a waiver thereof in that or any subsequent
instance.

         Maker shall pay upon demand any and all expenses,  including reasonable
attorney  fees,  incurred or paid by Holder without suit or action in attempting
to  collect  funds  due under  this  Promissory  Note.  In the even an action is
instituted  to enforce or  interpret  any of the terms of this  Promissory  Note
including but not




Promissory Note
September 25, 2006
Page 2


limited to any action or  participation  by Maker in, or in  connection  with, a
case or proceeding under the U.S. Bankruptcy Code or any successor statute,  the
prevailing party shall be entitled to recover all expenses  reasonably  incurred
at, before and after trial,  on appeal,  and on review whether or not taxable as
costs, including, without limitation,  attorneys' fees, witness fees (expert and
otherwise), deposition costs, copying charges and other expenses.

         This  Promissory  Note is to be  construed in all respects and enforced
according to the laws of the State of Oregon.


                                            "MAKER"

                                            VAUGHAN FOODS, INC.

                                            By:  /s/ Mark E. Vaughan
                                                --------------------------------

                                            Its: President
                                                --------------------------------


Accepted:

"HOLDER"

PAULSON INVESTMENT COMPANY, INC.

By:  Lorraine Maxfield
    ------------------------------------------
Its: Senior Vice President, Corporate Finance
    ------------------------------------------

EX-21

                                                                           EX-21

EXHIBIT 21

Exhibit 21

                       SUBSIDIARIES OF VAUGHAN FOODS, INC.
                       -----------------------------------


SUBSIDIARY                          STATE OF INCORPORATION OR ORGANIZATION
- ----------                          --------------------------------------

Cimarron Holdings, L.L.C.           Oklahoma

EX-23.1

                                                                    EXHIBIT 23.1

            Consent of Independent Registered Public Accounting Firm

We consent to the  reference to our firm under the caption  "Experts" and to the
use of our report dated April 19, 2006,  in the  Registration  Statement on Form
S-1 and related Prospectus of Vaughan Foods, Inc.

                                                     /s/ Cole & Reed, P.C.

Oklahoma City, Oklahoma
October 5, 2006

- --------------------------------------------------------------------------------