S-1/A

As filed with the Securities and Exchange Commission on ________, 2007

Registration No. 333-137861

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
_______________

AMENDMENT NO. 3 TO

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. 12th Street
Moore, OK 73160
(405) 794-2530
(405) 895-6596 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. 12th Street, Moore, OK 73160
(405) 794-2530
(405) 895-6596 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	2,300,000	(1)	$8.00		$18,400,000	$552.00
Common stock included in the units(4)	2,300,000		—		—
Class A warrants to purchase common stock
included in the units(4)	2,300,000		—		—	—
Class B warrants to purchase common stock
included in the units(4)	2,300,000		—		—	—
Common stock underlying the Class A
warrants included in the units(3)	2,300,000	(1)	$12.00		$27,600,000	$828.00
Common stock underlying the Class B
warrants included in the units(3)	2,300,000	(1)	$16.00		$36,800,000	$1,104.00
Representative’s warrants	200,000				$100	$.01
Units issuable upon exercise of the
representative’s warrants	200,000		$9.60		$1,920,000	$57.60
Common shares included in the units
underlying the representative’s warrants(4)	200,000		—		—	—
Class A warrants to purchase common stock
included in units issuable upon exercise of
the representative’s warrants(4)	200,000		—		—	—
Class B warrants to purchase common stock
included in the units issuable upon exercise
of the representative’s warrants(4)	200,000		—		—	—
Common stock underlying the Class A
warrants to purchase common stock
included in units issuable upon exercise of
the representative’s warrants(3)	200,000		$12.00		$2,400,000	$72.00
Common stock underlying the Class B
warrants to purchase common stock
included in units issuable upon exercise of
the representative’s warrants(3)	200,000		$16.00		$3,200,000	$96.00
Common stock to be resold by the
selling stockholders	160,714	(5)	$7.00	(6)	$1,125,000	$120.35
Class A warrants to purchase common stock
to be resold by the selling stockholders(4)	160,714	(5)	—		—	—
Class B warrants to purchase common stock
to be resold by the selling stockholders(4)	160,714	(5)	—		—	—
Common stock underlying Class A warrants
to be resold by the selling stockholders(3)	160,714	(5)	$10.50	(6)	$1,687,500	$180.56
Common stock underlying Class B warrants
to be resold by the selling stockholders (3)	160,714	(5)	$14.00	(6)	$2,250,000	$240.75
Total	16,003,570				$95,382,600	$3,251.27
Amount previously paid						17,319.90

(1)	Includes 300,000 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.
(5)	Assumes maximum expected number of securities to be resold by selling stockholders.
(6)	Assumes minimum proposed offering price in order to accord with maximum expected number of securities to be resold. Aggregate amount of registration fee would be the same in the event of maximum proposed offering price.

_________________________________

     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.

EXPLANATORY NOTE

     This Registration Statement contains two forms of prospectus: one to be used in connection with an initial public offering of 2,000,000 units by Vaughan Foods, Inc. (the “Company Prospectus”) and one to be used in connection with the potential resale of Common Stock, Class A and Class B redeemable common stock purchase warrants and the additional shares of the common stock of Vaughan Foods, Inc., underlying those warrants, by certain selling securityholders (the “Selling Securityholder Prospectus”). The Company Prospectus and Selling Securityholder Prospectus will be identical in all respects except for the alternate pages for the Selling Securityholder Prospectus included herein immediately before Part II, that are each labeled “Alternate Page for Selling Securityholder Prospectus.”

_________________________________

     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.

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 April 3, 2007

2,000,000 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, 2,000,000 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. Commencing six months from the date of this offering, we may redeem some or all of the Class A warrants at a price of $0.25 per warrant after they become separately tradeable and after the closing price of our common stock, as reported on the principal market on which our stock trades, has been at or above 200% of the unit offering price for five consecutive trading days, by giving the holders not less than 30 days’ notice. Commencing six months from the date of this offering, we may redeem some or all of the Class B warrants, at a price of $0.25 per warrant after they become separately tradeable by giving the holders not less than 30 days’ notice, which we may do 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 $7.00 -$8.00 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 and on the Boston Stock Exchange under the symbols “FOODU,” “FOOD” “FOODW” and “FOODZ,” respectively.

     Investing in these units involves significant risks. See “Risk Factors” beginning on page 9.

____________________

     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 initial public offering price for the units sold pursuant to this prospectus and issue to Paulson warrants to purchase a total of 200,000 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 300,000 units to cover over-allotments.

Paulson Investment Company, Inc.
             Capital West Securities, Inc.
                          Capital Growth Financial, LLC

The date of this prospectus is                     , 2007

     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.

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 3,471.2225 shares for each share of common stock (which increased our outstanding shares of common stock to 2,777,778 shares) and the related 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 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 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.

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

• Diverse and customized products. We offer a diverse range of ready-to-order quality products in conve- nient packaging types and sizes. We can also deliver customized “cut-to-order” fresh-cut produce to dis- tributors 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 2006, 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, 2005, or 2006.

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. 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. We believe that our existing customers would buy additional products that we add to our line. Accordingly, we plan to enlarge our business by taking the following steps, which are more fully described under “Business - Growth Plan”:

• Increase productive capacity for refrigerated prepared salads.

• Increase utilization of refrigerated delivery capacity.

• Broaden product line through internal growth and the acquisition of complementary businesses. We believe that the addition of these products as well as organic fruits and vegetables, side dishes, preserva- tive 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.

     Our ability to achieve our growth plan depends upon our ability to avoid a number of risks including possible contamination or mislabling of our products and the resultant occurrence of product liability claims, product recalls or increased scrutiny by regulators; increases in agricultural commodity costs beyond our ability to recover them through increased prices; disruption at our processing plant; changes in consumer preferences for fresh cut produce or refrigerated prepared salads; and our inability to compete against large national processors with greater financial resources and, on occasion, cost benefits in purchasing produce. We may also prove to be unable to appropriately manage our growth or lose one or more of our existing larger customers. All of these factors are more fully discussed in Risk Factors.

     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.

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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 amended agreements dated in March 2007, assuming gross proceeds from this offering of at least $14.0 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 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. 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., and Stan Gustas are each officers of Vaughan. On the effective date of this offering, Herbert Grimes, the President and Chief Executive Officer of Allison’s, will become Chairman and Chief Executive Officer, and Mark Vaughan will become President and Chief Operating Officer of Vaughan.

     Our principal executive office is located at 216 N.E. 12th Street, Moore, OK 73160 and our telephone number is (405) 794-2530. Our web address is www.vaughanfoods.com. None of the information on our website is part of this prospectus.

The Offering

Securities offered	2,000,000 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 trad-
	ing day thereafter if the 30th day is a weekend or holi-
	day. 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
after this offering	4,927,778
Warrants:
Number of Class A warrants to be
outstanding after this offering	2,150,000
Number of Class B warrants to be
outstanding after this offering	2,150,000
Exercise terms of Class A and Class B Warrants	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 com-
	mon stock at an exercise price equal to 200% of the ini-
	tial 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 Warrants	, 2012
Redemption of Class A and Class B Warrants	We may redeem some or all of the warrants commencing
	six months after this offering 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.

5

Symbols:
		Nasdaq	Boston
		Capital	Stock
		Market	Exchange
	Units	FOODU	FOODU
	Common Stock	FOOD	FOOD
	Class A Warrants	FOODW	FOODW
	Class B Warrants	FOODZ	FOODZ
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 begin-
	ning on page 12 of this prospectus in evaluating an
	investment in our securities.
Use of Proceeds	We will use approximately $2.5 million of the net pro-
	ceeds of the offering to complete the acquisition of
	Allison’s Gourmet Kitchens. We expect to use approxi-
	mately $2.0 million of the proceeds to repay short-term
	borrowings incurred in connection with the expansion of
	the existing facility, $2.4 million for construction or
	acquisition of a new production facility, approximately
	$4.4 million to repay debt, and the remainder for work-
	ing 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:

• 150,000 shares, 150,000 Class A warrants and 150,000 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 $7.50 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;

     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 300,000 units; and

• the warrant to purchase 200,000 units granted to the representative in connection with this offering.

6

Summary Financial Information*
(in thousands, except per share data)

Vaughan Foods

	Years ended December 31,
	2004			2005			2006
Consolidated statement of
operations data
Net sales	$	36,133		$	44,730		$	51,277
Gross profit		6,230			6,754			6,195
Selling, general and administrative
expenses		5,408			6,432			6,480
Rent expense (income)		(196	)		(295	)		(339	)
Interest expense		496			1,106			1,617
Other, net		(12	)		(88	)		(50	)
Income tax expense (benefit)		192			(160	)		(308	)
Net income (loss)	$	342		$	(241	)	$	(1,205	)
Net income (loss) per share – basic
and diluted	$	0.12		$	(0.09	)	$	(0.43	)
Weighted average number of shares
outstanding – basic and diluted		2,778			2,778			2,778
Allison’s Gourmet Kitchens
	Years ended December 31,
	2004			2005			2006
Consolidated statement of
operations data
Net sales	$	9,173		$	13,111		$	20,032
Gross profit		2,222			3,265			4,729
Selling, general and administrative
expenses and management fee		1,608			2,356			3,476
Interest expense		32			11			84
Net income	$	582		$	898		$	1,169

______________

*    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.

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, 2006

	Year ended December 31, 2006
	(Unaudited)
Consolidated statement of
operations data
Net sales		$	69,344
Gross profit			10,924
Selling, general and administrative
expenses and management fee			9,963
Interest expense			1,701
Other, net			(50	)
Income tax expense (benefit)			8
Net income (loss)		$	(698	)

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Consolidated balance sheet data:

     The historical information below show selected balance sheet data for Vaughan Foods and Allison’s at December 31, 2005 and December 31, 2006 on an actual basis.

     The pro forma combined post acquisition and pro forma results (post IPO) give effect to:

• the issuance of 150,000 shares, 150,000 Class A warrants and 150,000 Class B warrants included in the units to be issued to the holders of the Secured Notes, assuming an initial public offering price of $7.50 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 on the assumption that the acquisition occurred on January 1, 2006.

     The pro forma as adjusted data also takes into account our receipt of approximately $12.5 million of estimated net proceeds from this offering and the use of approximately $2.0 million to repay certain indebtedness, including the Secured Notes and other pro forma adjustments.

Vaughan Foods
(in thousands)

	December 31, 2005			December 31, 2006
Current assets	$	4,370		$	5,726
Working capital (deficit)		(2,480	)		(7,208	)
Total assets		16,970			21,002
Total current liabilities		6,850			12,934
Total long-term liabilities		9,514			8,667
Stockholders’ equity (deficiency)		606			(599	)
Allison’s Gourmet Kitchen
(in thousands)
	December 31, 2005			December 31, 2006
Current assets	$	1,842		$	3,829
Working capital		612			1,483
Total assets		2,822			6,760
Total current liabilities		1,229			2,346
Total long term liabilities		205			2,189
Partner’s capital		1,388			2,225

Pro Forma Combined Post Acquisition balance sheet data and Pro Forma As Adjusted balance sheet data
(Post IPO)
(in thousands)

	Pro Forma Combined			Pro Forma
	Post Acquisition			As Adjusted
	December 31, 2006			December 31, 2006
	(Unaudited)			(Unaudited)
Current assets	$	6,842		$	14,397
Working capital		(8,384	)		6,195
Total assets		25,799			32,672
Total current liabilities		15,226			8,202
Total long-term liabilities		11,171			11,192
Stockholders’ equity (deficiency)		(599	)		13,277

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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. 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 disease causing organisms are not eliminated by processing at the foodservice or consumer level. Also, products purchased from others for packing or distribution may contain contaminants that we are unable to identify. The risk can be controlled, but not eliminated, by use of good manufacturing practices and finished product testing. We may also encounter the same risks if a third party tampers with our products or if our products are inadvertently mislabeled. Shipment of adulterated products, even if 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.

Non-compliance with provisions of our long-term loans with respect to debt service ratio, current ratio and debt to equity ratio has resulted in an increase in the interest rate on the loans of 1%, which reduces our liquidity and could have a material adverse effect on our business, financial condition and results of operations.

     Certain of our debt agreements (a $4,000,000 secured bank line of credit, reduced to approximately $2.7 million under an extension agreement, with an outstanding balance at December 31, 2006 of approximately $2.7 million, and the Industrial Development Revenue Bonds issued by Cleveland County Industrial Authority in the aggregate principal amount of approximately $4.7 million at December 31, 2006) contain covenants regarding maintenance, of a debt service coverage ratio for the four most recent quarters, of 1.50 to 1.00, and, as of the last day of each quarter, a current ratio of 1.10 to 1.00 and debt to equity ratio of not more than 4.00 to 1.00. As of December 31, 2006, our debt service ratio was 0.42 to 1, our current ratio was 0.41 to 1, and our debt to equity ratio cannot be calculated since our net worth is negative as of that date. The non-compliance has resulted in an increase from 6.925% to 7.925% on the interest rate on these loans. This has resulted in our paying increased monthly interest of $2,260 and $4,160 respectively, resulting in our making total interest payments of approximately $21,328 and $38,548 per month respectively, on these two loans. The 1% increase will remain in place until we are in compliance with all the required ratios. If we are unable to make the interest payments, we could be compelled to curtail operations or seek protection under the bankruptcy laws. These and other consequences of noncompliance with interest payments could have a material adverse effect on the value of any common stock that you purchase in this offering. See “Liquidity and Capital Resources” beginning on page 28, and “Description of Certain Indebtedness” beginning on page 55.

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

     At December 31, 2006, Vaughan had total assets of $21.0 million and $14.4 million of outstanding indebtedness, consisting of approximately $2.7 million outstanding under a $4.0 million revolving credit facility, which we refer to as the “Credit Facility,” approximately $4.7 million in respect of the Industrial Development Bonds issued by the Cleveland County (Oklahoma) Industrial Authority, approximately $3.5 million outstanding under a term loan secured by a mortgage on our plant and related real property, $2.0 million under the Secured Notes, $1.0 million from the underwriter’s representative on an unsecured basis and $0.5 million of miscellaneous other

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indebtedness. In addition, at December 31, 2006, we were subject to operating and capital leases requiring approximately $1,524,000 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. Any inability to meet interest and principal payment obligations under our debt agreements could force us to curtail or terminate operations, or seek protection under the bankruptcy laws. In such events, the value of our equity securities could be materially and adversely affected. See “Liquidity and Capital Resources” beginning on page 28, and “Description of Certain Indebtedness” beginning on page 55.

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. See “Liquidity and Capital Resources” beginning on page 28, and “Description of Certain Indebtedness” beginning on page 55.

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

     Our ability to process and distribute our products depends, in large part, on the availability and affordability of fresh produce. The prices for high quality fresh produce can be volatile and supplies may be restricted due to weather, plant disease and changes in agricultural production levels. The amount and quality of available produce can vary greatly from season to season, or within a season, and our suppliers may not be able to meet their contractual obligations, particularly during periods of severe shortages. Limitations of supply, or the poor quality of produce available under our season-long contracts, could force us to buy produce on the open market during periods of rapid price increases, thus significantly increasing our costs. We can sometimes pass these higher costs on to customers, but a number of factors, including price increases that are faster or more severe than we anticipate may result in cost increases that we are not able to fully recover. We were particularly adversely affected during the second quarter of 2006 when adverse growing conditions in Southern California reduced the supply of lettuce at a time when alternative supplies from other growing regions were not yet available and forced us to buy lettuce on the open market during a period of rapidly rising prices. We maintained customer goodwill by continuing to supply them with lettuce under our sale and supply contracts, though at a cost of significantly reduced gross profit and overall losses 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. See “Comparison of years ended December 31, 2006 and 2005” on page 25.

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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 $200,000. See “Comparison of years ended December 31, 2006 and 2005” on page 25.

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. An inability to compete successfully could lead to the failure of our business.

     The food processing industry is intensely competitive. In the fresh-cut produce business we compete against large national processors, many with production facilities near farms that grow much of the produce supplying the United States markets, regional processors and 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. If we cannot compete successfully against our competitors we will not be able to grow and expand our business and may not, if our competitive failures are severe enough, continue in operation. See “Competition” beginning on page 41.

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

     We have rapidly expanded our operations since 2000. This growth has placed, and continued growth will continue to place, significant demands on our administrative, operational and financial resources. 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 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. If we cannot service our debt from our then existing cash flow and if we cannot obtain additional financing to service that debt we would be forced to curtail or terminate operations. See “Growth Plan” beginning on page 37.

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We rely on major customers which exposes us to the risk that we cannot pay obligations or service debt incurred in attempting to expand.

     None of our customers accounted for 10% or more of our sales in 2004, 2005 or 2006. However, seven independent Sysco Foods distributors, represented, in the aggregate, approximately 23% of our sales in 2004, 24% in 2005 and 15.5% in 2006 and 11 separate Wal-Mart distribution centers represented, in the aggregate, approximately 8.7% of our sales in 2004, and 9.1% in 2005, and 6.4% in 2006. Texas-based H.E. Butt Grocery Company, known as “HEB,” is our largest customer for deli salads, accounted for approximately 8.0%, 9.3% and 9.5% of our sales in 2004, 2005 and 2006, respectively. 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. See “Growth Plan” beginning on page 37.

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

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

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

     As of March 15, 2007, we had approximately 400 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. 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. See “Employees” on page 43.

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

     Our success depends, in part, on the continued contributions of our executive officers and other key employees. Our management team has significant industry experience and would be difficult to replace. We believe that the expertise and knowledge of these individuals in our industry, and in their respective fields, is a critical factor to our continued growth and success. We have not entered into an employment agreement with any of these individuals. 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. See “Management” beginning on page 44.

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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. See “Competition” beginning on page 41.

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 when the operations of the acquired businesses are being integrated into our operations.

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

     In connection with the acquisitions of businesses in the future, we may decide to consolidate the operations of any acquired business with our existing operations or make other changes with respect to the acquired business, which could result in special charges or other expenses. Our results of operations also may be adversely affected by expenses we incur in making acquisitions, by amortization of acquisition-related intangible assets with definite lives and by additional depreciation expense attributable to acquired assets. Any of the businesses we acquire may also have liabilities or adverse operating issues, including some that we fail to discover before the acquisition, and our indemnity for such liabilities may be limited. Additionally, our ability to make any future acquisitions may depend upon obtaining additional financing. We may not be able to obtain additional financing on acceptable terms or at all. To the extent that we seek to acquire other businesses in exchange for our Common Stock, fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions. See “Growth Plan” beginning on page 37.

Risks Related to this Offering

The representative of the underwriters may have a conflict of interest in underwriting this offering, which may affect the representative’s judgment as to pricing the securities or concluding the 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 consumma-

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tion 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, which could result in the securities being priced at levels above those which would otherwise prevail in the absence of such conflict or, could even result in the representative seeking to conclude the transaction under circumstances in which the transaction would otherwise be terminated. In either of these events, the purchasers of securities in this offering would be exposed to heightened risk of loss.

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 5 key employees will, in the aggregate, beneficially own 56.36% of the issued and outstanding shares of our common stock, or 53.13% 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. See “Principal Stockholders” on page 50.

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. See “Description of Securities” on page 51.

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 4,927,778 shares of common stock issued and outstanding and will have approximately an additional 6,800,000 shares of common stock reserved for future issuance as follows:

• 4,300,000 shares in the aggregate underlying the Class A and Class B warrants (including the warrants held by the holders of the Secured Notes);

• 900,000 shares underlying the over-allotment option, including the shares underlying the Class A and Class B warrants included in the units underlying that option;

• 600,000 shares underlying the representative’s warrant, including the shares underlying the Class A and Class B warrants included in the representative’s warrants; and

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

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     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, of the “Securities Act,” will be freely tradable without restriction. In addition the securities included in the units that will be issued to the holders of the Secured Notes, which include 150,000 shares of common stock, 150,000 Class A warrants, 150,000 Class B warrants and 300,000 shares of common stock underlying those warrants (assuming an initial public offering price of $7.50 per unit) are being registered in this registration for resale commencing 90 days after the effectiveness of this offering. Finally, upon the expiration of the one-year “lock-up” agreements to be signed by all of our existing stockholders approximately 2,777,778 unregistered shares will be freely tradeable subject to the timing and volume limitations set forth in Rule 144 promulgated under the Securities Act.

Thus, after the closing of this offering, the following shares will be tradeable:

• 2,000,000 shares of common stock (immediately freely tradeable);

• 450,000 shares of common stock underlying the units that will be issued to the holders of the Secured Notes, including the shares underlying the Class A and Class B warrants included in those units, assum- ing an initial public offering price of $7.50 per unit (freely tradeable commencing 90 days after the effectiveness of this offering); and

• Approximately 2,777,778 unregistered shares, after expiration of one-year “lock-up” agreements, sub- ject to the timing and volume limitations of Rule 144

See “Description of Securities” on page 51.

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. See “Dilution” on page 20.

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. Our allocations 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. See “Use of Proceeds” on page 17.

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. See “Preferred Stock” on page 52.

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 $5.13 per share or 68.4%, based on an assumed initial public offering price of $7.50 per share. As a

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result of this dilution, investors purchasing units from us will have contributed 97.3% of the total amount invested in us but will own only 40.6% 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. See “Dilution” on page 20.

You may never receive dividends on any shares underlying units that you purchase in this offering.

     We do not intend to pay dividends on our common stock in the future. We intend to retain future earnings for use in operating and expanding our business. Our board of directors will have complete discretion as to whether to pay dividends, based on any factors that they consider relevant. As a result, you may never receive dividends on your shares of our common stock. See “Dividend Policy” on page 19.

We have conducted a transaction with related parties that might have adversely affected the value of any shares you acquire in this offering.

     Immediately before the closing of this offering we will acquire all the partnership interests in Allison’s from four related parties, Herb Grimes, Mark Vaughan, Vernon J. Brandt, Jr. and Stan Gustas. These transactions were negotiated solely by our management and their terms were not approved by any independent directors since at that time we had no independent directors. If these transactions were unfair to us, the value of any shares you acquire in this offering may be reduced. See “Certain Relationships and Related Transactions” on page 49.

Certain provisions of Oklahoma law could restrict your ability to acquire additional shares of our stock, your ability to enter into business transactions with us, or your ability to vote, amongst other things, in elections of directors, and could result in our stock price being depressed.

     We have not opted out of certain Oklahoma statutes that restrict the ability of shareholders having 15% or more of our voting power to enter into transactions with us, and that of shareholders having one-fifth or more of our voting power to vote those shares. See “Anti-takeover provisions under Oklahoma law.” If you became a shareholder restricted by either statute, this would limit your voting power and your ability to conduct business with us. Also, in general, these statutory provisions could have a depressive effect on our stock price, since they deter certain potential business transactions that could be to our financial benefit. See “Anti-Takeover Provisions Under Oklahoma Law” beginning on page 53.

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

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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.

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 and repay debt used to continue work on this expansion;

• acquire the minority interest in Allison’s;

• build a new facility;

• pay debt; and

• increase working capital.

     Assuming a public offering price of $7.50 per unit, after deducting the estimated expenses of this offering, including the underwriting discount of $1,200,000, the representative’s non-accountable expense allowance of $300,000 and other estimated offering expenses of $1,000,000, we estimate that the net proceeds to us from this offering will be approximately $12,500,000. (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.) Marketing expenses are not expected to exceed 15% of the gross proceeds of the offering. If the representative exercises the over-allotment option in full, we estimate that the net proceeds of the offering will be approximately $14,560,000.

     We expect to use the net proceeds as follows:

	Approximate		Approximate
Use of Proceeds	Amount		Percentage
Acquisition of Allison’s	$	2,500,000		20.0
Payment of short-term borrowings incurred in connection with
expansion of the existing facility		2,000,000		16.0
Construction or acquisition of new production facility		2,400,000		19.0
Repayment of debt, excluding accrued interest		4,379,000		35.0
Working Capital		1,221,000		10.0
Total	$	12,500,000		100.0	%

     Acquisition of Allison’s. Immediately prior to the closing of this offering, pursuant to amended agreements dated March 2007, 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 which will be paid out of the proceeds of 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. On the effective date of this offering, Herb Grimes will become Chairman and Chief Executive Officer of Vaughan Foods and Mark Vaughan will become President and Chief Operating Officer of Vaughan Foods.

     Completion of expansion of existing facility. We have substantially completed building a 48,000 sq. ft. extension of our existing plant at Moore, Oklahoma for use by our Allison’s division. These facilities will increase our capacity to produce refrigerated prepared salads, and enable us to develop new prepared products, including soups, dressings and cooked/chilled items. We will use $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, the proceeds of which were used to continue work on this extension since July 2006.

     Construction of new production facility. We plan to build or acquire at least one additional production facility 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 relationships. The estimated amount of $2,400,000 includes the estimated cash portion

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of the cost of construction (or possible acquisition) and equipment for one new production facility in contiguous or other marketing areas.

     Repayment of debt

     We will use $4.4 million of the proceeds of this offering to pay the following debt:

• $2.0 million to pay short-term borrowings including the principal of the unsecured note due on the ear- lier of the first anniversary of its issuance or the closing of this offering and bearing interest at 10% per annum

• $2.7 million to pay our line of credit from Bank of the West

• $0.7 million to partially pay equipment loans and miscellaneous other debt

     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 $3,440,000 to our working capital.

     The expected amount of proceeds, and subsequent use of proceeds, is subject to variance based on the offering price. Assuming a minimum public offering price of $7.00 per unit and a maximum public offering price of $8.00 per unit, with gross proceeds of $14,000,000 and $16,000,000, underwriting discounts of $1,120,000 and $1,280,000, and non-accountable expense allowances of $280,000 and $320,000 respectively, but with other estimated offering expenses of $1,000,000 unchanged, we expect that the use of proceeds in the case of minimum and maximum expected proceeds will be as follows:

Use of Proceeds

	Approximate amount				Approximate percentage
	minimum		maximum		minimum		maximum
Acquisition of Allison’s	$	2,500,000	$	2,500,000	21.5		18.7	%
Payment of short-term borrowings incurred in
connection with expansion of the existing facility. .		2,000,000		2,000,000	17.2		14.9
Construction or acquisition of
new production facility		2,400,000		2,400,000	20.7		17.9
Repayment of debt, excluding accrued interest		4,379,000		4,379,000	37.8		32.7
Working capital		321,000		2,121,000	2.8		15.8
Total	$	11,600,000	$	13,400,000	100	%	100	%

     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 expected cash flow from 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.

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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. See “Risk Factors” starting on page 9.

CAPITALIZATION

     The following table sets forth our capitalization as of December 31, 2006 on an actual basis (after adjustment for a stock dividend of 3,471.222 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 for $2,500,000, all of which will be paid to the owners of the minority interests in Allison’s as 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.

     The pro forma as adjusted data take into account the issuance of 150,000 shares, 150,000 Class A warrants and 150,000 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 $7.50 per unit).

     The pro forma as adjusted data also take into account our receipt of $12,500,000 of estimated net proceeds from this offering, our use of approximately $6,379,000 of the proceeds to pay certain of our indebtedness (see “Use of Proceeds” starting on page 17), and other pro forma adjustments.

	December 31, 2006
					Pro forma
	Actual				combined				Pro forma
	(Vaughn Foods, Inc.)				post-acquisition				as adjusted
					(in thousands)
Long term debt including capital lease obligation,
net of current portion		$	8,667			$	10,735			$	10,255
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; 2,777,778 shares issued and
outstanding actual, 2,150,000 pro forma; and
4,927,778 shares issued and outstanding,
pro forma as adjusted			3				3				5
Additional paid-in capital			413				413				13,469
Member capital (deficit)			(23	)			(23	)			(23	)
Retained earnings (deficit)			(992	)			(992	)			(174	)
Total stockholders’ equity (deficiency)		$	(599	)		$	(599	)		$	13,277
Total capitalization		$	8,068			$	10,136			$	23,532

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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 (estimated to be $7.50) to the shares of common stock included in the unit and none to the warrants.

     At December 31, 2006, we had a pro forma negative net tangible book value, after giving effect to the acquisition of Allison’s, of $3,460,338, or approximately a negative value of $1.18 per share based on 2,927,778 shares. After taking into account the estimated net proceeds from this offering of $12,500,000, and other pro forma adjustments, our net tangible book value at December 31, 2006 would have been $11,660,366, or $3.55 per share. This represents an immediate increase of $2.37 per share to existing stockholders and immediate dilution of $5.13 per share, or 68.4%, 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				$	7.50
Net negative tangible book value per share at December 31, 2006	$	(1.18	)
Increase in net tangible book value per share attributable to new investors		3.55
Net tangible book value per share after the offering					2.37
Dilution per share to new investors				$	5.13

     The following table summarizes as of December 31, 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:

						Average
	Shares Purchased			Total Consideration		Price Per
	Number		Percent	Amount	Percent	Share
Executive officers, other officers
and directors(1)	2,777,778		56.4%	415,993	2.7%	$	0.15	(3)
Other existing stockholders(2)	150,000		3.0%	0	—%	$	0.0
New investors	2,000,000		40.6%	15,000,000	97.3%	$	7.50	(4)
Total	4,927,778	(4)	100.0%	15,415,993	100.0%

__________________

(1)	Consists of shares owned by Mark Vaughan, Vernon J. Brandt, Herb Grimes, Stan Gustas and other officers.
(2)	Consists of 150,000 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 $7.50 per unit. The actual number of units that will be issued to the holders of the Promissory Notes will depend on the actual initial public offering price of the units. Consideration does not include original issue discount chargeable to the purchasers of the Secured Notes.
(3)	Represents the per-share book value of the business transferred by the company’s founders upon its organiza- tion in 1989.
(4)	Based on an initial public offering price of $7.50 per unit.
(5)	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 2,300,000 shares of common stock. In that event, the gross proceeds from this offering will be $17,250,000 ($14,560,000 estimated net proceeds to Vaughan), representing approximately 97.6% of the total consideration for 44.0 total number of shares of common stock outstanding, and the dilution to new investors would be $4.84 per share, or 64.5% .

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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 five-year period ended December 31, 2006, and the consolidated balance sheet data dated December 31, 2006 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. 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)

	Years ended December 31,
	2002			2003			2004			2005			2006
Net sales	$	23,119		$	29,369		$	36,133		$	44,730		$	51,277
Cost of sales		18,732			24,967			29,903			37,976			45,082
Gross profit		4,387			4,402			6,230			6,754			6,195
Selling, general and administrative
expenses		3,486			3,891			5,408			6,433			6,480
Income from operations		901			511			822			321			(285	)
Other income (expense)		(95	)		(272	)		(288	)		(722	)		(1,227	)
Income (loss) before provision for
taxes		806			239			534			(401	)		(1,512	)
Income tax expense (benefit)		154			71			192			(160	)		(307	)
Net income (loss)	$	652		$	168		$	342		$	(241	)	$	(1,205	)
Net income (loss) per share
— basic and diluted	$	0.23		$	0.06			0.12		$	(0.09	)	$	(0.43	)
Weighted average number of							$
shares outstanding — basic
and diluted		2,778			2,778			2,778			2,778			2,778

Consolidated balance sheet data:
(in thousands)

	December 31, 2005			December 31, 2006
Current assets	$	4,370		$	5,726
Working capital (deficit)		(2,480	)		(7,208	)
Total assets		16,970			21,002
Total current liabilities		6,850			12,934
Total long-term liabilities		9,514			8,667
Stockholders’ equity (deficiency)		606			(599	)

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Allison’s Gourmet Kitchens
Statement of operations data:
(in thousands)

	Years ended December 31,
	2004		2005		2006
Net sales	$	9,173	$	13,111	$	20,032
Cost of sales		6,951		9,846		15,303
Gross profit		2,222		3,265		4,729
Selling, general and administrative
expenses		1,608		2,356		3,476
Income from operations		614		909		1,253
Interest expense		32		11		84
Net income (loss)	$	582	$	898	$	1,169

Consolidated balance sheet data:
(in thousands)

	December 31, 2005		December 31, 2006
Current assets	$	1,842	$	3,829
Working capital		612		1,483
Total assets		2,822		6,760
Total current liabilities		1,229		2,346
Total long-term liabilities		205		2,189
Partners’ capital		1,388		2,225

________________

†    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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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS

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

Vaughan Foods

Business 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. Our marketing area was largely determined by the short shelf life of fresh-cut products and, to a lesser extent, by the cost of refrigerated shipping. We sold primarily to food service accounts, restaurant accounts, and retail chains. We intend to expand our existing business, and to continue to introduce higher-value added products.

     By the end of 2002, our sales had grown to $23 million. However our value-added products were limited and gross profit margins were declining (from 27.1% in 2001 to 19.0% in 2002). Margins in our historical business have continued to decline, reaching 12.1% in the year ended December 31, 2006. 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. Initially, we added a limited number of refrigerated, prepared salads. In March 2003, three of our officers, together with Herb Grimes, founded Allison’s Gourmet Kitchens, Ltd., to manufacture a line of refrigerated, prepared salads for new retail outlets and our historical food service customers. Typically, Allison’s products generate higher gross profit margins ranging from 23.6% 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. We intend to use $2.5 million of the proceeds of the planned initial public offering to acquire Allison’s. We have also expanded our fresh-cut line to include more salad mixes to better meet the needs of retail chain store accounts. These salad mixes typically enjoy higher gross profit than salad ingredients sold to food service customers. The addition of the new business lines produced by Allison’s is expected to have a positive effect on the combined entity. Pro forma combined margin was 15.8 percent, as compared to Vaughan’s historical level of 12.1% for the year ended December 31, 2006. We expect the margins of the combined entity to increase over Vaughan’s historical level in the future as higher margin products should represent a higher percentage of our sales.

     Although 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 food product needs. Thus, it positioned us to meet some of those additional needs by expanding our product line, particularly into products providing greater margins, and by broadening the geographic region in which we serve. Also, the changing focus of our historical business into products, such as salad mixes and our “Fresh Fixins’ TM” line for the retail market, provide opportunities for increased margins.

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

     Sales. We have supply arrangements with twelve separate Wal-Mart distribution centers, representing approximately 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.

     Costs. The largest component of our costs is the cost of produce. The prices for produce can be volatile and supplies may be restricted due to weather, plant disease, and changes in agricultural production levels. The amount and quality of available produce can vary greatly from season to season, or within a season and our suppliers may not always be able to provide sufficient quality products, particularly during periods of severe short-

23

ages. Often increases in produce costs can be passed on to customers and occasionally, can even generate wider margins as market resistance to price increases fall.

     Generally, other than fluctuations in certain raw material costs that are 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, as we can generally offset the impact of inflation through a combination of productivity gains and price increases. However, during 2004, 2005, and 2006, we did experience significant increases 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 seek to protect ourselves against price increases by entering into season-long contracts to purchase approximately 100% of our estimated requirements for iceberg and romaine lettuce on a six-month advance basis. Approximately 70% to 100% of our estimated requirements for cabbage, onions, peppers, and potatoes are purchased on a three-month to one-year advance basis. These contracts are with numerous growers that are predominantly located in California, Arizona, Colorado, Florida, and Mexico. These growing regions supply nearly 100% of our annual produce requirements. Contracts are typically for a “growing season” or for periods of time that may vary in length from 6 months to 1 year.

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

• We have negotiated agreements with many of our fixed price customers that allow us to raise prices by giving seven days notice in response to increased commodity prices. The majority of these contracts are with major broad-line food service 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 to our customers the cost increases related to our greater value-added products.
  This transition to greater value-added specialty products has taken place gradually over the pastthree years.

Critical Accounting Policies and Estimates

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

     Inventory: Inventory purchases and purchase commitments are based upon forecasts of future demand. We value our inventory at the lower of average cost (which approximates first-in, first-out cost) or market. Inventory turns rapidly due to the nature of our fresh products; therefore, market is not a major consideration. If we believe that demand no longer allows us to sell our inventory above cost or at all, then we write down that inventory to market or write-off excess inventory levels. If customer demand subsequently differs from our forecasts, requirements for inventory write-offs could differ from our estimates. We have not experienced material inventory writeoffs in the past and try to manage inventory levels of both perishable and non-perishable supplies to avoid such writeoffs.

     Customer Rebates: The estimates and reserves for rebates are based on specific rebate programs, expected usage and historical experience. Actual results could differ from these estimates. In some programs, we accrue expense based on anticipated purchase volume under the program. Greater than anticipated volume under the program would result in a charge to earnings. We have not experienced material charges to earnings under our rebate programs in the past but could do so in the future.

     Allowance for Doubtful Accounts: The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and an assessment of international, political and economic risk as well

24

as the aging of the accounts receivable. If there is a change in a customer’s creditworthiness or actual defaults differ from our historical experience, our estimates of recoverability of amounts due us will be affected. We attempt to monitor customer accounts for indications of a customer’s inability to pay. Overdue accounts get special attention. Charges to bad debt expense as a percentage of net sales were 0.68% in 2004, 0.14% in 2005 and 0.12% in 2006.

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

     Intangible Assets: We evaluate the recoverability of intangible assets annually or more frequently if impairment indicators arise. Under SFAS No. 144, Accounting for the Disposal of Long-Lived Assets, intangible assets are evaluated whenever events or changes in circumstances indicate that the carrying value exceeds its fair value, which is determined based upon the estimated undiscounted future cash flows expected to result from the use of the asset, including disposition. Cash flow estimates used in evaluating for impairment represent management’s best estimates using appropriate assumptions and projections at the time. We believe that accounting for intangible assets is a critical accounting policy due to the requirement to estimate the value in accordance with SFAS No. 144 and we will recognize a significant intangible in connection with the purchase of Allison’s. Our intangible assets consist primarily of loan origination fees, which are reduced by amortization over the life of the loans. There is very little variability in the estimates of these intangibles.

     In accordance with SFAS 131 guidance, the Company will continue to be treated as a single business segment until the completion of construction and the placement into operation of separate facilities for Allison’s, as part of expansion of Vaughan’s plant. Commencement of operations by Allison’s in this new facility is not expected to take place until after this offering. After the offering, the simultaneous purchase of Allison’s by Vaughan and completion of the separate facilities, Allison’s will be housed in a separate but contiguous facility. At that time, we will likely regard Allison’s as a separate reporting segment per SFAS 131 guidelines.

Results of Operations Vaughan Foods

	Percentage of Revenue
	Year Ended December 31,
	2004		2005		2006
Net Sales	$36,133,015		$44,730,265		$51,277,371
Net Sales	100.0	%	100.0	%	100.0	%
Cost of Sales	82.8	%	84.9	%	87.9	%
Gross Profit	17.2	%	15.1	%	12.1	%
SG&A Expense	15.0	%	14.5	%	12.6	%
Operating Income	2.2	%	0.6	%	(0.6	)%
Total other Income and expense	(0.8	)%	(1.6	)%	(2.4	)%
Earnings (Loss) Before
Income Taxes	1.5	%	(0.9	)%	(2.9	)%
Income Tax (Benefit)	0.5	%	(0.4	)%	(0.6	)%
Net Earnings (Loss)	0.9	%	(0.5	)%	(2.3	)%

Comparison of Years Ended December 31, 2006 and 2005

     Net Sales. Net sales in 2006 increased by $6.6 million (14.8%) to $51.3 million from $44.7 million in the prior year. The increase was due primarily to increased volume from 20 new customers and, to a lesser extent, increased volume from some food distributors and other existing customers.

25

     Our average selling price for all products decreased from $0.67 per pound in 2005 to $0.66 per pound in 2006. The net $6.7 million increase in product sales (exclusive of backhaul revenue) from 2005 to 2006 reflects a $7.5 million increase in sales due to the higher average volume offset by an $800,000 decrease in sales due to lower average prices. Lower average prices resulted primarily from customer credits granted in connection with lower quality lettuce as described below. Net sales and pounds of our products are as follows:

	2005					2006
	Pounds		Sales			Pounds		Sales
	(in millions)		($ in millions)			(in millions)		($ in millions)
Lettuce		35.8		$	21.3		39.5		$	23.1
Cabbage		11.0		$	5.0		13.9		$	5.6
Onions		6.8		$	5.2		7.7		$	5.5
Serve Fresh Kits		3.2		$	4.5		3.4		$	4.8
Other Produce		7.9		$	7.1		11.5		$
Backhaul Revenue				$	1.6				$	1.5
TOTAL		64.7		$	44.7		76.0		$	51.3

     Gross profit. Gross profit in 2006 declined by $600,000 to $6.2 million from $6.8 million in the prior year. The gross profit percentage in 2006 declined to 12.1% from 15.1% in 2005. Approximately $400,000 of the decrease in gross profit was due to increased costs associated with poor quality lettuce and increased fuel costs, and approximately $200,000 was due to excess cost of sales related to an ammonia leak in the processing plant. Poor quality lettuce reduced our yields of finished product and also required increased handling and trimming. Poor quality lettuce was a result of unusual weather conditions during the spring growing season in a number of regions.

     Higher fuel costs increased our cost of inbound freight which was a significant factor in our increased cost of sales for the year ended December 31, 2006 compared to 2005. Fuel costs related to freight out to customers as a percentage of sales increased from 3.2% in the year ended December 31, 2005 to 3.5% in the year ended December 31, 2006; an increase of 8.8% .

     Our plant is refrigerated using liquid ammonia, which is pumped through our cooling system by a network of high-pressure pipes. In early April 2006, one of the pumps developed a leak in one of its seals. The amount of ammonia discharged was large enough to force evacuation of our plant and the immediate surrounding area, and we were not able to resume operation until the discharged ammonia had dissipated, the pump had been replaced, and our facility had again been cooled back to our normal operating temperature range of 35-40 degrees Fahrenheit. This evacuation resulted in decreased revenue for this time period, as we lost 2 ¹ / ₂ days of production, and incurred a one-time expense of an ammonia consulting firm, which was employed to ensure that an incident such as this will never occur again. We have since implemented a maintenance and prevention plan for our ammonia system to ensure we are fully operational at all times. Additionally, we have trained the majority of our maintenance and management staff to perform maintenance, detection, and prevention of leaks and malfunctions. Due to the ammonia leak, we incurred additional costs of sales expenses of approximately $200,000; consisting of $50,000 in credits and returns, $50,000 in additional plant payroll, $20,000 in late delivery fees, $20,000 in cleanup and supplies, and $60,000 in other expenses.

     Selling, General, and Administrative Expenses. Selling, general, and administrative expenses for the years ended December 31, 2006 and 2005 were $6.48 million and $6.43 million, respectively; an increase of approximately $50,000 or 0.7% . Expenses in 2006 relating to our initial public offering have been capitalized.

     Income (loss) from Operations. Operating income or loss for the years ended December 31, 2006 and 2005 was a loss of $284,000 and a profit of $322,000, respectively. The 2006 decrease in profitability of approximately $500,000 was due to lower lettuce yields related to spring crop failures and the ammonia leak.

     Other income (expenses). Other income (expense) for the years ended December 31, 2006 and 2005 was a net expense of $1,227,000 and $722,000, respectively, an increase of approximately $500,000 or 70%. The primary reason for the increased 2006 expense was an increase of approximately $500,000 of amortization of bridge loan asset (treated as interest expense) and increased interest expense related to short-term borrowings used to complete the expansion of the building, a decline in interest income of $38,000 due to lower balances in interest bearing restricted cash accounts, partially offset by increased rental income of $44,000.

     Earnings (loss) before income taxes. Earnings (loss) before income taxes for the years ended December 31, 2006 and 2005 was a loss of approximately $1.5 million and a loss of $400,000, respectively, for a decrease in profitability of $1.1 million. The decrease was principally caused by the decrease in gross profit of approximately

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$600,000 and increased interest expense of approximately $500,000. In addition, higher revenue was offset by a decreased gross profit due to low quality lettuce and the ammonia leak and an increase in interest expense related to the expansion of our facility.

     Income Taxes. The income tax benefit for the years ended December 31, 2006 and 2005 was $308,000 and $160,000, respectively. The income tax benefit was due to the net operating loss and state tax job credits. Our effective tax rates for the years ended December 31, 2006 and 2005 were 20% and 40% respectively. The increase in the effective rate is due to non-deductibility of amortization of bridge loan asset treated as interest.

     Net Income (loss). Net income (loss) for the years ended December 31, 2006 and 2005 was a loss of approximately $1.2 million and $241,000, respectively. The decrease of approximately $1 million in net income was due to the $1.1 million loss in earnings before income taxes offset by a $147,000 increase in income tax benefit.

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, an increase of $8.6 million, or 24%. The increase in net sales was primarily 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 onion products. Volume increased from 54.7 million pounds sold in 2004, to 64.7 million pounds sold in 2005, an increase of 18.3% . The increase in sales reflects the expansion of our lettuce and cabbage lines, as well as the addition of 29 new customers. The sales from these new customers accounted for 2.5% of total net sales in 2005. Of the 24% increase in net sales, 13.1% was due to new customer sales. The remaining 10.9% was due to increased sales volume from some food distributors and other existing customers during the year 2005.

     The average price for all products increased from $0.64 per pound in 2004 to $0.67 per pound in 2005. The net $8.3 million increase in product sales (exclusive of backhaul revenue) from 2004 to 2005 reflects a $6.4 million increase in sales due to the higher average volume and an $1.9 million increase in sales due to higher average prices. Net sales and pounds for our products are as follows:

	2004					2005
	Pounds		Sales			Pounds		Sales
	(in millions)		($ in millions)			(in millions)		($ in millions)
Lettuce		29.8		$	17.3		35.8		$	21.3
Cabbage		11.4		$	5.5		11.0		$	5.0
Onions		5.8		$	4.2		6.8		$	5.2
Serve Fresh Kits		0.5		$	0.8		3.2		$	4.5
Other Produce		7.2		$	7.0		7.9		$	7.1
Backhaul Revenue				$	1.3				$	1.6
TOTAL		54.7		$	36.1		64.7		$	44.7

     Gross profit. Gross profit for the years ended December 31, 2005 and 2004 was $6.7 million and $6.2 million respectively, an increase of $500,000 or 8%. Our gross profit margin for the years ended December 31, 2005 and 2004 was 15.1% and 17.2% respectively. The increase in gross profit dollars was due to increased volume and higher lettuce and onion prices. The decrease in our gross profit margin was due in large part to higher oil prices nationwide, which affected our utilities, transportation, and packaging costs. Between 2004 and 2005, within cost of sales, raw materials costs increased 30%, packaging costs increased 27%, and distribution costs and utilities costs each increased 32%.

     Selling, General, and Administrative Expense. Selling, general, and administrative expense for the years ended December 31, 2005 and 2004 was $6.4 million and $5.4 million respectively, an increase of $1.0 million, or 18.5% . The increased expenses were primarily due to the cost of the audit of our financial statements for the prior three years, additional legal fees and other expenses of approximately $250,000 necessary to prepare the company for a public offering, increased salaries expense of approximately $250,000, increased computer expenses of approximately $180,000, and related increases in travel, consulting fees, and other expenses of approximately $320,000. During 2005, as part of our expansion, we added 40 new positions, including three at the vice president level. As a result of these additions, the average number of employees increased from 252 to 292. The increase in computer expenses resulted from the introduction of new accounting software.

     Income (loss) from Operations. Operating income for the years ended December 31, 2005 and 2004 was $322,000 and $822,000 respectively, a decrease of $500,000, or 61%. This decrease in operating income was due to the increase in gross profit of $500,000 offset by increased selling, general, and administrative expenses of $1.0 million.

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     Other income (expense). Other income (expense) for the years ended December 31, 2005 and 2004 was a net expense of $722,000 and a net expense of $287,000, respectively, for an increase of $435,000, or 152%. This increase was primarily due to increased rental income of approximately $99,000 from Allison’s and increased other income of approximately $76,000, offset by an increase in interest expense of approximately $553,000. The increased interest expense reflects increased debt to expand our processing facility, add new processing equipment, and transportation equipment. The increased other income is interest income earned when industrial bond proceeds remained on deposit.

     Earnings (Loss) before income taxes. Earnings (Loss) before income taxes for the years ended December 31, 2005 and 2004 was a loss of approximately $401,000 and a profit of approximately $534,000, respectively, for a decrease in profitability of approximately $935,000. Higher revenue and the amount of gross profit from increased volume and prices were offset by increases in selling, general and administrative expenses related primarily to expenses associated with preparation for the planned initial public offering, increased salaries and related expenses, and increased interest expenses from increased debt to fund facilities expansion.

     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 2005 and 2004 was 40% and 36%, respectively.

     Net Income(loss): Net income (loss) for the years ended December 31, 2005 and 2004 was a loss of approximately $241,000 and a profit of approximately $342,000, respectively. The decrease of $583,000 in net income was due to the $935,000 decrease in earnings before income taxes offset by a $352,000 increase in income tax benefit.

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. Cash and cash equivalents as of December 31, 2006, were $868,000. Our net working capital (current assets minus current liabilities) was negative $7.2 million as of December 31, 2006 and negative $2.5 million as of December 31, 2005. The deterioration in our net working capital is the result of losses incurred in the 12 months ended December 31, 2006, costs that we have incurred due to capital expenditures, and our occasional use of working capital to pay for portions of our building expansion and extension of vendor terms and increasing our short-term borrowings. The successful completion of this offering described below will improve our working capital position and provide the necessary financing to fund our expansion.

     We anticipate that our cash and cash equivalent balance, existing working capital, and expected cash flow from operations will be sufficient to satisfy our operational cash flow requirements over the next 12 months. See “Use of Proceeds” beginning on page 17. However, we cannot provide assurance that our actual cash requirements will not be greater than we currently expect. We also cannot provide assurance that we will successfully complete the pending initial public offering described below. If we are unable to complete the pending initial public offering and other sources of liquidity are not available to us or if we cannot generate sufficient cash flow from operations, we may be required to obtain additional sources of funds through cost reductions, asset sales, or additional financing from third parties, or a combination thereof. We cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms.

The following is summarized cash flow information for 2004, 2005 and 2006.

($ in 000’s)	2004			2005			2006
Net income	$	342		$	(241	)	$	(1,205	)
Non-cash items		1,141			884			1,485
Changes in working capital		(76	)		(871	)		1,570
Operating activities		1,407			(228	)		1,850
Investing activities		(7,143	)		23			(2,901	)
Financing activities		5,977			(442	)		1,883
Net increase (decrease) in cash	$	241		$	(647	)	$	832

     Operating activities. In 2005 our operating results declined due to increased selling, general & administrative expenses primarily due to the hiring of additional employees in anticipation of a significant expansion of our business. In 2006, our operating results declined significantly because of increases in cost of sales due to poor quality lettuce from a poor spring growing season, and an ammonia leak in our processing facility.

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     Non-cash items include items that are not expected to generate or require the use of cash, such as depreciation and amortization, and provision for bad debts.

     Changes in working capital requirements include changes in receivables, inventories, prepaid expenses, and accounts payables and accrued liabilities. The recent significant changes in working capital reflect the continuing expansion of our business. Increasing receivables resulting from increasing sales generate a requirement for cash, which is partially offset by increased accounts payable. In 2006, our working capital position deteriorated significantly due to the loss. As a result, our accounts payable increased by $1.6 million over the period.

     Investing activities. Cash used in investing activities reflects our expansion and investment in new processing facilities and equipment in 2004, 2005 and 2006. The $7.1 million use of cash in 2004, reflects the investment in new plant and equipment and temporary investment of debt proceeds. In 2006, the $2.9 million use of cash was primarily for investment in new plant and equipment. In total, approximately $10.0 million has been invested in new plant and equipment in the period 2004 through 2006.

     Financing activities. In 2004, we borrowed approximately $5.0 million from industrial revenue bonds and $2.8 million from a line of credit and used the proceeds to repay approximately $1.0 million in long term debt and capital leases, repay approximately $2.1 million of our line of credit pay $500,000 in loan origination fees, and provide a net of approximately $2.0 million to partially fund our expansion. In 2005, we borrowed approximately $2.3 million from our line of credit, and $527,000 of long-term debt to repay approximately $1.8 million of our line of credit and $1.5 million in long-term debt and capital leases, and provided $1.3 million plus existing cash resources to fund our expansion.

     Over the period from 2004 through 2006, we borrowed approximately $16.1 million from our line of credit, industrial revenue bonds, and other short and long term loans, refinanced approximately $7.3 million in short and long term obligations and provided approximately $8.8 million to fund our expansion. During the same period, we generated approximately $3.0 million in cash from operations, for a total of $11.8 million. We used approximately $10.0 million to fund our expansion as described above. The remaining $1.8 million was used for working capital and other corporate purposes. Our line of credit and other short-term borrowings are used primarily to fund our working capital, while the long term debt and industrial revenue bonds have been used to fund our expansion.

     Industrial revenue bonds. Under the terms of our industrial revenue bonds, we are obligated to meet certain covenants. The most significant of these are as follows.

• We are 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. We have not been required to retain a consultant even though the ratio has fallen below the requirement. At December 31, 2006, our debt service coverage ratio was 0.42.

• We are 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, 2006 our current ratio is .41 to 1.00.

• We are 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, 2006, our debt to equity ratio could not be calculated due to a negative equity balance.

• We are required to maintain not more than 10% of our accounts payable in excess of 75 days past due. We are in compliance with this covenant as of December 31, 2006.

• We are required to maintain not more than 20% of our accounts receivable in excess of 90 days past due. We are in compliance with this covenant as of December 31, 2006.

     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 industrial revenue bonds of one percentage point until we are in compliance with the required ratios. Accordingly, the interest rate on the industrial revenue bonds was increased in June 2006 from 6.925% to 7.925% . Noncompliance with these covenants will not impact our ability to undertake additional debt or equity financing. We expect to be back to compliance with these ratios upon receipt of the proceeds of this offering. See “Risk Factors” beginning on page 9, “Description of Certain Indebtedness” starting on page 55, and Note 9 to the Vaughan Foods, Inc., consolidated financial statements.

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     The following is a summary of the contractual commitments associated with our debt and lease obligations, as well as our purchase commitments as of December 31, 2006:

	Payments due by period
									More than 5
($ in 000’s)	Total		Less than 1 year		1-3 years		3-5 years		years
Long-term debt obligations	$	8,794	$	607	$	1,195	$	634	$	6,358
Capital lease obligations		652		173		387		93
Operating lease obligations		872		340		448		83
Purchase obligations		3,529		3,529
Short-term borrowings		6,964		6,964
Total	$	20,811	$	11,613	$	2,030	$	810	$	6,358

     Market risk. Market risks consist of interest rate fluctuations and commodity price fluctuations as further described below.

     Interest Rate Risks. We are subject to market risk from exposure to fluctuations in interest rates. Some of our debt instruments contain variable interest rates adjusted quarterly and indexed by different published rates. At December 31, 2006 our revolving line of credit variable interest rate was 10.25%, or Wall Street Journal Prime + 2.00%, on borrowings of $2,726,578. Other long-term debt, totaling $3,379,000, secured by real estate and other assets also have variable rates indexed by LIBOR and other lending institution Base Rates.

     Commodity Price Risks. The supply and price of fresh vegetables and fruits is subject to volatility due to growing seasons, crop failure and other factors beyond our control. We contract for supply at fixed prices to ensure our ability to maintain an adequate supply of raw materials, so that we may service our customers in the event of a market shortage. Our purchase contracts may cause our purchase costs to be higher in the event of a low market with excessive supply. In contrast, our purchase contracts may cause our purchase costs to be lower in the event of a high market with limited supply. There is no guaranty that our suppliers will be able to fulfill our contracts in the event of a limited supply market.

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

     Fuel Cost. Our business is substantially dependent upon timely delivery of our products by our fleet of trucks and trailers. Increases in fuel costs increased our delivery costs during 2006 and could put us at a competitive disadvantage to suppliers located closer to their customers. Increases in fuel costs included increased raw material costs for inbound freight, and our cost to deliver products to our customers.

     We attempt to pass all increased raw material costs on to our customers, however we cannot provide assurance that we will be able to pass all increased costs on to our customers in the future, especially during short-term market fluctuations.

     Public company. 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 Markets, 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 in order to allow our chief executive officer and our chief financial officer to certify as to effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Beginning with the year ending December 31, 2008, our independent registered public accounting firm will be required to evaluate and test our

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internal control over financial reporting, and to issue an opinion on the effectiveness or 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 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.

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, Mark Vaughan, Vernon Brandt, Jr. and Stan Gustas. Four key factors for this start-up were:

• Vaughan Foods was purchasing high volumes of produce items that are utilized in refrigerated pre- pared 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 million pounds annually.

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

     We expanded Vaughan’s original ten existing products 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, 35% foodservice, including several other smaller distributors. Our retail business is primarily in grocery chains, making our products available to individual consumers. The foodservice percentage consists largely of restaurants. By the end of 2005 we were at maximum capacity and began construction of 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. The added production capacity is designed as a general expansion to produce all products.

Critical Accounting Policies and Estimates

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

     Inventory: Inventory purchases and purchase commitments are based upon forecasts of future demand. We value our inventory at the lower of average cost (which approximates first-in, first-out cost) or market. Inventory turns rapidly due to the nature of our fresh products; therefore, market is not a major consideration. If we believe that demand no longer allows us to sell our inventory above cost or at all, then we write down that inventory to market or write-off excess inventory levels. If customer demand subsequently differs from our forecasts, requirements for inventory write-offs could differ from our estimates. We have not experienced material inventory writeoffs in the past and try to manage inventory levels of both perishable and non-perishable supplies to avoid such writeoffs.

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     Customer Rebates: The estimates and reserves for rebates are based on specific rebate programs, expected usage and historical experience. Actual results could differ from these estimates. In some programs, we accrue expense based on anticipated purchase volume under the program. Greater than anticipated volume under the program would result in a charge to earnings. We have not experienced material charges to earnings under our rebate programs in the past but could do so in the future.

     Allowance for Doubtful Accounts: The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in a customer’s credit worthiness or actual defaults differ from our historical experience, our estimates of recoverability of amounts due us will be affected. We attempt to monitor customer accounts for indications of a customer’s inability to pay. Overdue accounts get special attention. Charges to bad debt expense as a percentage of net sales were 0.13% in 2004, 0.00% in 2005 and 0.03% in 2006.

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

     Intangible Assets: We evaluate the recoverability of intangible assets annually or more frequently if impairment indicators arise. Under SFAS No. 144, Accounting for the Disposal of Long-Lived Assets, intangible assets are evaluated whenever events or changes in circumstances indicate that the carrying value exceeds its fair value, which is determined based upon the estimated undiscounted future cash flows expected to result from the use of the asset, including disposition. Cash flow estimates used in evaluating for impairment represent management’s best estimates using appropriate assumptions and projections at the time. We believe that accounting for intangible assets is a critical accounting policy due to the requirement to estimate the value in accordance with SFAS No. 144. Our intangible assets consist of a customer list obtained by Allison’s from Vaughan Foods, Inc. at the inception and a customer relationship from the acquisition of Wild About Foods, Inc. We are amortizing the cost of both intangible assets over a period of not more than 5 years. We believe there to be very little variability in the estimate of value on the intangibles. The value of the customer relationship is calculated by discounting projected earnings from the date of acquisition to the extent of the liability for excess purchase price.

Results of Operations Allison’s Gourmet Kitchens
(in thousands)

	Percentage of Revenue
	Year Ended December 31,
	2004		2005		2006
Revenue	$  9,173		$ 13,111		$ 20,032
Cost of Revenue	75.8	%	75.1	%	76.4	%
Gross Profit/Margin	24.2	%	24.9	%	23.6	%
SG&A Expenses	17.5	%	18.0	%	17.4	%
Income (loss) from Operations	6.7	%	6.9	%	6.3	%
Interest Expense	0.3	%	0.1	%	0.4	%
Net Earnings	6.4	%	6.8	%	5.8	%

Comparison of the Years Ended December 31, 2006 and 2005

     Net Sales. Net sales for the years ended December 31, 2006 and 2005 were $20 million and $13.1 million, respectively, an increase of approximately $6.9 million, or 52.8% . The increase was due to the addition of new customers, and increased volume and higher prices with existing customers. The increases in prices reflected higher commodity costs for raw materials, which we were able to pass on, in part, to our customers. During the year ended December 31, 2006, we added six new customers. The sales derived from these customers were 9.90% of net sales, accounting for approximately $1.9 million of the increase. The remaining $5 million of the increase was from volume and price increases from existing customers.

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     The average price for all products increased from $0.82 per pound in 2005 to $0.90 per pound in 2006. The net $6.9 million increase in sales from 2005 to 2006 reflects a $5.2 million increase in sales due to the higher average volume and a $1.7 million increase in sales due to higher average prices.

     An important component of this difference resulted from the addition of the Soups & Sauces category through the acquisition of Wild About Foods. The new Soups & Sauces category accounted for an increase of 3.0 million pounds and $4.9 million in sales in 2006. Without this new category, total pounds would have increased by 3.3 million and total sales would have increased by $2.0 million. Also, the average price per pound would have fallen from $0.82 in 2005 to $0.78 in 2006. The $2.0 million increase in sales in “same category” products reflects a $2.7 million increase in sales due to higher average volume offset by a $700,000 decrease in sales due to the lower average price per pound.

	2005			2006
	Pounds	Sales		Pounds	Sales
	(in millions)	($ in millions)		(in millions)	($ in millions)
Potato Salads	11.1	$	7.6	13.1	$	9.1
Pasta Salads	1.8	$	1.4	2.3	$	1.8
Cole Slaw	1.5	$	1.1	1.9	$	1.5
Meat Salads	0.8	$	1.6	0.9	$	1.9
All Other	0.8	$	1.4	1.1	$	0.8
Soups & Sauces	—	$	—	3.0	$	4.9
TOTAL	16.0	$	13.1	22.3	$	20.0

     Gross Profit. Gross profit for the years ended December 31, 2006 and 2005 was $4.7 million and $3.3 million, respectively, an increase of $1.5 million, or 46%. Our gross profit margins for the years ended December 31, 2006 and 2005 were 23.6% and 24.9%, respectively. The increase in gross profit was due to growth in sales volume and price increases. The decrease in gross profit as a percent of sales was due to the portion of increased costs associated with higher oil prices nationwide which we were unable to pass on to our customers in higher prices. Higher oil prices affect our utilities, transportation, and packaging costs. For the years ended December 31, 2006 and 2005, we experienced a 37% increase in the cost of packaging and a 36% increase in the cost of transportation.

     We believe that increased fuel costs have increased our cost of outbound freight to customers, which is a significant factor in our increased cost of sales for the year ended December 31, 2006 as compared to the year ended December 31, 2005.

     Selling, General, and Administrative Expense. Selling, general, and administrative cost for the years ended December 31, 2006 and 2005 were $3.5 million and $2.4 million, respectively, an increase of $1.1 million, or 47.5% . This increase was primarily a result of the growth in sales. Broker’s commissions increased by $163,000, freight expense by $259,000, marketing expense by $52,000, insurance expense by $40,000, and travel by $30,000. Selling, general, and administrative costs for Wild About Food increased by $309,000. The remaining $247,000 increase is due to increases in legal and professional, advertising, and other expenses, net of a $38,000 decrease in the management fee to the general partner.

     Income (loss) from Operations. Operating income for the years ended December 31, 2006 and 2005 was $1.3 million and $909,000, respectively, an increase of $344,000. The increase in operating income was due to increase in gross profit of $1.5 million from the growth of sales, offset by the $1.1 million increase in selling, general, and administrative expenses.

     Interest Expense. Interest expense for the years ended December 31, 2006 and 2005 was $84,000 and $11,000, respectively, an increase of $72,500. The increased interest expense reflects the increase in outstanding debt used to fund the purchase of equipment to be used in the new processing facility.

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

     Net Income. Net income for the years ended December 31, 2006 and 2005 was $1.1 million and $898,000, respectively, an increase of $272,000. The increase in net earnings was due to the $1.5 million increase in gross profit from the growth in sales, offset by the $1.1 million increase in selling, general, and administrative expense to support the sales growth and the $72,500 increase in interest expense on increased debt to purchase new equipment.

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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, an increase of $3.9 million, or 42%. 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 9 million in 2004 to 16.0 million in 2005. The increase in volume and sales reflects the addition of new product, and the addition of 11 new customers. The sales from these new customers accounted for 27% of total net sales in 2005.

     The average price for all products decreased from $1.02 per pound in 2004 to $0.82 per pound in 2005. The net $3.9 million increase in sales from 2004 to 2005 reflects a $7.2 million increase in sales due to the higher average volume offset by a $3.3 million decrease in sales due to lower average prices. Net pounds and sales for our products are as follows.

	2004			2005
	Pounds	Sales		Pounds	Sales
	(in millions)	($ in millions)		(in millions)	($ in millions)
Potato Salads	5.6	$	3.9	11.1	$	7.6
Pasta Salads	0.8		0.6	1.8		1.4
Cole Slaws	0.7		0.6	1.5		1.1
Meat Salads	0.5		1.1	0.8		1.6
All other salads	1.4		3.0	0.8		1.4
TOTAL	9.0	$	9.2	16.0	$	13.1

     Gross Profit. Gross profit for the years ended December 31, 2005 and 2004 was $3.3 million and $2.2 million, respectively, an increase of $1.1 million, or 50%. Our gross profit margin for the years ended December 31, 2005 and 2004 was 24.9% and 24.2%, respectively. The increase in gross profit was due to increased volume from increased sales to new and existing customers, and price increases to existing customers.

     Selling, General, and Administrative Expenses. Selling, general, and administrative expenses for the years ended December 31, 2005 and 2004 were $2.4 million and $1.6 million, respectively, an increase of approximately $800,000, or 50%. The increase in expenses was incurred primarily to support the increased sales volume. Broker’s commission increased $220,000, freight increased $370,000, and salaries increased $90,000. The management fee to the general partner increased by $85,000. In addition, other items such as insurance, telephone and professional fees increased a total of $35,000.

     Income (loss) from Operations. Operating income for the year ended December 31, 2005 and 2004 was $909,000 and $614,000, respectively, an increase of $295,000, or 48%. The increase was due to the growth in product sales.

     Interest Expense. Interest expense for the years ended December 31, 2005 and 2004 was $11,000 and $31,800, respectively, a reduction of approximately $20,800. The reduction in interest expense was due to a decrease in the outstanding debt.

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

     Net Income. Net income for the years ended December 31, 2005 and 2004 was $898,000 and $583,000, respectively, an increase of $315,000, or 54%. The increase in net income was due to the $295,000 increase in operating income resulting from sales growth in the business plus a $20,000 reduction in interest expense because of reduced debt outstanding.

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.

The following is summarized cash flow information for 2004, 2005 and 2006.

(in thousands)
	2004			2005		2006
Net income	$	583		$	898	$	1,169
Non-cash items		76			104		151
Changes in working capital		(591	)		603		(1,008	)

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Operating activities		68			1,605			312
Investing activities		(278	)		(458	)		(1,345	)
Financing activities		106			(546	)		1,754
Net increase (decrease) in cash	$	(104	)	$	601		$	721

     Operating activities: Our operating results and resulting cash flows have improved over the period 2004 through 2006. During that period, our net income totaled approximately $2.6 million attributable to the growth in the business from increased volume from existing customers and the addition of new customers. We generated a total of approximately $2.0 million cash from operating activities after allowing for non-cash items and changes in working capital. We retained approximately $1.3 million to fund an increase in working capital to support the business growth.

     Non-cash items include items that are not expected to generate or require the use of cash, such as depreciation and amortization and provision for bad debts.

     Investing activities: Over the period 2004 through 2006, we invested a total of approximately $2.1 million in new plant and equipment to support the expansion of our business.

     Financing activities: Over the period 2004 through 2006, we borrowed approximately $2.5 million in short and long-term debt. We refinanced approximately $1.2 million in short and long-term debt and capital leases, and used the remaining $1.3 million, along with cash generated from operating activities, to fund our investment in new plant and equipment.

     We have a $1 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%. 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 December 31, 2006, we had no outstanding balance under this line of credit. The bank line of credit agreement is subject to certain covenants that we were in compliance with or for which we have obtained a waiver as of December 31, 2006.

     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 as the secured line of credit discussed above. The maturity date of this loan is 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.

     The following is a summary of the contractual commitments associated with our debt and lease obligations, as well as our purchase commitments as of December 31, 2006:

Contractual Obligations
(in thousands)
	Payments due by period
			Less than		1 - 3		3 - 5		More than
	Total		1 year		years		years		5 years
Long-Term Debt Obligations	$	2,402	$	339	$	774	$	1,155	$	135
Capital Lease Obligations		8		3		4
Short-term borrowings		254		254
Total	$	2,664	$	596	$	778	$	1,155	$	135

     Market risk. Market risks consist of interest rate fluctuations and commodity price fluctuations as further described below.

     Interest Rate Risks. We are subject to market risk from exposure to fluctuations in interest rates. Some of our debt instruments contain variable interest rates adjusted quarterly and indexed by different published rates. At December 31, 2006 our line of credit variable interest rate was 8.25%, or Wall Street Journal Prime + 0.75% . The line of credit is for $1.0 million. At December 31, 2006, we have no outstanding balance on that line of credit. We also have a $600,000 line of credit at a variable interest rate of Wall Street Journal prime plus 1.0% . At December 31, 2006, our outstanding balance on this line of credit is $253,995.

     Commodity Price Risks. The supply and price of fresh vegetables and fruits is subject to volatility due to growing seasons, crop failure and other factors beyond our control. We bear a risk of price fluctuations under our agreement with Vaughan, from whom we purchase our supplies of fresh produce. Vaughan contracts for supply at fixed prices to ensure their ability to maintain an adequate supply of raw materials, so that they may service their customers in the event of a market shortage. Their purchase contracts may cause their purchase costs to be higher in the event of a low market with excessive supply. In contrast, their purchase contracts may cause their purchase costs to be lower in the event of a high market with limited supply. There is no guaranty that their suppliers will

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be able to fulfill their contracts in the event of a limited supply market. In the event, Vaughan is subject to price and market fluctuations as described above, they may pass all or some of the effects on to us.

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

     We attempt to pass all increased raw material costs on to our customers, however we cannot provide assurance that we will be able to pass all increased costs on to our customers in the future, especially during short-term market fluctuations.

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 (see “Acquisitions” below).

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,

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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.

Acquisitions

     Immediately prior to the closing of this offering, pursuant to amended agreements dated in March 2007, 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. 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. On the effective date of this offering, Herb Grimes will become Chairman and Chief Executive Officer of Vaughan Foods and Mark Vaughan will become President and Chief Operating Officer of Vaughan Foods.

     Allison’s acquired substantially all of 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. The acquired assets consisted primarily of food processing and packaging equipment and, to a lesser extent, accounts receivable, cash, building improvements and software. The assumed liabilities consisted of $60,000 of accounts payable (including credit card obligations incurred in the ordinary course of business), and liabilities under operating equipment leases. The real property consisted of two building lots and related improvements in Fort Worth, Texas.

     Effective June 1, 2006, the Partnership acquired certain assets and assumed certain liabilities of Wild About Foods, Inc. and All For One. Inc. (together, “Wild”). Wild produces refrigerated food products for food service and retail customers. The purchase price was comprised of a cash payment of approximately $7,000, notes payable to the sellers totalling $250,000, assumption of (i) a mortgage loan of approximately $154,000, (ii) a line of credit loan of approximately $23,000, (iii) a capital lease of approximately $9,000, and (iv) accounts payable and other liabilities of approximately $236,000. Assets acquired consisted of cash and accounts receivable of approximately $25,000, inventory of approximately $131,000 and property and equipment of approximately $523,000. In addition, the acquisition provides for a contingent purchase price payment equal to 65% of operating income over and above $250,000, as defined, during the three-year period following the closing. 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.

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 have substantially completed a 46,000 sq. ft. addition to our 108,000 sq. ft. plant in Moore, Oklahoma to be used for refrigerated prepared sal- ads and other prepared products. A new, state-of-the-art potato cook/chill system in that facility will sub- stantially increase output of cooked and chilled potatoes for use in our potato salad products. This system has begun producing trial batches of potato salad and is expected to begin commercial produc- tion in April 2007. Other new equipment will enable us to prepare our own dressings and sauces, ingre- dients 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.

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• Broaden product line. We plan to broaden the line of products offered both in our existing primary mar- ket 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, 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 60 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

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Broccoli Salad Kit	Carrot/Celery Snacks
Cole Slaw Kit	Cabbage
Pico de Gallo	Tomatoes
	Green, Red and Yellow Peppers
Salad Mixes	Cauliflower/Broccoli Florets
	Potatoes
Salad Kits	Miscellaneous
Premium Salad Blend	Squash
Garden Salad Mix	Turnips
Shredded Iceberg	Radishes
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”. Since November 2006 we have added seven new items to our “Fresh Fixins^®” line.

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

     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 April 2007 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. Trial lines of five gourmet dips were introduced at two customers in November 2006.

     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

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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 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,

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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.

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 conve- nient packaging types and sizes. We can also deliver customized “cut-to-order” fresh-cut produce to dis- tributors 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 2006, we purchased from approximately 50 suppliers in five diverse grow- ing 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 inter- ruptions 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^®”

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• “Allison’s Gourmet Kitchens and design™”

• “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 12, above.

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

     In response to recent elevated consumer concern over food safety involving fresh produce, we have initiated a pre-harvest program, called “Greenlight ™ Ag Safety” that will focus on the safety and quality of produce before purchase and shipment into our facilities. Under this program we will conduct onsite surveys assessing potential sources of contamination, including well and irrigation water, and site analysis pertaining to nearby animal husbandry operations, animal infestations, field drainage and soil amendments. We will take physical samples of produce prior to harvest and evaluate these samples for pathogenic organisms in a mobile testing facility at or near the crop location. This program is in a start-up phase and full implementation with all major raw materials is not expected until the first quarter 2008.

     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.

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Property

     Our executive offices and plant are located at 216 Northeast 12th 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 48,000 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 April 1, 2007. We also lease, from an unaffiliated third party at market rate, 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.

Employees

     As of March 15, 2007, Vaughan and Allison’s employed 400 people at our Moore, Oklahoma facility, of which 23 are salaried management, 8 are sales and sales support personnel, 15 are other and administrative personnel and 354 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.
Robert S. Dillon	50	Director nominee*
Richard A. Kassar	60	Director nominee*
Laura J. Pensiero	39	Director nominee*

*Ms. Pensiero and Mr. Kassar will take office immediately following the closing of the initial public offering contemplated by this prospectus. Mr. Dillon will take office on the effective date of this prospectus. All director nominees are “independent” as defined in relevant Nasdaq rules.

     Mark E. Vaughan. Mark Vaughan has served as President, Chief Executive Officer and a director of Vaughan since 1992. On the effective date of this offering he will become President and Chief Operating Officer while remaining a director. He has over 20 years of food processing experience and has directed advances in quality control, food safety, purchasing and manufacturing processes at Vaughan. Mr. Vaughan attended the University of Oklahoma.

     Vernon J. Brandt. Vernon (“Butch”) Brandt has served as a Vice President and a director of Vaughan since 1994. He will resign as a director on the effective date of this offering. 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 since 2003. On the effective date of this offering he will become our Chairman of the Board and Chief Executive Officer while retaining his positions at Allison’s. 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 Development until it was acquired by Orval Kent Holding Company in January 1996. From January 1996 until November 1996 Mr. Grimes was President of the Mrs. Crockett’s division of Orval Kent. From November 1996 until Orval Kent was acquired by Sky Chefs, Inc. in 2002, Mr. Grimes served as Vice-President of Sales, Marketing, and Research and Development for Orval Kent. From 2002 until he co-founded Allison’s, he was a private investor. 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.

     Richard A. Kassar. Mr. Kassar, a director nominee, is Chief Executive Officer of Fresh Pet Company, a manufacturer of fresh refrigerated pet food, which he launched as a start-up in October 2006. From July 2006 to October 2006 he raised venture capital for Fresh Pet Company. From 2002 until 2006 Mr. Kassar was Senior Vice President and Chief Financial Officer of Meow Mix. When Meow Mix was sold to Del Monte Corporation in May 2006, Mr. Kassar remained in his position there until July 2006. From 2001 until 2002 he was a consultant to venture capital businesses with respect to acquisitions of consumer brands and service organizations. From 1999 to 2001 he was Co-President and Chief Financial Officer of Global Household Brands, a manufacturer of

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consumer household cleaning products. He was Senior Vice President, Chief Operating Officer and Corporate Comptroller of Chock Full O’Nuts Corporation from 1986 to 1999. Mr. Kassar is a director and audit committee member of World Fuel, a New York Stock Exchange listed public company whose principal business is supplying fuel to the marine and aviation industry, and a director and chair of the audit committee of Velocity Express, a NASDAQ listed public company whose principal business is providing same-day transportation services. He is a graduate of Baruch College and is an inactive Certified Public Accountant.

     Laura J. Pensiero. Laura Pensiero has 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 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).

     We will at all times maintain at least two directors who are “independent” as defined in relevant Nasdaq rules.

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 is and will be made up entirely of independent directors as defined in relevant Nasdaq rules.

     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. Kassar will be chairman of the Audit Committee and the other members of the Audit Committee will be Mr. Dillon and Ms. Pensiero. The Board has determined that Mr. Kassar is an “audit committee financial expert,” as that term is defined in Item 401(h) of Regulation S-B, and all audit committee members are “independent” for purposes of Nasdaq listing standards and Section 10A–(3)(b) 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.

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     Following this offering, the members of the Compensation Committee will be Messrs. Kassar and Dillon 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:

• evaluating the composition, size and governance of our Board and its committees and make recommen- dations 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. Kassar and Dillon 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.

Executive Compensation

Compensation Discussion and Analysis

     The Company is in the process of assembling a compensation committee to evaluate and define the annual compensation for its executive officers and directors. The objectives of the compensation committee will be designed to attract and retain qualified, effective managers with the experience necessary to manage the Company’s business effectively. Financial performance of the Company will be a major factor in the compensation of key employees as well as their individual contributions. Stock options are expected to comprise a portion of the compensation amounts following the successful implementation of the Company’s initial public offering. Stock options will be properly accounted for under SFAS No. 123R and will be either incentive stock options (in compliance with federal tax regulations) or non-incentive options. The compensation amounts in the following Summary Compensation Tables reflect executive compensation prior to the existence of the compensation committee, but were nonetheless determined by factors that we believe were in the best interests of the company.

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     Summary compensation. The following table sets forth information regarding compensation awarded to, earned by, or paid to by either Vaughan or Allison’s to our principal executive officer, our principal financial officer and our other most highly compensated executive officers whose compensation exceeded $100,000 in 2006 for all services rendered to us in all capacities for the fiscal year ended December 31, 2006.

Summary Compensation Table(1)

Name and
Principal Position	Year	Salary		Bonus		Total
Mark E. Vaughan,	2006	$	221,130	$	—	$	221,130
President and Chief
Executive Officer
Stan L. Gustas,	2006		85,217		—		85,217
Chief Financial Officer
Herb Grimes, (2)	2006		257,500		39,660		297,160
Managing Partner
Allison’s Gourmet Kitchens
Vernon Brandt Jr.,	2006		135,166		—		135,166
Vice President of Operations

_________________
(1)	The table includes, in the amounts shown for Herb Grimes, compensatory payments consisting of manage- ment 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.
(2)	Serving as an executive officer of Allison’s.

Director Compensation

     In the past, our directors have not received compensation. Future 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. No grants have been made pursuant to the plan. The Equity Incentive Plan gives our board of directors the ability to provide incentives through grants of incentive and non-qualified stock options to our employees, consultants and directors.

     A total of 1,000,000 shares of our common stock 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.

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Term and Amendment of the Plan

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

Terms of Options

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

Federal Income Tax Consequences

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

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

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 Oklahoma General Corporation Act, 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 March, 2007, 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. 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. Mr. Gustas owns the remaining 12.5% and will be paid $312,500 from such net proceeds. See “Risk Factors” starting on page 9.

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

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

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PRINCIPAL STOCKHOLDERS

     The following table sets forth information regarding the beneficial ownership of our common shares as of the effective date of this offering of

• 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 table takes into account the issuance of 150,000 shares, 150,000 Class A warrants and 150,000 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 $7.50 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.

		Percent of Shares Outstanding
	Number of Shares	Before the		After the
Name of Beneficial Owners(1)	Beneficially Owned(2)(4)	Offering(3)		Offering(3)
Mark E. Vaughan	1,177,778	42.40		23.90
Vernon J. Brandt	298,611	10.75		6.05
Stan L. Gustas	111,111	4.00		2.25
Herbert Grimes	1,177,778	42.40		23.90
All directors and executive officers as a
group (4 persons)	2,765,278	99.55	%	56.10	%

___________________
(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 2,777,778 shares issued and outstanding immediately before this offering and 4,927,778 shares issued and outstanding immediately after this offering.
(4)	The original price per share when the shares were first issued over five years ago to Vaughan’s founders was $0.15, representing the per-share book value of the business transferred by Vaughan’s founders upon Vaughan’s organization in 1989.

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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 4,927,778 shares of common stock issued and outstanding and 5,227,778 shares if the over-allotment option is exercised in full. At the time this offering is effective, we will have 2,927,778 shares of common stock outstanding held of record by approximately 27 stockholders after taking into account 150,000 shares of common stock included in the units that we will issue to the holders of the Secured Notes (based on assumed offering price of $7.50 per unit). The following materially complete description summarizes the most important terms of our capital stock.

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 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 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 Stock are 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 Stock do not have cumulative voting rights. Upon our dissolution, liquidation or winding up, holders of our Common Stock are 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 Stock are not subject to any redemption provisions and are not convertible into any other shares of our capital stock. All outstanding shares of our Common Stock are, and the shares of our Common Stock to 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 Stock will 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 2,150,000 Class A warrants issued and outstanding of which 2,000,000 are included in the units sold in this offering and 150,000 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 $7.50 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.

     Redemption. Commencing six months from the date of the offering, 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

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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.

     If at the warrant expiration date the warrants are not exercisable because of the failure of Vaughan to maintain an effective registration statement, the expiration date shall be extended to a date that is 30 calendar days following notice to the holders of the warrants that the warrants are again exercisable. Under no circumstances may the Company be required to effect a cash settlement of the warrants.

     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 2,150,000 Class B warrants issued and outstanding including 2,000,000 Class B warrants included in the units sold in this offering and 150,000 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 $7.50 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.

     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;

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• 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.

     Any future issuance of preferred stock will be approved by a majority of our independent directors who do not have an interest in the transaction and who have access, at our expense, to our or independent legal counsel.

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.

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 trans- action 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

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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 share- holder 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 pro- vided 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.

     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.

See “Risk Factors” starting on p. 9.

Listing

     We have applied to list the units, common stock, Class A warrants and Class B warrants on the Nasdaq Capital Market and the Boston Stock Exchange under the symbols “FOODU”, “FOOD”, “FOODW” and “FOODZ”, 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 “Secured Notes.” The Secured 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 Secured 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 Secured Notes, the purchasers of $1.5 million of the Secured Notes 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 face value of the Secured Notes purchased by that investor and the purchasers of the remaining $0.5 million of the face value of the Secured Notes will receive that number of equity securities to be issued in this public offering having a value, at the initial public offering price, of 75% of the face value of the Secured 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 Secured Notes, the investors will receive an aggregate of 281,250 shares of our common stock. If we have not repaid the Secured 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 as described below under the caption “Shares Eligible for Future Sale — Registration Rights.” The investors in the Secured 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 Secured 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 $1,000,000 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

     At December 31, 2006, Vaughan had 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 was secured by accounts receivable, inventory and general intangibles. At December 31, 2006, short-term borrowings under this line of credit were $2,726,578 and Vaughan had $1,273,422 available under this line of credit. Vaughan had a line of credit balance at December 31, 2005 of $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. See note 8 of the Vaughan Foods, Inc. financial statements.

     In December 2006, we reached an informal agreement with the lender, subsequently confirmed by e-mail, that, subject to approval of our credit and the execution of a formal note extension agreement, the lender would extend the line until April 30, 2007. Under the terms of the proposed extension, the maximum amount that could be borrowed under the line would be fixed at $2,726,578 and a new financial covenant would be added providing that if subsequent monthly collateral valuations are less than the value of the collateral at November 30, 2006, we would immediately be deemed to be in default without any available grace period to cure such default. See “Risk Factors” beginning on page 9, and Notes 7 and 11 to the Vaughan Foods, Inc. financial statements.

     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 December 31, 2006, short-term borrowings under this line of credit were $0. 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 December 31, 2006. At December 31, 2005 and 2006, short-term borrowings on previous lines of credit were $0. See note 5 of the financial statements of Allison’s.

     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 December 31, 2006, short-term borrowings under this

55

line of credit were $253,995. Wild About Food was in compliance with all covenants. See note 5 of the financial statements of Allison’s.

     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.

SHARES ELIGIBLE FOR FUTURE SALE

This Offering

     After this offering is completed we expect to have 4,927,778 shares of common stock outstanding (assuming an offering price of $7.50 per unit). 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 5,227,778 shares of common stock outstanding if the representative’s over-allotment option is exercised in full. Of these shares, the 2,000,000 shares of common stock issued as part of the units sold in this offering (2,300,000 shares if the representative’s over-allotment is exercised in full) and the 150,000 shares of common stock included in the units that will be issued to the holders of the Secured Notes 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 2,000,000 shares of common stock underlying the Class A warrants and the 2,000,000 shares of common stock underlying the Class B warrants issued as part of the units sold in this offering (2,300,000 shares of common stock in the case of the Class A warrants and 2,300,000 shares of common stock in the case of the Class B warrants if the representative’s over-allotment is exercised in full) as well as the 150,000 shares of common stock underlying the Class A Warrants and the 150,000 shares of common stock underlying the Class B Warrants included in the units that will be issued to the holders of the Secured Notes will also be freely tradeable after exercise of the warrants, except for shares held by our affiliates. However, the holders of the Secured Notes have agreed not to sell or otherwise dispose of any of their shares for a period of one year after completion of this offering, pursuant to lock-up agreements similar to those described below under “Outstanding Restricted Stock.”

Outstanding Restricted Stock

     The remaining 2,777,778 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, 1,476,389 shares of common stock would be eligible for sale under Rule 144 90 days after completion of the offering and 12,500 shares of common stock would be eligible for sale under Rule 144 on January 8, 2008. The balance of the restricted shares would be eligible for sale under Rule 144.

     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.

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Registration Rights

     We have agreed to register for resale an estimated total (based on an assumed initial public offering price of $7.50 per unit) of approximately (a) 150,000 shares of common stock, (b) 150,000 Class A warrants, and 150,000 class B warrants that we will issue to holders of the Secured Notes on the date of this prospectus, as well as the 300,000 shares of common stock underlying those warrants 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.

     In January, 2007 we obtained agreement from all investors in the Secured Notes eliminating any possibility of any cash payments to them by us in the event we fail to file a resale registration statement in accordance with the original registration rights agreement executed in connection with the sale of the Secured Notes. In return, we committed to filing a resale prospectus with this registration, and will pay any applicable late fees for failure to file the registration statement within the prescribed time periods in shares of common stock. We will also pay any applicable late fees for failure to keep the registration statement effective in shares of common stock rather than in cash, pursuant to our option to do so.

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.

     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.

	Number of
Underwriter	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.

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     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 $        , $        , $        , 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 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 200,000 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 one year after the effective date of this offering, and will expire on the fifth anniversary of the effective date. The representative’s warrants 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 one year 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, or as otherwise permitted under subparagraph (g)(2) of the NASD’s Corporate Financing Rule and only if the warrants 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

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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 and we have agreed to maintain such registration during the term of these warrants. 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.

     The following table summarizes the underwriting discount and non-accountable expense allowance we will pay to the underwriters. These amounts are shown assuming a selling price of $7.50 per unit and both no exercise and full exercise of the underwriters’ over-allotment option.

	Total
				Without		With
		Per unit		over-allotment		over-allotment
Underwriting discount	$	.60	$	1,200,000	$	1,380,000
Non-accountable expense allowance		.15		300,000		310,000

     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. We have been advised by the underwriter that it has no present intention and there are no agreements or understandings, explicit or tacit, relating to the early release of the locked-up shares.

     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, 2004, 2005 and 2006 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.

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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, 2005 and December 31, 2006	F-2
Consolidated Statement of Operations for the years ended December 31, 2003, 2004, 2005
and 2006	F-3
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2003, 2004,
2005 and 2006 and for the nine month period ended September 30, 2006	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004, 2005
and 2006	F-5
Notes to Consolidated Financial Statements	F-6-16
Allison’s Gourmet Kitchens, Limited Partnership
Financial Statements
Report of Independent Registered Public Accounting Firm	F-17
Balance Sheets at December 31, 2004 and 2005, and 2006	F-18
Statement of Operations for the years ended December 31, 2003, 2004, 2005 and 2006	F-19
Statement of Partners’ Equity for the years ended December 31, 2003, 2004, 2005 and 2006	F-20
Statements of Cash Flows for the years ended December 31, 2003, 2004, 2005 and 2006	F-21
Notes to Financial Statements	F-22
Pro Forma Combined Financial Statements
Balance Sheets at December 31, 2006	F-31
Statements of Operations for the year ended December 31, 2006	F-32

62

Cole & Reed

Independent Auditors’ Report

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, 2005 and 2006, and the related consolidated statements of operations, shareholders’ equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 2006. 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 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, 2005 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

/s/ Cole & Reed, P.C.

Cole & Reed, P.C.

Oklahoma City, Oklahoma
March 12, 2007

531 Couch Dr. Suite 200	TEL 405.239.7961	RSM McGladrey Network
Oklahoma City, OK	FAX 405.235.0042	An Independently Owned Member
73102-2251	WEB www.coleandreed.com

F-1

Vaughan Foods, Inc.

Consolidated Balance Sheets

	December 31,			December 31,
	2005			2006
ASSETS
Current assets:
Cash and cash equivalents	$	36,163		$	868,377
Accounts receivable, net of allowance for doubtful accounts of
$90,502 at December 31, 2004, $106,682 at December 31, 2005
and $42,867 at September 30, 2006		3,164,644			3,414,843
Accounts receivable, related party		335,666			144,243
Inventories		725,578			631,674
Prepaid expenses and other assets		67,700			79,793
Bridge loan asset, net of amortization		—			562,500
Deferred tax assets		40,539			24,717
Total current assets		4,370,290			5,726,147
Restricted assets:
Cash		80,471			270
Investments		1,950,580			597,181
Certificate of deposit		256,000			250,000
Total restricted assets		2,287,051			847,451
Property and equipment, net		9,836,262			13,102,988
Other assets:
Assets held for sale		40,000			40,000
Loan origination fees, net of accumulated amortization		436,465			516,410
Deferred tax assets, noncurrent		—			202,119
Deferred cost of public offering		—			566,955
Total other assets		476,465			1,325,484
TOTAL	$	16,970,068		$	21,002,070
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,692,648		$	4,221,635
Accounts payable, related party		—			69,502
Line of credit		2,314,294			2,726,578
Short-term borrowings		—			3,000,000
Bridge funding liability		—			1,125,000
Accrued liabilities		990,432			1,011,985
Current portion of long-term debt		690,308			606,885
Current portion of capital lease obligation		162,804			172,370
Total current liabilities		6,850,486			12,933,955
Long term liabilities:
Long-term debt, net of current portion		8,728,940			8,187,067
Capital lease obligation, net of current portion		649,337			479,618
Deferred tax liability		135,367			—
Total long-term liabilities		9,513,644			8,666,685
Stockholders’ equity (deficiency):
Common stock, $0.001 par value; authorized 50,000,000 shares;
5,000,000 shares issued and outstanding (2,777,778) shares issued
and outstanding at December 31, 2005 and 2004 and September 30, 2006.		2,778			2,778
Preferred stock, $0.001 per value; authorized 5,000,000 shares; 0 shares;
issued and outstanding at December 31, 2005 and 2004 and
September 30, 2006.		—			—
Paid in Capital		413,215			413,215
Member Capital (deficit)		(12,839	)		(22,921	)
Retained earnings (deficit)		202,784			(991,642	)
Total stockholders’ equity (deficiency)		605,938			(598,570	)
TOTAL	$	16,970,068		$	21,002,070

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

F-2

Vaughan Foods, Inc.

Consolidated Statements of Operations

	Year Ended December 31,
		2004			2005			2006
Net sales	$	36,133,015		$	44,730,265		$	51,277,371
Cost of sales		29,903,140			37,976,138			45,082,176
Gross profit		6,229,875			6,754,127			6,195,195
Selling, general and administrative expenses		5,408,311			6,432,569			6,479,920
Operating income		821,564			321,558			(284,725	)
Rent income		196,257			295,593			339,222
Interest expense		(495,793	)		(1,106,052	)		(1,616,980	)
Interest and other income		12,256			88,180			50,332
Other income and expense, net		(287,280	)		(722,279	)		(1,227,426	)
Earnings (loss) before income taxes		534,284			(400,721	)		(1,512,151	)
Income tax (benefit)		191,981			(159,667	)		(307,643	)
Net income (loss)	$	342,303		$	(241,054	)	$	(1,204,508	)
Weighted average shares outstanding –
basic and diluted		2,777,778			2,777,778			2,777,778
Net income (loss) per share –
basic and diluted	$	0.12		$	(0.09	)	$	(0.43	)

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

F-3

Vaughan Foods, Inc.

Consolidated Statements of Shareholders’ Equity (Deficiency)

													Total
							Member			Retained			Stockholder’s
	Common Stock				Paid in		Capital			Earnings			Equity
	Shares issued	Amount			Capital		(Deficit)			(Deficit)			(Deficiency)
Balance at December 31, 2004	2,777,778	$	2,778	$	413,215	$	89,993		$	163,108		$	669,094
Net income (loss)	—		—		—		(9,496	)		351,799			342,303
Dividends	—		—		—		—			(55,000	)		(55,000	)
Balance at December 31, 2004	2,777,778		2,778		413,215		80,497			459,907			956,397
Net income (loss)	—		—		—		16,069			(257,123	)		(241,054	)
Dividends	—		—		—		(109,405	)		—			(109,405	)
Balance at December 31, 2005	2,777,778		2,778		413,215		(12,839	)		202,784			605,938
Net loss	—		—		—		(10,082	)		(1,194,426	)		(1,204,508	)
Balance at December 31, 2006	2,777,778	$	2,778	$	413,215	$	(22,921	)	$	(991,642	)	$	(598,570	)

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

F-4

Vaughan Foods, Inc.

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2004			2005			2006
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings (loss)	$	342,303		$	(241,054	)	$	(1,204,508	)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization		685,841			1,003,563			1,724,816
Provision for bad debts		244,659			61,363			63,966
Gain on disposal of property and equipment		(7,552	)		(21,323	)		3,931
Loss on impairment of property and equipment		63,230			—			—
Deferred income taxes		155,210			(159,667	)		(307,643	)
Changes in operating assets and liabilities:
Accounts receivable		(942,969	)		(302,643	)		(310,235	)
Accounts receivable – Related party		(64,826	)		(190,918	)		191,423
Inventories		(87,960	)		(38,148	)		93,903
Prepaid expenses and other assets		21,111			59,604			(12,093	)
Income taxes receivable		(28,228	)		—			—
Other assets		80,124			10,685			—
Accounts payable		743,851			(778,032	)		1,514,968
Accounts payable, related party		—			—			69,502
Accrued liabilities		202,307			368,712			21,554
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES		1,407,101			(227,858	)		1,849,584
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payments received on notes receivable		110,314			25,000			—
Cash paid for property and equipment		(3,321,573	)		(1,610,766	)		(4,371,223	)
Proceeds from sale of property and equipment		33,797			109,405			34,604
Loan proceeds deposited to restricted asset accounts		(3,965,204	)		—			—
Restricted assets		—			(129,435	)		(15,893	)
Distributions from restricted assets		—			1,884,566			1,451,564
Purchase of restricted certificate of deposit		—			(256,000	)		—
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES		(7,142,666	)		22,770			(2,900,948	)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments of loan origination fees		(500,599	)		—			(176,300	)
Cash paid for deferred public offering expense		—			—			(566,955	)
Proceeds from line of credit		2,814,663			2,314,294			500,000
Repayments on line of credit		(2,116,833	)		(1,771,743	)		(87,716	)
Proceeds from short-term borrowings		—			—			3,000,000
Proceeds from long-term debt		6,838,593			527,555			90,140
Repayment of long-term debt and capital leases		(962,619	)		(1,457,832	)		(875,591	)
Due from stockholders		(65,927	)		65,927			—
Repayment of amounts due to stockholders		(30,380	)		(10,751	)		—
Distributions to limited liability company members		—			(109,405	)		—
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES		5,976,898			(441,955	)		1,883,578
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS		241,333			(647,043	)		832,214
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD		441,873			683,206			36,163
CASH AND CASH EQUIVALENTS AT
END OF PERIOD	$	683,206		$	36,163		$	868,377
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest paid, net of capitalized interest	$	482,976		$	1,023,731		$	1,055,446
Income taxes	$	65,000		$	—		$	—
Supplemental disclosures of noncash
financing and investing activities:
Property and equipment acquired under capital
lease obligations	$	309,238		$	—		$	—
Repayment of stockholder advances through
declaration of dividends	$	55,000		$	—		$	—
Bridge funding liability	$	—		$	—		$	1,125,000

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

F-5

Vaughan Foods, Inc.

Notes to Consolidated Financial Statements

(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 which 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 18 to the consolidated financial statements.

(c) 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.

(d) Accounts Receivable and Credit Policies

Trade accounts receivable are customer obligations due under normal trade terms generally requiring payment within 15 to 21 days from the invoice date. Receivables are recorded based on the amounts invoiced to customers. Interest and delinquency fees are not generally assessed and, if they are assessed, are not included in income or trade accounts receivables until realized in cash. Discounts allowed for early payment, if any, are charged against income when the payment is received. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are 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, 2004 and 2005, the Company increased the valuation allowance with charges to bad debt expense totaling approximately $245,000 and $61,000, respectively. During the year ended December 31, 2006, the Company reduced the valuation allowance approximately $42,000.

A lien exists on certain receivables related to fresh produce under the Perishable Agricultural Commodities Act of 1930, which partially subordinates the lien placed by the line of credit.

(e) Inventories

Inventories consist principally of food products and are stated at the lower of average cost (which approximates first-in, first-out) or market. Costs included in inventory consist of materials, packaging supplies, and labor. General and administrative costs are not charged to inventory.

F-6

Vaughan Foods, Inc.

Notes to Consolidated Financial Statements

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

(f) 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 the straight-line method over the following estimated useful lives:

Plant and improvements	15 - 40 years
Machinery and equipment	5 - 15 years
Transportation equipment	3 - 10 years
Office equipment	5 - 7 years

(g) 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.

(h) Revenue Recognition

The Company recognizes revenue, net of related sales discounts and allowances, when persuasive evidence of an arrangement exists (such as a customer purchase order), delivery has occurred, our price to the customer has been fixed or is determinable, and collectibility is reasonably assured. Revenues also include those amounts related to shipping and handling. Shipping and handling expenses are included in cost of goods sold. Consideration from the company to a retailer is presumed to be a reduction of the company’s selling price of its products and, therefore, is 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, at the time in which the sale is recognized.

(i) Accounting for Rebates

The Company establishes reserves for rebates based on specific programs, expected usage and historical experience.

(j) 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.

(k) 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.

F-7

Vaughan Foods, Inc.

Notes to Consolidated Financial Statements

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

(k) Earnings (Loss) Per Share - Continued

The Company has agreed to issue shares of common stock in connection with its short-term borrowing when any initial public offering is consummated. The details of this agreement are described in Note 8. The Company has not included these shares in diluted earnings per share because the shares have not yet been issued and due to the Company’s net loss for the period the effects of inclusion would (even if issued) be anti-dilutive.

(l) 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. This loss is included in the selling, general and adminis-traive expenses in the consolidated statements of operations.

(m) 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.

(n) Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are measured at cost which approximates 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.

(o) 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 2004, 2005 and 2006. Realized gains and losses on sales of securities are based on the specific identification method. Declines in the fair value of investment securities below their carrying value that are other than temporary are recognized in earnings. As of December 31, 2006, the Company’s investments consisted entirely of guaranteed investment contracts at a fixed interest rate of 2.25 percent.

(p) Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, and Related Implementation Issues” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a Company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 is effective as of the beginning of fiscal years that begin after December 15, 2006. The Company is evaluating its uncertain tax positions and does not expect the interpretation will have a material impact on its financial position, results of operations or cash flows.

F-8

Vaughan Foods, Inc.

Notes to Consolidated Financial Statements

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

(p) Recently Issued Accounting Pronouncements - Continued

In September of 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which provides companies an option to report selected financial assets and liabilities at fair value. SFAS No. 159 requires companies to provide information helping financial statement users to understand the effect of a company’s choice to use fair value on its earnings, as well as to display the fair value of the assets and liabilities a company has chosen to use fair value for on the face of the balance sheet. Additionally, SFAS No. 159 establishes presentation and disclosure requirements designed to simplify comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on its consolidated financial statements.

In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The adoption of SAB No. 108 did not have an effect on the Company’s consolidated financial statements.

(q) Reclassifications

Certain amounts in the 2004 and 2005 financial statements have been reclassified to conform to the 2006 presentation.

(r) Stock Dividend

On September 30, 2006, the Company’s board of directors approved a 3,472.2225 share stock dividend of common stock (accounted for as a stock split). As a result stockholders received 3,471.2225 shares of stock for each share held as of September 30, 2006.

(s) Change in par value

On September 30, 2006 the par value of the Company’s common stock was reduced to $0.001 per share. The Company retroactively restated the common stock and paid-in-capital accounts.

(3) Inventories

A summary of inventories follows:
	December 31,		December 31,
	2005		2006
Raw Materials and Supplies	$	625,173	$	543,787
Finished Goods		100,405		87,887
Total Inventory	$	725,578	$	631,674

F-9

Vaughan Foods, Inc.

Notes to Consolidated Financial Statements

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

		December 31,		December 31,
		2005		2006
	Project construction account	$	1,445,834	$	270
	Debt reserve account		510,372		525,620
	Interest fund account		70,916		71,391
	Principal fund account		—		170
	Accrued interest receivable		3,929		—
	Certificate of deposit		256,000		250,000
	Total Restricted Assets	$	2,287,051	$	847,451
(5)	Property and Equipment
	Property and equipment, at cost, consists of the following:
		December 31,		December 31,
		2005		2006
	Land	$	199,762	$	199,762
	Plant and improvements		5,919,477		5,919,477
	Machinery and equipment		4,640,603		4,685,688
	Transportation equipment		1,948,712		2,000,913
	Office equipment		63,382		78,382
	Construction in progress		389,393		4,598,530
			13,161,329		17,482,752
	Less accumulated depreciation		3,325,067		4,379,764
	Net Property, Plant and Equipment	$	9,836,262	$	13,102,988
(6)	Assets Held for Sale
	Assets held for sale, at cost, net of impairments, consists of the following:
		December 31,		December 31,
		2005		2006
	Plant and improvements, Stroud, Oklahoma	$	40,000	$	40,000

F-10

Vaughan Foods, Inc.

Notes to Consolidated Financial Statements

(7) Line of Credit

At December 31, 2005 and 2006, the Company had a $4,000,000 secured bank line of credit, due on October 31, 2006, providing for interest at Wall Street Journal prime plus 0.75%, with an initial rate of 6.75% . The line of credit was secured by accounts receivable, inventory and general intangibles. At December 31, 2005 and 2006, short-term borrowings under the line were $2,314,294 and $2,726,578, respectively. The line of credit contains certain financial covenants which replicate those covenants of the Cleveland County Industrial Authority Bond Issue. The Company was out of compliance with some of the covenants. The Company has not obtained a waiver of the financial covenants. See note 9 for terms of Cleveland County Industrial Authority Bonds.

In December 2006, the Company reached an informal agreement with the lender, subject to credit approval of the Company and the execution of a formal note extension agreement, to extend the line until April 30, 2007. Under the terms of the proposed extension, the maximum amount that could be borrowed under the line would be fixed at $2,726,578 and a new financial covenant would be added providing that if subsequent monthly collateral valuations are less than the value of the collateral at November 30, 2006. The borrower would immediately be deemed to be in default without any available grace period to cure such default. Further, the interest rate on borrowed funds under the line will increase from 0.75% over the specified prime rate to 2% over that prime rate and the Company would be required to pay the lender a 1% extension fee on borrowed funds on the execution of the extension agreement and a 2% extension fee on borrowed funds on the earlier of the maturity date or the completion of the Company’s pending initial public offering (See Note 11).

(8) Short-term Borrowings

The Company entered into 10% secured subordinated promissory notes on July 17, 2006 for a maximum of $2,000.000. The notes are secured by the pledge by certain partners of 60% of the limited partnership interests in Allison’s Gourmet Kitchens, LP. The entire principal amount of the notes and all accrued and unpaid interest thereon is due and payable on the earlier of June 30, 2007 (the “Maturity Date”), or the third business day following the completion of an underwritten public offering or a private placement by the Company resulting in gross proceeds of $5 million or more (a “Qualified Offering’). The notes are subordinate to all other existing indebtedness of the Company. Borrowings under these notes were $2,000,000 at December 31, 2006. As additional consideration for their purchase of notes, each purchaser of $1,500,000 principal amount of notes (“First Notes”) 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. Further, the holders of notes totaling $500,000 which are junior to First Notes (“Junior Notes”) are to receive that number of equity securities to be issued having a value of 75% of the notes purchased by that investor. Proceeds of the note will be used to complete construction of the addition to the existing facility. The liability for additional compensation of $1,125,000 is shown as Bridge Funding liability on the accompanying balance sheet. In addition to the liability, an intangible asset related to the loan origination was recorded in the original amount of $1,125,000, net of amortization of $562,500 in the accompanying balance sheet. At December 31, 2006, the carrying amount of this intangible asset was $562,500. The amortization of this intangible asset is recorded as interest expense in the consolidated statements of operations. The number of shares to be issued using the expected offering price of $7.50 is 150,000.

If a Subsequent Offering has not been consummated by the Maturity Date and the notes have been repaid on or before the Maturity Date, then on such date, the Company shall deliver to each investor such number of shares of its common stock as shall equal the result obtained by dividing one-half (50%) of the original principal amount of the First Notes and by dividing three-quarters (75%) of the original principal amount of the Junior Notes by $4.00. The number of shares to be issued under this provision would be 281,250. If the Company has not repaid the Secured Notes by that time, the investors will receive an aggregate of 500,000 shares of the Company’s common stock.

If a Subsequent Offering has not been consummated by the Maturity Date and the notes have not been repaid on or before the Maturity Date, then on such date the Company shall deliver to each investor such number of shares of its common stock as shall equal the result obtained by dividing 100% of the original principal amount of the Note purchased by such investor in this offering by $4.00. The number of shares to be issued under this provision would be 500,000.

F-11

Vaughan Foods, Inc.

Notes to Consolidated Financial Statements

(8) Short-term Borrowings - (Continued)

The Company agreed to enter into a 10% non-secured promissory note on September 21, 2006 for a maximum of $1,000,000. The maturity date is the earlier of April 30, 2007, or the consummation of any initial public offering consummated before the maturity date. Borrowings under this note were $1,000,000 at December 31, 2006. This note is payable to the underwriter with whom the Company is working on its initial public offering (see Note 11).

(9) Long-Term Debt and Capital Lease Obligation

Long-term debt consists of the following:

	December 31,		December 31,
	2005		2006
7.75 - 8.10% Cleveland County
Industrial Revenue Bonds
secured by real property
final payment due December 1, 2024	$	5,000,000	$	4,690,000
5.75 - 9.00% Real estate loans
secured by real property
final payments due August 1, 2028
and July 22, 2009		3,579,325		3,518,267
6.50 - 7.00% Equipment loans
secured by various manufacturing equipment
final payments due from 2007 thru 2008		124,654		43,552
4.75 - 6.50% Vehicle loans
secured by various transportation equipment
final payments due from 2008 thru 2010		435,626		299,547
Consolidated entity:
8.00 - 10.00% Equipment loans
secured by aircraft
final payments due November 30, 2007
and April 25, 2019		279,643		242,586
Total debt		9,419,248		8,793,952
Less current portion		690,308		606,885
Net long-term debt	$	8,728,940	$	8,187,067

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 notice given to Beneficial Owners quarterly for each of the previous four quarters. If the Debt Service coverage ratio reported for each of the previous four quarters is less than 1.50 to 1.00 the Company is required to retain a consultant. For the year ended December 31, 2006, the Company’s Debt Service Coverage ratio is 0.42 to 1.00. The trustee has not required the Company to retain a consultant.

Current Ratio: The Company is required to maintain a current ratio 1.10 to 1.00 calculated as of the last day of each calendar quarter beginning after January 1, 2006. As of December 31, 2006, the Company’s current ratio is 0.41 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, 2006, the Company’s debt to equity ratio could not be calculated due to a negative equity balance.

Accounts Payable: The Company agrees that not more than 20% of its accounts payable shall be in excess of 90 days past due. The Company is in compliance with this covenant as of December 31, 2006.

F-12

Vaughan Foods, Inc.

Notes to Consolidated Financial Statements

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

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, 2006.

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 has resulted 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,
	2005		2006
8.95 - 9.19% Equipment leases	$	812,141	$	651,988
Total debt		812,141		651,988
Less current portion		162,804		172,370
Net long-term debt	$	649,337	$	479,618
Annual Debt Service Requirements

The annual principal payment requirements to maturity, for long-term debt and capital leases at December 31, 2006 are as follows:

Year Ending			Capital Lease
December 31,	Long-Term Debt		Obligation		Total
2007	$	606,885	$	172,370	$	779,255
2008		520,349		184,983		705,332
2009		674,634		201,409		876,043
2010		123,660		93,226		216,886
2011		510,632		—		510,632
2012 - 2028		6,357,792		—		6,357,792
Principal outstanding at
December 31, 2006	$	8,793,952	$	651,988	$	9,445,940

During the years ended December 31, 2004, 2005 and 2006, total interest costs were $495,793, $1,106,052 and $1,846,390, respectively. The amount of interest costs capitalized to construction projects during the years ended December 31, 2004, 2005 and 2006 were $0.00, $0.00, and $229,410, respectively.

(10) Accrued Liabilities

A summary of accrued liabilities follows:

	December 31,		December 31,
	2005		2006
Accrued compensation	$	195,261	$	179,379
Accrued rebates		419,821		403,071
Accrued promotions/incentives		74,612		41,102
Accrued worker’s compensation		41,749		158,976
Accrued interest expense		105,467		156,420
Accrued property taxes		—		32,522
Accrued payroll taxes		153,522		40,515
Total Accrued Liabilities	$	990,432	$	1,011,985

F-13

Vaughan Foods, Inc.

Notes to Consolidated Financial Statements

(11) Pending Initial Public Offering

The Company has signed a letter of intent with an Underwriter to raise approximately $12.5 million, after expenses, on a “Firm Commitment” basis. The Company intends to issue approximately 2.0 million units consisting of one share of common stock and one class A warrant and one class B warrant. The proceeds from the offering are expected to be used to, (i) acquire the partnership interests in Allison’s Gourmet Kitchens, LP (for $2.5 million), (ii) repay a short-term borrowing which has been used to complete the extension of our existing facility ($2.0 million), (iii) construct or acquire one or more new facilities ($2.4 million), (iv) repay the bank line of credit and other indebtedness ($4.4 million), and (iv) increase our working capital ($1.2 million).

(12) Income Taxes

Income tax expense (benefit) for the years ended December 31, 2004, 2005 and 2006, consist of the following:

	December 31,
	2004			2005			2006
Current:
Federal	$	36,771		$	—		$	—
State		—			—			—
		36,771			—			—
Deferred:
Federal		185,663			(135,156	)		(303,323	)
State		(30,453	)		(24,511	)		(4,320	)
		155,210			(159,667	)		(307,643	)
Total	$	191,981		$	(159,667	)	$	(307,643	)
Deferred tax assets (liabilities) are as follows:
					December 31,			December 31,
					2005			2006
NOL Carryforward				$	256,712		$	613,749
Oklahoma Job/Investment Credits					131,116			99,737
Depreciation					(547,223	)		(535,394	)
Other					64,567			48,744
Net deferred tax asset (liability)				$	(94,828	)	$	226,836
Current portion				$	40,539		$	24,717
Non-current portion					(135,367	)		202,119
				$	(94,828	)	$	226,836

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 carry-back period.

F-14

Vaughan Foods, Inc.

Notes to Consolidated Financial Statements

(12) Income Taxes - (Continued)

As of December 31, 2006, the Company has a net operating loss carryfoward of $1,615,128 which, if unused, will commence expiring in 2018 and state new jobs/investment credit carryforwards totaling $ 99,737 which, if unused, will commence expiring in 2007. At December 31, 2006, $33,000 of state new jobs/investment credit car-ryforwards expired. If unused, $12,170 of credits will expire on December 31, 2007.

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,
	2004			2005			2006
Computed “expected” income taxes	$	181,657		$	(136,245	)	$	(514,131	)
State income taxes, net of federal
income tax		32,057			(23,422	)		(16,141	)
Permanent difference due to
amortization of equity transactions		—			—			(191,250	)
Utilization of net operating loss
carryforwards against current
income		(21,733	)		—			—
State new jobs/investment credits		—			—			31,379
	$	191,981		$	(159,667	)	$	(307,643	)

(13) 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:

2007	$	340,064
2008		310,591
2009		137,798
2010		68,001
2011		15,225
	$	871,679

During the years ended December 31, 2004, 2005 and 2006, lease expense under operating leases was $425,359, $597,327 and $709,269, respectively.

(14) 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 2004, 2005 and 2006, were $7,801, $7,996 and $6,537, respectively.

In August 2006, the Company adopted a stock option plan providing for potential awards of up to $1,000,000 shares. No shares have been issued under the plan.

(15) 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-15

Vaughan Foods, Inc.

Notes to Consolidated Financial Statements

(16) 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. The Company provides a discounted price for products sold to Allison’s Gourmet Kitchens, LP for use as ingrediants in the partnership’s products. All other transactions between the companies are at fair market value. During the years ended December 31, 2004, 2005 and 2006, the Company’s sales, including freight services, to the Partnership and purchases from the Partnership were as follows:

	2004		2005		2006
Sales to Partnership	$	429,997	$	726,769	$	820,602
Freight Revenue from Partnership	$	356,060	$	579,673	$	541,618
Purchases from Partnership	$	761,077	$	602,520	$	603,211

At December 31, 2005 and 2006, trade accounts receivable includes $30,995, and $41,882 respectively, from the Partnership. Accounts Payable related to purchases from the Partnership were $0 and $69,502 at December 31, 2005 and 2006, 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 $196,257, $295,593 and $339,222 under this lease during the years ended December 31, 2004, 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 $109,558, $195,390 and $239,770 for the years ended 2004, 2005 and 2006, respectively. At December 31, 2005 and 2006, the Company was owed $304,671 and $102,361 in outstanding reimbursements from the Partnership, respectively. These amounts are included in Accounts receivable, related party in the accompanying balance sheet.

The Company receives reimbursement from the Partnership for services provided by staff in relation to administration, sales and other in the amounts of $136,585, $212,195 and $207,689 for the years ended 2004, 2005 and 2006, respectively.

(17) 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, 2006 which would have a material adverse effect on its financial position, results of operations or liquidity.

(18) 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, 2006 and 2005 as follows:

	December 31,		December 31,
	2005		2006
Total Assets	$	266,804	$	219,665
Total Liablities	$	279,643	$	242,586

F-16

Cole & Reed

Independent Auditors’ Report

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

We have audited the accompanying consolidated balance sheets of Allison’s Gourmet Kitchens, Limited Partnership as of December 31, 2005 and 2006, and the related consolidated statements of operations, partners’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. 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 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, 2005 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

/s/ Cole & Reed, P.C.

Cole & Reed, P.C.

Oklahoma City, Oklahoma
March 12, 2007

531 Couch Dr. Suite 200	TEL 405.239.7961	RSM McGladrey Network
Oklahoma City, OK	FAX 405.235.0042	An Independently Owned Member
73102-2251	WEB www.coleandreed.com

F-17

Allison’s Gourmet Kitchens, Limited Partnership

Consolidated Balance Sheets

	December 31,		December 31,
	2005		2006
				(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	600,498	$	1,321,967
Accounts receivable, net of allowance for doubtful
accounts of $35,462 at December 31, 2005 and $22,177
at December 31, 2006		665,728		1,448,731
Accounts receivable, related party		—		69,502
Inventories		565,873		962,134
Prepaid expenses		9,601		26,976
Total current assets		1,841,700		3,829,310
Property and equipment, net		945,699		2,692,165
Other assets:
Loan origination fees, net of amortization		—		7,363
Intangible asset		34,976		231,619
TOTAL		2,822,375		6,760,457
LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
Line of credit		—		253,995
Accounts payable		407,630		887,364
Accounts payable, related party		335,666		144,243
Accrued liabilities		328,153		369,006
Current portion of long-term debt		91,209		338,380
Current portion of capital lease obligation		66,719		3,419
Amounts payable to former owners of Wild About Food		—		350,000
Total current liabilities		1,229,377		2,346,407
Long-term debt, net of current portion		80,930		2,063,937
Amounts payable to former owners of Wild About Food,
net of current portion		0		120,605
Capital lease obligation, net of current portion		123,664		4,124
Total long-term liabilities		204,594		2,188,666
Partners’ Equity:
Limited partners’ equity		1,374,515		2,203,125
General partner’s equity		13,889		22,259
Total partners’ equity		1,388,404		2,225,384
TOTAL	$	2,822,375	$	6,760,457

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

F-18

Allison’s Gourmet Kitchens, Limited Partnership

Consolidated Statements of Operations

	Year Ended December 31,
	2004		2005		2006
Net sales	$	9,173,248	$	13,110,516	$	20,031,808
Cost of sales		6,951,176		9,845,433		15,302,897
Gross profit		2,222,072		3,265,083		4,728,911
Selling, general and administrative
expenses		1,357,793		2,021,227		3,178,580
Management fee — General partner		249,917		335,083		297,160
Selling, General and Administrative
expenses		1,607,710		2,356,310		3,475,740
Operating income		614,362		908,773		1,253,171
Interest expense		31,827		11,236		83,736
Net earnings	$	582,535	$	897,537	$	1,169,435

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

F-19

Allison’s Gourmet Kitchens, Limited Partnership

Consolidated Statement of Partners’ Equity

							Total
	Limited			General			Partners’
	Partner			Partner			Equity
Balance at January 1, 2004	$	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	$	1,374,515		$	13,889		$	1,388,404
Distributions to general partner		—			(3,325	)		(3,325	)
Distributions to limited partners		(329,130	)		—			(329,130	)
Net income applicable to the period from
January 1, 2006 to December 31, 2006		1,157,740			11,695			1,169,435
Balance at December 31, 2006	$	2,203,125		$	22,259		$	2,225,384

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

F-20

Allison’s Gourmet Kitchens, Limited Partnership

Statements of Cash Flows

	Year Ended December 31,
	2004			2005			2006
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings	$	582,535		$	897,537		$	1,169,435
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization		76,120			104,019			144,301
Provision for bad debt		—			—			6,612
Changes in assets and liabilities:
Accounts and notes receivable		(792,394	)		373,006			(763,437	)
Accounts receivable, related party		—			—			(69,502	)
Inventories		(305,265	)		6,437			(265,302	)
Prepaid Expenses		—			(9,601	)		(17,375	)
Disbursements in transit		42,023			(42,023	)		—
Accounts payable		358,740			(89,298	)		292,473
Accounts payable, related party		29,512			190,918			(191,423	)
Accrued liabilities		76,468			173,699			6,191
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES		67,739			1,604,694			311,973
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payments received on notes receivable		—			—			—
Cash paid for property and equipment		(278,129	)		(457,880	)		(1,344,990	)
Cash paid for intangible assets		—			—			—
NET CASH USED IN INVESTING
ACTIVITIES		(278,129	)		(457,880	)		(1,344,990	)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Partner distributions		—			(478,449	)		(332,455	)
Payments of loan origination fees		—			—			(7,661	)
Proceeds from line of credit		450,750			—			1,370,457
Repayments of line of credit		(450,750	)		—			(1,008,815	)
Payments on long-term debt and capital leases		(104,603	)		(163,498	)		(452,398	)
Proceeds of long-term debt		210,659			95,631			2,185,358
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES		106,056			(546,316	)		1,754,486
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS		(104,334	)		600,498			721,469
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD		104,334			—			600,498
CASH AND CASH EQUIVALENTS AT
END OF PERIOD	$	—		$	600,498		$	1,321,967
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest paid, net of capitalized interest	$	30,097		$	24,566		$	92,671
SUPPLEMENTAL DISCLOSURES OF
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of Property and Equipment
through assumption of
Long-term debt and other liabilities	$	—		$	—		$	522,647
Acquisition of Inventory through assumption of
debt and other liabilities	$	—		$	—		$	130,958

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

F-21

Allison’s Gourmet Kitchens, Limited Partnership

Notes to Consolidated Financial Statements

(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 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 created to acquire certain assets (net of liabilities assumed – see Note 16). Allison’s owns 100% of Wild About Food – Oklahoma. All inter-company transactions and balances have been eliminated in consolidation.

(c) 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 personal income tax liability.

(d) 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.

(e) Accounts Receivable and Credit Policies

Trade accounts receivable are customer obligations due under normal trade terms generally requiring payment within 15 to 21 days from the invoice date. Receivables are recorded based on the amounts invoiced to customers. Interest and delinquency fees are not generally assessed and, if they are assessed, are not included in income or trade accounts receivable until realized in cash. Discounts allowed for early payment, if any, are charged against income when the payment is received. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are 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. Allowances for uncollectible accounts have been recorded in the amount of $22,177 and $35,462 as of December 31, 2006 and 2005, respectively.

F-22

Allison’s Gourmet Kitchens, Limited Partnership

Notes to Consolidated Financial Statements

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

(f) Inventories

Inventories consist principally of food products and are stated at the lower of average cost (which approximates first-in, first-out) or market. Costs included in inventory consist of materials, packaging supplies, and labor. General and administrative costs are not charged to inventory.

(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 the straight-line method over the following estimated useful lives:

Equipment 7 - 10 years

(h) 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 apprpriate 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.

(i) 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.

An estimate for the value of intangible assets related to customer relationships was calculated by discounting projected earnings to the date of acquisition and recognized to the extent of the contingent liability of the excess purchase price.

(j) 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-23

Allison’s Gourmet Kitchens, Limited Partnership

Notes to Consolidated Financial Statements

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

(k) Revenue Recognition

The Partnership recognizes revenue, net of related sales discounts and allowances, when persuasive evidence of an arrangement exists (such as a customer purchase order), delivery has occurred, our price to the customer has been fixed or is determinable, and collectibility is reasonably assured. Revenues also include those amounts related to shipping and handling. Shipping and handling expenses are 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 at the time in which the sale is recognized.

(l) Accounting for Rebates

The Company establishes reserves for rebates based on specific programs, expected usage and historical experience.

(m) Concentrations of Credit Risk

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

(n) Recently Issued Accounting Pronouncements

In September of 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Partnership has not determined the effect, if any, the adoption of this statement will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which provides companies an option to report selected financial assets and liabilities at fair value. SFAS No. 159 requires companies to provide information helping financial statement users to understand the effect of a company’s choice to use fair value on its earnings, as well as to display the fair value of the assets and liabilities a company has chosen to use fair value for on the face of the balance sheet. Additionally, SFAS No. 159 establishes presentation and disclosure requirements designed to simplify comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Partnership has not determined the effect, if any, the adoption of this statement will have on its consolidated financial statements.

In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The adoption of SAB No. 108 did not have an effect on the Partnership’s consolidated financial statements.

F-24

Allison’s Gourmet Kitchens, Limited Partnership

Notes to Consolidated Financial Statements

(3)	Inventories
	A summary of inventories follows:
		December 31,		December 31,
		2005		2006
	Raw Materials and Supplies	$	487,413	$	742,609
	Finished Goods		78,460		219,525
	Total Inventory	$	565,873	$	962,134
(4)	Property and Equipment
	Property and equipment, at cost, consists of the following:
		December 31,		December 31,
		2005		2006
	Land	$	—	$	38,400
	Plant and improvements		—		225,519
	Office equipment		—		9,841
	Machinery and equipment		791,992		1,271,692
	Construction in progress		322,300		1,443,266
			1,114,292		2,988,718
	Less accumulated depreciation		168,593		296,553
	Net Property, Plant and Equipment	$	945,699	$	2,692,165
(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 December 31, 2006, short-term borrowings under this line of credit were $0. 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 December 31, 2006. At December 31, 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 December 31, 2006, short-term borrowings under this line of credit were $253,995. 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.

F-25

Allison’s Gourmet Kitchens, Limited Partnership

Notes to Consolidated Financial Statements

(6) Long-Term Debt and Capital Lease Obligation

Long-term debt consists of the following:

	December 31, 2005		December 31, 2006
8.75% Equipment loan
secured by manufacturing equipment
final payment due March 3, 2011	$	172,139	$	2,100,525
9.56% Equipment loans
secured by refrigeration equipment
final payment due May 1, 2021		—		152,720
9.56% Real estate loan
secured by real property
final payment due May 1, 2021		—		149,072
Total debt		172,139		2,402,317
Less current portion		91,209		338,380
Net long-term debt	$	80,930	$	2,063,937
Capital lease obligations consist of the following:
	December 31, 2005		December 31, 2006
Equipment leases	$	190,383	$	7,543
Total debt		190,383		7,543
Less current portion		66,719		3,419
Net long-term debt	$	123,664	$	4,124
Annual Debt Service Requirements

The annual principal payment requirements to maturity, for long-term debt and capital leases at December 31, 2006 are as follows:

Year Ending			Capital Lease Obligation
September 30,	Long-Term Debt				Total
2007	$	338,380	$	3,419	$	341,799
2008		369,294		4,124		373,418
2009		404,137		—		404,137
2010		441,691		—		441,691
2011		713,973		—		713,973
2012-2020		134,842				134,842
Principal outstanding at
December 31, 2006	$	2,402,317	$	7,543	$	2,409,860

During the years ended December 31, 2004, 2005 and 2006, total interest costs were $30,097, $24,566 and $123,873, respectively. The amount of interest costs capitalized to construction projects during the years ended December 31, 2004, 2005 and 2006 were $0.00, $0.00, and $31,202.

F-26

Allison’s Gourmet Kitchens, Limited Partnership

Notes to Consolidated Financial Statements

(7) Accrued Liabilities

A summary of accrued liabilities follows:

	December 31, 2005		December 31, 2006
Accrued compensation	$	160,257	$	137,725
Accrued rebates		145,427		201,818
Accrued interest expense		673		6,589
Accrued payroll taxes		21,796		14,925
Other accruals		—		7,949
Total Accrued Liabilities	$	328,153	$	369,006

(8) Amounts Payable to Former Owners of Wild About Foods, Inc.

The Partnership has current liabilities in the amount of $350,000 and long-term liabilities in the amount of $120,605, both of which are related to contingent payments to former owners of Wild About Foods, Inc. See note 16.

(9) 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 value of the asset at December 31, 2006 is $18,934. The Partnership amortizes the asset to expense over a period of five years. Amortization expense was $16,143, $16,143 and $16,143 for the years 2004, 2005 and 2006, respectively.

The Partnership holds an intangible asset, a customer relationship with a certain customer of Wild About Food-Oklahoma, LLC. The value of the relationship is $212,685 net of amortization of $7,920 at December 31, 2006. The Partnership amortizes the asset to expense over a period of five years. (See note 16).

(10) 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 $388 for the year ended December 31, 2004. The Partnership has elected to discontinue the plan. No contributions were made during the year ended December 31, 2005 and 2006.

(11) 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, and distributions are one (1) percent for the general partner and ninety-nine (99) percent for the limited partners.

(12) 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 December 31, 2006 which would have a material adverse effect on its financial position, results of operations or liquidity.

F-27

Allison’s Gourmet Kitchens, Limited Partnership

Notes to Consolidated Financial Statements

(13) 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 $196,567, $295,593 and $339,222 under this lease for the years ended December 31, 2004, 2005 and 2006 respectively.

(14) Major Customers

The Partnership has three customers that represent greater than 10% of their total sales, individually. Those customers represent 34%, 22% and 10% of total sales. A change in any one of these customer relationships could adversely affect the Partnership’s financial position.

Wild About Food has a significant customer which represents greater than 90% of the company’s total sales revenue. The customer relationship includes a renewable contract.

(15) Related Party Transactions

Vaughan Foods, Inc.

During the normal course of business, the Partnership purchases raw materials and freight services and sells finished products to Vaughan Foods, Inc. The Partnership enjoys a discounted price on raw material purchases from Vaughan Foods, Inc. in amount of approximately 5% to 10% in comparison with other customers of Vaughan Foods, Inc. All other transactions between the companies are at fair market value.

	2004	2005	2006
Raw materials purchases	$429,997	$726,769	$820,602
Freight purchases	$356,060	$579,673	$541,618
Finished product sales	$761,077	$602,520	$603,211

At December 31, 2005 and 2006, accounts payable-related party includes $30,995 and $41,882 respectively, due to Vaughan Foods, Inc. Accounts receivable related to finished product sales were $0 and $69,502 at December 31, 2005 and 2006, respectively.

The Partnership leases its facilities from Vaughan Foods, Inc. on an annual lease arrangement. The lease agreement provides for nine consecutive one year options to extend the lease agreement. The Partnership paid $196,257, $295,593 and $339,222 under this lease during the years ended December 31, 2004, 2005, and 2006 respectively. Vaughan Foods, Inc. 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 Vaughan Foods, Inc. of $109,558, $195,390 and $239,770 for the three years ended 2004, 2005 and 2006 respectively. At December 31, 2005 and 2006, the Partnership owed $304,671 and $102,361 in outstanding reimbursements to Vaughan Foods, Inc., respectively.

Vaughan Foods, Inc. receives reimbursement from Allison’s Gourmet Kitchens, LTD for services provided by staff in relation to administration, sales and other in the amounts of $136,585, $212,195 and $163,241 for fiscal 2004, 2005 and 2006, respectively.

F-28

Allison’s Gourmet Kitchens, Limited Partnership

Notes to Consolidated Financial Statements

(16) Acquisition of Wild About Food

Effective June 1, 2006, the Partnership acquired certain assets and assumed certain liabilities of Wild About Foods, Inc. and All For One, Inc. (together, “Wild”). Wild produces refrigerated food products for food service and retail customers. The purchase price was comprised of a cash payment of approximately $7,000, notes payable to the sellers totaling $250,000, assumption of (i) a mortgage loan of approximately $154,000, (ii) a line of credit loan of approximately $23,000, (iii) a capital lease of approximately $9,000, and (iv) accounts payable and other liabilities of approximately $236,000. Assets acquired amounted to cash and accounts receivable of approximately $25,000, inventory of approximately $131,000 and property and equipment of approximately $523,000. In addition, the acquisition provides for a contingent purchase price payment equal to 65% of operating income over and above $250,000, as defined, during the three-year period following the closing. For the six months ended December 31, 2006, the amount of additional consideration liability was $220,605, which is capitalized as intangible assets (value of customer relationship, net of amortization). The Partnership also entered into a three-year employment agreement with the previous owner. The financial statements of the Partnership for the year ended 2006 include the results of operations and cash flows of Wild About Food since the date of acquisition.

F-29

Vaughan Foods, Inc.
Unaudited Pro Forma Financial Statements

Basis of Presentation

Vaughan Foods, Inc., (“Vaughan”) and Allison’s Gourmet Kitchens, LP (“Allison’s”) are separate discrete entities with significant integration of operations. Three officers of Vaughan together with Herb Grimes are the owners of Allison’s and Allison’s uses Vaughan’s plant and facilities, distribution network and fleet of tractors and trailers. In addition, Allison’s uses Vaughan’s fresh cut produce in its products and the Companies share certain office, managerial and other personnel. The unaudited pro forma condensed consolidated financial statements give effect to the acquisition of Allison’s by Vaughan and consummation of the Offering as discussed below:

Acquisitions

Immediately prior to the closing of the offering, pursuant to agreements dated in May and June 2006, Vaughan has agreed to acquire, for nominal consideration , 60% of the limited partnership interests in Allison’s (a limited liability partnership), and will also acquire the remaining 40% of the limited partnerships and the general partnership interest in Allison’s for $2,500,000.

Initial Public Offering (the Offering)

The net proceeds to the Company from the sale of 2,000,000 units (composed of one share of Common Stock, one Class A and one Class B Warrant). Net proceeds, based upon an assumed initial public offering price of $7.50 per unit are estimated to be $12.5 million ($14.6 million if the Underwriters’ over-allotment option for an additional 300,000 units is exercised in full) after deducting the underwriting discount and estimated expenses of this offering. Of the net proceeds, $2.5 million will be used to pay for the acquisition of the interests in Allison’s, $2.0 million will be used to repay short-term borrowings, used for the completion of the expansion of the existing facility and $2.4 million will be used for construction or acquisition of a new production facility, approximately $4.4 million will be used to repay indebtedness with a weighted average interest rate of 8.6% . The remainder of the net proceeds ($1.2 million) will be used for working capital and general corporate purposes, including possible use in additional acquisitions. Pending the final allocation of the remainder, that portion of the proceeds will be invested in short term investments with an assumed interest rate of 5%. In addition, 150,000 shares will be issued pursuant to the agreement in connection with the short-term borrowings referred to above.

The unaudited pro forma condensed consolidated balance sheets give effect to the acquisition of Allison’s and the Offering as if they had occurred on December 31, 2006. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2006 give effect to these transactions as if they had occurred at January 1, 2006.

The Company believes that the accompanying unaudited pro forma consolidated financial information contains all the material adjustments necessary to fairly present its financial position as of December 31, 2006. The unau-dited pro forma financial information presented does not purport to be indicative of the financial position or operating results which would have been achieved had the acquisition taken place at the dates indicated and should not be construed as representative of the Company’s financial position or results of operations for any future date or period.

The unaudited pro forma adjustments are based on available information and upon certain assumptions that the Company believes are reasonable under the circumstances; however, the actual recording of the acquisition will be based on ultimate appraisals, evaluations and estimates of fair value. If these appraisals and evaluations identify assets with definable lives, the assets will be amortized over their expected useful lives. If any goodwill is recorded it will not be amortized. The Company will evaluate the relative fair market value of the intangible assets identified in its acquisition by estimating the future earnings streams of the related business lines and comparing the present value of the result of that estimation to the stated value of the related assets. Impairments, if any, will be charged to operations when identified.

F-30

Vaughan Foods, Inc. and Allison’s Gourmet Kitchens, LP

Unaudited Proforma Condensed Consolidated Balance Sheets
As of December 31, 2006

				Allison’s					Acquisition			Pro Forma
	Vaughan			Gourmet					and			Combined			Pro Forma
	Foods, Inc.			Kitchens, Inc.					Accounting			Post			IPO			Pro Forma
	Historical			Historical		Eliminations			Adjustments			Acquisition			Adjustments			Results
Current assets:
Cash and cash
equivalents	$	868,377		$	1,321,967							$	2,190,344					$	2,190,344
Cash investments, IPO									$	(2,500,000	) (a)		(2,500,000	)	$	8,117,550	(A)		5,617,550
Accounts receivable, net		3,414,843			1,448,731								4,863,574						4,863,574
Accounts receivable,
related party		144,243			69,502		(213,745	)					—						—
Inventories		631,674			962,134								1,593,808						1,593,808
Prepaid expenses and
other current assets		104,510			26,976								131,486						131,486
Bridge loan asset, net
of amortization		562,500											562,500			(562,500	)(B)		—
Total current assets		5,726,147			3,829,310		(213,745	)		(2,500,000	)		6,841,712			7,555,050			14,396,762
Restricted assets:
Cash and cash equivalents		270											270						270
Investments		597,181											597,181						597,181
Certificate of deposit		250,000											250,000						250,000
Total restricted assets		847,451					—			—			847,451			—			847,451
Property and equipment, net		13,102,988			2,692,165								15,795,153						15,795,153
Other assets:
Assets held for sale		40,000											40,000						40,000
Loan origination fees, net		516,410			7,363								523,773			(115,355	) (C)		408,418
Deferred tax assets,
non current		202,119											202,119						202,119
Deferred cost of public
offering		566,955											566,955			(566,955	) (D)		—
Intangible assets					212,685					750,085	(b)		962,770						962,770
Other					18,934								18,934						18,934
Total other assets		1,325,484			238,982		—			750,085			2,314,551			(682,310	)		1,632,241
TOTAL ASSETS	$	21,002,070		$	6,760,457	$	(213,745	)	$	(1,749,915	)	$	25,798,867		$	6,872,740		$	32,671,607
Accounts payable and
accrued expenses	$	5,233,620		$	1,606,370				$	159,671	(c)	$	6,999,661					$	6,999,661
Accounts payable,
related party		69,502			144,243		(213,745	)					—						—
Line of credit		2,726,578			253,995								2,980,573			(2,726,578	) (E)		253,995
Short-term borrowing		3,000,000											3,000,000			(3,000,000	) (E)		—
Bridge funding liability		1,125,000											1,125,000			(1,125,000	) (E)		—
Current portion of
long-term debt and
capital leases		779,255			341,799								1,121,054			(172,370	)(E)		948,684
Total current
liabilities		12,933,955			2,346,407		(213,745	)		159,671			15,226,288			(7,023,948	)		8,202,340
Long-term debt and
capital leases, net of
current portion		8,666,685			2,068,061								10,734,746			(479,618	)(E)		10,255,128
Other long-term liabilities					120,605								120,605						120,605
Deferred tax liability		—								315,799	(d)		315,799			500,412	(F)		816,210
Total long-term
liabilities		8,666,685			2,188,666		—			315,799			11,171,150			20,794			11,191,943
Total partners’ equity					2,225,384					(2,225,384	)(e)		—						—
Shareholders’ equity:
Common stock		2,778											2,778			2,150	(G)		4,928
Paid-in capital		413,215											413,215			13,055,895	(H)		13,469,110
Member capital (deficit)		(22,921	)										(22,921	)		—			(22,921	)
Retained earnings		(991,642	)										(991,642	)		817,849	(I)		(173,793	)
Total shareholders’
equity		(598,570	)				—			—			(598,570	)		13,875,894			13,277,324
TOTAL LIABILITIES
AND SHARE-
HOLDERS’ EQUITY	$	21,002,070		$	6,760,457	$	(213,745	)	$	(1,749,915	)	$	25,798,867		$	6,872,740		$	32,671,607

The accompanying notes to unaudited pro forma financial statements are an integral part of this financial statement

F-31

Vaughan Foods, Inc. and Allison’s Gourmet Kitchens, LP

Unaudited Proforma Condensed Consolidated Statements of Operations
For the Year Ended December 31, 2006

					Allison’s						Acquisition		Pro Forma
		Vaughan			Gourmet						and		Combined				Pro Forma
		Foods, Inc.			Kitchens, Inc.						Accounting		Post				IPO			Pro Forma
		Historical			Historical			Eliminations			Adjustments		Acquisition				Adjustments			Results
Net sales	$	51,277,371		$	20,031,808		$	(1,965,431	)	$			$	69,343,748					$	69,343,748
Cost of sales		45,082,176			15,302,897			(1,965,431	)				58,419,642							58,419,642
Gross profit		6,195,195			4,728,911			—			—		10,924,106				—			10,924,106
Selling, general and								447,459
administrative								(447,459	)		187,521	(b1)
expenses		6,479,920			3,178,580			(339,222	)		159,671	(b2)	9,666,470							9,666,470
Management fee —
general partner					297,160								297,160							297,160
Total selling, general and
administrative
expenses and
management fee		6,479,920			3,475,740			(339,222	)		347,192		9,963,630				—			9,963,630
Operating income		(284,725	)		1,253,171			339,222			(347,192	)	960,476				—			960,476
Rent income		339,222						(339,222	)				—							—
																	88,107	(B1)
																	562,500	(B2)
Interest expense		(1,616,980	)		(83,736	)							(1,700,716		)		386,754	(B3)		(663,355	)
Interest income													—				280,900	(B4)		280,900
Other, net		50,332											50,332							50,332
Total other income
and expense		(1,227,426	)		(83,736	)		(339,222	)				(1,650,384		)		1,318,361			(332,123	)
Earnings(loss) before
income taxes		(1,512,151	)		1,169,435			—			(347,192	)	(689,908		)		1,318,361			628,353
Income tax (benefit)/
expense		(307,643	)								315,799	(b3)	8,156				500,412	(B5)		508,568
Net income (loss)	$	(1,204,508	)	$	1,169,435		$	—		$	(662,991	)	$	(698,064	)	$	817,849		$	119,785
Weighted average
shares outstanding —
basic and diluted		2,777,778											2,777,778				2,150,000	)(B6)		4,927,778
Net income (loss) per
share — basic and
diluted	$	(0.43	)										$	(0.25	)				$	0.02

The accompanying notes to unaudited pro forma financial statements are an integral part of this financial statement

F-32

Vaughan Foods, Inc. and Allison’s Gourmet Kitchens, LP

Notes to Unaudited Pro Forma Condensed, Consolidated Financial Statements

1. Acquisition of Allison’s

Vaughan Foods, Inc. will acquire the partnership interests in Allison’s on the closing of the Offering. Allison’s uses Vaughan’s plant and facilities, distribution network and fleet of tractors and trailers. In addition, Allison’s uses Vaughan’s fresh cut produce in its products and the Companies share certain office, managerial and other personnel. The unaudited pro forma condensed consolidated financial statements give effect to the acquisition of Allison’s by Vaughan and the consummation of the Offering.

2. Basis of Consolidation

The unaudited pro forma condensed, consolidated financial statements give effect to the acquisition of Allison’s by Vaughan, the pro forma adjustments required by the acquisition, and the consummation of the Offering of 2,000,000 units (composed of one share of Common Stock, one Class A and one Class B Warrant).The Acquisition was accounted for using the purchase method of accounting. These statements are based on the historical financial statements of Vaughan and Allison’s and the estimates and assumptions as discussed in these footnotes.

3. Unaudited Pro Forma Balance Sheets and Statements of Operations — Acquisition and Accounting Adjustments

The following table sets forth the accounting adjustments required to reflect the acquisition of Allison’s by Vaughan and pro forma tax adjustments required to reflect a provision for taxes on the earnings of Allison’s (which was not taxed directly as a partnership). Based on management’s preliminary analysis, it is anticipated that the historical carrying value of the assets and liabilities of Allison’s will approximate fair value. The amount of Intangible Assets (value of customer relationship) is estimated to be $937,606. This amount will be reviewed for impairment as required and amortized over 5 years. Management has not currently identified any other material tangible or identifiable intangible assets of Allison’s to which a portion of the purchase could reasonably be allocated. Vaughan and Allison’s have a favorable oral transfer pricing agreement when operating as separate entities. The agreement provides for Allison’s to purchase raw materials from Vaughan at a price less than fair market value. As a consolidated entity, the pricing agreement would have no effect, In this connection the Company has recorded in selling, general and administrative expense approximately $160,000 representing a settlement of a favorable pricing agreement. The amount was calculated using the present value of the annual purchases under the agreement discounted using a rate that a company having a similar capital structure would realize.

     Acquisition and accounting adjustments

Pro Forma Adjustments to Unaudited Proforma Condensed, Consolidated Balance Sheets As of December 31, 2006

(a	)	Purchase price for Allison’s - $2,500,000
(b	)	Pro forma adjustment to record intangible asset (value of customer relationship) in connection with acquisition of Allison’s - $937,606 net of amortization of $187,521 - net amount of $750,085
(c	)	Pro forma adjustment to record settlement of favorable purchases agreement - $159,671
(d	)	Pro forma adjustment to set up tax provision related to earnings of Allison’s not taxed as a partner- ship - $443,917 less provision related to settlement of favorable purchases agreement - $60,611, and provision related to amortization of goodwill - $67,507, - net amount $315,799
(e	)	Pro forma adjustment to remove total partners’ equity of Allison’s - $2,225,384

Pro Forma Adjustments to Unaudited Proforma Condensed, Consolidated Income Statements For the year ended December 31, 2006

(b1	)	Pro forma adjustment to record amortization of intangible asset (value of customer relationship)
		($937,607 being amortized over 5 years) - $187,521
(b2	)	Pro forma adjustment to reflect settlement of favorable purchases agreement - $159,671
(b3	)	Pro forma adjustment to set up tax provision related to earnings of Allison’s not taxed as a partner-
		ship - $443,917 less provision related to settlement of favorable purchases agreement - $60,611, and
		provision related to amortization of goodwill - $67,507, - net amount $315,799

F-33

Vaughan Foods, Inc. and Allison’s Gourmet Kitchens, LP

Notes to Unaudited Pro Forma Condensed, Consolidated Financial Statements

4. Unaudited Pro Forma Balance Sheets and Statements of Operations — Initial Public Offering Adjustments

Pro Forma IPO Adjustments give effect to the consummation of the Offering of 2,777,778 units (composed of one share of Common Stock, one Class A and one Class B Warrant). These statements are based on the historical financial statements of Vaughan and Allison’s and the estimates and assumptions as discussed in these footnotes. The following table reflects the details of the adjustments required to give effect to the IPO, the reduction of indebtedness, the adjustment of interest expense and interest income, adjustments to equity, adjustments to reflect tax provisions, and other account adjustments.

     Initial Public Offering Adjustments

Pro Forma Adjustments to Unaudited Proforma Condensed, Consolidated Balance Sheets As of December 31, 2006

(A)	Pro forma adjustment to reflect net cash proceeds from IPO - $8,117,550
(B)	Pro forma adjustment to reflect write off of Bridge loan asset - $562,500
(C)	Pro forma adjustment to reflect write off of loan origination fees - $115,355
(D)	Pro forma adjustment to reclassify deferred cost of public offering to equity - $566,955
(E)	Pro forma adjustment to reflect payment of line of credit - $2,726,578; short term borrowing - $3,000,000; current portion of long-term debt and capital leases - $172,370; long-term debt and capital leases - $479,618, and the write off of bridge funding liability - $1,125,000
(F)	Pro forma adjustment to reflect provision for taxes on pro forma income - $500,412
(G)	Pro forma adjustment to reflect par value of 2,150,000 shares to be issued - $2,150
(H)	Pro forma adjustments to reflect proceeds from IPO ($12,500,000 plus $1,125,000 bridge funding liability less $566,955 deferred cost of public offering, less par value of shares to be issued $2,150 - see (H) - $13,055,895
(I)	Pro forma adjustment to reflect net pro forma income for the year ended 12/31/06 - $817,849

Pro forma adjustments to Unaudited Condensed, Consolidated income statements for the year ended December 31, 2006

(B1	)	Pro forma adjustment to remove amortization of loan origination costs treated as repaid - $88,107
(B2	)	Pro forma adjustment to remove short-term borrowing expenses related to debt repaid - $562,500
(B3	)	Pro forma adjustment to reduce interest expense related to debt treated as repaid - $386,754
(B4	)	Pro forma adjustment to reflect interest income on average cash balance at 5% - $280,900
(B5	)	Pro forma adjustment to set up tax provision related to proforma adjustments - $500,412
(B6	)	Pro forma adjustment to reflect issuance of 2,000,000 and 150,000 shares to be issued in connec-
		tion with the public offering

F-34

Until      , 2007 (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.		2,000,000 Units
Table of Contents	Page
Prospectus Summary	3
Risk Factors	9
Special Note Regarding Forward-
Looking Statements	16
Use of Proceeds	17
Dividend Policy	19
Capitalization	19
Dilution	20
Selected Consolidated Financial Data	21
Management’s Discussion and		PROSPECTUS
Analysis of Financial Condition and
Results of Operations	23
Business	36
Management	44
Certain Relationships and Related		PAULSON INVESTMENT
Transactions	49	COMPANY, INC.
Principal Stockholders	50
Description of Securities	51
Description of Certain Indebtedness	55
Shares Eligible for Future Sale	56
Underwriting	57
Legal Matters	60
Experts	60
Where You Can Find More
Information	61
Index to Financial Statements	62	, 2007

[Alternate Page for Selling Securityholder Prospectus]

     The information in this prospectus is not complete and may be changed. The Selling Securityholders may not sell these securities until 90 days after 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)

[ ] Class A Warrants
[ ] Class B Warrants
[ ] Shares

     This Prospectus relates to the resale of [ ] shares, [ ] Class A and [ ] Class B redeemable common stock purchase warrants (collectively, the “Warrants”) and the additional [ ] shares of the common stock of Vaughan Foods, Inc., underlying the Warrants (collectively, the “Shares”), which are being offered for resale by the Selling Securityholders. Each Class A warrant entitles its holder to purchase one share of common stock at an exercise price equal to $_____. Each Class B warrant entitles its holder to purchase one share of common stock at an exercise price equal to $_____. The Class A and Class B warrants are exercisable at any time beginning on _______, 2007 until ________, 2012. Vaughan Foods, Inc. may redeem some or all of the Class A warrants at a price of $0.25 per warrant, at any time beginning 30 days after the date of this Prospectus by giving the holders not less than 30 days’ notice. Vaughan Foods, Inc. may redeem some or all of the Class B warrants, at a price of $0.25 per warrant, at any time beginning 30 days after the date of this Prospectus by giving the holders not less than 30 days’ notice, which Vaughan Foods, Inc. may do at any time after its 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. The Selling Securityholders will receive units identical to those being offered in Vaughan Foods, Inc.’s initial public offering at the closing of its initial public offering. The Shares and the Warrants that the Selling Securityholders are offering pursuant to this resale prospectus are included in those units, and will separate from the units and become eligible for resale on the 30th calendar day following the date of this prospectus.

     Vaughan Foods, Inc. will not receive any of the proceeds from sales of the Warrants or the Shares by the Selling Securityholders. These securities may be offered from time to time by the Selling Securityholders, their pledgees and/or donees, after the effective date of this registration statement through ordinary brokerage transactions in the over-the-counter market or exchange, in negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices. The Selling Securityholders may not sell any Warrants or Shares until they trade on the Nasdaq Capital Market, which we expect will be the 30th day following the date of this Prospectus.

     The Selling Securityholders have not entered into any underwriting arrangement. The Selling Securityholders may pay usual and customary or specifically negotiated brokerage fees or commissions in connection with sales of the Warrants and/or the Shares.

     On the date of this Prospectus, the Securities and Exchange Commission declared effective a registration statement, filed under the Security Act, regarding our underwritten public offering of 2,000,000 units, each consisting of one share of our common stock, one Class A warrant and one Class B warrant, without giving effect to the overallotment option granted to the representative of the underwriters to purchase an additional 300,000 units. In connection with the offering of the units, we granted the representative of the underwriters a warrant to purchase 200,000 units. The Warrants are identical to the Class A and Class B warrants included in the units sold in that underwritten public offering.

          THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.

          SEE “RISK FACTORS.”

     THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus is ___________, 2007

[Alternate Page for Selling Securityholder Prospectus]

The Offering

Securities offered [ ]	Class A Warrants. See “DESCRIPTION OF SECURI-
	TIES” and “SELLING SECURITYHOLDERS AND
	PLAN OF DISTRIBUTION.”
[ ]	Class B Warrants. See “DESCRIPTION OF SECURI-
	TIES” and “SELLING SECURITYHOLDERS AND
	PLAN OF DISTRIBUTION.”
[ ]	Shares of common stock, no par value. See “DESCRIP-
	TION OF SECURITIES” and “SELLING SECURITY-
	HOLDERS AND PLAN OF DISTRIBUTION.”
Exercise terms	Each Class A warrant entitles its holder to purchase one
	share of common stock at an exercise price equal to
	$_____. Each Class B warrant entitles its holder to pur-
	chase one share of common stock at an exercise price
	equal to $_____. The Class A and Class B warrants are
	exercisable at any time after ______, 2007.
Expiration date	__________, 2012
Redemption	We may redeem some or all of the Class A warrants at a
	price of $0.25 per warrant, at any time beginning 30
	days after the date of this Prospectus by giving the hold-
	ers 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 beginning 30 days after the date of
	this Prospectus 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 preced-
	ing the notice, are equal to or greater than $100 million.
Proposed Nasdaq Capital Market symbols	Class A Warrants — FOODW
	Class B Warrants — FOODZ
	Shares — FOOD
Risk factors	This Offering involves a high degree of risk. See “RISK
	FACTORS.”

[Alternate Page for Selling Securityholder Prospectus]

PLAN OF DISTRIBUTION

     The Selling Securityholders propose to offer and sell the Warrants and/or the Shares (collectively, the “Securities”) at any time beginning 90 days after the date of this Prospectus at such times, in such manner and at such prices as they determine. The Securities may be offered by the Selling Securityholders in one or more types of transactions, which may or may not involve brokers, dealers or cash transactions. The Selling Securityholders may also use Rule 144 under the Securities Act to sell the Securities once Vaughan Foods, Inc. and they meets the criteria and conform to the requirements of that rule. There is no underwriter or coordinating broker acting in connection with the proposed sales of the Securities by the Selling Securityholders. On the date that Vaughan Foods, Inc.’s initial public offering closes, the Selling Securityholders will receive units identical to those being offered in its initial public offering. The Shares and the Warrants that the Selling Securityholders are offering are included in those units, and will separate from the units and become eligible for resale on the 30th calendar day following the date of this prospectus, though they may not be offered until 90 days after the date of this Prospectus.

     The Selling Securityholders have advised us that sales of the Securities may be effected from time to time in transactions (which may include block transactions), that may take place on the over-the-counter market or an exchange, including ordinary broker transactions, privately negotiated transactions or through sales to one or more dealers for resale as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or negotiated prices. The Selling Securityholders may effect such transactions by selling the Securities directly to purchasers or to or through broker-dealers, which may act as agents or principals. Such broker-dealers may receive compensation in the form of discounts, concessions, or commissions from the Selling Securityholders, and/or the purchasers of the Securities for whom such broker-dealers may act as agents or to whom they sell as principal, or both (which compensation as to a particular broker-dealer may be in excess of customary commissions), but in no case to exceed 8% of the gross proceeds of such sales. The Selling Securityholders, and any broker-dealers that act in connection with the sale of the Securities might be deemed to be “underwriters” within the meaning of Section 2(11) of the Securities Act, and any commissions received by them and any profit on the resale of the Securities as principal might be deemed to be underwriting discounts and commissions under the Securities Act. The Selling Securityholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the warrants or shares against certain liabilities, including liabilities arising under the Securities Act.

     Because each of the Selling Securityholders may be deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act, the Selling Securityholders will be subject to prospectus delivery requirements under the Securities Act. If any broker-dealers are used by the Selling Securityholders, their pledgees and/or donees, any commissions paid to broker-dealers and, if broker-dealers purchase any of the Securities, as principals, any profits received by such broker-dealers on the resale of the Securities, may be deemed to be underwriting discounts or commissions under the Securities Act. In addition, any profits realized by the Selling Securityholders, their pledgees and/or donees, may be deemed to be underwriting commissions. We have agreed to pay all of the costs, expenses and fees in connection with registering the Securities other than brokerage commissions, if any, attributable to the sale of the Securities, which will be borne by the Selling Securityholders, their pledgees and/or donees. Furthermore, in the event of a “distribution” of shares any Selling Securityholder, any selling broker-dealer and any “affiliated purchasers” may be subject to Regulation M under the Securities Exchange Act of 1934 which prohibits any “stabilizing bid” or “stabilizing purchase” for the purpose of pegging, fixing or stabilizing the price of the Securities in connection with this offering.

[Alternate Page for Selling Securityholder Prospectus]

USE OF PROCEEDS

     Vaughan Foods, Inc. will not receive any proceeds upon the sale of any of the Securities, but will receive an aggregate of $[ ] if all of the Class A Warrants are exercised, and an aggregate of $[ ] if all of the Class B Warrants are exercised.

SELLING SECURITY HOLDERS

     The following table sets forth information with respect to the Selling Securityholders. Once Vaughan Foods, Inc. issues the units comprising the Shares and Warrants to the Selling Securityholders, the Selling Securityholders will not own any other securities issued by Vaughan Foods, Inc.

	Beneficial Ownership of Shares and Warrants			Beneficial Ownership after offering
	Prior to Sale			if all Shares and Warrants are sold
Selling	Class A	Class B		Class A	Class B
Securityholder	Warrants	Warrants	Shares(1)	Warrants	Warrants	Shares
The Schwitter Family Trust (2)
1216 Monterey Circle
Plano, TX 75075	14,285	14,285	42,855	0	0	0
Glenbrook Capital LP (3)
430 Cambridge Avenue
Palo Alto, CA 94306	5,357	5,357	16,071	0	0	0
Marvin I. Haas
91 Central Park West, Apt. 14B
New York, NY 10023	10,714	10,714	32,142	0	0	0
Guerilla IRA Partners LP (4)
237 Park Avenue, 9th Floor
New York, NY 10017	3,571	3,571	10,713	0	0	0
Richard J. Berman
338 West 84th Street
New York, NY 10170	14,285	14,285	42,855	0	0	0
F/B/O Norman H. Pessin (5)
SEP IRA
400 East 51st Street
New York, NY 10022	28,571	28,571	85,713	0	0	0
High Capital Funding, LLC (6)
333 Sandy Springs Circle
Suite 230
Atlanta, GA 30328	26,785	26,785	80,355	0	0	0
Howard Commander
PO Box 9
West Lebanon, NY 12195	2,678	2,678	8,034	0	0	0
1999 CAHR Dynastic Trust (7)
1051 Saxony Drive
Highland Park, IL 60035	10,714	10,714	32,142	0	0	0
Weiner Family Investment, LLC (8)
8200 Jett Ferry Road
Atlanta, GA 30350	2,678	2,678	8,034	0	0	0
Mary L. Hart
1085 Riverside Trace
Atlanta, GA 30328	3,678	3,678	8,054	0	0	0
Ronald Berk
945 Fifth Avenue
New York, NY 10021	2,678	2,678	8,034	0	0	0
SGC Capital LLC (9)
19495 Biscayne Blvd.
Suite 409
Aventura, FL 33180	3,571	3,571	10,713	0	0	0
IG Family Limited Liability
Limited Partnership (10)
19495 Biscayne Blvd
Suite 409
Aventura, FL 33180	7,142	7,142	21,426	0	0	0
Gary E. Bryant Trust (11)
16 Carmel Woods
Laguna Niguel, CA 92677	3,571	3,571	10,713	0	0	0
James C. Yadgir Trust (12)
111 S. Baybrook Drive
Unit D
Chicago, IL 60074-6842	10,714	10,714	32,142	0	0	0

	Beneficial Ownership of Shares and Warrants			Beneficial Ownership after offering
	Prior to Sale			if all Shares and Warrants are sold
Selling	Class A	Class B		Class A	Class B
Securityholder	Warrants	Warrants	Shares(1)	Warrants	Warrants	Shares
Halter Financial Group, Inc. (13)
12890 Hilltop Road
Argyle, TX 76226	7,142	7,142	32,142	0	0	0
George R. Jarkesy, Jr.
18205 Burkhardt Road
Tomball, TX 77377	3,571	3,571	10,713	0	0	0

(1)	Reflects shares underlying the Warrants.
(2)	Andre Schwitter III and Jacalyn Schwitter, Grantor/Trustees, have investment making authority for The Schwitter Family Trust.
(3)	Glenbrook Capital Management, General Partner, has investment making authority for Glenbrook Capital LP.
(4)	Leigh J. Curry, Managing Director, has investment making authority for Guerilla IFA Partners L.P.
(5)	Norman H. Pessin has investment making authority for Norman H. Pessin SEP IRA.
(6)	Frank E. Hart, Manager, Fred A. Brasch and David Rapaport have investment making authority for High Capital Funding, LLC.
(7)	Michael E. Cahr, Trustee, has investment making authority for the Cahr Dynastic Trust.
(8)	Jerold Weiner, President, has investment making authority for Weiner Family Investment, LLC.
(9)	Steven Geduld, President, has investment making authority for SCG Capital, LLC.
(10)	Irwin Geduld, Trustee, has investment making authority for the IG Family Limited Liability Limited Partnership.
(11)	Gary E. Bryant, Trustee, has investment making authority for the Gary E. Bryant Trust.
(12)	James C. Yadgir, Trustee, has investment making authority for the James C. Yadgir Trust.
(13)	Timothy Patrick Halter, President, has investment making authority for Halter Financial Group, Inc.

[Alternate Page for Selling Securityholder Prospectus]

[ ] Class A Warrants
[ ] Class B Warrants
[ ] Shares

VAUGHAN FOODS, INC.

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	$	17,110
NASD fee	$	16,687
Nasdaq Capital Market listing fee	$	50,000	*
Boston Stock Exchange listing fee	$	15,000	*
Printing expenses	$	100,000	*
Accounting fees and expenses	$	200,000	*
Legal fees and expenses	$	500,000	*
Blue sky filing fees and related attorney fees and expenses	$	75,000	*
Transfer agent and registrar fees and expenses	$	3,500	*
“Road Show” and miscellaneous other expenses	$	22,703	*
Total	$	1,000,000	*

*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:

• 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.

II-1

     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 $1.25 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 offer- ing. 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
No.	Description

1.1	Form of Underwriting Agreement*
3.1	Certificate of Incorporation, as amended1
3.2	Bylaws1
4.1	Specimen stock certificate3
4.2	Form of warrant agreement, including form of Class A and Class B warrants*
4.3	Specimen unit certificate3
4.4	Form of representative’s warrant*
4.5	Mortgage and loan agreement dated December 31, 20041
4.6	Indenture of trust dated December 31, 20041
4.7	Real estate loan due August 1, 20281
4.8	Agreement of the registrant to furnish agreements defining rights of holders of long term debt1
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, 20061
10.2	Agreement between Vaughan Foods, Inc., Braxton Management, Inc., Herb Grimes and Stan Gustas, dated May 19, 20061
10.3	Vaughan Foods, Inc. equity incentive plan3
10.4	Form of Securities Purchase and Subscription Agreement dated as of July 17, 20061
10.5	Form of Registration Rights Agreement dated as of July 17, 20061
10.6	Loan and Security agreement dated as of June 29, 20051
10.7	Promissory Note extension agreement dated as of June 28, 2006 and Promissory Note dated June 29, 20051
10.8	Form of Promissory Note dated September 25, 20061
10.9	Form of Second Promissory Note extension agreement and amendment to loan and security agreement2
10.10	Form of Lock-Up Agreement3
10.11	Agreement between Vaughan Foods, Inc., Mark E. Vaughan and Vernon Brandt, Jr. dated March 22, 2007*
10.12	Agreement between Vaughan Foods, Inc., Braxton Management, Inc., Herb Grimes and Stan Gustas dated March 22, 2007*
21.1	Subsidiary schedule1
23.1	Consent of Cole & Reed, PC*
23.2	Consent of Cole & Reed, PC*
23.3	Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1)*
24.1	Power of attorney (included in signature page)

_________________
* Filed herewith
1. Filed with the initial filing of this registration statement on October 6, 2006
2. Filed with the first amendment to this registration statement on December 27, 2006
3. Filed with the second amendment to this registration statement on January 30, 2007

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 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;

II-3

         (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 April 3, 2007.

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 3^rd day of April, 2007.

Signature	Title
/s/ MARK E. VAUGHAN*	President, Chief Executive Officer and
Mark E. Vaughan	Director (Principal Executive Officer
/s/ STAN L. GUSTAS*	Chief Financial Officer
Stan Gustas	(Principal Financial and Accounting Officer
/s/ VERNON J. BRANDT*	Director
Vernon J. Brandt

*   by: /s/ STEPHEN A. ZELNICK*
Stephen A. Zelnick, attorney-in-fact

II-5

EX-1.1

                               Vaughan Foods, Inc.




                             UNDERWRITING AGREEMENT



                              dated _________, 2007












                        PAULSON INVESTMENT COMPANY, INC.



                             UNDERWRITING AGREEMENT




_________, 2007


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 2,000,000 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 2,000,000 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 300,000 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. 333-137861), 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 and the Boston Stock Exchange under the symbols "FOODU," "FOOD," "FOODW"
and "FOODZ," 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 _______, 2007, 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 200,000 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

                                       27


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 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....................................................   2,000,000
                                                                     =========


                                    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: _______, 2007


                                    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-4.2

                                WARRANT AGREEMENT



                                     BETWEEN



                               VAUGHAN FOODS, INC.

                                       AND

                            ------------------------




                           DATED AS OF _________, 2007







                                WARRANT AGREEMENT

         This Agreement, dated as of ________, 2007, is between Vaughan Foods,
Inc., an Oklahoma corporation (the "COMPANY") and Continental Stock Transfer &
Trust, 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 _________, 2012 (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 _________, 2007 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 _______, 2007; 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
New York, New York 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 New York, New York, 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 ___________, 2007
[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. 333-137861) 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 New York, New York.

         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 _________, 2012


                    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 _________,
2007 and before the close of business on _________, 2012 ("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 New York, New York, of Continental Stock Transfer &
Trust Company, 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 _______, 2007, 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:
                                               Title: President




                                          Attest:  _____________________________
                                                    Secretary

Countersigned:


Continental Stock Transfer & Trust Company
Warrant Agent



By: ______________________________________
     Authorized Officer





                                    EXHIBIT B



                VOID AFTER 5 P.M. PACIFIC TIME ON _________, 2012


                    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 _________, 2007 and before the
close of business on _________, 2012 ("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 New York, New York, of Continental Stock Transfer & Trust
Company, 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 __________, 2007, 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 _______, 2007, 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:
                                             Title:   President




                                        Attest:  _______________________________
                                                  Secretary

Countersigned:


Continental Stock Transfer & Trust Company
Warrant Agent




By: ______________________________________
     Authorized Officer


                                       4

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



                                  200,000 Units




                                       of


                               VAUGHAN FOODS, INC.













                            Void after ________, 2012







     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 ________,
2012, up to 200,000 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 one year 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. In any such event, 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. If the Company
shall fail to honor any exercise of the Warrant as provided above, then (i) the
Company shall use its best efforts to cause the exercise of the Warrant to be
lawful at the earliest practicable time and (ii) the Warrant and its associated
registration rights shall not expire until the tenth business day following the
date on which the Company notifies the Warrantholder that the Warrant may be
lawfully exercised.


     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-5.1

                                                                     Exhibit 5.1

                       MORSE, ZELNICK, ROSE & LANDER, LLP
                                 405 PARK AVENUE
                            NEW YORK, NEW YORK 10022

                                 (212) 838-1177

                                  April 3, 2007

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 and Amendment Nos. 1, 2 and 3 thereto (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) 2,300,000 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) 2,300,000
shares of Common Stock included in the Units; (c) 2,300,000 Class A Warrants;
(d) 2,300,000 Class B Warrants; (e) 2,300,000 shares of Common Stock underlying
the Class A Warrants; (f) 2,300,000 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 200,000 units identical to the Units (the
"Representative's Warrants"); (h) 200,000 units underlying the Representative's
Warrants; (i) 200,000 shares of Common Stock underlying the units underlying the
Representative's Warrant; (j) 200,000 Class A warrants underlying the units
underlying the Representative's Warrant; (k) 200,000 Class B warrants underlying
the units underlying the Representative's Warrant; (l) 277,778 shares of Common
Stock underlying the Class A warrants underlying the units underlying the
Representative's Warrant; (m) 200,000 shares of Common Stock underlying the
Class B warrants underlying the units underlying the Representative's Warrant;
(n) 160,714 shares of Common Stock to be sold by the Selling Stockholders as
described in the Registration Statement; (o) 160,714 Class A warrants (each a
"Selling Stockholder Class A Warrant"), each to purchase one share of Common
Stock, to be sold by the Selling Stockholders as described in the Registration
Statement; (p) 160,714 Class B warrants (each a "Selling Stockholder Class B
Warrant"), each to purchase one share of Common Stock, to be sold by the Seller
Stockholders as described in the Registration Statement; (q) 160,714 shares of
Common Stock underlying the Selling Stockholder Class A Warrants; (r) 160,714
shares of Common Stock underlying the Selling Stockholder Class B Warrants; and
(s) any additional securities issued pursuant to Rule 462(b) of the Act. The
securities described in clauses (a) through (s) 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), (k), (o) and (p) 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-10.11

                                                                   EXHIBIT 10.11


                               VAUGHAN FOODS, INC.
                              216 East 12th Street
                              Moore, Oklahoma 73160

                                                                  March 22, 2007

Mark E. Vaughan
Vernon J. Brandt, Jr.
Vaughan Foods, Inc.
216 East 12th Street
Moore, Oklahoma 73160

                    Re: Conveyance of Ownership Interests in
                         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 $14
million underwritten by Paulson Investment Co. as outline in the Letter of
Intent dated May 8, 2006 between Paulson Investment Company, Inc. and Vaughan
Foods, Inc. be completed by May 15, 2007. The transfer will be made
simultaneously with the closing of the public offering.

         Please confirm your agreement by signing below and returning a copy of
Vaughan Foods, Inc. at your early convenience.


                                        Very truly yours,
                                        VAUGHAN FOODS, INC.


                                        By: /s/ Mark E. Vaughan
                                            -------------------
                                        Mark E. Vaughan, 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-10.12

                                                                   EXHIBIT 10.12

                               VAUGHAN FOODS INC.
                            216 Northeast 12th Street
                              Moore, Oklahoma 73160

                                                                  March 22, 2007

Braxton Management, Inc.
Mr. Herb Grimes
      and
Mr. Stan Gustas
c/o Vaughan Foods, Inc.
216 Northeast 12th Street
Moore, Oklahoma 73160

         This will set forth the agreement pursuant to which we, or a wholly
owned subsidiary formed for that purpose, will acquire 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 $2.5 million payable in cash (the
"Purchase Price"). The Purchase Price will be payable immediately after the
closing of the IPO. 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 that 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 an operating division or by a separate subsidiary
that we will organize for that purpose. Herb will serve as the Chairman and
Chief Executive Officer of that division or subsidiary 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
                                            -------------------
                                            Mark E. Vaughan, President

Accepted and agreed to
This 22nd day of March, 2007

/s/ Herb Grimes
- ---------------
Herb Grimes

/s/ Stan Gustas
- ---------------
Stan Gustas


Braxton Management, Inc.

By: /s/ Herb Grimes
    ---------------

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  March 12,  2007  for  Vaughan  Foods,  Inc.,  in  the
Registration  Statement on Amendment No. 3 to Form S-1 and related Prospectus of
Vaughan Foods, Inc.

                                                     /s/ Cole & Reed, P.C.


Oklahoma City, Oklahoma
April 3, 2007

- --------------------------------------------------------------------------------

EX-23.2

                         [Cole & Reed, P.C. Letterhead]

                                                                    EXHIBIT 23.2

            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 March 12, 2007 for Allison's  Gourmet  Kitchens,  in the
Registration  Statement on Amendment No. 3 to Form S-1 and related Prospectus of
Vaughan Foods, Inc.

                                            /s/ Cole & Reed P.C.

Oklahoma City, Oklahoma
April 3, 2007