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

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended October 31, 2005

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________

Commission File Number 000-31797

VERMONT PURE HOLDINGS, LTD.
(Exact name of business issuer in its charter)

DELAWARE 03-0366218
(State or other jurisdiction of I.R.S. Employer Identification Number
incorporation or organization)

1050 Buckingham St., Watertown, CT 06795
(Address of principal executive offices and zip code)
Formerly: 45 Krupp Drive, Williston VT 05495

Issuer's telephone number, including area code: (860) 945-0661

Securities registered pursuant to Section 12(g) of the Act: None

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.001 per share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

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

The aggregate market value of the registrant's voting and non-voting common
equity held by non-affiliates of the registrant, computed by reference to the
last sale price per share of common stock on April 30, 2005, the last day of the
registrant's most recently completed second fiscal quarter, as reported on the
American Stock Exchange, was $21,932,821.

The number of shares outstanding of the Issuer's Common Stock, $.001 par value,
was 21,655,646 on January 17, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement, which is expected to
be filed not later than 120 days after the registrant's fiscal year ended
October 31, 2005, to be delivered in connection with the registrant's
annual meeting of stockholders, are incorporated by reference
to Part III into this Form 10-K.

TABLE OF CONTENTS

PAGE
----

PART I

Item 1. Business 3
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 15
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16

PART II

Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 30
Item 9A. Controls and Procedures 30
Item 9B. Other Information 30

PART III

Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 31
Item 13. Certain Relationships and Related Transactions 31
Item 14. Principal Accountant Fees and Services 31

ITEM IV

Item 15. Exhibits and Financial Statement Schedules 32
Signatures

In this annual report on Form 10-K, "Vermont Pure," the "Company," "we," "us"
and "our" refer to Vermont Pure Holdings, Ltd. and its subsidiary, taken as a
whole, unless the context otherwise requires.

This Annual Report on Form 10-K contains references to trade names, label
design, trademarks and registered marks of Vermont Pure Holdings, Ltd. and its
subsidiary and other companies, as indicated. Unless otherwise provided in this
Annual Report on Form 10-K, trademarks identified by (R) are registered
trademarks or trademarks, respectively, of Vermont Pure Holdings, Ltd. or its
subsidiary. All other trademarks are the properties of their respective owners.

Except for historical facts, the statements in this annual report are
forward-looking statements. Forward-looking statements are merely our current
predictions of future events. These statements are inherently uncertain, and
actual events could differ materially from our predictions. Important factors
that could cause actual events to vary from our predictions include those
discussed in this annual report under the heading "Risk Factors." We assume no
obligation to update our forward-looking statements to reflect new information
or developments. We urge readers to review carefully the risk factors described
in this annual report and in the other documents that we file with the
Securities and Exchange Commission. You can read these documents at www.sec.gov.

PART I

ITEM 1. BUSINESS.

INTRODUCTION AND INDUSTRY TRENDS

Vermont Pure Holdings, Ltd. is engaged in the production, marketing and
distribution of bottled water and the distribution of coffee, ancillary
products, and other office refreshment products. Through February 2004, when we
divested the retail segments of our business, our products were sold
predominantly in the Northeast, as well as in the Mid-Atlantic and Mid-Western
United States. Since March 2004, we have operated exclusively as a Home and
Office delivery business, using our own trucks for distribution throughout New
England, New York, and New Jersey. All of our water products are still
(non-sparkling) waters.

We believe that consumers perceive bottled water to be a healthy and refreshing
beverage alternative to beer, liquor, wine, soft drinks, coffee and tea and
sales of bottled water will continue to grow as consumers focus on health and
fitness, alcohol moderation and the avoidance of both caffeine and sodium.
Bottled water has become a mainstream beverage as the centerpiece of many
consumers' healthy living lifestyles. In addition, we believe that the
development and continued growth of the bottled water industry reflects growing
public awareness of the potential contamination and unreliability of municipal
water supplies.

In recent years, the bottled water industry has experienced periods of
significant consolidation and aggressive price competition. Large multi-national
companies such as Nestle, Groupe Danone and Suntory Water Group have been active
acquirers of small and medium sized regional bottled water companies. In 2003,
Danone and Suntory pooled their respective United States assets in the industry
into a joint venture to create the largest Home and Office water delivery
company in the country. In 2005, this joint venture was sold to a private equity
firm. In general, the primary drivers of this consolidation are the incremental
growth realized by acquiring the target company's customer base, and synergies
resulting from integrating existing operations. Moreover, the entrance of major
soft drink bottlers, notably Coca-Cola (with Dasani) and Pepsi Cola (with
Aquafina), into the bottling and distribution segment of the industry has had a
major impact on the bottled water industry.

COMPANY BACKGROUND

Incorporated in Delaware in 1990, we originally developed Vermont Pure(R)
Natural Spring Water as our flagship brand in the still, non-carbonated retail
consumer category. Over the next decade, we grew aggressively both internally
and through acquisitions, primarily in the Home and Office market. In addition
to marketing the Vermont Pure(R) brand, in 1995 we renewed marketing efforts
with respect to our original trademark, Hidden Spring(R). We expanded our
product lines to include more sizes and features, such as sports caps on
selected bottle sizes for convenient single serve, and multi-packs for the
grocery and convenience store channels.

By 1996, we began to pursue a strategy of diversifying our product offerings.
Most notably, we began to utilize an acquisition strategy in 1996 to minimize
our reliance on the retail consumer side of the business and to increase growth
in other categories. Prior to 1996, our retail business represented 90% of our
total sales revenues. By way of contrast, in 2003, our last full year in the

retail business, our Home and Office delivery category represented 65% of our
total sales. Additional benefits of increasing the Home and Office channel have
included higher gross margins and reduced seasonality of our sales.

In October 2000, we merged with the Crystal Rock Spring Water Company, Inc. of
Watertown, Connecticut. Crystal Rock had historically focused its manufacturing
resources on the still, non-carbonated segment of the bottled water industry.
Although its primary business had been the marketing and distribution of the
Crystal Rock(R) brand of purified and mineralized drinking water to the Home and
Office delivery markets, it also distributed coffee, other refreshment type
products, and vending services in Connecticut, New York and Massachusetts. We
continued our acquisition strategy in fiscal 2002 and 2003 with smaller
acquisitions in our established Home and Office markets.

We closed acquisitions in fiscal year 2004 with $5 million in annual sales in
our core market areas. The activity for the year culminated at the end of the
year with the acquisition of Mayer Brothers Home and Office division in Buffalo,
NY, making us the largest distributor in that market. Previously in the year, we
had acquired Mayer Brothers smaller Rochester operations. These acquisitions
solidified our presence in the western New York region.

In 2004, we sold the retail segments (which we traditionally have referred to
separately as "PET" and "Gallon") of our business, while retaining our Home and
Office distribution business. The segments sold included our retail consumer
business under our own brands, as well as the private label business that we
packed for others. The sale included the springs, manufacturing facility,
inventory, and the related machinery and equipment located in Randolph Center,
Vermont. We retained the Vermont Pure(R) trademark and continue to distribute
water under that brand throughout our Home and Office distribution area, while
licensing it to the buyer, for a period of 30 years, for use in the bottling and
distribution of retail products. The buyer acquired our Hidden Spring(R)
trademark and licenses it back to us for Home and Office distribution. We
relocated our five-gallon Home and Office bottling operations from Randolph to
White River Junction, Vermont, and source our spring water from a Vermont
location under an existing water supply agreement. Also in conjunction with the
sale, we relocated our corporate headquarters to our Williston, Vermont
facility. Subsequently, we moved our headquarters to Watertown, CT where most of
our administrative operations are now located.

Although we are proud of the business and brands we built in the retail consumer
market, the goal of the transaction was to enable us to concentrate on our
higher margin, and more profitable, Home and Office business, which distributes
the Crystal Rock(R) brand of water, as well as our Vermont Pure(R) water, coffee
and other products. It is the culmination of a strategy that we began pursuing
in 1996, when we originally diversified into the Home and Office segment. Over
time, the retail segments became unprofitable, as margins had been squeezed by
intense competition in this segment of the market. Management's decision to
concentrate the business in the Home and Office market has been driven by, among
other things, attractive margins and good cash flows from equipment rentals, as
well as by the advantages of product diversification.

OTHER SIGNIFICANT PRODUCT LINES

Coffee, a product that is counter seasonal to water, is the second leading
product in the distribution channel, now accounting for 18% of our total sales
in fiscal year 2005. We generally buy coffee under contracts that set prices for
up to eighteen months, in order to maintain price and supply

stability. Please refer to "Commodity Price Risks -- Coffee" on page 29 of this
report for additional information on our coffee supply agreements. Because
coffee is a commodity, we cannot ensure that future supplies and pricing will
not be subject to volatility in the world commodity markets. Any interruption in
supply or dramatic increase in pricing may have an adverse effect on our
business.

The increase in coffee sales in 2004 and 2005 has been driven by the market
growth of single serve coffee products. This development has revolutionized the
marketplace and, while we expect the growth of these products to continue,
innovation and changes in distribution will play a significant role in the
profitability of the products.

WATER SOURCES, TREATMENT, AND BOTTLING OPERATIONS

Water from the local municipalities is the primary raw source for the Crystal
Rock(R) brand. The raw water is purified through a number of processes beginning
with filtration. Utilizing carbon and ion exchange filtration systems, we remove
chlorine and other volatile compounds and dissolved solids. After the filtration
process, impurities are removed by reverse osmosis and/or distillation. We
ozonate our purified water (by injecting ozone into the water as an agent to
prohibit the formation of bacteria) prior to storage. Prior to bottling, we add
pharmaceutical grade minerals to the water, including calcium and potassium, for
taste. The water is again ozonated and bottled in a fully enclosed clean room
with a high efficiency particulate air, or HEPA, filtering system designed to
prevent any airborne contaminants from entering the bottling area, in order to
create a sanitary filling environment.

If for any reason this municipal source for Crystal Rock(R) water were curtailed
or eliminated, we could, though probably at greater expense, purchase water from
other sources and have it shipped to our manufacturing facilities.

In conjunction with our acquisition of their Home and Office distribution
assets, we entered into a contract with Mayer Brothers of Buffalo, New York to
bottle our Crystal Rock(R) brand in that market.

The primary source of our natural spring water is a spring owned by a third
party in Stockbridge, Vermont that is subject to a water supply contract. We
also obtain water, under similar agreements with third parties, from springs in
Bennington and Tinmouth, Vermont. All of the springs we use are approved by the
State of Vermont as sources for natural spring water.

We have for several years bought spring water from a source in Stockbridge,
Vermont. Until late 1999, we had no contract with respect to this source.
Commencing in November 1999, we obtained a 50-year water supply contract to
purchase, on a first priority basis, up to 5,000,000 gallons per month from the
spring owner. Because this amount is well in excess of our current needs and
within the apparent capacity of the spring, we believe that we can readily meet
our bulk water supply needs for the foreseeable future.

In 2002, we signed a 20-year agreement with the Town of Bennington, Vermont to
purchase water from a spring owned by the town. Under that agreement, we can use
up to 100,000 gallons a day from this site. We plan to use this water primarily
in our Halfmoon, New York bottling facility. We started using water from this
site in November 2004.

Percolation through the earth's surface is nature's best filter of water. We
believe that the exceptionally long percolation period of natural spring water
assures a high level of purity. Moreover, the long percolation period permits
the water to become mineralized and pH balanced. We believe that the age and
extended percolation period of our natural spring water provides the natural
spring water with certain distinct attributes: a purer water, noteworthy mineral
characteristics (including the fact that the water is sodium free and has a
naturally balanced pH), and a light, refreshing taste.

An interruption or contamination of any of our spring sites would materially
affect our business. We believe that we could find adequate supplies of bulk
spring water from other sources, but that we might suffer inventory shortages or
inefficiencies, such as increased purchase or transportation costs, in obtaining
such supplies.

We are highly dependent on the integrity of the sources and processes by which
we derive our products. Natural occurrences beyond our control, such as drought,
earthquake or other geological changes, a change in the chemical or mineral
content or purity of the water, or environmental pollution may affect the amount
and quality of the water emanating from the springs or municipal sources that we
use. There is a possibility that characteristics of the product could be changed
either inadvertently or by tampering before consumption. Even if such an event
were not attributable to us, the product's reputation could be irreparably
harmed. Consequently, we would experience economic hardship. Occurrence of any
of these events could have an adverse impact on our business. We are also
dependent on the continued functioning of our bottling processes. An
interruption may result in an inability to meet market demand and/or negatively
impact the cost to bottle the products. Additionally, the distribution of the
product is dependent on other businesses.

PRODUCTS

We sell our three major brands in three and five gallon bottles to homes and
offices throughout New England, New York, and New Jersey. In general, Crystal
Rock(R) is distributed in southern New England and upstate and western New York,
while Vermont Pure(R) and Hidden Spring(R) are distributed throughout New
England. We rent water coolers to customers to dispense bottled water. Our
coolers are available in various consumer preferences such as cold, or hot and
cold, dispensing units. In conjunction with our Home and Office accounts, we
also distribute a variety of coffee, tea and other hot beverage products and
related supplies, as well as other consumable products used around the office.
We offer vending services in some locations. We rent multi-burner and sell
single serve coffee machines to customers. In addition, we supply whole beans
and coffee grinders for fresh ground coffee and cappuccino machines to
restaurants. We are the exclusive office coffee distributor of Baronet Coffee in
New England, New York and New Jersey. In addition to Baronet Coffee, we sell
other national brands, most notably, Green Mountain Coffee Roasters.

MARKETING AND SALES OF BRANDED PRODUCTS

Our water products are marketed and distributed in five and three-gallon bottles
as "premium" bottled water. We seek brand differentiation by offering a choice
of high quality spring and purified water along with a wide range of coffee and
office refreshment products, and value-added service. Home and Office sales are
generated and serviced using our own facilities, employees and vehicles.

Telemarketers and outside/cold-call sales personnel are used to market our Home
and Office

delivery. We support this sales effort through promotional giveaways and Yellow
Pages advertising, as well as radio, television and billboard advertising
campaigns. We also sponsor local area sporting events, participate in trade
shows, and endeavor to be highly visible in community and charitable events.

We market our Home and Office delivery service throughout most of New England
and New York and parts of New Jersey.

Advertising and Promotion

We advertise our products primarily through Yellow Pages and other print media
and secondarily through print, television and radio media. We have also actively
promoted our products through sponsorship of various organizations and sporting
events. In recent years, we have sponsored professional golf and tennis events
and various charitable and cultural organizations, such as Special Olympics, the
National Association of Breast Cancer Organizations, the Multiple Sclerosis
Society, and the Vermont Symphony Orchestra.

Sales and Distribution

We sell and deliver products directly to our customers using our own employees
and route delivery trucks. We make deliveries to customers on a regularly
scheduled basis. We bottle our water at our facilities in Watertown,
Connecticut, White River Junction, Vermont, and Halfmoon, New York. We maintain
numerous distribution locations throughout our market area. From these locations
we also distribute dispensing equipment, a variety of coffee, tea and other
refreshment products, and related supplies. We ship between our production and
distribution sites using both our own and contracted carriers.

We use outside distributors in areas where we currently do not distribute our
products. Distributor sales represented less than 2% of total revenue in fiscal
year 2005.

SUPPLIES

We currently source all of our raw materials from outside vendors. As one of the
largest Home and Office distributors in the country, we are able to capitalize
on volume to continue to reduce costs. We are a member of the Quality Bottlers
Cooperative, or QBC, a purchasing cooperative comprised of some of the largest
independent Home and Office water companies in the United States. QBC acts as a
purchasing and negotiating agent to acquire national pricing for the cooperative
on common materials such as bottles, water coolers, cups, and other supplies.
QBC believes that due to its size it can effectively purchase equipment and
supplies at levels competitive to larger national entities.

We rely on trucking to receive raw materials and transport and deliver our
finished products. Consequently, the price of fuel significantly impacts the
cost of our products. We purchase our own fuel for our Home and Office delivery
and use third parties for transportation of raw materials and finished goods
between our warehouses. While volume purchases can help control erratic fuel
pricing, market conditions ultimately determine the price. In 2005 we
experienced substantial increases in fuel prices as a result of international
events and natural disasters. Continued increases in fuel prices would likely
affect our profitability if we are not able to adjust our pricing accordingly
without losing sales volume.

No assurance can be given that we will be able to obtain the supplies we require
on a timely basis or that we will be able to obtain them at prices that allow us
to maintain the profit margins we have had in the past. We believe that we will
be able to either renegotiate contracts with these suppliers when they expire
or, alternatively, if we are unable to renegotiate contracts with our key
suppliers, we believe that we could replace them. Any raw material disruption or
price increase may result in an adverse impact on our financial condition and
prospects. For instance, we could incur higher costs in renegotiating contracts
with existing suppliers or replacing those suppliers, or we could experience
temporary dislocations in its ability to deliver products to our customers,
either of which could have a material adverse effect on our results of
operations.

SEASONALITY

Our business is seasonal. The period from June to September, when we have our
highest water sales, represents the peak period for sales and revenues due to
increased consumption of cold beverages during the summer months in our core
Northeastern United States market. Conversely coffee, which represented 18% of
our sales in 2005, has a peak sales period from November to March.

COMPETITION

We believe that bottled water historically has been a regional business in the
United States. However, the Home and Office market includes several large
regional brands such as Poland Spring, Deer Park, Belmont Springs and Culligan
that are all owned by larger companies with national or multinational
distribution. Additionally, we compete with smaller, locally-owned, regional
bottlers such as Monadnock in the Boston area and Leisure Time in the Hudson
Valley of New York.

With our Vermont Pure(R) brand, we compete on the basis of pricing, customer
service, and quality of our products, the image of the State of Vermont,
attractive packaging, and brand recognition. With the Crystal Rock(R) brand, we
compete on the basis of taste, service, and the purity of the distilled product
with minerals added back. We consider our trademarks, trade names and brand
identities to be very important to our competitive position and defend our
brands vigorously.

We feel that installation of filtration units in the home or commercial setting
poses a competitive threat to our business. To address this, we make available
plumbed-in filtration units and servicing contracts on a limited basis.

Competition from non-traditional sources is changing the marketplace. The two
most notable examples are water filtration as a substitute for purchasing water
and cheaper coolers from offshore sources, making customer purchasing a more
viable alternative to leasing. We are reacting to these changes by integrating
this type of equipment into our business. If we are not able to successfully
integrate them into our business, our sales and profits could decrease.

There has also a been a trend developing in the marketplace for consumers to own
their own water coolers, thereby foregoing rental charges on the unit. If this
trend continues, it could have a negative impact on our sales as a result of the
reduced rental income.

As discussed above, coffee is another significant component of our overall
sales. The growth of this product line has been driven by single serve packages.
Since these packages are relatively new, distribution channels are not yet fully
developed. Increased competition for sales most likely will develop from other
food and beverage distributors, retailers, and the internet. In addition,
machines to brew these packages are different from traditional machines and
packages ideally need to be brewed in machines that accommodate the specific
package. It is conceivable that the popularity of a certain machine or brand may
dictate what products are successful in the marketplace. Consequently, our
success, both from a sales and profitability perspective, may be affected by our
access to distribution rights for certain products and machines and our
decisions concerning which equipment to invest in.

TRADEMARKS

We sell our bottled water products under the trade names Vermont Pure Natural
Spring Water(R), Crystal Rock(R), and Stoneridge(R). We have rights to other
trade names, including Hidden Spring(R), Pequot Natural Spring Water(R),
Excelsior Spring Water(R), Happy Spring Water(R), Manitock Spring Water(R), and
Vermont Naturals(R). Our trademarks as well as label design are registered with
the United States Patent and Trademark Office.

GOVERNMENT REGULATION

The Federal Food and Drug Administration (FDA), regulates bottled water as a
"food." Accordingly, our bottled water must meet FDA requirements of safety for
human consumption, of processing and distribution under sanitary conditions and
of production in accordance with the FDA "good manufacturing practices." To
assure the safety of bottled water, the FDA has established quality standards
that address the substances that may be present in water which may be harmful to
human health as well as substances that affect the smell, color and taste of
water. These quality standards also require public notification whenever the
microbiological, physical, chemical or radiological quality of bottled water
falls below standard. The labels affixed to bottles and other packaging of the
water are subject to FDA restrictions on health and nutritional claims for foods
under the Fair Packaging and Labeling Act. In addition, all drinking water must
meet Environmental Protection Agency standards established under the Safe
Drinking Water Act for mineral and chemical concentration and drinking water
quality and treatment that are enforced by the FDA.

We are subject to the food labeling regulations required by the Nutritional
Labeling and Education Act of 1990. We believe we are in compliance with these
regulations.

We are subject to periodic, unannounced inspections by the FDA. Upon inspection,
we must be in compliance with all aspects of the quality standards and good
manufacturing practices for bottled water, the Fair Packaging and Labeling Act,
and all other applicable regulations that are incorporated in the FDA quality
standards.

In May 1996, new FDA regulations became effective that redefined the standards
for the identification and quality of bottled water. We believe that we meet the
current regulations of the FDA, including the classification as spring water.

We also must meet state regulations in a variety of areas. The Department of
Health of the State of Vermont regulates water products for purity, safety and
labeling claims. Bottled water sold in

Vermont must originate from an "approved source." The water source must be
inspected and the water sampled, analyzed and found to be of safe and wholesome
quality. The water and the source of the water are subject to an annual
"compliance monitoring test" by the State of Vermont. In addition, our bottling
facilities are inspected by the Department of Health of the State of Vermont.

Our product labels are subject to state regulation (in addition to the federal
requirements) in each state where the water products are sold. These regulations
set standards for the information that must be provided and the basis on which
any therapeutic claims for water may be made.

The bottled water industry has a comprehensive program of self-regulation. We
are a member of the International Bottled Water Association, or IBWA. As a
member, our facilities are inspected annually by an independent laboratory, the
National Sanitation Foundation, or NSF. By means of unannounced NSF inspections,
IBWA members are evaluated on their compliance with the FDA regulations and the
association's performance requirements, which in certain respects are more
stringent than those of the federal and various state regulations.

The laws that regulate our activities and properties are subject to change. As a
result, there can be no assurance that additional or more stringent requirements
will not be imposed on the our operations in the future. Although we believes
that our water supply, products and bottling facilities are in substantial
compliance with all applicable governmental regulations, failure to comply with
such laws and regulations could have a material adverse effect on our business.

EMPLOYEES

As of January 17, 2006, we had 328 full-time employees and 30 part-time
employees. None of the employees belong to a labor union. We believe that our
relations with our employees are good.

ADDITIONAL AVAILABLE INFORMATION

Our principal website is www.vermontpure.com. We make our annual, quarterly and
current reports, and amendments to those reports, available free of charge on
www.vermontpure.com, as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange
Commission. Reports of beneficial ownership of our common stock, and changes in
that ownership, by directors and officers on Forms 3, 4 and 5 are likewise
available free of charge on our website.

The information on our website is not incorporated by reference in this annual
report on Form 10-K or in any other report, schedule, notice or registration
statement filed with or submitted to the SEC.

The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically at
www.sec.gov. You may also read and copy the materials we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.

ITEM 1A RISK FACTORS

We operate in a competitive business environment that is influenced by
conditions that are both controllable and beyond our control. These conditions
include, but are not limited to, the regional

economy, monetary policy, and the political and regulatory environment. The
following summarizes important risks and uncertainties that may materially
affect our business in the future.

OVER A PERIOD OF YEARS, WE HAVE BORROWED SUBSTANTIAL AMOUNTS OF MONEY TO FINANCE
ACQUISITIONS. IF WE ARE UNABLE TO MEET OUR DEBT SERVICE OBLIGATIONS TO OUR
SENIOR AND SUBORDINATED LENDERS, WE WOULD BE IN DEFAULT UNDER THOSE OBLIGATIONS,
AND THAT COULD HURT OUR BUSINESS OR EVEN RESULT IN FORECLOSURE, REORGANIZATION
OR BANKRUPTCY.

The underlying loans are secured by substantially all of our assets. If we do
not repay our indebtedness in a timely fashion, our secured creditors could
declare a default and foreclose upon our assets, which would likely result in
harmful disruption to our business, the sale of assets for less than their fully
realizable value, and possible bankruptcy. We must generate enough cash flow to
service this indebtedness until maturity.

Fluctuations in interest rates could significantly increase our expenses. We
will have significant interest expense for the foreseeable future, which in turn
may increase or decrease due to interest rate fluctuations. To partially
mitigate this risk, we have established fixed interest rates on approximately
75% of our outstanding debt.

As a result of our large amount of debt, we may be perceived by banks and other
lenders to be highly leveraged and close to our borrowing ceiling. Until we
repay some of our debt, our ability to access additional capital may be limited.
In turn, that may limit our ability to finance transactions and to grow our
business. In addition, our senior credit agreement limits our ability to incur
incremental debt without our lender's permission.

Our senior credit agreement contains numerous covenants and restrictions that
affect how we conduct our business.

THE BAKER FAMILY CURRENTLY OWNS A MAJORITY OF OUR VOTING STOCK AND CONTROLS THE
COMPANY. SUCH CONTROL AFFECTS OUR CORPORATE GOVERNANCE, AND COULD ALSO HAVE THE
EFFECT OF DELAYING OR PREVENTING A CHANGE OF CONTROL OF THE COMPANY.

The Baker family group, consisting of the four current directors Henry Baker
(Chairman Emeritus), Peter Baker (CEO), John Baker (Executive Vice President)
and Ross Rapaport (Chairman), as trustee, together own a majority of our common
stock. Accordingly, these stockholders, acting together, can exert a controlling
influence over the outcome of matters requiring stockholder approval, such as
the election of directors, amendments to our certificate of incorporation,
mergers and various other matters. The concentration of ownership could also
have the effect of delaying or preventing a change of control of the company.

As permitted under the corporate governance rules of the American Stock Exchange
(AMEX), we have, at the direction of the Baker family group, elected "controlled
company" status under those rules. A controlled company is exempted from these
AMEX corporate governance rules: (1) the requirement that a listed company have
a majority of independent directors, (2) the requirement that nominations to the
company's board of directors be either selected or recommended by a nominating
committee consisting solely of independent directors, and (3) the requirement
that officers' compensation be either determined or recommended by a
compensation committee consisting solely

of independent directors. We do not currently utilize exemption (3) as we have a
compensation committee consisting solely of three independent directors.

OUR SUCCESS DEPENDS ON THE CONTINUED SERVICES OF KEY PERSONNEL.

Our continued success will depend in large part upon the expertise of our senior
management. Peter Baker, our Chief Executive Officer and President, John Baker,
our Executive Vice President, and Bruce MacDonald, our Chief Financial Officer,
Treasurer and Secretary, have entered into employment agreements with Vermont
Pure Holdings, Ltd. These "at will" employment agreements do not prevent these
employees from resigning. The departure or loss of any of these executives
individually could have an adverse effect on our business and operations.

THE PERSONAL INTERESTS OF OUR DIRECTORS AND OFFICERS CREATE A CONFLICT.

As mentioned above, the Baker family group owns a majority of our common stock.
In addition, in connection with the acquisition of Crystal Rock Spring Water
Company in 2000, we issued members of the Baker family group (including Joan
Baker, the wife of Henry Baker) 12% subordinated promissory notes secured by all
of our assets. The current balance on these notes is approximately $14,000,000.
We also lease important facilities in Watertown and Stamford, Connecticut from
Baker family interests. These interests of the Baker family create various
conflicts of interest.

THE MARKET FOR BOTTLED WATER IS SUBJECT TO RAPID MARKET CHANGE, INTRODUCTION OF
COMPETING PRODUCTS, AND CHANGING INDUSTRY STANDARDS.

We operate in highly competitive markets. The principal methods of competition
in the markets in which we compete are distribution capabilities, brand
recognition, quality, reputation, and price. We have a significant number of
competitors, some of which have far greater resources than us. Among our
principal competitors are the Nestle Waters North America, large regional brands
owned by private groups, and local competitors in the markets that we serve.
Price reductions and the introduction of new products by our competitors can
adversely affect our revenues, gross margins, and profits.

In addition, the industry has been affected by the increasing availability of
water coolers in discount retail outlets. This has negatively impacted our
rental revenue stream in recent years as more customers choose to purchase
coolers rather than rent them. The reduction of rental revenue has been somewhat
offset by the increase in coolers that we sell but not to the extent that
rentals have declined. We do not expect retail sales to replace rentals
completely because we believe that the purchase option does not provide the
quality and service that many customers want. However, third party retail cooler
sales may continue to negatively impact our rental revenues in the future.

THE BOTTLED WATER INDUSTRY IS REGULATED AT BOTH THE STATE AND FEDERAL LEVEL. IF
WE ARE UNABLE TO CONTINUE TO COMPLY WITH APPLICABLE REGULATIONS AND STANDARDS IN
ANY JURISDICTION, WE MIGHT NOT BE ABLE TO SELL OUR PRODUCTS IN THAT
JURISDICTION, AND OUR BUSINESS COULD BE SERIOUSLY HARMED.

The Federal Food and Drug Administration regulates bottled water as a food. Our
bottled water must meet FDA requirements of safety for human consumption,
labeling, processing and distribution under sanitary conditions and production
in accordance with FDA "good manufacturing practices." In addition, all drinking
water must meet Environmental Protection Agency standards established under the
Safe Drinking Water Act for mineral and chemical concentration and drinking
water

quality and treatment, which are enforced by the FDA. We also must meet state
regulations in a variety of areas. These regulations set standards for approved
water sources and the information that must be provided and the basis on which
any therapeutic claims for water may be made. We have received approval for our
drinking water in Connecticut, Massachusetts, New Hampshire, New Jersey, New
York, Rhode Island and Vermont. However, we can give no assurance that we will
receive such approvals in the future.

WE DEPEND UPON MAINTAINING THE INTEGRITY OF OUR WATER RESOURCES AND
MANUFACTURING PROCESS. IF OUR WATER SOURCES OR BOTTLING PROCESSES WERE
CONTAMINATED FOR ANY REASON, OUR BUSINESS WOULD BE SERIOUSLY HARMED.

Our ability to retain customers and the goodwill associated with our brands is
dependent upon our ability to maintain the integrity of our water resources and
to guard against defects in, or tampering with, our manufacturing process. The
loss of integrity in our water resources or manufacturing process could lead to
product recalls and/or customer illnesses that could significantly reduce our
goodwill, market share and revenues. Because we rely upon natural spring sites
for sourcing some of our water supply, acts of God, such as earthquakes, could
alter the geologic formation of the spring sites, constricting water flow.

In addition, we do not own any of our water sources. Although we feel the long
term rights to our spring and municipal sources are well secured, any dispute
over these rights that resulted in prolonged disruption in supply could cause an
increase in cost of our product or shortages that would not allow us to meet the
market demand for our product.

FLUCTUATIONS IN THE COST OF ESSENTIAL RAW MATERIALS AND COMMODITIES, INCLUDING
FUEL COSTS, FOR THE MANUFACTURE AND DELIVERY OF OUR PRODUCTS COULD SIGNIFICANTLY
IMPACT OUR BUSINESS.

We rely upon the raw material of polycarbonate, a commodity that is subject to
fluctuations in price and supply, for manufacturing our bottles. Bottle
manufacture also uses petroleum-based products. Increases in the cost of
petroleum will likely have an impact on our bottle costs.

Our transportation costs increase as the price of fuel rises. Because trucks are
used extensively in the delivery of our products, the rising cost of fuel has
impacted and can be expected to continue to impact the profitability of our
operations unless we are able to pass along those costs to our customers.
Further, limitations on the supply or availability of fuel could inhibit our
ability to get raw materials and distribute our products, which in turn could
have an adverse affect on our business.

A significant portion of our sales, 18% in fiscal year 2005, is derived from
coffee. The supply and price of coffee may be limited by climate, by
international political and economic conditions, and by access to
transportation, combined with consumer demand. An increase in the price of
coffee could result in a reduction in our profitability. If our ability to
purchase coffee were impaired by a market shortage, our sales might decrease,
which would also result in a reduction of profitability.

WE HAVE A LIMITED AMOUNT OF BOTTLING CAPACITY. SIGNIFICANT INTERRUPTIONS ON OUR
BOTTLING FACILITIES COULD ADVERSELY AFFECT OUR BUSINESS.

We own three bottling facilities, and also contract with a third party, to
bottle our water. If any of these facilities were incapacitated for an extended
period of time, we would likely have to relocate production to an alternative
facility. The relocation and additional transportation could increase the cost
of our products or result in product shortages that would reduce sales. Higher
costs and lower sales would reduce profitability.

WE RELY UPON A SINGLE SOFTWARE VENDOR THAT SUPPLIES THE SOFTWARE FOR OUR ROUTE
ACCOUNTING SYSTEM.

Our route accounting system is essential to our overall administrative function
and success. An extended interruption in servicing the system could result in
the inability to access information. Limited or no access to this information
would likely inhibit the distribution of our products and the availability of
management information, and could even affect our compliance with public
reporting requirements. Our supplier is Computer Design Systems, or CDS, of
which we own approximately 24%. CDS has a limited number of staff that has
proprietary information pertaining to the operation of the software. Changes in
personnel might result in disruption of service. Any of these consequences could
have a material adverse impact on our operations and financial condition.

OUR CUSTOMER BASE IS LOCATED IN NEW ENGLAND, NEW YORK AND NEW JERSEY. IF THERE
WERE TO BE A MATERIAL DECLINE IN THE ECONOMY IN THESE REGIONS, OUR BUSINESS
WOULD BE LIKELY BE ADVERSELY AFFECTED.

Essentially all of our sales are derived from New England, New York and New
Jersey. A significant negative change in the economy of any of these regions,
changes in consumer spending in these regions, or the entry of new competitors
into these regional markets, among other factors, could result in a decrease in
our sales and, as a result, reduced profitability.

OUR BUSINESS IS SEASONAL, WHICH MAY CAUSE FLUCTUATIONS IN OUR STOCK PRICE.

The period from June to September represents the peak period for sales and
revenues due to increased consumption of beverages during the summer months in
our core Northeastern United States markets. Warmer weather in our geographic
markets tends to increase sales, and cooler weather tends to decrease sales. To
the extent that our quarterly results are affected by these patterns, our stock
price may fluctuate to reflect them.

ACQUISITIONS MAY DISRUPT OUR OPERATIONS OR ADVERSELY AFFECT OUR RESULTS

We regularly evaluate opportunities to acquire other businesses. The expenses we
incur evaluating and pursuing acquisitions could have a material adverse effect
on our results of operations. If we acquire a business, we may be unable to
manage it profitably or successfully integrate its operations with our own.
Moreover, we may be unable to realize the financial, operational, and other
benefits we anticipate from these acquisitions. Competition for future
acquisition opportunities in our markets could increase the price we pay for
businesses we acquire and could reduce the number of potential acquisition
targets. Further, acquisitions may involve a number of special financial and
business risks, such as:

- charges related to any potential acquisition from which we may
withdraw;

- diversion of our management's time, attention, and resources;

- decreased utilization during the integration process;

- loss of key acquired personnel;

- increased costs to improve or coordinate managerial, operational,
financial, and administrative systems including compliance with the
Sarbanes-Oxley Act of 2002;

- dilutive issuances of equity securities, including convertible debt
securities;

- the assumption of legal liabilities;

- amortization of acquired intangible assets;

- potential write-offs related to the impairment of goodwill;

- difficulties in integrating diverse corporate cultures; and

- additional conflicts of interests.

WE ARE REQUIRED TO BE IN COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT
AS OF OUR FISCAL YEAR ENDING OCTOBER 31, 2007. UNDER CURRENT REGULATIONS, THE
FINANCIAL COST OF COMPLIANCE WITH SECTION 404 IS SIGNIFICANT. FAILURE TO ACHIEVE
AND MAINTAIN EFFECTIVE INTERNAL CONTROL IN ACCORDANCE WITH SECTION 404 COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OUR STOCK PRICE.

We are in the process of implementing the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, which requires management to assess the
effectiveness of our internal controls over financial reporting and include an
assertion in our annual report as to the effectiveness of its controls. The cost
to comply with this law will affect our net income adversely during the
compliance period. In addition, management's effort and cost are no assurance
that our independent auditors will attest to the effectiveness of our internal
controls in its report required by the law. If that is the case, the resulting
report from our auditors may have a negative impact on our stock price.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES.

As part of our Home and Office delivery operations, we have entered into or
assumed various lease agreements for properties used as distribution points and
office space. The following table summarizes these arrangements:

Location Lease expiration Sq. Ft. Annual Rent
- -------- ---------------- ------- -----------

Williston, VT June 2009 10,000 $ 69,556
Waltham, MA December 2008 11,760 $108,780
Bow, NH June 2010 9,600 $ 48,360
Rochester, NY January 2007 15,000 $ 89,400
Buffalo, NY Month-to-month 10,000 $ 60,000
Syracuse, NY December 2010 10,000 $ 38,070
Halfmoon, NY October 2011 22,500 $165,825
Plattsburgh, NY May 2010 5,000 $ 24,000
Watertown, CT October 2010 67,000 $360,000
Stamford, CT October 2010 22,000 $216,000
White River Junction, VT June 2009 12,000 $ 69,100
Waterbury, CT June 2007 5,000 $ 24,200
Groton, CT October 2009 7,500 $ 56,375

All locations are used primarily for warehousing and distribution and have
limited office space for location managers and support staff. The exception is
the Watertown, CT location that has a substantial amount of office space for
sales, accounting, information systems, customer service, and general
administrative staff.

In conjunction with the Crystal Rock merger, we entered into ten-year lease
agreements to lease the buildings that are utilized for operations in Watertown
and Stamford, Connecticut. The landlord for the buildings is a trust with which
Henry, John, and Peter Baker, and Ross Rapaport are affiliated. We believe that
the rent charged under these leases approximate fair market rental value.

We expect that these facilities will meet our needs for the next several years.
For the lease that is currently under a month to month arrangement, we plan to
negotiate a renewal or enter into a lease at another facility that better meets
our needs on a long term basis.

ITEM 3. LEGAL PROCEEDINGS.

Please refer to Item 3, "Legal Proceedings," in our Annual Report on Form 10-K/A
for the fiscal year ended October 31, 2004 for a description of our August 2003
lawsuit in federal district court in Massachusetts against Nestle Waters North
America, Inc. and its parent company, Nestle S.A. That description is
incorporated by this reference. In March 2004, we voluntarily dismissed our case
against Nestle S.A. Since January 31, 2005, the date of last year's disclosure,
Nestle has made a number of motions on which the Court has yet to rule. The case
continues to proceed in its discovery phase.

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

No matter was submitted to a vote of security holders during the quarter ended
October 31, 2005.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Our Common Stock is traded on the American Stock Exchange, or AMEX, under the
symbol VPS. The table below indicates the range of the high and low daily
closing prices per share of Common Stock as reported by AMEX.

Fiscal Year Ended October 31, 2005

High Low
----- -----

First Quarter $2.53 $1.71
Second Quarter $2.86 $1.80
Third Quarter $2.16 $1.68
Fourth Quarter $2.26 $1.71

Fiscal Year Ended October 31, 2004

First Quarter $3.45 $3.00
Second Quarter $3.50 $2.75
Third Quarter $3.10 $2.05
Fourth Quarter $2.24 $1.79

The last reported sale price of our Common Stock on AMEX on January 17, 2006 was
$1.82 per share.

As of that date, we had 443 record owners and believe that there were
approximately 3,200 beneficial holders of our Common Stock.

No dividends have been declared or paid to date on our Common Stock. Our senior
credit agreement prohibits us from paying dividends without the prior consent of
the lender. It is unlikely that we will pay dividends in the foreseeable future.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

The following table sets forth additional information as of October 31, 2005,
about shares of our Common Stock that may be issued upon the exercise of options
and other rights under our existing equity compensation plans and arrangements,
divided between plans approved by our stockholders and plans or arrangements
that were not required to be and were not submitted to our stockholders for
approval.

(c)
Number of Securities
(a) (b) remaining available for
Number of Securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan Category warrants and rights rights reflected in column (a)).
- ------------- -------------------------- ------------------------- -------------------------

Equity compensation plans
approved by security holders (1) 2,470,490 $2.99 61,197

Equity compensation plans not
approved by security holders (2) 156,000 $2.50 -0-
------------- ----- ------
Total 2,626,490 $2.96 61,697
============= ===== ======

(1) Includes options to purchase 1,479,200 shares of our common stock issued to
the former chief executive officer and several directors. These options
expired in December 2005 in connection with the resignation of such officer
and directors from our company.

(2) Represents options to purchase 156,000 shares of our common stock issued to
several former directors. These options expired in December 2005 in
connection with the resignation of such directors from our company.

ITEM 6. SELECTED FINANCIAL DATA.

The selected consolidated financial data set forth below should be read in
conjunction with our financial statements and footnotes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this report. The historical results are not necessarily
indicative of the operating results to be expected in the future.

Fiscal Years Ended
-------------------------------------------------------------------
October 31, October 31, October 31, October 31, October 30,
(000's except per share) 2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------

Net sales $ 59,835 $ 52,473 $ 49,854 $ 49,068 $ 47,551
Income from continuing operations $ 871 $ 500 $ 941 $ 2,079 $ 775
Income per share from continuing operations $ .04 $ .02 $ .04 $ .09 $ .04
Total assets $102,889 $103,781 $111,123 $109,143 $106,138
Long term debt, less current portion $ 37,975 $ 37,854 $ 48,274 $ 46,540 $ 47,851

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following Management's Discussion and Analysis (MD&A) is intended to help
the reader understand our company. The MD&A should be read in conjunction with
our consolidated financial statements and the accompanying notes. This overview
provides our perspective on the individual

sections of the MD&A, as well as a few helpful hints for reading these pages.
The MD&A includes the following sections:

- Business Overview - a brief description of fiscal year 2005.

- Results of Operations -- an analysis of our consolidated results of
operations for the three years presented in our consolidated financial
statements.

- Liquidity and Capital Resources -- an analysis of cash flows, sources
and uses of cash, and contractual obligations and a discussion of
factors affecting our future cash flow.

- Critical Accounting Policies -- a discussion of accounting policies
that require critical judgments and estimates. Our significant
accounting policies, including the critical accounting policies
discussed in this section, are summarized in the notes to the
accompanying consolidated financial statements.

BUSINESS OVERVIEW

The improvement in our operating results in fiscal year 2005 was indicative of
the sales growth that we experienced from higher pricing and volume increases
which also resulted in increased gross profit. The increase in gross profit was
eroded by higher selling, general, and administrative costs and other costs. The
increase in operating costs was driven by market prices for fuel and insurance
as well as administrative costs for regulatory compliance, corporate
reorganization, refinancing, and severance. In addition, we incurred costs
related to the settlement of legal suits. Much of the increase in administrative
costs, specifically corporate reorganization, refinancing, severance, and legal
settlements, we do not expect to incur in future years.

RESULTS OF OPERATIONS

Fiscal Year Ended October 31, 2005 Compared to Fiscal Year Ended October 31,
2004

Sales

Sales for fiscal year 2005 were $59,835,000 compared to $52,473,000 for 2004, an
increase of $7,362,000 or 14%. Sales attributable to acquisitions in fiscal year
2005 were $3,731,000. Net of the acquisitions, sales increased 7%.

The comparative breakdown of sales is as follows:

Product Line 2005 2004 Difference % Diff.
- ------------ ------------ ------------ ------------ -------
(in 000's $) (in 000's $) (in 000's $)

Water $28,869 $25,043 $3,826 15%
Coffee and Other Products 21,629 18,524 3,105 17%
Equipment Rental 9,337 8,906 431 5%
------- ------- ------ ---
Total $59,835 $52,473 $7,362 14%
======= ======= ====== ===

Water - The increase in water sales was primarily attributable to acquisitions.
Net of acquisitions, water sales increased 6%. The increase, net of acquisition,
was evenly split between the effect of price and volume. The increase in price
was attributable to general increases in list prices. Increases in volume were a
result of an increase in demand in our core markets which, in part, was
favorably

impacted by substantially warmer weather than a year ago. Sales to distributors,
which account for about 4% of water sales, were up 15%.

Coffee and Other Products - Sales of coffee and other products increased 4% from
sales volume related to acquisitions. Net of acquisitions, sales in this
category increased 13%. The increase in sales was attributable to increased
volume of all products in this category but primarily to the growth of single
serve coffee, which grew 43% to $5,045,000 in fiscal year 2005 compared to
$3,532,000 in fiscal year 2004. The margin on single serve coffee products is
lower than that for traditional products. Other revenue increases were generated
by increased sales of coolers and single serve brewers and fees charged to
customers to offset increased fuel costs. These represented a total revenue
increase of $426,000. We expect cooler sales to grow at a similar rate next year
as customers choose to purchase coolers rather than rent them.

Equipment Rental - Equipment rental revenue was up in fiscal year 2005 compared
to fiscal year 2004 as a result of more cooler placements and additional coffee
machine rentals from the sale of single serve coffee. Net of acquisitions,
equipment rental revenue was down 2% for the year compared to last year. Total
equipment rental and water cooler placements in the fiscal year 2005, net of
acquisitions, were down 1% compared to fiscal year 2004 as a result of sales
competition in the retail market. We expect water cooler rental placements to
stay level or decrease slightly in the coming year as customers purchase their
own coolers. Average rental price was down 1%. Brewer rentals increased slightly
as a result of demand for single serve units.

Gross Profit/Cost of Goods Sold

Gross profit increased $5,296,000, or 18% in fiscal year 2005 compared to 2004,
to $34,992,000 from $29,696,000. As a percentage of sales, gross profit
increased to 59% of sales from 57% for the respective period. The increase in
gross profit, in dollars and as a percentage of sales, was attributable to
higher pricing and lower cost of goods sold. Lower costs were primarily a result
of bottling efficiencies in our plants. In addition, production and
transportation costs decreased as a result of our outsourced water bottling in
western New York, which commenced in November 2004 in conjunction with our
acquisition of Mayer Brothers in Buffalo, NY.

Cost of goods sold includes all costs to bottle water, costs of purchasing and
receiving products for resale, including freight, as well as costs associated
with product quality, warehousing and handling costs, internal transfers, and
the repair and service of rental equipment, but does not include the costs of
distributing our product to our customers. We include distribution costs in
selling, general, and administrative expense, and the amount is reported below.
Other companies may include distribution costs in their cost of goods sold, in
which case, on a comparative basis, such other companies may have a lower gross
margin as a result.

Income from Operations/Operating Expenses

Income from operations increased to $5,221,000 in 2005 from $4,505,000 in 2004,
an increase of $716,000, or 16%. The increase was attributable to higher sales
and gross profit that more than offset higher operating costs.

Total operating expenses increased to $29,771,000 for the year, up from
$25,191,000 the prior year, an increase of $4,580,000, or 18%. Selling, general
and administrative (SG&A) expenses were $27,791,000 in fiscal year 2005 and
$23,748,000 in 2004, an increase of $4,043,000, or 17%. Of total SG&A expenses,
route sales costs, significantly influenced by labor, fuel, vehicle,

and insurance costs, increased 14%, or $1,584,000 to $13,182,000 in fiscal year
2005 from $11,598,000 in fiscal year 2004, primarily related to labor for
commission-based sales from increased product volume, fuel due to market prices,
vehicle lease and repair costs, and insurance costs due to market rates and loss
experience. Included in SG&A expenses, total direct distribution related costs
increased to $12,563,000 in fiscal year 2005 from $10,940,000 in fiscal year
2004. In addition, selling costs increased 14%, or $345,000 to $2,849,000 in
fiscal year 2005 from $2,504,000 in fiscal year 2004, as a result of a increase
in sales staffing. Administrative costs increased 22%, or $2,113,000 to
$11,760,000 in fiscal year 2005 from $9,646,000 in fiscal year 2004, as a result
of legal, accounting, and consulting costs attributed to regulatory compliance,
corporate reorganization, bank refinancing, and severance costs.

Advertising expenses were $1,194,000 in fiscal year 2005 compared to $1,034,000
in 2004, an increase of $160,000, or 15%. The increase in advertising costs is
primarily related to television and print advertising campaigns run during the
year.

Amortization increased to $787,000 in fiscal year 2005 from $409,000 in 2004.
This increase is attributable to intangible assets that were acquired as part of
several acquisitions in fiscal year 2004.

Other Income and Expense, Income Taxes, and Income from Continuing Operations

Interest expense was $3,365,000 for fiscal year 2005 compared to $3,507,000 for
fiscal year 2004, a decrease of $142,000. Lower interest costs were primarily a
result of reduced amounts of senior and subordinated debt. Lower loan balances,
and conversion of $3,600,000 of subordinated debt to senior debt, were partially
offset by higher market interest rates and fixing new senior debt at a higher
rate than market rates at the time.

In fiscal year 2005, we incurred $250,000 related to the settlement of legal
matters with former employees. These expenses comprise most of the $261,000 of
total miscellaneous expense in 2005. In 2004, we recognized an impairment charge
related to our investment in a software provider as we determined it was likely
that the investment was not recoverable. The amount of the charge was $153,000.
We expect to continue to receive reliable products and service from the
provider.

Income from continuing operations before income tax expense was $1,610,000 in
fiscal year 2005 compared to $855,000 in fiscal year 2004. The tax expense for
fiscal year 2005 was $740,000 compared to $355,000 for fiscal year 2004 and was
based on an effective tax rate of 46% in 2005 and 41% in 2004. The increase in
the tax rate is a result of a shift in earnings in states with higher effective
rates and permanent differences primarily, non-deductible meals and
entertainment and other items. Our total effective tax rate is a combination of
federal and state rates for the states in which we operate.

Income from continuing operations was $871,000 in 2005, $371,000 more than
income from continuing operations of $500,000 in 2004.

Discontinued Operations

There were no discontinued operations in 2005. The loss from operations for
discontinued retail segments in fiscal year 2004 was $79,000. This related to
the four months of operations of those segments. The gain on the sale of assets
of the discontinued operations was $353,000. The

corresponding tax expense of loss from discontinued operations combined with the
gain on the sale of $114,000 was calculated at 42%.

Net Income

Net income of $871,000 in fiscal year 2005 was derived from continuing
operations and exceeded fiscal year 2004 by $211,000. Net income of $660,000 in
fiscal year 2004 was attributable to income from continuing operations and loss
from discontinued operations combined with a gain on the sale of a portion of
the retail business.

Based on the weighted average number of shares of Common Stock outstanding of
21,620,000 (basic) and 21,626,000 (diluted) during 2005, net income was $.04 per
share - basic and diluted. All earnings per share were derived from continuing
operations. Based on the weighted average number of shares of common stock
outstanding of 21,497,000 (basic) and 21,575,000 (diluted) during 2004, net
income was $.03 per share - basic and diluted. Of the $.03 earnings per share,
$.02 was attributable to continuing operations while $.01 was from discontinued
operations, basic and diluted. Fiscal year 2005 earnings per share exceeded
those for 2004 by $.01 per share, in total, and $.02 per share for continuing
operations.

The fair value of our swaps increased $107,000 during the year, resulting in an
unrealized gain of $65,000, net of taxes for the fiscal year ended October 31,
2005. The increase during the year has been recognized as an adjustment to net
income to arrive at comprehensive income as defined by the applicable accounting
standards. Further, it has been recorded as a current asset and an increase in
accumulated other comprehensive income on our consolidated balance sheet.

Fiscal Year Ended October 31, 2004 Compared to Fiscal Year Ended October 31,
2003

Sales

Sales for fiscal year 2004 were $52,473,000 compared to $49,854,000 for 2003, an
increase of $2,619,000, or 5%. Sales attributable to acquisitions in fiscal year
2004 were $3,022,000. Net of the acquisitions, sales decreased 1%.

The comparative breakdown of sales is as follows:

Product Line 2004 2003 Difference % Diff.
- ------------ ------------ ------------ ------------ -------
(in 000's $) (in 000's $) (in 000's $)

Water $25,043 $24,030 $1,013 4%
Coffee and Other Products 18,524 17,284 1,240 7%
Equipment Rental 8,906 8,540 366 4%
------- ------- ------ ---
Total $52,473 $49,854 $2,619 5%
======= ======= ====== ===

Water - Net of acquisitions, water sales decreased 2%. The decrease was
primarily a result of a decrease in distributor volume. This was a result of the
loss of a major distributor and lower volume from remaining distributors. Sales
to distributors are the least profitable part of our business and account for
about 4% of water sales. The volume of water from our own distribution system
was flat while the average selling price per delivered bottle increased 1%,
reflecting competitive pressures in our core market. The increase in selling
price was not enough to offset the decrease in distributor volume.

Coffee and Other Products - The acquisition of a large office coffee distributor
during the second half of fiscal year 2003 and in the last quarter of fiscal
year 2004 accounted for 6% of the increase in sales. Net of acquisitions, the
category increased 1%. Sales of Keurig single-serve coffee packages more than
offset a decrease in conventional coffee sales to account for the growth.
However, the margin on single serve distribution is lower than traditional
coffee products. In addition, a non-recurring favorable adjustment in 2003
related to deposits for bottles not returned resulted in a 2% decrease in sales
for this category.

Equipment Rental - Growth from acquisitions resulted in a 5% increase in cooler
rental placements. Average rental price was down 1%. Brewer rentals increased
slightly as a result of demand for single serve units. Net of acquisitions,
rental income was down 1%.

Gross Profit/Cost of Goods Sold

Gross profit increased $642,000, or 2% in fiscal year 2004 compared to 2003 to
$29,696,000 from $29,054,000. The increase in gross profit was attributable to
higher sales. As a percentage of sales, gross profit decreased to 57% of sales
from 58% for the respective period. The decrease in gross profit, as a
percentage of sales, was attributable to higher costs of sales and a higher
percentage of sales of non-water related products. The increase in cost of sales
is attributable to higher costs of production as a result of higher costs of
materials for bottles and labor, and higher service costs as a result of lower
sales volume per customer.

Income from Operations/Operating Expenses

Income from operations decreased to $4,505,000 in 2004 from $5,807,000 in 2003,
a decrease of $1,302,000, or 22%. The decrease was related to a higher sales mix
of lower margin products, higher production and service costs and higher
operating costs.

Total operating expenses increased to $25,191,000 for the year, up from
$23,248,000 the prior year, an increase of $1,943,000, or 8%. Selling, general
and administrative (SG&A) expenses were $23,748,000 in fiscal year 2004 and
$22,229,000 in 2003, an increase of $1,519,000, or 7%. Of total SG&A expenses,
route distribution costs, significantly influenced by labor, fuel, vehicle, and
insurance costs, increased 11%. Included in SG&A expenses, total distribution
related costs increased to $10,940,000 in fiscal year 2004 from $9,821,000 in
fiscal year 2003. In addition, selling costs decreased 8% as a result of
vacancies in our sales staffing and administration costs increased 5% as a
result of the costs of serving more customers and increasing regulatory
requirements.

Advertising expenses were $1,034,000 in fiscal year 2004 compared to $832,000 in
2003, an increase of $202,000, or 24%. The increase in advertising costs is
related to additional yellow page advertising in 2004.

Amortization increased to $409,000 in fiscal year 2004 from $186,000 in 2003.
This increase is attributable to intangible assets that were acquired as part of
several acquisitions in fiscal years 2003 and 2004.

Other Income and Expense, Income Taxes, and Income from Continuing Operations

Interest expense was $3,507,000 for fiscal year 2004 compared to $4,269,000 in
2003, a decrease of $762,000. Lower interest costs were primarily a result of
reduced amounts of senior and subordinated debt combined with lower fixed rate
commitments compared to a year ago.

The gain on sale of equipment was $10,000 in fiscal year 2004 compared to a loss
of $2,000 in 2003 primarily related to the sale of bottling equipment when new
equipment was purchased in 2004 for relocation of a bottling line from Randolph
to White River Junction Vermont. We also recognized an impairment charge related
to our investment in a software provider as we determined it was likely that the
investment was not recoverable. The amount of the charge was $153,000. We expect
to continue to receive reliable products and service from the provider.

Income from continuing operations before income tax expense was $855,000 in
fiscal year 2004 compared to income from continuing operations before taxes of
$1,536,000 in 2003. The tax expense for fiscal year 2004 was $355,000 compared
to tax expense of $595,000 in 2003 and was based on an effective tax rate of 41%
in 2004 and 39% in 2003. The increase in the tax rate is a result of a shift in
earnings to states with higher effective rates and federal permanent
differences. Our total effective tax rate is a combination of federal and state
rates for the states in which we operate.

Income from continuing operations was $500,000 in 2004, $441,000 less than
income from continuing operations of $941,000 in 2003.

Discontinued Operations

The loss from operations for discontinued retail segments in fiscal year 2004
was $79,000. This related to the four months of operations of those segments.
The gain on the sale of assets of the discontinued operations was $353,000. The
corresponding tax expense of loss from discontinued operations combined with the
gain on the sale of $114,000 was calculated at 42%. Income from discontinued
operations in fiscal year 2003 was $637,000. Tax expense, calculated at an
effective rate of 40%, was $246,000. Total income from discontinued operations
was $160,000 in 2004 compared to $391,000 in 2003.

Net Income

Net income of $660,000 in fiscal year 2004 was attributable to income
from continuing operations and loss from discontinued operations combined with a
gain on the sale of a portion of the retail business. This was a decrease in net
income of $672,000 from net income of $1,332,000 in 2003.

Based on the weighted average number of shares of Common Stock outstanding of
21,497,000 (basic) and 21,575,000 (diluted) during 2004, net income was $.03 per
share - basic and diluted. Of the $.03 earnings per share, $.02 was attributable
to continuing operations while $.01 was from discontinued operations, basic and
diluted. This compares to $.06 per share, $.04 continuing and $.02 discontinued,
basic and diluted, in 2003.

The fair value of our swaps increased $139,000 during the year ended October 31,
2004, resulting in an unrealized gain of $103,000, net of taxes. This increase
has been recognized as an adjustment to net income to arrive at comprehensive
income as defined by the applicable accounting standards. Further, it has been
recorded as a current asset and an increase in accumulated other comprehensive
income on our consolidated balance sheet.

LIQUIDITY AND CAPITAL RESOURCES

As of October 31, 2005, we had working capital of $3,372,000 compared to
$350,000 as of October 31, 2004, an increase of $3,022,000. The increase in
working capital was primarily the result of refinancing our senior debt facility
in 2005, an increase in cash and receivables generated from operations, and
reclassification of a note receivable from a long term to a current asset based
on its date of maturity. These were partially offset by the decrease in current
portion of the deferred tax asset.

On April 6, 2005, we refinanced our senior credit facility with Bank of America.
Webster Bank is a participant in the new loan. The new facility refinanced $28
million of existing senior debt in the form of a seven year term loan, provides
a revolving credit facility of $6 million for working capital and letters of
credit for a term of three years, and makes available up to $7.5 million to be
used for acquisitions for a period of three years. The term loan may also
provide funds for future principal payment of our subordinated debt if certain
financial covenants are met after the first two years of the loan.

With the $28 million of term debt, we repaid our borrowings under our former
senior credit facility with Webster Bank, including $17.5 million under the old
term loan and $5.4 million under the old acquisition line of credit as well as
$3.6 million of our subordinated debt. The balance of the new term loan as well
as $2 million of the new line of credit was used to pay a balance of $3.5
million on the old revolving line of credit with Webster Bank. At October 31,
2005, we had no outstanding balance on our line of credit with Bank of America.
There was $1.4 million of letters of credit outstanding, leaving $4.6 million of
availability. As of October 31, 2005, there were outstanding balances of
$26,500,000 on the term loan and $600,000 on the acquisition line.

The term loan amortizes over seven years and the new acquisition debt amortizes
as a term loan for five years after the first three years. During the first
three years of the acquisition debt, interest only is paid on a monthly basis
for amounts outstanding. Interest on the term loan is tied to our performance
based on the 30-day LIBOR plus a 250 basis point margin, while the acquisition
and revolving lines have a 225 basis point margin over the 30-day LIBOR. For the
respective loans, the margin may vary from 125 to 225 basis points and 150 to
250 basis points based on the level of senior debt to earnings before interest,
taxes, depreciation, and amortization (EBITDA). The applicable margins as of
October 31, 2005 was 2.50% for the term note and 2.25% for the acquisition line,
resulting in total variable interest rates of 6.59% and 6.34%, respectively, as
of that date. The facility is secured by substantially all of the Company's
assets.

As a result of our refinancing, less of our debt has been classed as a current
liability. At the end of fiscal 2004, the outstanding amount of our operating
line of credit was $1,500,000 which was, along with $200,000 of the acquisition
line of credit, classified as current debt. As of October 31, 2005, this had
been paid down in full with funds from the new term loan as well as cash from

operations. In addition, the payment schedule of the new term loan reduced the
payments over the next 12 months.

Our credit facility requires that we be in compliance with certain financial
covenants at the end of each fiscal quarter. The covenants include senior fixed
charge coverage of greater than 1.25 to 1, total fixed charge coverage of
greater than 1 to 1, and senior debt to EBITDA of greater than 3 to 1. As of
October 31, 2005, we were in compliance with all of the financial covenants of
our new credit facility and we expect to be in compliance in the foreseeable
future.

As of October 31, 2005, we had two separate interest rate swap agreements
outstanding. We had $10 million of debt fixed at 2.74% plus the current margin
of 2.5% in an agreement with Webster Bank that expires in June 2006. On May 3,
2005, we entered into an additional interest rate swap agreement with Bank of
America in conjunction with our new senior financing. The credit agreement
requires that we fix 75% of the interest rate of the term debt for the life of
the loan. The swap with Bank of America fixes the interest rate at 4.66%, plus
the applicable margin, 2.50% as of October 31, 2005, and amortizes concurrently
with the loan principal to fix the interest rate with respect to 75% of the
outstanding principal. The swaps constituting 75% of fixed rate principal
include our existing swap. For a further explanation of our fixed debt
instruments, see Item 7A.

As of October 31, 2005, we had $1,390,000 committed to letters of credit secured
by our operating line of credit.

In fiscal year 2005, we reduced our deferred tax asset by $738,000 to reflect
usage of federal net operating loss carryforwards and other deferred tax assets.
This reflects our utilization of our deferred tax assets to offset taxes that
would have been payable in cash for the period. We have increased the current
portion and decreased the long-term portion of the deferred tax asset to reflect
current estimates of future utilization. There is a total deferred tax asset of
$1,451,000 as of October 31, 2005.

During fiscal year 2005, we used cash for capital expenditures, acquisitions,
and repayment of debt. Cash used for capital expenditures of $3,126,000 was used
for the purchase of bottling equipment, and coolers, brewers, bottles, and racks
related to Home and Office distribution.

In addition to our senior and subordinated debt commitments, we have significant
future cash commitments, primarily in the form of operating leases that are not
reported on the balance sheet. The following table sets forth our contractual
commitments as of October 31, 2005:

PAYMENT DUE BY PERIOD
-------------------------------------------------------------------
LESS THAN 1 MORE THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
- ----------------------- ----------- ----------- ----------- ----------- -----------

Debt (1) $41,242,000 $3,268,000 $ 7,374,000 $ 9,056,000 $21,544,000
Interest on Debt (1) 18,938,000 3,550,000 6,363,000 5,175,000 3,850,000
Operating Leases 8,615,000 2,289,000 3,915,000 2,262,000 149,000
Coffee Purchase Commitments 719,000 616,000 103,000 -- --
----------- ---------- ----------- ----------- -----------
Total $69,514,000 $9,723,000 $17,755,000 $16,493,000 $25,543,000
=========== ========== =========== =========== ===========

(1) Interest based on 75% of outstanding senior debt at the hedged interest
rate discussed above, 25% of outstanding senior debt at a variable rate of
5.95%, and subordinated debt at a rate of 12%.

As of the date of Form 10-K, we have no other material contractual
obligations or commitments.

Factors Affecting Future Cash Flow

In 2005, we generated sufficient cash to fund operations, capital expenditures,
scheduled loan payments and pay down the operating line of credit with the bank.
We anticipate that we will continue to be profitable and generate cash for these
and other purposes. If we continue to generate cash in excess of these
activities we will explore opportunities to best use it. We will continue to
evaluate potential acquisitions in our existing core market areas and may borrow
more money to finance such transactions if we close them. However, we have a
large amount of debt and would like to pay down debt if we do not find
acquisitions that are accretive. If the business does not perform to our
expectations we would have to borrow from our line of credit to fund some
expenditures and our debt level would not decrease as much as anticipated or may
increase.

Moreover, interest rates have been increasing and we continue to be exposed to
market rates. We expect capital spending of $3,126,000 in fiscal year 2005 to
remain relatively unchanged in 2006.

Inflation has had no material impact on our performance.

CRITICAL ACCOUNTING POLICIES

Our financial statements are prepared in accordance with generally accepted
accounting principles. Preparation of the statements in accordance with these
principles requires that we make estimates, using available data and our
judgment for such things as valuing assets, accruing liabilities, and estimating
expenses. The following is a list of what we feel are the most critical
estimations that we make when preparing our financial statements.

Accounts Receivable - Allowance for Doubtful Accounts

We routinely review our accounts receivable, by customer account aging, to
determine the collectibility of the amounts due based on information we receive
from the customer, past history, and economic conditions. In doing so, we adjust
our allowance accordingly to reflect the cumulative amount that we feel is
uncollectible. This estimate may vary from the proceeds that we actually
collect. If the estimate is too low we may incur higher bad debt expenses in the
future resulting in lower net income. If the estimate is too high, we may
experience lower bad debt expense in the future resulting in higher net income.

Fixed Assets - Depreciation

We maintain buildings, machinery and equipment, and furniture and fixtures to
operate our business. We estimate the life of individual assets to spread the
cost over the expected life. The basis for such estimates is use, technology,
required maintenance, and obsolescence. We periodically review these estimates
and adjust them if necessary. Nonetheless, if we overestimate the life of an
asset or assets, at a point in the future, we would have to incur higher
depreciation costs and consequently, lower net income. If we underestimate the
life of an asset or assets, we would absorb too much depreciation in the early
years resulting in higher net income in the later years when the asset is still
in service.

Goodwill - Intangible Asset Impairment

We have acquired a significant number of companies. The difference between the
value of the assets and liabilities acquired, including transaction costs, and
the purchase price is recorded as goodwill.

If goodwill is not impaired, it would remain as an asset on our balance sheet at
the value acquired. If it is impaired, we would be required to write down the
asset to an amount that accurately reflects its carrying value. We have had an
independent valuation of the Company performed as of October 31, 2005. By
comparing the fair value to the carrying value of the Company, we have
determined that goodwill is not impaired. In providing the valuation, the
independent valuation firm has relied, in part, on projections of future cash
flows of the assets that we provided. If these projections change in the future,
there may be a material impact on the valuation of the Company, which may result
in an impairment of goodwill.

Deferred Tax Asset

We have recognized a deferred tax asset on our balance sheet to reflect
cumulative current benefit of future tax loss carryforwards and other deferred
income taxes. We expect this asset to be realized over the next two years and
therefore have not provided a valuation allowance related to this asset. We have
relied on our estimated financial results for future years. If we have
overestimated earnings in future years, we may have, in turn, overestimated the
deferred tax asset and may have to provide a valuation allowance, decreasing net
income. Conversely, it may take us longer than two years to realize the value of
the asset.

Stock Based Compensation

In following the accounting treatment prescribed by APB Opinion No. 25, we have
recognized no compensation expense for our stock option awards because the
exercise price of our stock options equals the market price of the underlying
stock on the date of option grant. If our compensation committee chose to award
options at lower than market prices, we would be required to recognize
compensation expense. There are currently no plans to issue options at prices
lower than the market value. The compensation committee has issued restricted
shares of our stock and recorded compensation expense as a result of the
issuance.

We provide pro forma disclosure in the footnotes to our financial statements to
enable the reader to assess the impact on the financial statements if we had
used the fair value method using SFAS 123. In doing so, we make certain
assumptions related to interest rates and the volatility of its stock price. The
accuracy of these assumptions affects the eventual outcome of the amount of
stock based compensation reported in the footnote.

We estimate a risk free rate of return based on current (at the time of option
issuance) U. S. Treasury bonds and calculates the volatility of its stock price
over the past twelve months from the option issuance date. The fluctuations in
the volatility assumption used in the calculation over the years reported is a
direct result of the increases and decrease in the stock price over that time.
All other factors being equal, a 10% increase in the volatility percentage
results in approximately a 12% increase in the fair value of the options, net of
tax.

SFAS 123(R) will be effective for us starting with its fiscal year ending
October 31, 2006. In March 2005, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 107 (SAB 107) which provides additional guidance
regarding the pronouncement. We are currently assessing the impact that SFAS
123(R) will have on our results of operations and financial position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISKS

At October 31, 2005, we had approximately $7,225,000 of long-term debt subject
to variable interest rates. Under the credit agreement with Bank of America, we
pay interest at a rate of LIBOR plus a margin of 2.50%, or 6.59% at October 31,
2005. A hypothetical 100 basis point increase in the LIBOR rate would result in
an additional $72,000 of interest expense on an annualized basis. Conversely, a
decrease would result in a proportionate interest cost savings.

We have fixed the interest rate on $10 million of debt at 5.24% with a swap
agreement until June 2006 and an amount amortizing with our term note equal to
75% of the principal at 7.16%. On May 3, 2005, the Company entered into an
interest rate hedge ("swap") agreement in conjunction with its new senior
financing. The new credit agreement requires that the Company fix the interest
rate on its term debt for the life of the loan. The swap fixes the interest rate
at 4.66%, plus the applicable margin, 2.50% at October 31, 2005, and amortizes
concurrently with the loan principal to fix the interest rate with respect to
75% of the outstanding principal. The swap arrangement constituting 75% of fixed
rate principal include the $10 million swap until June 2006. When that swap
matures in June 2006 the balance of the aforementioned swap will increase to
hedge 75% of the term loan on an amortizing basis. As of October 31, 2005, the
total notional amount committed to swap agreements was $19.9 million.

As of October 31, 2005, these were rates favorable to the market. We will
continue to evaluate swap rates as the market dictates. They serve to stabilize
our cash flow and expense but ultimately may cost more or less in interest than
if we had carried all of our debt at a variable rate over the swap term. To date
we have fixed rates as required by our credit agreement with the bank. Future
low rates may compel us to fix a higher portion to further stabilize cash flow
and expenses as we monitor short and long term rates and debt balances.

COMMODITY PRICE RISKS

Coffee

The cost of our coffee purchases are dictated by commodity prices. As of October
31, 2005, we purchased green coffee on the spot market and fixed price contracts
with our vendors. We enter into contracts to mitigate market fluctuation of
these costs by fixing the price for certain periods. As of October 31, 2005, we
had fixed the price of our anticipated supply through December 2006 at a "green"
price of $.98 -$1.07 per pound. We are not insulated from price fluctuations
beyond that date. At our existing sales levels, an increase in pricing of $.10
per pound would increase our total cost for coffee $75,000 annually. In this
case, competitors that had fixed pricing might have a competitive advantage.

Diesel Fuel

We own and operate vehicles to deliver product to customers. The cost of fuel to
operate these vehicles fluctuates over time. During fiscal year 2005, fuel
prices increased significantly. We estimate that a $0.10 increase per gallon in
fuel cost would result in an increase to operating costs of approximately
$60,000 on an annual basis. In aggregate, we have spent approximately an
additional $402,000 on fuel as a result of higher prices in fiscal year 2005
compared to 2004. We

have offset some of this cost by adjusting our price to our customers on a
monthly basis while fuel prices are higher.

ITEM 8. FINANCIAL STATEMENTS

Our Consolidated Financial statements and their footnotes are set forth on pages
F-1 through F-24.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our Chief Executive Officer and our Chief Financial Officer, and other members
of our senior management team have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)). Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures, as
of the end of the period covered by this report, were adequate and effective to
provide reasonable assurance that information required to be disclosed by us,
including our consolidated subsidiary, in reports that we file or submit under
the Exchange Act, is recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms.

The effectiveness of a system of disclosure controls and procedures is subject
to various inherent limitations, including cost limitations, judgments used in
decision making, assumptions about the likelihood of future events, the
soundness of internal controls, and fraud. Due to such inherent limitations,
there can be no assurance that any system of disclosure controls and procedures
will be successful in preventing all errors or fraud, or in making all material
information known in a timely manner to the appropriate levels of management.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the fourth quarter of fiscal 2005, there were no changes in our internal
control over financial reporting that materially affected or are reasonably
likely to materially affect internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is incorporated by reference from the
Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 26, 2006.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is incorporated by reference from the
Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 26, 2006.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information required by this Item is incorporated by reference from the Proxy
Statement for our Annual Meeting of Stockholders scheduled to be held April 26,
2006.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item is incorporated by reference from the
Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 26, 2006.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required by this Item is incorporated by reference from the
Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 26, 2006.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

a) The following documents are filed as part of this report:

Financial Statements

Reference is made to the Financial Statements included in Item 8 of
Part II hereof.

Schedules

None

b) Exhibits:

FILED WITH INCORPORATED BY REFERENCE
EXHIBIT THIS FORM ----------------------------------------
NO. DESCRIPTION 10-K FORM FILING DATE EXHIBIT NO.
- ------- --------------------------------------------- ---------- ---- ------------------ ------------

3.1 Certificate of Incorporation S-4 September 6, 2000 Exhibit B to
Appendix A
3.2 Certificate of Amendment to Certificate of 8-K October 19, 2000 4.2
Incorporation
3.3 By-laws 10-Q September 14, 2001 3.3
4.1 Registration Rights Agreement with Peter 8-K October 19, 2000 4.6
K. Baker, Henry E. Baker, John B. Baker
and Ross Rapaport
10.1* 1993 Performance Equity Plan S-8 August 25, 1995 10.1
10.2* 1998 Incentive and Non-Statutory Stock 14A March 10, 2003 A
Option Plan, as amended
10.3* 1999 Employee Stock Purchase Plan 14A March 15, 1999 A
10.4* 2004 Stock Incentive Plan 14A March 9, 2004 B
10.5* Instrument of Amendment dated September 8-K September 28, 2005 10.1
22, 2005 amending the 1999 Employee Stock
Purchase Plan
10.6* Employment Agreement dated January 1, 2005 10-K January 31, 2005 10.4
with Timothy G. Fallon
10.7* Employment Agreement dated January 1, 2005 10-K January 31, 2005 10.6
with Peter K. Baker
10.8* Employment Agreement dated March 24, 2005 10-Q July 8, 2005 10.7
with Bruce S. MacDonald
10.9* Employment Agreement dated January 1, 2005 10-K January 31, 2005 10.7
with John B. Baker
10.10* Employment Agreement dated January 1, 2005 8-K June 29, 2005 10.1
with Henry E. Baker
10.11* Severance Agreement dated December 5, 2005
with Timothy Fallon X
10.12 Lease of Grounds in Stamford, Connecticut S-4 September 6, 2000 10.24
from Henry E. Baker
10.13 Lease of Buildings and Grounds in Watertown, S-4 September 6, 2000 10.22

Connecticut from the Baker's
Grandchildren Trust
10.14 Lease of Building in Stamford, Connecticut S-4 September 6, 2000 10.23
from Henry E. Baker
10.15 Credit Agreement dated April 5, 2005 with 10-Q July 8, 2005 10.1
Bank of America and Webster Bank
10.16 Form of Term Note dated April 5, 2005 10-Q July 8, 2005 10.2
issued to Bank of America and Webster Bank
10.17 Form of Subordination and Pledge Agreement 10-Q July 8, 2005 10.3
dated April 5, 2005 between Henry E.
Baker, Joan Baker, John B. Baker, Peter K.
Baker and Bank of America
10.18 Form of Second Amended and Restated 10-Q July 8, 2005 10.4
Promissory Note dated April 5, 2005 issued
to Henry E. Baker, Joan Baker, John B.
Baker and Peter K. Baker
10.19 Form of Acquisition Note dated April 5, 10-Q July 8, 2005 10.5
2005 issued to Bank of America and Webster
Bank
10.20 Form of Revolving Credit Note dated April 10-Q July 8, 2005 10.6
5, 2005 issued to Bank of America and
Webster Bank
10.21 Form of Indemnification Agreement dated
November 2, 2005 with each of Henry E.
Baker, John B. Baker, Peter K. Baker,
Phillip Davidowitz, Martin A. Dytrych,
David Jurasek, John M. Lapides, Bruce S.
MacDonald and Ross S. Rapaport X
10.22 Form of Indemnification Agreement dated
November 2, 2005 with each of John M.
Lapides and Martin A. Dytrych X
10.23 Purchase and Sale Agreement dated March 1, 10-Q March 16, 2004 10.27
2004 with MicroPack Corporation
10.24 Trademark License Agreement dated March 1, 10-Q March 16, 2004 10.28
2004 with MicroPack Corporation
10.25 Supply and License Agreement dated March 10-Q March 16, 2004 10.29
1, 2004 with MicroPack Corporation
22.1 Subsidiary X
23.1 Consent of Deloitte & Touche LLP X
31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 X
31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 X
32.1 Certification of Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 X
32.2 Certification of Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 X

* Management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Vermont Pure Holdings, Ltd. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

VERMONT PURE HOLDINGS, LTD.

By: /s/ Peter K. Baker
----------------------------------
Dated: January 30, 2006 Peter K. Baker, Chief Executive
Officer

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

Name Title Date
- ---- ----- ----

/s/ Ross S. Rapaport Chairman of the Board of Directors January 30, 2006
- -------------------------------------
Ross S. Rapaport

/s/ Henry E. Baker Director, Chairman Emeritis January 30, 2006
- -------------------------------------
Henry E. Baker

/s/ John B. Baker Executive Vice President and Director January 30, 2006
- -------------------------------------
John B. Baker

/s/ Peter K. Baker Chief Executive Officer and Director January 30, 2006
- -------------------------------------
Peter K. Baker

/s/ Phillip Davidowitz Director January 30, 2006
- -------------------------------------
Phillip Davidowitz

/s/ Martin A. Dytrych Director January 30, 2006
- -------------------------------------
Martin A. Dytrych

/s/ John M. Lapides Director January 30, 2006
- -------------------------------------
John M. Lapides

/s/ Bruce S. MacDonald Chief Financial Officer and Chief January 30, 2006
- ------------------------------------- Accounting Officer and Secretary
Bruce S. MacDonald

EXHIBITS TO VERMONT PURE HOLDINGS, LTD.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2005
EXHIBITS FILED HEREWITH

Exhibit
Number Description
- ------- -----------

10.11 Severance Agreement dated December 5, 2005 with Timothy Fallon

10.21** Form of Amendment of Indemnification Agreements, dated
November 2, 2005, between the Company and the following Directors and
Officers:

Henry E. Baker
John B. Baker
Peter K. Baker
Phillip Davidowitz
David Jurasek
Bruce S. Macdonald
Ross S. Rapaport

10.22** Form of Indemnification Agreements, dated November 2, 2005, between
the Company and John M. Lapides and Martin A. Dytrych

22.1 Subsidiary

23.1 Consent of Deloitte & Touche LLP

31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----------

Report of the Independent Registered Public Accounting Firm F-1

Financial Statements:

Consolidated Balance Sheets,
October 31, 2005 and 2004 F-2

Consolidated Statements of Operations,
Fiscal Years Ended October 31, 2005, 2004, and 2003 F-3

Consolidated Statements of Stockholders' Equity
and Comprehensive Income
Fiscal Years Ended October 31, 2005, 2004, and 2003 F-4

Consolidated Statements of Cash Flows,
Fiscal Years Ended October 31, 2005, 2004, and 2003 F-5

Notes to Consolidated Financial Statements F-6 - F-24

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Vermont Pure Holdings, Ltd.
Watertown, Connecticut

We have audited the accompanying consolidated balance sheets of Vermont Pure
Holdings, Ltd. and subsidiary (the "Company") as of October 31, 2005 and 2004,
and the related consolidated statements of operations, changes in stockholders'
equity and comprehensive income and cash flows for each of the three years in
the period ended October 31, 2005. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Vermont Pure Holdings, Ltd. and
subsidiary as of October 31, 2005 and 2004, and the results of their operations
and their cash flows for each of the three years in the period ended October 31,
2005, in conformity with accounting principles generally accepted in the United
States of America.

/s/ DELOITTE & TOUCHE LLP
January 26, 2006

F-1

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

October 31, October 31,
2005 2004
------------ ------------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 1,895,810 $ 783,445
Accounts receivable - net of reserve of $289,837 and $303,304 7,249,801 7,065,530
for 2005 and 2004, respectively
Inventories 1,133,315 1,069,834
Current portion of deferred tax asset 796,662 1,439,446
Other current assets 1,699,370 1,379,104
Unrealized gain on derivatives 168,582 103,100
------------ ------------
TOTAL CURRENT ASSETS 12,943,540 11,840,459
------------ ------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 10,890,376 12,147,200
------------ ------------

OTHER ASSETS:
Goodwill 74,755,851 74,772,591
Other intangible assets - net of accumulated amortization 3,569,818 3,734,899
Deferred tax asset 654,729 749,713
Other assets 75,000 536,000
------------ ------------
TOTAL OTHER ASSETS 79,055,398 79,793,203
------------ ------------
TOTAL ASSETS $102,889,314 $103,780,862
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long term debt $ 3,266,750 $ 6,140,635
Accounts payable 2,582,105 2,828,789
Accrued expenses 2,990,129 2,318,486
Current portion of customer deposits 732,835 202,244
------------ ------------
TOTAL CURRENT LIABILITIES 9,571,819 11,490,154
------------ ------------
Long term debt, less current portion 37,975,000 37,853,696
Customer deposits 2,933,732 3,168,483
------------ ------------
TOTAL LIABILITIES 50,480,551 52,512,333
------------ ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Common stock - $.001 par value, 50,000,000 authorized shares,
21,744,817 issued and 21,673,267 outstanding shares as of
October 31, 2005 and 21,569,711 issued and 21,498,161
outstanding as of October 31, 2004 21,744 21,569
Additional paid in capital 58,207,645 57,869,411
Treasury stock, at cost, 71,550 shares as of October 31, 2005
and October 31, 2004 (264,735) (264,735)
Unearned compensation (134,250) --
Accumulated deficit (5,590,223) (6,460,816)
Accumulated other comprehensive income 168,582 103,100
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 52,408,763 51,268,529
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $102,889,314 $103,780,862
============ ============

See the accompanying notes to the consolidated financial statements.

F-2

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

Fiscal Year Ended October 31
---------------------------------------
2005 2004 2003
----------- ----------- -----------

NET SALES $59,834,575 $52,473,401 $49,854,313
COST OF GOODS SOLD 24,842,247 22,777,542 20,799,833
----------- ----------- -----------
GROSS PROFIT 34,992,328 29,695,859 29,054,480
----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses 27,790,539 23,748,088 22,229,135
Advertising expenses 1,193,905 1,033,601 832,443
Amortization 787,043 409,380 186,060
----------- ----------- -----------
TOTAL OPERATING EXPENSES 29,771,487 25,191,069 23,247,638
----------- ----------- -----------
INCOME FROM OPERATIONS 5,220,841 4,504,790 5,806,842
----------- ----------- -----------
OTHER EXPENSE:
Interest (3,364,902) (3,506,769) (4,268,958)
Miscellaneous expense (245,580) (143,189) (1,523)
----------- ----------- -----------
TOTAL OTHER EXPENSE (3,610,482) (3,649,958) (4,270,481)
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,610,359 854,832 1,536,361
INCOME TAX EXPENSE 739,766 354,708 594,974
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 870,593 500,124 941,387

DISCONTINUED OPERATIONS:
(Loss) income from discontinued operations -- (78,555) 637,044
Gain on disposal of segments of business -- 352,535 --
Income tax expense from discontinued operations -- (113,759) (246,022)
----------- ----------- -----------
INCOME FROM DISCONTINUED OPERATIONS -- 160,221 391,022
----------- ----------- -----------
NET INCOME $ 870,593 $ 660,345 $ 1,332,409
=========== =========== ===========
NET INCOME PER SHARE - BASIC:
Continuing Operations $ 0.04 0.02 $ 0.04
Discontinued Operations -- 0.01 0.02
----------- ----------- -----------
NET INCOME $ 0.04 $ 0.03 $ 0.06
=========== =========== ===========
NET INCOME PER SHARE - DILUTED:
Continuing Operations $ 0.04 0.02 $ 0.04
Discontinued Operations -- 0.01 0.02
=========== =========== ===========
NET INCOME $ 0.04 $ 0.03 $ 0.06
=========== =========== ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC 21,619,863 21,497,251 21,282,294
=========== =========== ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - DILUTED 21,625,683 21,574,515 21,764,698
=========== =========== ===========

See the accompanying notes to the consolidated financial statements.

F-3

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

Additional
Common Stock Paid in Unearned Treasury
Shares Par Value Capital Compensation Shares
---------- ----------- ------------ ------------- ----------

Balance, October 31, 2002 21,235,927 $21,236 $57,023,093 --

Stock compensation 9,285 9 38,988
Exercise of stock options 125,000 125 281,124
Treasury stock purchase (71,550) 71,550
Shares purchased under employee
stock plan 60,775 61 191,864
Net income
Unrealized gain on derivatives
---------- ------- ----------- ------
Balance, October 31, 2003 21,359,437 21,431 57,535,069 71,550

Stock compensation 7,484 7 56,350
Exercise of stock options 33,200 33 82,967
Restricted stock grants 26,000 26 57,174
Shares purchased under employee
stock plan 72,040 72 179,777
Officer share purchases 5,741
Deferred compensation (47,667)
Net income
Unrealized gain on derivatives
---------- ------- ----------- ------
Balance, October 31, 2004 21,498,161 21,569 57,869,411 71,550

Shares purchased under employee
stock plan 97,047 97 150,646
Restricted stock grants 75,000 76 134,174 $(134,250)
Stock compensation 3,059 2 5,747
Deferred compensation 47,667
Net income
Unrealized gain on derivatives
---------- ------- ----------- ---------- ------
Balance, October 31, 2005 21,673,267 $21,744 $58,207,645 $(134,250) 71,550
========== ======= =========== ========== ======

Accumulated
Other
Stock Accumulated Comprehensive Comprehensive
Amount Deficit Gain (Loss) Total Income
--------- ----------- ------------- ----------- -------------

Balance, October 31, 2002 $ -- $(8,453,570) $(842,898) $47,747,861

Stock compensation 38,997
Exercise of stock options 281,249
Treasury stock purchase $(264,735) (264,735)
Shares purchased under employee
stock plan 191,925
Net income 1,332,409 1,332,409 $1,332,409
Unrealized gain on derivatives 807,394 807,394 807,394
--------- ----------- --------- ----------- ----------
Balance, October 31, 2003 (264,735) (7,121,161) (35,504) 50,135,100 $2,139,803
==========

Stock compensation 56,357
Exercise of stock options 83,000
Restricted stock grants 57,200
Shares purchased under employee
stock plan 179,849
Officer share purchases 5,741
Deferred compensation (47,667)
Net income 660,345 660,345 $ 660,345
Unrealized gain on derivatives 138,604 138,604 138,604
--------- ----------- --------- ----------- ----------
Balance, October 31, 2004 (264,735) (6,460,816) 103,100 51,268,529 $ 798,949
==========

Shares purchased under employee
stock plan $ 150,743
Restricted stock grants $ --
Stock compensation $ 5,749
Deferred compensation $ 47,667
Net income $ 870,593 $ 870,593 $ 870,593
Unrealized gain on derivatives $ 65,482 $ 65,482 65,482
--------- ----------- --------- ----------- ----------
Balance, October 31, 2005 $(264,735) $(5,590,223) $ 168,582 $52,408,763 $ 936,075
========= =========== ========= =========== ==========

See the accompanying notes to the consolidated financial statements.

F-4

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Ended October 31,
-----------------------------------------
2005 2004 2003
------------ ------------ -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 870,593 $ 660,345 $ 1,332,409
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 4,802,387 5,091,470 5,074,159
Provision for bad debts 316,667 366,844 598,142
Amortization 787,043 409,380 186,060
Non cash interest expense 31,862 -- --
Deferred tax expense 737,768 150,283 575,776
Gain (loss) on disposal of property and equipment (15,067) (9,649) 42,137
Gain on the sale of segments of business -- (352,535) --
Non cash compensation 53,416 34,234 38,997
Loss on investment in CDS -- 152,838 --
Changes in assets and liabilities:
Accounts receivable (500,938) (154,303) (1,011,285)
Inventories (63,481) (594,561) 1,102,285
Other current assets (203,693) 30,402 (529,008)
Other assets (39,000) (136,027) 603,765
Accounts payable (246,683) 178,516 446,557
Accrued expenses 671,643 (477,290) (58,536)
Customer deposits 295,840 235,867 (157,212)
------------ ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,498,357 5,585,814 8,244,246
------------ ----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,126,397) (3,231,338) (4,171,835)
Proceeds from the sale of segments of business -
net of transaction costs -- 8,921,693 --
Proceeds from sale of property plant and equipment 83,433 584,565 106,526
Cash used for acquisitions - net of cash acquired (414,440) (4,448,477) (3,953,692)
Other investing activities -- -- (116,236)
------------ ----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (3,457,404) 1,826,443 (8,135,237)
------------ ----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit borrowings 2,000,000 6,689,248 1,866,433
Proceeds from debt 28,513,852 -- 3,746,653
Payments on line of credit (3,500,000) (1,443,248) (1,866,433)
Principal payments on debt (29,908,183) (13,313,723) (3,545,984)
Payments of debt issuance costs (185,000) -- --
Exercise of common stock options -- 83,000 281,249
Purchase of treasury stock -- -- (264,735)
Proceeds from sale of common stock 150,743 185,590 191,925
------------ ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (2,928,588) (7,799,133) 409,108
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH 1,112,365 (386,876) 518,117
CASH AND CASH EQUIVALENTS - beginning of year 783,445 1,170,321 652,204
------------ ----------- -----------
CASH AND CASH EQUIVALENTS - end of year $ 1,895,810 $ 783,445 $ 1,170,321
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
EXCLUDING NON-CASH FINANCING AND INVESTING ACTIVITIES
Cash paid for interest $ 2,565,763 $ 3,715,739 $ 4,398,114
============ =========== ===========
Cash paid for taxes $ 246,109 $ 72,079 $ 360,238
============ =========== ===========
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Notes payable issued in acquisitions $ 141,750 $ 640,000 $ 200,000
============ =========== ===========
Note receivable on sale of segment of business $ -- $ (500,000) $ --
============ =========== ===========

See the accompanying notes to the consolidated financial statements.

F-5

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS OF THE COMPANY

Vermont Pure Holdings, Ltd. and Subsidiary (collectively, the "Company") is
engaged in the production, marketing and distribution of bottled water and
distribution of coffee, ancillary products, and other office refreshment
products. Through February, 2004, when the Company divested the retail
segments of its business, the Company's products were sold, predominantly
in the Northeast, as well as in the Mid-Atlantic and Mid-Western United
States. Distribution was accomplished through a network of independent
beverage distributors and with the Company's own trucks and employees.
Commencing March 2004, the Company operated exclusively as a home and
office delivery business, using its own trucks to distribute throughout New
England, New York, and New Jersey.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - For 2003, the consolidated financial statements
include the accounts of Vermont Pure Holdings, Ltd. and its wholly-owned
subsidiaries, Vermont Pure Springs, Inc., Crystal Rock Spring Water Company
("Crystal Rock"), Excelsior Spring Water Company Inc. and Adirondack Coffee
Services. In 2004, the Company merged the subsidiaries mentioned above into
Vermont Pure Holdings, Ltd. In December 2004, the Company organized a new
wholly owned subsidiary, Crystal Rock, LLC, and assigned all of its
material operating assets, leases and other contracts to the new
subsidiary. As of and for the years ended October 31, 2005 and 2004 the
consolidated financial statements of the Company include the accounts of
Vermont Pure Holdings, Ltd. and its wholly-owned subsidiary, Crystal Rock,
LLC. All material inter-company profits, transactions, and balances have
been eliminated in consolidation.

A. Cash Equivalents - The Company considers all highly liquid
temporary cash investments with an original maturity of three
months or less to be cash equivalents.

B. Inventories - Inventories primarily consist of products that are
purchased for resale and are stated at the lower of cost or
market on a first in, first out basis.

C. Property and Equipment - Property and equipment are stated at
cost net of accumulated depreciation. Depreciation is calculated
on the straight-line method over the estimated useful lives of
the assets, which range from three to ten years for equipment,
and from ten to forty years for buildings and improvements.

D. Goodwill and Other - Intangible assets with lives restricted by
contractual, legal, or other means are amortized over their
useful lives (defined by sfas no. 142 As the period over which
the asset is expected to contribute to the future cash flows of
the entity). Goodwill and other intangible assets not subject to
amortization are tested for impairment annually or more
frequently

F-6

if events or changes in circumstances indicate that the asset
might be impaired. The amount of impairment for goodwill and
other intangible assets is measured as the excess of their
carrying values over their implied fair values. The Company
conducted assessments of the carrying value of its goodwill as
required by sfas no. 142 And concluded that there was no
impairment of goodwill as of October 31, 2005 and 2004. Other
than goodwill, intangible assets consist primarily of customer
lists and covenants not to compete, with estimated lives ranging
from 3 to 10 years.

E. Securities Issued for Services - Through October 31, 2005, the
Company recorded stock option awards in accordance with the
provisions of accounting principles board (apb) opinion 25,
"accounting for stock issued to employees." The Company estimated
the fair value of stock option awards in accordance with sfas no.
123, "Accounting for stock-based compensation," as amended by
sfas no. 148, "Accounting for stock-based compensation -
transition and disclosure, an amendment of financial accounting
standards board (fasb) statement no. 123," And disclosed the
resulting estimated compensation effect on net income on a pro
forma basis.

The Company has several stock-based compensation plans under
which incentive and non-qualified stock options and restricted
shares are granted, and an Employee Stock Purchase Plan (ESPP).
The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to employees, and related Interpretations." No
compensation cost is reflected in net income for incentive and
non-qualified stock options or ESPP shares. Forfeitures of
employee awards are provided in the following table as pro forma
effects as they occur. Option awards with multiple vest dates are
treated as separate awards, resulting in pro forma expense
reported on an accelerated basis. All incentive and non-qualified
stock option grants had an exercise price equal to the market
value of the underlying common stock on the date of grant. The
ESPP shares are granted at 85% of the lower of the fair market
value at the commencement of the offering or the last day of the
payroll payment period. As of January 1, 2006 the plan has been
modified to allow employees to purchase shares of the Company's
common stock at a purchase price equal to 95% of the lower of the
fair market value on the commencement date of the offering and
the last day of the payroll payment period. The following table
illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of
FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation:

F-7

Years Ended
October 31,
2005 2004 2003
--------- ----------- ----------

Net Income - As Reported $ 870,593 $ 660,345 $1,332,409
Add: stock based employee compensation
expense included in net income, net of
related tax effects 28,123 5,577 --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (336,444) (353,203) (249,656)
Pro Forma Net Income $ 562,272 $ 312,719 $1,082,753
========= ========= ==========
Basic - As Reported $ .04 $ .03 $ .06
========= ========= ==========
Basic - Pro Forma $ .03 $ .01 $ .05
========= ========= ==========
Diluted - As Reported $ .04 $ .03 $ .06
========= ========= ==========
Diluted - Pro Forma $ .03 $ .01 $ .05
========= ========= ==========

The weighted average fair values of the options granted for the respective
fiscal years, using the Black-Scholes option pricing model, were $.86, $1.15,
and $1.70, respectively.

Assumptions used for estimating the fair value of the options on the date of
grant under the Black-Scholes option pricing model are as follows for the fiscal
years ended october 31, 2005, 2004, and 2003:

2005 2004 2003
------- ------- -------

Expected Dividend Yield 0% 0% 0%
Expected Life 5 Years 5 Years 5 Years
Risk Free Interest Rate 3.0% 3.0% 5.7%
Volatility 36% 39% 36%

Effective November 1, 2005, the Company adopted the provisions of SFAS No. 123,
"Share-Based Payments (revised 2004)," (SFAS No. 123R). This statement
supercedes the intrinsic value measurement provisions of APB Opinion No. 25 and
requires companies to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant date fair value of the
award. That cost will be recognized over the period during which an employee is
required to provide services in exchange for the award, the requisite service
period (usually the vesting period). SFAS No. 123R will also require companies
to measure the cost of employee services received in exchange for ESPP awards
and the Company will be required to expense the grant date fair value of the
Company's ESPP awards. Through October 31, 2005 the Company reported in the
above table on a pro forma basis the forfeitures of employee awards as they
occurred. Under SFAS No. 123R this accounting method is no longer permitted, and
beginning November 1, 2005 the Company provides an estimate of forfeitures at
initial grant date.

F-8

SFAS No 123R became effective for the Company on November 1,
2005, and the Company is currently evaluating the impact that
SFAS No. 123R will have on its consolidated financial statements.
No existing award vesting dates were accelerated prior to
adoption.

F. Net Income Per Share - Net income per share is based on the
weighted average number of common shares outstanding during each
period. Potential common shares are included in the computation
of diluted per share amounts outstanding during each period that
income is reported. In periods in which the company reports a
loss, potential common shares are not included in the diluted
earnings per share calculation since the inclusion of those
shares in the calculation would be anti-dilutive. As required by
SFAS No. 128, Earnings per share, the company considers
outstanding "in-the-money" stock options as potential common
stock in its calculation of diluted earnings per share and uses
the treasury stock method to calculate the applicable number of
shares.

G. Advertising Expenses - The Company expenses advertising costs at
the commencement of the advertising campaign.

H. Customer Deposits - Customers receiving home or office delivery
of water pay the Company a deposit for the water bottle that is
refunded when the bottle is returned. Based on historical
experience, the Company uses an estimate of the deposits it
expects to refund over the next twelve months to determine the
current portion of the liability, and classifies the remainder of
the deposit obligation as a long term liability.

I. INCOME TAXES - The Company uses SFAS No. 109, Accounting for
income taxes, when calculating its tax expense and the value of
tax related assets and liabilities. This requires that the tax
impact future events be considered when determining the value of
assets and liabilities in its financial statements and tax
returns. The Company accounts for income taxes under the
liability method. Under the liability method, a deferred tax
asset or liability is determined based upon the tax effect of the
differences between the financial statement and tax basis of
assets and liabilities as measured by the enacted rates that will
be in effect when these differences reverse. A valuation
allowance is recorded if realization of the deferred tax assets
is not likely.

J. Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the
united states of america requires management to make estimates
and assumptions that affect the 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.

K. Fair Value of Financial Instruments - The carrying amounts
reported in the consolidated balance sheet for cash, trade
receivables, accounts payable and

F-9

accrued expenses approximate fair value based on the short-term
maturity of these instruments.

L. Impairment for Long-lived and Intangible Assets - The Company
reviews long-lived assets and certain identifiable intangible
assets for impairment whenever circumstances and situations
change such that there is an indication that the carrying amounts
may not be recovered. Recoverability is assessed based on
estimated undiscounted future cash flows. At October 31, 2005 and
2004, the Company believes that there has been no impairment of
its long-lived and intangible assets.

M. Revenue Recognition - Revenue is recognized when products are
delivered to customers. A certain amount of the Company's revenue
is derived from leasing water coolers and coffee brewers. These
leases are generally for the first 12 months of service. The
Company recognizes the income ratably over the life of the lease.

N. Shipping and Handling Costs - The Company distributes its home
and office products directly to its customers on its own trucks.
The delivery costs related to the Company's route system, which
are reported under selling, general, and administrative expenses,
were $12,563,000, $10,940,000, and $9,821,000 for fiscal years
2005, 2004, and 2003, respectively.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2005, FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations", offering further guidance on SFAS No. 143,
"Accounting for Asset Retirement Obligations". The pronouncement details
certain requirements related the asset retirement if it is conditional on
future event(s). FIN 47 is effective for fiscal years ending after December
15, 2005. The Company does not believe that FIN 47 will have a material
impact on its financial position or results from operations.

4. MERGERS AND ACQUISITIONS

During fiscal years 2005, 2004 and 2003, Vermont Pure Holdings, Ltd. made
four, seven, and five acquisitions, respectively. The purchase price paid
for the acquisitions for the respective years is as follows:

2005 2004 2003
-------- ---------- ----------

Cash $478,770 $4,331,351 $3,888,764
Notes Payable 141,750 640,000 200,000
Acquisition Costs 32,800 552,125 64,928
-------- ---------- ----------
$653,320 $5,523,476 $4,153,692
======== ========== ==========

The allocation of purchase price related to these acquisitions for the
respective years is as follows:

F-10

2005 2004 2003
-------- ---------- ----------

Accounts Receivable $ -- $ 296,189 $ 895,620
Inventories 70,532 1,048,320 116,875
Identifiable Intangible Assets 546,398 2,613,500 785,965
Goodwill 36,390 1,875,263 2,355,232
Bottle Deposits -- (309,796) --
-------- ---------- ----------
Purchase Price $653,320 $5,523,476 $4,153,692
======== ========== ==========

The following table summarizes the pro forma consolidated condensed results
of operations (unaudited) of the Company for the fiscal years ended October
31, 2005, 2004, and 2003 as though the acquisitions had been consummated at
the beginning of fiscal year 2003:

2005 2004 2003
----------- ----------- -----------

Net Sales $60,372,549 $58,539,910 $59,515,489
=========== =========== ===========
Net Income $ 871,833 $ 905,348 $ 2,013,269
=========== =========== ===========
Net Income Per Share-Diluted $ .04 $ .04 $ .09
=========== =========== ===========
Weighted Average Common Shares
Outstanding-Diluted 21,625,683 21,574,515 21,764,698
=========== =========== ===========

The operating results of the acquired entities have been included in the
accompanying statements of operations since their respective dates of
acquisition.

5. LEASES

To open an account that includes the rental of equipment, a customer is
required to sign a contract that recognizes the receipt of the equipment,
outlines the Company's ownership rights, the customer's responsibilities
concerning the equipment, and the rental charge for twelve months. In
general, the customer does not renew the agreement after twelve months and
is free to terminate the agreement with the return of the equipment in good
condition. We expect to have revenue of $785,000 from the rental of such
equipment over the next twelve months. The carrying cost of the equipment,
which is included in property and equipment in the consolidated balance
sheets, used to generate this revenue is calculated as follows:

Original Cost $2,563,420
Accumulated Depreciation 1,130,910
----------
Carrying Cost $1,432,510
==========

6. ACCOUNTS RECEIVABLE

The Company reduces its receivables by an allowance for future
uncollectible amounts. The activity in the allowance for continuing
operations for the years ended October 31, 2005, 2004, and 2003 is as
follows:

F-11

2005 2004 2003
--------- --------- ---------

Balance, beginning of year $ 303,304 $ 335,321 $ 248,880
Provision 316,667 366,844 598,142
Write-offs (330,134) (398,861) (511,701)
--------- --------- ---------
Balance, end of year $ 289,837 $ 303,304 $ 335,321
========= ========= =========

7. INVENTORIES

Inventories at October 31 consisted of:

2005 2004
---------- ----------

Finished Goods $ 994,240 $ 900,917
Raw Materials 139,075 168,917
---------- ----------
Total Inventories $1,133,315 $1,069,834
========== ==========

8. PROPERTY AND EQUIPMENT

Property and equipment at October 31 consisted of:

Useful
Life 2005 2004
------------ ----------- -----------

Buildings and improvements 10 - 40 yrs. $ 386,960 $ 332,518
Machinery and equipment 3 -10 yrs. 27,977,298 26,504,296
----------- -----------
28,364,258 26,836,814
Less accumulated depreciation 17,473,882 14,689,614
----------- -----------
$10,890,376 $12,147,200
=========== ===========

Depreciation expense for the fiscal years ended October 31, 2005, 2004 and
2003 was 4,802,387, $5,091,470, and $5,074,159 respectively.

9. GOODWILL AND OTHER INTANGIBLE ASSETS

Components of other intangible assets at October 31 consisted of:

October 31,
-------------------------------------------------------------
2005 2004
----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------

Amortized Intangible Assets:
Customer Lists and Covenants
Not to Compete $4,655,238 $1,527,060 $4,152,840 $759,591
Other Identifiable Intangibles 633,168 191,528 513,604 171,954
---------- ---------- ---------- --------
Total $5,288,406 $1,718,588 $4,666,444 $931,545
========== ========== ========== ========

Amortization expense for fiscal years 2005, 2004, and 2003 was $787,043,
$409,380, and $186,060 respectively.

F-12

Estimated Amortization Expense:

Fiscal Year Ending Amount
- ------------------ --------

October 31, 2006 $831,476
October 31, 2007 694,101
October 31, 2008 652,409
October 31, 2009 474,019
October 31, 2010 199,036

The changes in the carrying amount of goodwill for the fiscal years ended
October 31, 2005 and 2004 are as follows:

2005 2004
----------- -----------

Beginning Balance $74,772,591 $72,899,355
Goodwill acquired during the year 36,390 1,875,263
Goodwill disposed of during the year (53,130) (2,027)
----------- -----------
Balance as of October 31 $74,755,851 $74,772,591
=========== ===========

10. ACCRUED EXPENSES

Accrued expenses as of October 31, 2005 and 2004 were as follows:

2005 2004
---------- ----------

Payroll and Vacation $1,501,402 $ 959,633
Interest 524,545 607,203
Severance 250,000 --
Accounting and Legal 211,501 176,257
Legal Settlements 100,000 --
Miscellaneous 402,681 575,393
---------- ----------
Total $2,990,129 $2,318,486
========== ==========

11. DEBT

a) Senior Debt

On April 6, 2005, the Company refinanced its senior credit facility with
Bank of America. Webster Bank is a participant in the new loan. The new
facility refinanced $28 million of existing senior debt in the form of a
seven year term loan, provides a revolving credit facility of $6 million
for working capital and letters of credit for a term of three years, and
makes available up to $7.5 million to be used for acquisitions for a period
of three years. The term loan may also provide funds for future principal
payment of the Company's subordinated debt if certain financial covenants
are met after the first two years of the loan.

With the $28 million of term debt, the Company repaid its borrowings under
its former senior credit facility with Webster Bank, including $17.5
million under the old term loan and $5.4 million under the old acquisition
line of credit as well as $3.6 million of its

F-13

subordinated debt. The balance of the new term loan as well as $2 million
of the new line of credit was used to pay a balance of $3.5 million on the
old revolving line of credit with Webster Bank. At October 31, 2005, the
Company had no outstanding balance on its line of credit with Bank of
America. However, there was $1.4 million of letters of credit outstanding,
leaving $4.6 million of availability. As of October 31, 2005, there were
outstanding balances of $26,500,000 on the term loan and $600,000 on the
acquisition line.

The term loan amortizes over seven years and the new acquisition debt
amortizes as a term loan for five years after the first three years. During
the first three years of the acquisition debt, interest only is paid on a
monthly basis for amounts outstanding. Interest on the term loan is tied to
the Company's performance based on the 30-day LIBOR plus a 250 basis point
margin, while the acquisition and revolving lines have a 225 basis point
margin over the 30-day LIBOR. For the respective loans, the margin may vary
from 125 to 225 basis points and 150 to 250 basis points based on the level
of senior debt to earnings before interest, taxes, depreciation, and
amortization (EBITDA). The applicable margins as of October 31, 2005 was
2.50% from the term note and 2.25% for the acquisition line, resulting in
total variable interest rates of 6.59% and 6.34%, respectively. The
facility is secured by substantially all of the Company's assets.

The credit agreement with Bank of America requires that the Company be in
compliance with certain financial covenants at the end of each fiscal
quarter. The covenants include senior fixed charge coverage of greater than
1.25 to 1, total fixed charge coverage of greater than 1 to 1, and senior
debt to EBITDA of greater than 3.00 to 1. From the inception of the credit
agreement through October 31, 2005, the Company was in compliance with all
of the financial covenants of its new senior credit facility.

b) Subordinated Debt

As part of the acquisition agreement in 2000 with the former shareholders
of Crystal Rock Spring Water Company, the Company issued subordinated notes
in the amount of $22,600,000. The notes have an effective date of October
5, 2000, were for an original term of seven years (subsequently extended to
2012 as part of the senior refinancing described above) and bear interest
at 12% per year. Scheduled repayments are made quarterly and are interest
only for the life of the note unless specified financial targets are met.
In April 2004, the Company repaid $5,000,000 of the outstanding principal.
In April, 2005, the Company repaid an additional $3,600,000 of this
principal. As of October 31, 2005, payments of interest only of $420,000
are due quarterly with a principal payment of $14,000,000 due at maturity.

The notes are secured by all of the assets of the Company but specifically
subordinated, with a separate agreement between the debt holders, to the
senior debt described in Note 11(a) above.

c) Annual maturities of debt as of October 31, 2005 are summarized as
follows:

F-14

Senior Credit Lines Subordinated Other Totals
----------- ------------ ------------ -------- -----------

Fiscal year ending
October 31,
2006 3,125,000 -- 141,750 3,266,750
2007 3,499,000 -- -- 3,499,000
2008 3,876,000 -- -- 3,876,000
2009 4,250,000 60,000 -- -- 4,310,000
2010 and after 11,750,000 540,000 14,000,000 -- 26,290,000
----------- -------- ----------- -------- -----------
Total Debt $26,500,000 $600,000 $14,000,000 $141,750 $41,241,750
=========== ======== =========== ======== ===========

12. INTEREST RATE SWAP AGREEMENTS

The Company uses interest rate swaps to fix certain long term interest
rates. The swap rates are based on the floating 30-day LIBOR rate and are
structured such that if the loan rate for the period exceeds the fixed rate
of the swap, then the bank pays the Company to lower the effective interest
rate. Conversely, if the rate is lower than the fixed rate, the Company
pays the bank additional interest.

On May 3, 2005, the Company entered into an interest rate hedge ("swap")
agreement in conjunction with its new senior financing. The new credit
agreement requires that the Company fix the interest rate on its term debt
for the life of the loan. The swap fixes the interest rate at 4.66%, plus
the applicable margin, 2.50% at October 31, 2005, and amortizes
concurrently with the loan principal to fix the interest rate with respect
to 75% of the outstanding principal. The swaps constituting 75% of fixed
rate principal include another swap which is in the notional amount of $10
million and a fixed rate of $5.24%, including the applicable margin. When
that swap matures in June 2006 the balance of the aforementioned swap will
increase to hedge 75% of the term loan on an amortizing basis. As of
October 31, 2005, the total notional amount committed to swap agreements
was $19.9 million.

As of October 31, 2004, the Company had one swap agreement for a total
notional amount of $10 million.

Based on the floating rate for years ended October 31, 2005 and 2004, the
Company paid $44,000 less and $304,000 more in interest, respectively, than
it would have without the swaps.

These swaps are considered hedges under SFAS Nos. 133 and 137. Since the
instruments are intended to hedge against variable cash flows, they are
considered a cash flow hedge. As a result, the changes in the fair values
of the derivatives are recognized as comprehensive income or loss until the
hedged item is recognized in earnings. The net unrealized realized gain,
net of income taxes, for the years ended October 31, 2005, 2004 and 2003
was $65,482, $138,604, and 807,394, respectively. The accumulated other
comprehensive gain as of October 31, 2005 and 2004 was $168,582 and
$103,100, respectively.

F-15

13. STOCK BASED COMPENSATION

a) Stock Option Plan

In November 1993, the Company adopted the 1993 Performance Equity Plan (the
"1993 Plan"). The 1993 Plan authorizes the granting of awards for up to
1,000,000 shares of common stock to key employees, officers, directors and
consultants until November 2003. Grants can take the form of stock options
(both qualified and non-qualified), restricted stock awards, deferred stock
awards, stock appreciation rights and other stock based awards. During
fiscal 2004 and 2003 there were no options issued under this plan. The plan
prohibits issuances of options after November 2004.

In April 1998, the Company's shareholders approved the 1998 Incentive and
Non Statutory Stock Option Plan. In April 2003, the Company's shareholders
approved an increase in the authorized number of shares to be issued under
its 1998 Incentive and Non-Statutory Stock Option Plan from 1,500,000 to
2,000,000. This plan provides for issuances of up to 2,000,000 options to
purchase the Company's common stock under the administration of the
compensation committee of the Board of Directors. The intent of the plan is
to reward options to officers, employees, directors, and other individuals
providing services to the Company. The following table summarizes the
activity related to stock options and outstanding stock option balances
during the last three fiscal years:

Outstanding Options Weighted Average
(Shares) Exercise Price
------------------- ----------------

Balance at October 31, 2002 2,583,821 2.93
Granted 65,000 4.09
Exercised (125,000) 2.25
Expired (45,000) 3.64
---------
Balance at October 31, 2003 2,478,821 2.98
Granted 265,000 2.96
Exercised (33,200) 2.50
Expired (47,831) 2.77
---------
Balance at October 31, 2004 2,662,790 2.96
Granted 414,500 2.28
Expired (450,800) 2.50
---------
Balance at October 31, 2005 2,626,490 $2.96
=========

The following table summarizes information pertaining to outstanding stock
options as of October 31, 2005:

Weighted
Average Weighted Weighted
Exercise Outstanding Remaining Average Exercisable Average
Price Options Contractual Exercise Options Exercise
Range (Shares) Life Price (Shares) Price
- ------------- ----------- ----------- -------- ----------- --------

$1.80 - $2.60 981,500 4.78 $2.41 916,500 $2.45
$2.81 - $3.38 1,404,990 5.28 3.15 1,404,990 3.15
$3.50 - $4.25 185,000 5.71 3.89 185,000 3.89
$4.28 - $4.98 55,000 5.03 4.82 55,000 4.82
--------- ---------
2,626,490 5.12 $2.96 2,561,490 $2.99
========= =========

F-16

Outstanding options and warrants include options issued under the 1993
Plan, the 1998 Plan, the 2003 Plan and non-plan options and warrants. There
were 2,457,790 exercisable options at a weighted average price of $2.96 per
share as of October 31, 2004.

Outstanding options have lives ranging from 5-10 years, vesting from 0-5
years, and have exercise prices ranging from $1.80-$4.98 per share.

b) Employee Stock Purchase Plan

The Company maintains an ESPP, under which 500,000 shares of common stock
were reserved for issuance. The ESPP enables eligible employees to
subscribe, through payroll deductions, to purchase shares of the Company's
common stock at a purchase price equal to 85% of the lower of the fair
market value on the commencement date of the offering and the last day of
the payroll payment period. At October 31, 2005, 355,017 shares had been
issued and up to 144,533 shares are subject to outstanding subscriptions
under the ESPP. As of January 1, 2006 the plan has been modified to allow
employees to purchase shares of the Company's common stock at a purchase
price equal to 95% of the lower of the fair market value on the
commencement date of the offering and the last day of the payroll payment
period.

c) 2004 Stock Incentive Plan

In April 2004, the Company's shareholders approved the 2004 Stock Incentive
Plan. The plan provides for issuances of awards of up to 250,000 restricted
or unrestricted shares, or incentive or non-statutory stock options, of the
Company's common stock. On September 17, 2004, the Company issued 26,000
restricted shares for two awards to employees under this plan. These awards
vest one year from the anniversary date. The total value of the awards was
$57,200. The Company recognizes compensation over the vesting period
resulting in expenses of $47,667 and $9,533 in fiscal years 2005 and 2004,
respectively.

On January 1, 2005, the Company issued 75,000 restricted shares as an award
to an employee under this plan. The total value of the award was $133,500.
The Company did not recognize compensation related to this award in fiscal
year 2005 since, during the period, it was not probable that the shares
would vest. Effective November 2, 2005, these shares were forfeited in
connection with the resignation of the employee (see Note 22).

14. RETIREMENT PLAN

The Company has a defined contribution plan which meets the requirements of
Section 401(k) of the Internal Revenue Code. All employees of the Company
who are at least twenty-one years of age are eligible to participate in the
plan. The plan allows employees to defer a portion of their salary on a
pre-tax basis and the Company contributes 25% of amounts contributed by
employees up to 6% of their salary. Company contributions to the plan
amounted to $116,000, $107,000, and $102,000, for the fiscal years ended
October 31, 2005, 2004, and 2003, respectively

F-17

15. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company's operating leases consist of trucks, office equipment and
rental property.

Future minimum rental payments over the terms of various lease contracts
are approximately as follows:

Fiscal Year Ending October 31,

2006 $2,289,130
2007 2,098,033
2008 1,816,756
2009 1,298,477
2010 964,307
Thereafter 148,500
----------
Total $8,615,203
==========

Rent expense was $2,701,332, $2,502,739, and $2,136,596 for the fiscal
years ended October 31, 2005, 2004, and 2003, respectively.

CONTINGENCIES

In January 2003, the Company settled a suit alleging that a vendor did not
adequately perform the services rendered in connection with approximately
$500,000 of unpaid billings. In settling the suit, the Company agreed to
pay $50,000 to the vendor in full settlement of the litigation, and the
parties released each other from any further liability in the case. A gain
of $150,000 was recognized in the first quarter of 2003 since the Company
had set up a reserve for settlement of the suit that exceeded the final
amount paid. The gain has been included as a reduction of selling, general
and administrative expenses.

In fiscal year 2005, the Company accrued $100,000 related to a judgment
regarding a claim asserted by a former employee of a business that the
Company acquired. The claim was made prior to the acquisition and the
amount of the expected settlement was recorded as a miscellaneous expense
in the accompanying statement of operations for the fiscal year ended
October 31, 2005.

16. RELATED PARTY TRANSACTIONS

a) Directors and Officers

Three of the Company's major shareholders (former Crystal Rock
shareholders) have employment contracts with the Company through October 5,
2005. They are also directors. One contract entitles the shareholder to
annual compensation of $47,000 as well as a leased Company vehicle. The
other two contracts entitle the respective shareholders to annual
compensation of $200,000 each and other bonuses and prerequisites.

F-18

The Company leases a 67,000 square foot facility in Watertown, CT and a
22,000 square foot facility in Stamford, CT from a family trust controlled
by a related party. The lease expires in October 2010. Future minimum
rental payments under these leases are as follows:

Fiscal year
ending October 31, Stamford Watertown Total
- ------------------ ---------- ---------- ----------

2006 248,400 414,000 662,400
2007 248,400 414,000 662,400
2008 248,400 414,000 662,400
2009 248,400 414,000 662,400
2010 248,400 414,000 662,400
---------- ---------- ----------
Totals $1,242,000 $2,070,000 $3,312,000
========== ========== ==========

The Company's Chairman of the Board, Ross S. Rapaport, who also acts as
Trustee in various Baker family trusts is employed by Pepe & Hazard LLP a
business law firm that the Company uses from time to time. During fiscal
2005, 2004, and 2003, the Company paid $117,506, $147,467, and $83,043
respectively, for services provided by Pepe & Hazard LLP.

b) Investment in Voyageur

The Company has an equity position in a software company named Computer
Design Systems, Inc. (CDS), d/b/a Voyageur Software. One of the Company's
directors is a member of the board of directors of CDS. The Company uses
software designed, sold and serviced by CDS in its Home and Office delivery
system to manage customer service, deliveries, inventory, billing and
accounts receivable. During fiscal 2005, 2004, and 2003, the Company paid
$217,871, $582,277, and $113,193, respectively, for service, software, and
hardware.

As of October 31, 2003, the Company held a note receivable from CDS dated
August 1, 1998 for the principal amount of $120,000 with accrued interest
of $43,650 and an original maturity date of August 15, 2003. At October 31,
2003, interest accrued on the note was equal to $50,150. In October 2003,
the Company exercised the option to convert the principal amount of the
note into additional common shares of CDS during 2003. At October 31, 2003,
the Company's share of CDS losses resulted in a net equity investment in
CDS of $100,988, representing approximately 24% of the common stock of CDS.
In July 2004, the Company exercised the option to convert the interest
amount into additional common shares of CDS. In 2004, the Company
determined that it's investment in CDS was impaired and wrote off the
remaining balance of $152,838 which is reflected as a charge to operations
as a miscellaneous expense in the accompanying statement of operations for
the fiscal year ended October 31, 2004. Since the Company has written off
its entire interest in CDS as of that date, it did not recognize its share
of the loss for CDS in fiscal year 2005. The loss not reflected by the
Company in fiscal year 2005 was $8,000.

F-19

17. INCOME TAXES

The Company has approximately $5.8 million of available net operating loss
carryforwards at October 31, 2005 expiring from 2005 through 2018.

Deferred tax assets (liabilities) at October 31, 2005 and October 31, 2004,
are as follows:

October 31,
-------------------------
2005 2004
----------- -----------

Accounts receivable allowance $ 110,138 $ 115,256
Amortization (67,518) 159,587
Payroll 350,945 228,270
Tax effect of operating loss carryforwards 2,185,374 2,414,924
Sale of Business Segment 962,515 807,564
Other 448,126 384,302
----------- -----------
Total deferred tax asset 3,989,580 4,109,903
----------- -----------
Depreciation (818,814) (838,519)
Returnable Containers (1,719,375) (1,082,225)
----------- -----------
Total deferred tax liability (2,538,189) (1,920,744)
----------- -----------
Deferred tax asset, net $ 1,451,391 $ 2,189,159
=========== ===========

Income tax expense differs from the amount computed by applying the
statutory tax rate to net income before income tax expense as follows:

Fiscal Year Ended October 31,
------------------------------
2005 2004 2003
-------- -------- --------

Income tax expense computed at the
statutory rate $547,522 $384,071 $739,350
Effect of permanent differences 120,959 22,661 28,881
State income taxes 71,285 61,735 72,765
-------- -------- --------
Income tax expense $739,766 $468,467 $840,996
======== ======== ========

F-20

The following is the composition of income tax expense (benefit):

Fiscal Year Ended October 31,
------------------------------
2005 2004 2003
-------- -------- --------

Current:
Federal $ 208 $199,184 $ 54,230
State 1,790 119,000 211,000
-------- -------- --------
Total current 1,998 318,184 265,230
-------- -------- --------
Deferred:
Federal 667,664 111,283 575,766
State 70,104 39,000 --
-------- -------- --------
Total deferred 737,768 150,283 575,766
-------- -------- --------
Total income tax expense $739,766 $468,467 $840,996
======== ======== ========

On September 3, 2003 the Company reached settlement with the Internal
Revenue Service related to an audit of federal income tax for its Crystal
rock subsidiary for the tax year ending October 5, 2000. The settlement
resulted in an increase in the Company's income taxes of $136,000. This
amount has been included in income tax expense for 2003.

In calculating its effective tax rate, the Company has considered the
effect of certain contingent factors involving state and local income
taxes. Although it believes that the tax returns filed accurately reflect
operations and financial results, the Company has accrued liability as of
October 31, 2005 and 2004 of approximately $284,000 and $160,000,
respectively, for the purpose of settling disputes in the event that
certain jurisdictions viewed particular tax laws differently than the
Company did when the returns were filed.

18. NET INCOME PER SHARE

The following calculation provides the reconciliation of the denominators
used in the calculation of basic and fully diluted earnings per share:

F-21

Fiscal Year Ended October 31,
---------------------------------------
2005 2004 2003
----------- ----------- -----------

Income from Continuing Operations $ 870,593 $ 500,124 $ 941,387
Income from Discontinued Operations -- 160,221 391,022
----------- ----------- -----------
Net Income $ 870,593 $ 660,345 $ 1,332,409
=========== =========== ===========
Denominator:
Basic Weighted Average Shares
Outstanding 21,619,863 21,497,251 21,282,294
Effect of Stock Options 5,820 77,264 482,404
----------- ----------- -----------
Diluted Weighted Average Shares Outstanding 21,625,683 21,574,515 21,764,698
=========== =========== ===========
Basic Net Income Per Share:
Income from Continuing Operations $ .04 $ .02 $ .04
Income from Discontinued Operations $ .00 $ .01 $ .02
----------- ----------- -----------
Net Income $ .04 $ .03 $ .06
=========== =========== ===========
Diluted Net Income Per Share:
Income from Continuing Operations $ .04 $ .02 $ .04
Income from Discontinued Operations $ .00 $ .01 $ .02
----------- ----------- -----------
Net Income $ .04 $ .03 $ .06
=========== =========== ===========

In addition to the options used to calculate the effect of dilution, there
were 2,561,490 and 1,645,000 options outstanding for the years ended
October 31, 2005 and 2004, respectively, that were not included in the
dilution calculation because the options' exercise price exceeded the
market price of the underlying common shares.

19. SALE OF BUSINESS SEGMENTS

On March 2, 2004, the Company completed the sale of substantially all of
the assets related to its Retail and Retail - Gallons segments. These
segments have been accounted for as discontinued operations.

The sale resulted in a gain before income taxes, reported in discontinued
operations, of $352,535. The gain was calculated by deducting the net
carrying value of the assets and liabilities and transaction costs from the
net proceeds as follows:

Selling Price $10,567,998
Accounts Receivable (1,147,229)
Inventory (2,490,181)
Property, Plant, and Equipment (7,093,641)
Accounts Payable 1,739,347
Transaction Costs (1,223,759)
-----------
Gain $ 352,535
===========

In addition to cash proceeds of $10,067,998, the Company received a
$500,000, 5% subordinated note from the buyer as consideration for the
sale. Interest is payable by the seller on a quarterly basis and the total
principal is due on the second anniversary of the

F-22

sale. Substantially all of the proceeds of the sale were used to reduce
debt. $5,000,000 was used to pay down the Company's senior term debt with
Webster Bank and $5,000,000 was used to pay down its subordinated debt.

Revenues, expenses, and costs have been excluded from the respective
captions in the related financial statements and reported as (loss) income
from discontinued operations, net of income taxes, for fiscal years 2004
and 2003. For the years ended October 31, 2004 and 2003, net sales from
discontinued operations were $6,434,000 and $26,341,000, respectively. The
loss from discontinued operations was $79,000 for fiscal year 2004 and
income from discontinued operations was $637,000 for fiscal year 2003. The
respective losses and income do not include any allocation of corporate
costs that were previously allocated to the discontinued operations. Those
costs are expected to continue in the future and have been allocated to the
only remaining line of business in continuing operations.

20. UNAUDITED QUARTERLY FINANCIAL DATA

The Company's unaudited quarterly financial data for the last two fiscal
years is as follows:

For the quarter ended:
Fiscal 2005 ------------------------------------------------
(000's of $ except January 31, April 30, July 31, October 31,
net income per share) 2005 2005 2005 2005
- --------------------- ----------- --------- -------- -----------

Net Sales $13,964 $14,756 $15,306 $15,809
Gross Profit $ 8,032 $ 8,588 $ 9,048 $ 9,324
Income from Continuing
Operations $ 7 $ 205 $ 382 $ 277
Net Income $ 7 $ 205 $ 382 $ 277
Earnings per Share:
------- ------- ------- -------
Net Income - Basic and Diluted $ -- $ .01 $ .02 $ .01
======= ======= ======= =======

For the quarter ended:
Fiscal 2004 ------------------------------------------------
(000's of $ except January 31, April 30, July 31, October 31,
net income per share) 2004 2004 2004 2004
--------------------- ----------- --------- -------- -----------

Net Sales $11,998 $13,182 $13,555 $13,738
Gross Profit $ 5,360 $ 5,960 $ 5,745 $ 5,713
(Loss) income from Continuing
Operations $ (320) $ 187 $ 390 $ 243
Income from Discontinued
Operations $ 64 $ 96 -- --
------- ------- ------- -------
Net (Loss) Income $ (256) $ 283 $ 390 $ 243
======= ======= ======= =======
(Loss) Earnings per Share:
Continuing Operations - Basic
and Diluted $ (.01) $ .01 $ .02 --
Discontinued Operations - Basic
and Diluted -- $ .01 -- --
------- ------- ------- -------
Net Income - Basic and Diluted $ (.01) $ .02 $ .02 --
======= ======= ======= =======

F-23

21. CONCENTRATION OF CREDIT RISK

The Company maintains its cash accounts at various financial institutions.
The balances at times may exceed federally insured limits. At October 31,
2005, the Company had cash in deposits exceeding the insured limit by
approximately $1,754,000.

22. SUBSEQUENT EVENTS

Effective November 2, 2005, the Company's Chief Executive Officer ("CEO")
resigned from that office as well as director. In addition, five other
directors resigned. Also on that date the Board of Directors named a new
CEO and two new directors and the Board voted to become a "controlled
company" under the Corporate Governance Rules of the American Stock
Exchange.

A controlled company is exempted from certain rules otherwise applicable to
companies whose securities are listed on AMEX, including (1) the
requirement that a the company have a majority of independent directors;
(2) the requirement that nominations to the company's Board of Directors be
either selected or recommended by a nominating committee consisting solely
of independent directors; and (3) the requirement that officers'
compensation be either determined or recommended by a compensation
committee consisting solely of independent directors.

As a result of the resignation of the CEO and directors, 1,479,200 stock
options, issued under various plans, outstanding as of October 31, 2005
expired on December 1, 2005.

In conjunction with the resignation of the CEO the Company entered into a
severance agreement with him. The severance agreement provides for payments
totaling $250,000 over a period from May, 2006 to October 2007. It also
includes customary provisions regarding the confidentiality of Company
information and clarifies or modifies several provisions of Mr. Fallon's
Employment Agreement with the Company dated as of January 1, 2005.

F-24