Letter From The President

BRAND BUILDING ON A NEW PLATFORM - Talent, Innovation, Execution

Begin with a portfolio of innovative natural and organic brands. Combine with the fast growing specialty foods consumer category. Add a blend of industry-leading talent and culinary expertise. Support with an uncompromising commitment to execution. Mix to create the Monterey Gourmet Foods' platform for success-a platform that our team achieved in 2006 and continues to embrace for the future.

It is with great pride and pleasure that I address you in what is my first annual report as your President and CEO. Over the past several months, I have met with many of you to share our vision, provide insight into our plans and to update you on the progress of our many initiatives.

I came on as President and CEO at an exciting time-a time in which the natural and organic markets continue to expand and the general public is taking a close look at what it's eating-focusing on quality, freshness, convenience, and wellness. The products we create and produce align with the upswing of the healthy, natural and organic lifestyle that is being embraced throughout the country. Our ongoing commitment to the growing consumer preference for natural and organic foods provides a strong platform for continued growth.

These exciting times bring exciting changes. The past months have brought many changes throughout the organization. As a new team, we have made great progress in realigning our organization. By structuring the company as one operating entity, we are able to support all our brands and their growing categories within our production plants and sales teams. This restructure provides an opportunity for Monterey Gourmet Foods to effectively and efficiently capitalize on many current and upcoming opportunities.

Calendar 2006 was a year that saw continued progress in our brand building through new and existing distribution of all our categories.

Net sales increased $9MM over 2005 and reflect increased volume in all our natural and organic brands. Key factors that spurred this increase were our CIBO Naturals and Emerald Valley Kitchen brands increasing more than 32% this year; increased volume and distribution of our fresh tamales, which sold aggressively in the fourth quarter of 2006; and increases in our core pasta business.

In addition, we generated $7.0 million cash from operations during 2006 compared to a usage of $1.0 million cash for the same 12 months for 2005, an improvement of $8.1 million. This is not clearly identified in our income statement, but is disclosed in statement of cash flows. The generation of cash in 2006 and the $4.3 million of cash on our balance sheet prepare us for the future.

In 2006, our driving focus was to improve our top and bottom line performances while completing our organizational realignment. TALENT-INNOVATION-EXECUTION are the new core initiatives within Monterey Gourmet Foods.

• TALENT - With the completion of our team alignments and a leadership platform comprised of an executive team, our most talented leaders are building a solid foundation to support the profit growth of our business. The team leaders are diligently working to develop, empower and improve the talents of all operating units. We challenged and aligned our best practices to ensure consistent and effective use of all our resources within each business unit.
  
  
• INNOVATION - The commitment to ensuring our leadership role in the innovation of our brands, categories and systems continues to inspire and challenge us to provide new ideas and solutions that will propel our growth while complementing our focus on driving improved profitability. Our Culinary teams are focused on driving and building our seven core natural and organic brands that extend into the thirteen core category competencies of our California, Washington and Oregon plants. New categories within our plants are also being explored with a continued passion for quality and freshness.
  
  
• EXECUTION - Supported by the ownership and alignment of all operating departments, the execution of projects and initiatives instills the passion for success in all our employees. We have redesigned our compensation programs to ensure alignment and consistent accountablity with our revenue and profit targets and to ensure that our employees are rewarded for the Company's success. As an organization, we know the importance of compensating our talent to ensure that innovation and execution are delivered.
  
  

As you can see, this is a thrilling time at Monterey Gourmet Foods. Throughout 2007, you will continue to see TALENT-INNOVATION-EXECUTION at the core of our company. We strive to develop high energy, passionate and talented teams. Our teams will develop innovative products and solutions that meet or exceed our profit targets. Our systems will be executed effeciently and effectively to better serve our customers and our consumers.

Our natural and organic brands continue to grow in their respective categories and we look forward to the many exciting prospects of our future. Our commitment to our brand-building platform will support our balanced approach to ensure our long term success.

We thank each and every one of our shareholders and employees for their support and it is with great energy and passion that together we embrace our promising future.

Respectfully and Sincerely,

Eric Eddings