FORM 10-K

Registrant’s telephone number, including area code (952) 258-4000

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

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

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

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

Indicate by check mark whether the Registrantregistrant (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 requirements for the past 90 days.    ýx  Yes    o No

Indicate by checkmark whether the Registrant is an accelerated filer (as defined in exchange Act Rule 12b-2). o¨ Yes  ý  No 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 the 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.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  o¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  Not applicable

No

The Registrant’sregistrant’s common stock is not publicly traded.

There were 3,000 shares of the registrant’s common stock outstanding as of March 15, 2007.

PART IDocuments incorporated by reference: None

PART I

ITEM 1 – 1—BUSINESS

FORWARD-LOOKING STATEMENTS

Forward-looking Statements

Certain items herein are “forward-looking statements.” Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future sales or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries and economies in which we operate and other information that is not historical information and, in particular, appear under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used herein, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but there can be no assurance that our expectations, beliefs and projections will be realized.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report.report (please see Item 1A—RISK FACTORS). Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Form 10-K include changes in domestic and international economic conditions. Additional risks and uncertainties include variances in the demand for our products due to consumer and industry developments, as well as variances in the costs to produce such products, including normal volatility in egg, feed, butter and dairy productscheese costs. If any of these risks or uncertainties materialize, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in or imply by any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.

GENERAL

General

Michael Foods, Inc. and its subsidiaries (the “Company”, “we”, “us”,(together, the “Company,” “we,” “us,” and “our”) is a diversified producer and distributor of food products in four areas - three areas—egg products, refrigerated distribution dairy products, and potato products. We believe, through our Egg Products Division, we are the largest producer of processed egg products in North America. TheOur Refrigerated Distribution Division distributes a broad line of refrigerated grocery products to retail grocery outlets, including cheese, shell eggs, bagels, butter, margarine, muffins, potato products juice and ethnic foods. The Dairy Products Division processes and distributes soft-serve mix, ice cream mix, and extended shelf-life ultrapasteurized milk, creamers and other specialty dairy products to domestic quick service businesses and other foodservice outlets, ice cream manufacturers and others. TheOur Potato Products Division processes and distributes refrigerated potato products sold to the foodservice and retail grocery markets in the United States. Please see Note JI to our consolidated financial statements for additional information about our business segments.

Our strategy is to growcreate value-added food product sales, primarily in the foodservice market, by focusing on developing, marketing and distributing innovative, refrigerated products. The keyservice solutions with our customers and suppliers to this strategy is “value-added”, whether that is in the product, the distribution channel or in the service provided to customers.

1

deliver profitable and sustainable growth.

In April 2001,November 2003, we were acquired by an investor group comprised of a management group led by our Chairman, President and Chief Executive Officer, affiliates of Jeffrey Michael, a director of the Company, and two private equity investment firmsfirm and a management group through the merger of Michael Foods Acquisition Corp.THL Food Products Co. with and into the previous M-Foods Holdings, Inc. (the “Merger”), with old M-Foods Holdings, Inc. being the continuing entity. Old M-Foods Holdings, Inc. then merged with Michael Foods, Inc. Old M-Foods Holdings, Inc. continued as the surviving corporation and was immediately thereafter renamed Michael Foods, Inc. (the “Merger”“Company”). TheAny reference to the “Predecessor” refers to Michael Foods, Inc. prior to the Merger. Our current parent, as a result of the Merger, is M-Foods Holdings, Inc.

Egg Products Division

EGG PRODUCTS DIVISION

The Egg Products Division, comprised of our subsidiaries M. G. Waldbaum Company (“Waldbaum”), Papetti’s Hygrade Egg Products, Inc. (“Papetti’s”), and MFI Food Canada, Ltd. and Trilogy Egg Products, Inc., produces, processes and distributes numerous egg products and shell eggs. Collectively, the three subsidiariesentities are also knownreferred to as the Michael Foods Egg Products Company. We believe that theour Egg Products Division is the largest egg products producer and the thirdfourth largest egg producer in North America. Principal value-added egg products are ultrapasteurized, extended shelf-life liquid eggs (“Easy Eggs(R)Eggs^®”, “Table Ready(TM)” and “Excell”), and "Excell."egg white-based egg substitutes (“Better ‘n Eggs(TM)Eggs^™”, “Table Ready(TM)”, and “All Whites(TM)Whites^™”), and hardcooked and precooked egg products.products (“Table Ready^™”). Other egg products include frozen, liquid and dried egg whites, yolks and whole eggs. TheWe believe our Egg Products Division is the largest supplier of extended shelf-life liquid eggs, precooked egg patties and omelets, dried eggs and hardcooked eggs in the United StatesNorth America and is a leading supplier of frozen and liquid whole eggs, whites and yolks.

The2

Our Egg Products Division distributes its egg products to food processors and foodservice customers primarily throughout the United States,North America, with some international sales in the Far East, South America and Europe. The largest selling product line within the Division, which is extended shelf-life liquid eggs, and other egg products are marketed nationally to a wide variety of foodservice and industrialfood ingredients customers. The Division also is a leading supplier of egg white-based egg substitutes sold in the U.S. retail and foodservice markets. Most of the Division’s annual shell egg sales are made to our Refrigerated Distribution Division, which, in turn, distributes them throughout its 30 state territory.

Division.

In 2002,2006, the Division derived approximately 97%98% of net sales from egg products, with 3%2% of net sales coming from shell eggs. Pricing for shell eggs and certain egg products in the United States and Canada reflects levels reported by Urner Barry Spot Egg Market Quotations (“Urner Barry”), a recognized industry publication. Prices of certain higher valued-added products, such as extended shelf-life liquid eggs, egg substitutes, and hardcooked and pre-cookedprecooked egg products typically are not significantly affected by Urner Barry quoted price levels. Such products accounted for approximately 60%74% of the Division’s 20022006 sales. Prices for the Division’s other products, including frozen, short shelf-life liquid, certain dried and frozen products and, particularly, shell eggs, are significantly affected by frequently changing market levelsprices as reported by Urner Barry.

In 2002,2006, approximately 30% of the Division’s egg needs were satisfied by production from Company-ownedour owned hens, with the balance being purchased under growerthird-party egg procurement contracts and in the spot market. The cost of eggs from Company-ownedour owned facilities is largely dependent upon the cost of feed. Additionally, for an increasing proportion of eggs purchased under growerthird-party egg procurement contracts, the egg cost is determined by the cost of feed, as the contracts are priced using a formula based upon the underlying feed costs. For the larger proportionremaining portion of eggs purchased under growerthird-party egg procurement contracts plusand for eggs purchased in the spot market, the egg cost is determined by normal market forces. Such costs are largely determined by reference to Urner Barry quotations. Historically, feed costs have generally been less volatile than have egg market prices, and internally produced

2

eggs generally arehave been lower in cost than are externally sourced eggs. Key feed costs, such as corn and soybean meal costs, are partially hedged through the use of futures and other purchase contracts. There is no market mechanism for hedging egg prices.

The Division has endeavored to moderate the effects of egg market commodity factors through an emphasis on value-added products and the internal production of eggs, where the egg cost is somewhat controllable. Further, the Division attempts to match market-affected egg sourcing with the production of egg products whose selling prices are also market-affected, and cost-affected egg sourcing, as best can be managed, with higher value-added products priced over longer terms, generally 6-12 months. The former allows the Division to typically realize a modest processing margin on such sales, even though there are notable commodity influences on both the egg sourcing costcosts and the egg products pricing, with each changing as frequently as daily. Shell eggs are essentially a commodity and are sold based upon reported egg prices. Egg prices are significantly influenced by modest shifts in supply and demand. Pricing of shell eggs is also typically affected by seasonal demand related to increased consumption during holiday periods.

The Division’s principal egg processing plants are located in New Jersey, Minnesota, Nebraska, Pennsylvania, Iowa, Manitoba and Ontario. We have decided that the St. Marys, Ontario plant will close in late March 2007 (see Note G to our consolidated financial statements for more information). Certain of the Division’s facilities are fully integrated from the production and maintenance of laying flocks through the processing of egg products. Fully automated laying barns, housing approximately 13,000,00013,500,000 producing hens, are located in Nebraska, Minnesota and South Dakota,Dakota. Approximately 1,900,000 of which approximately 1,600,000these hens are housed in contract facilities. Major laying facilities also maintain their own grain and feed storage facilities. Further, the production of approximately 7,500,00015,000,000 hens is under long-term supply agreements, with an additional 21,000,00017,000,000 hens under shorter-term agreements. The Division also maintains facilities with approximately 2,800,0003,000,000 pullets located in Nebraska and Minnesota.

Refrigerated Distribution Division

REFRIGERATED DISTRIBUTION DIVISION

TheOur Refrigerated Distribution Division, comprised of our wholly-owned subsidiaries Crystal Farms Refrigerated Distribution Company (“Crystal Farms”) and Wisco Farm Cooperative, distributes a wide range of refrigerated grocery products directly to retailers and to wholesale warehouses. The Division believesWe believe that itsthe Division’s strategy of offering quality branded products at a good value relative to national brands has contributed to itsthe Division’s growth. These distributed refrigerated products, which consist principally of cheese, shell eggs, bagels, butter, margarine, muffins, potato products juice and ethnic foods, are supplied by various vendors, or our other divisions, of the Company, to the Division’s specifications. Cheese accountsaccounted for approximately 61%68% of divisional annualthe Division’s 2006 sales. While we do not produce cheese, we operate a cheese packaging facility in Lake Mills, Wisconsin, which processes and packages various cheese products for our Crystal Farms brand cheese business and for various private label customers.

The Division has expanded its market area using both company-owned and leased resources and independent distributors. The Division’s market area includes 30 states primarilyis the United States, with a large customer concentration in the central United States. Retail locations carrying the Division’s products approximate 4,500exceed 10,000 stores. A majority of these retail stores though a majority are served via customers’ warehouses. In 2002, sales to the warehouse operations of SUPERVALU, Inc., and to its owned and franchised stores, represented approximately 41% of divisional sales. The Division maintains a fleet of refrigerated tractor-trailers to deliver products daily to its retail customers from ten distribution centers centrally located centrally in its key marketing areas.

3

DAIRY PRODUCTS DIVISION

The DairyPotato Products Division comprised of Kohler Mix Specialties, Inc. (“Kohler”), Kohler Mix Specialties of Connecticut, Inc., Midwest Mix, Inc., M-Foods Dairy, LLC, and M-Foods Dairy TXCT, LLC, processes and sells soft-serve mix, ice cream mix, frozen yogurt mix, creamers, milk and specialty dairy products, many of which are ultra-high temperature (“UHT”) pasteurized products. The Division sells its products throughout much of the United States from processing facilities in Minnesota, Texas and Connecticut.

UHT processing is designed to produce bacteria-free products with delicate flavors, such as milk, ice cream mixes and specialty dairy products such as coffee creamers, whipping cream, half and half and cordials. Many of the Division’s products have an extended shelf-life of up to ninety days, which extends the trade territory that can be effectively served by the Division to include most of the United States.

Soft-serve, frozen yogurt and ice cream mixes are made to customers’ specifications. Currently, the Division produces approximately 100 different formulations. We believe the customization of high quality products and high customer service levels are critical to the Division's business.

The Division has approximately 500 customers, including branded ice cream manufacturers, quick service restaurants, other foodservice outlets and independent ice cream retailers. The Division’s top five customers represented approximately 60% of 2002 divisional sales volume. Most of the Division’s sales are to customers who purchase products on a cost-plus basis. This includes sales to most of the large quick service restaurant chains operating in its market areas. Sales of soft-serve, milk shake, and ice cream mixes are more seasonal than the Company’s other products, with higher sales volume occurring between April and October. The addition of other specialty dairy products in recent years, such as non-refrigerated dairy creamers and cartoned items, has somewhat offset the impact on the Division’s sales and earnings from this seasonality.

POTATO PRODUCTS DIVISION

Refrigerated potato products are produced and sold by our wholly-owned subsidiaries Northern Star Co. (“Northern Star”) and Farm Fresh Foods, Inc. (“Farm Fresh”) to both the foodservice and retail markets. ProductsThis division’s products consist of shredded hash browns and diced, sliced, mashed and other specialty potato products. In 2002,2006, approximately 61%55% of the Potato Products Division’s net sales were to the foodservice market, with the balance to the retail market.

The Division maintains its main processing facility in Minnesota, with a smaller facility located in Nevada. The Division typically purchases approximately 90%-95% of its annual potato requirements from contract producers. The balance of potato requirements are purchased on the spot market. The Division maintains a high percentage of its contracted supply from irrigated fields and also has geographical diversification of its potato sources. However, weather remains an important factor in determining raw potato prices and quality. Variations in the purchase price and/or quality of potatoes can affect the Potato Products Division’s operating results.

SALES, MARKETING AND CUSTOMER SERVICE

Sales, Marketing and Customer Service

Each of our fourthree divisions has developed a marketing strategy which emphasizes high quality products and customer service. Michael Foods Sales, an internal sales group, coordinates the foodservice and retail sales of the Egg Products Dairy Products and Potato Products divisions,Divisions, primarily for national and regional accounts,

4

and is supported by a centralized order entry and customer service staff. The consolidations of the historically distinct egg products sales groups, and related customer service groups, were completed in 2001. A group of foodservice brokers is used by Michael Foods Sales to supplement its internal sales efforts. Further,Furthermore, the Egg Products Division utilizes a separate broker group for the retail market and maintains a small sales group which handles certain industrialfood ingredient egg product sales. We have aOur marketing staff which executes egg products and potato products marketing plans in the foodservice market and for related national retail brands, while the Refrigerated Distribution Division has a smallersmall marketing staff which handles that division’s retail marketing plans, along with additional resources available from outside agencies and consultants as needed.

The Refrigerated Distribution Division’s internal and external sales personnel obtain orders from retail stores which arefor next day delivery, and warehouse accounts for delivery usually placed no more than one day ahead of the requested delivery date. Thewithin 14 days. This Division’s marketing efforts are primarily focused on in-store and co-op advertising programs, which are executed with grocers on a market-by-market basis. During 2002, Crystal Farms increased its consumer support programs, with largely favorable sales volume results.

Customers

The Egg Products Division also has consumer support programs to support its egg products sold in the retail market.

ACQUISITIONS

We have made many acquisitions and anticipate that we will continue to make acquisitions as part of our strategic plan. We made one acquisition in 2002.  We bought the egg products assets of Canadian Inovatech Inc. This acquisition, along with the effect of a consolidation of a previous joint venture, is expected to add approximately $60 million to our net sales in 2003.  There were no acquisitions in 2001.

CUSTOMERS

Our foodservice sales are primarily made under long-standing preferred supplier relationships with a majoritymany of ourits customers. Our customers include eachmany of the major broad-line foodservice distributors and mostmany national restaurant chains that serve breakfast. As the largest processed egg producer in the industry, we offer our customers a broad product selection, large-scale manufacturing capabilities and specialized service. The Egg Products Division’s major customers in each of theits market channels include leading foodservice distributors, such as Sysco and U.S. Foodservice, (each more than 10% of our consolidated  net sales), national restaurant chains, such as Burger King, and International House of Pancakes, Sonic Corp. and Dunkin’ Donuts, major retail grocery store chains, such as Costco, Wal-Mart and Ahold group stores, and major industrialfood ingredient customers, such as General Mills/PillsburyMills, Inc. and Unilever Bestfoods.Bestfoods North America.

The Refrigerated Distribution Division has customer relationships with large food store chains that rely on us to deliver a variety of dairy case products in a timely and efficient manner. For the year ended December 31, 2006, the Division served over 10,000 retail locations, inclusive of stores receiving products through warehouse delivery. SUPERVALU, the food industry’s largest distributor, is the Refrigerated Distribution Division’s largest customer. For the year ended December 31, 2006, sales to warehouse operations of SUPERVALU and SUPERVALU-owned and franchised stores accounted for approximately 41% of the Division’s net sales and another customer, Roundy’s Inc., accounted for 13% of the Division’s net sales. Other principal customers include Coborn’s Inc., Nash Finch Company, C & S Wholesale Grocers, Inc. and Wal-Mart Stores, Inc.

The Potato Products Division leverages existing relationships with national foodservice distributor customers of the Egg Products Division. Hence, many of the top Potato Products Division’s customers are also long-standing customers of the Egg Products Division. The Division provides foodservice distributors the convenience of centrally sourcing many different types of refrigerated potato and egg products. The Potato Products Division’s largest customers include major foodservice distributors, such as Sysco and U.S. Foodservice and major retail grocery store chains, such as Kroger, Publix, Wal-Mart and Albertsons.

COMPETITION4

Competition

All aspects of our businesses are extremely competitive. In general, food products are price sensitive and affected by many factors beyond our control, including changes in consumer tastes, fluctuating commodityinput prices, changes in supply due to weather, and production variances and feed costs.variances.

Our Egg Products DivisionThe egg processing industry is considered the largest egg products processor and the third largest egg producer in North America. The Egg Products Division competes with many suppliers of egg products and eggs. Whilecompetitive, especially when compared to the shell egg industryindustry. Sunny Fresh Foods, a subsidiary of Cargill, is highly fragmented, the Company’s largest higher value-added egg products sector is less fragmented, as there has been a trend toward consolidation in recent years and further consolidation in the industry is expected. Other majorcompetitor. The Company also competes with other egg producers include Cal-Maineproducts processors including Sonstegard Foods Inc. andCompany, Rose Acre Farms, Inc. We believe our Egg Products Division is among the lowest cost egg producers in the United States. We believe that Easy Eggs’ (R), Echo Lake Farm Produce, Golden Oval Eggs, LLC and Table Ready’s (TM) salmonella-negative aspects, extended shelf-lives and ease of use are significant competitive advantages in the foodservice and industrial food markets for eggs. We believe our largest competitor in egg products is the Sunny FreshConAgra Foods, Inc. subsidiary of Cargill, Inc.

5

OurThe Refrigerated Distribution Division competes with the refrigerated products of otherlarger suppliers such as Beatrice Companies, Inc. (a subsidiary of ConAgra Foods, Inc.), Kraft Foods, Inc., Land O’ Lakes,Dairy Farmers of America, Sargento Foods, Inc., and Sargento Cheese Company, Incorporated.Sorrento Lactalis, Inc. We positionCrystal Farmsas an alternative mid-priced brand, operating at price points below national brands and above retail store brands. The Division believes that itsRefrigerated Distribution Division’s emphasis on a high level of service and lower-priced branded products has enabled it to compete effectively in its market area with much larger national brand companies.

Through our Potato Products Division, we were the first company to introduce nationally branded refrigerated potato products in the late 1980s to the United States’ foodservice and retail markets. We believe we are the Dairy Products Division provides a significant amountlargest processor and distributor of the soft-serve mix, and a significant percentage of ice cream mix, sold in Minnesota and Wisconsin. Kohler also has a large percentage of the UHT soft-serve mix and UHT fluid milk business with quick service restaurant chainsrefrigerated potato products in the central and eastern United States. Competitors mainly include local dairies utilizing conventional pasteurization and regional dairies with UHT products.  In certain lines, we compete with Dean Foods Co., a national dairy products producer.

U.S. The Potato Products Division has a leading market share in refrigerated potato products sold in the United States foodservice andDivision’s major retail markets, where competitors are generally smaller, local or regional companies. One refrigerated potato products competitor,Unilever N. V. (Shedd’s Country Crock Side Dishes) and Reser’s Fine Foods Inc., has a national presence.producer of refrigerated products. Other competitors include Bob Evans Farms Inc. and smaller local and regional processors, including I&K Distributors, Inc. (Yoder’s) and Naturally Potatoes in the foodservice sector. Certain companies, in the frozen potato products business, such as Ore-Ida Foods, Inc. (a subsidiary of H. J. Heinz Co.) and Lamb-Weston, Inc. (a subsidiary of ConAgra Foods, Inc.), also sell frozen versions of potato products which are sold by the Division in refrigerated form.

PROPRIETARY TECHNOLOGIES AND TRADEMARKS

Proprietary Technologies and Trademarks

We use a combination of patents, trademarkspatent, trademark and trade secrets laws to protect the intellectual property for our products. We own proprietary patents and we have exclusive license agreements for several patents and technologies. In 1988, we entered intoobtained an exclusive license agreement to use patented processes developed and owned by North Carolina State University involving the ultra-pasteurizationultrapasteurization of liquid eggs. TheFour of the five patents licensed to us under this agreement expire between 2006 and 2010. Our license to use these patents will continue until the expiration of the patents. This patented processexpired in 2006. The technology produces liquid eggs that are salmonella and listeria-negative, as defined by federal law, and extendextends the shelf-life of liquid eggs from less than two weeks to over ten weeks.

We also own an exclusive license to use a patented process, owned and developed by the University of Missouri, to eliminate salmonella from shell eggs. This patent expiresThe licensed patents are set to expire in 2016.2014. Our license to use this patentthese patents will continue until the expiration of the patent.patents. We currently use this technology for processing in-shell pasteurized eggs sold through our refrigerated distribution division.Refrigerated Distribution Division. We also have acquired licenses to other patents and technology from other third parties, including the University of Nebraska.

We believe that certain of our competitors infringe upon some of our patents and the patents licensed to us. Along with North Carolina State University, we have initiatedInfringement litigation against several processors of competing liquid egg products claiming infringement of the original and subsequent related process and product patents licensed to us by North Carolina State Universityactions with respect to ultra-pasteurized liquidour egg production. In 1992, a juryultrapasteurization license agreement were settled in recent years with three egg processors—Nulaid Foods Inc., Rose Acre Farms and Cutler Egg Products (now owned by Golden Oval Eggs, LLC). Each party agreed that the United States District Court for the Middle District of Florida found the original patent to bepatents were valid and that a processor, Bartow Food Co., willfullyenforceable, and deliberately infringed onethey operated under sublicense agreements through the summer of the patents. In another action, the United States District Court for the District of New Jersey found in 1992 and 1993 that Papetti’s had infringed certain of2006, when the patents and that the licensed patents are valid and enforceable. In 1994, the United States Court of Appeals for the Federal Circuit upheld this judgment. In 1993, Nulaid Foods, Inc. sought a declaratory judgment that the licensed patents are invalid. This action was subsequently settled and, in 2000, Nulaid Foods conceded the validity and enforceability of the patents, as wellexpired.

6

as their past infringement of the patents. Nulaid Foods is currently using the patented process by operating under a sublicense agreement. In 1996, reissue and reexamination proceedings were initiated by us and our competitors with the U.S. Patent and Trademark Office, or PTO, seeking to determine the scope and validity of some of the patents that we license from North Carolina State University. The PTO ruled that the claims in the licensed patents are valid and in full force and effect. In 2000, Sunny Fresh Foods, Inc., a division of Cargill, Inc., filed an action seeking declaratory judgment that Sunny Fresh Foods does not infringe upon the licensed patents and that the licensed patents are invalid. We have filed a counter claim alleging that Sunny Fresh Foods has infringed the patents. For more information, see Item 3—Legal Proceedings.

Although we actively pursue patent infringement litigation, we do not believe that the expiration of these patents will have a material adverse affect on our business or market share within these product segments because of our strong market position, combined with the fact that we believe our largest competitor is currently infringing on these patents.

The Egg Products Division maintains numerous trademarks and/or trade names for its products, including “Logan Valley,“Michael Foods,” “Wakefield,“Better ‘n Eggs,” “Sunny Side Up,“All Whites,” “Michael Foods,“Papetti’s,” “Deep Chill,” “MGW,” “Simply Eggs Brand,” “Better `n Eggs,” “All Whites,” “Chef’s Omelet Brand,” “Express Eggs,” “Quaker“Quaker State Farms,” “Broke“Broke N’ Ready,” “Canadian“Canadian Inovatech,” “Centromay” (trademark pending)“Centromay, “Centrova,” “Emulsa,“Emulsa,” and “Inovatech.“Inovatech.” Ultra-pasteurizedUltrapasteurized liquid eggs are marketed using the “Easy“Easy Eggs” “Table Ready,trade name. Refrigerated Distribution Division products are marketed principally under the “Crystal Farms” and “Excelle” trade names.name. Other Refrigerated Distribution Division trademarks include“Crescent Valley, “Westfield Farms”,and “David’s Deli.”

Within the Potato Products Division, Northern Star Co. markets itswe market our refrigerated potato products to foodservice customers under a variety of brands, including “Northern“Northern Star” “Farm Fresh” and “Quality Farms.“Farm Fresh.” The “Simply Potatoes”“Simply Potatoes” and “Diner’s Choice”“Diner’s Choice” brands are used for retail refrigerated products.

Food Safety

We believe that we take extensive precautions to ensure the safety of our products. In addition to routine inspections by state and federal regulatory agencies, including continuous United States Department of Agriculture (“USDA”) inspection of many facilities, we have instituted quality systems plans in each of our divisions which address topics such as supplier

Refrigerated Distribution Division products are marketed principally under the “Crystal Farms” trade name.  The Dairy5

control, ingredient, packaging and product specifications, preventive maintenance, pest control and sanitation. Each of our facilities also has in place a hazard analysis critical control points plan which identifies critical pathways through which contaminants may enter our facilities and mandates control measures that must be used to prevent, eliminate or reduce all relevant food borne hazards. For example, at our Egg Products Division does not have significant trade names.facilities, sanitization steps are in place to eliminate the risk of microbial contamination of our employees entering certain facilities, including the use of foot baths to reduce the risk of product contamination. Each of our divisions has also instituted a product recall plan, including lot identifiability and traceability measures, that allows us to act quickly to reduce the risk of consumption of any product which we suspect may be a problem.

In December 2004, our Potato Products Division initiated a voluntary recall of certain hash brown potato products sold in the retail market. In February 2005, the recall matter, as it pertains to federal regulatory oversight, was closed. The financial impact of this recall was immaterial.

GOVERNMENT REGULATIONWe maintain general liability insurance, which includes product liability coverage, which we believe to be sufficient to cover potential product liabilities.

Government Regulation

All of our divisions are subject to federal, state and local government regulations relating to grading, quality control, product branding and labeling, waste disposal and other aspects of their operations. Our divisions are also subject to USDA and FDAFood and Drug Administration (“FDA”) regulation regarding grading, quality, labeling and sanitary control. The processing plants of ourOur Egg Products Division processing plants that break eggs, and some of our other egg processing operations, are subject to continuous on-site USDA inspection. All of our other processing plants are subject to periodic inspections by the USDA, FDA and state regulatory authorities.

Crystal Farms’Farms cheese and butter products and the Dairy Products Division’s various dairy products are affected by milk price supports established by the USDA. The support price serves as an artificial minimum price for these products, which may not be indicative of market conditions that would prevail if suchthese supports were abolished.

A substantial portion of the egg production operations of our Egg Products Division are located in the State of Nebraska. With certain exceptions, a provision of the Nebraska constitution generally prohibits corporations from engaging in farming or ranching in Nebraska. Although the constitutional provision contains an exemption for agricultural land operated by a corporation for the purpose of raising poultry, the Nebraska Attorney General has, in written opinions, taken the position that facilities devoted primarily to the production of eggs do not fall within such exemption and therefore are subject to the restrictions contained in the constitutional provision. We believe that our egg

7

production facilities in Nebraska are part of integrated facilities for the production, processing and distribution of egg products, and therefore, that any agricultural land presently owned by us in Nebraska is being used for non-farming and non-ranching purposes.

The constitution empowers the Nebraska Attorney General, or if the Attorney General fails to act, a Nebraska citizen, to obtain a court order to, among other things, force a divestiture of land held in violation of this constitutional provision. If land subject to such a court order is not divested within a two-year period, the constitutional provision directs the court to declare the land escheated, or forfeited, to the State of Nebraska. We are not aware of any proceedings under this approximately 75 year-old constitutional provision pending or threatened against us or any other companies engaging in farming or ranching activities in Nebraska. We believe that we have adequate contingency arrangements in place in the event a determination is made that we engage in farming and/or ranching activities proscribed by the Nebraska constitution. Until the scope of such provision has been clarified by further judicial, legislative, or executive action, there can be no assurance as to the effect, if any, that it may have on our Egg Products Division.

ENVIRONMENTAL REGULATION

We are subject to federal state and localstate environmental regulations and requirements, including those governing discharges to air and water, the management of hazardous substances, the disposal of solid and hazardous wastes, and the remediation of contamination.

We use Our environmental management and compliance programs are led by our Director of Environmental Engineering. Additionally, we have an ongoing relationship with an environmental consulting firm, to help us comply with environmental requirements. In addition,and we use other consultants as may be required. As a review was conducted by independent environmental consultants in connection with the Merger, and, as a result of our efforts, we believe we are currently in material compliance with all environmental regulations and requirements. Nonetheless, as

We have made, and will continue to make, expenditures to ensure environmental compliance. For example, in recent years, we have upgraded the wastewater treatment system at our Klingerstown, Pennsylvania facility, we have paid for construction of a wastewater treatment facility in Lenox, Iowa, and we have updated the wastewater system at our egg production facility in Bloomfield, Nebraska. Additionally, in 2005 we committed to constructing a new mechanical wastewater treatment facility in Wakefield, Nebraska and completed a financing with the City of Wakefield in 2005 to allow us to do so. We recently received lender approval to complete a related financing, which will address an increase in the project’s cost and which should be completed in mid-2007. The facility is the case with any business, if we do not fully comply with environmental regulations, or if a release of hazardous substances occurs at or from one of our facilities, we mayunder construction and is to be subject to penalties and/or held liable for the cost of remedying the condition.

operational in late 2007. For further information on Nebraska matters, please see Item 3.

Many of our facilities discharge wastewater pursuant to wastewater discharge permits. We dispose of our waste from our internal egg production primarily by providing it to farmers for use as fertilizer. We dispose of our solid waste from potato processing by selling the waste to a processor who converts it to animal feed.

We have made, and will continue to make, expenditures to maintain our compliance with environmental requirements. We have upgraded the wastewater treatment system at our Klingerstown, Pennsylvania facility and agreed to pay the city of Lenox, Iowa the cost to construct and operate a wastewater treatment plant used by our facility located there. We believe that these expenditures will reduce the risk of wastewater violations at these facilities. In addition, we updated our wastewater treatment system at our egg production facility in Bloomfield, Nebraska in 2002. Assessments of our wastewater treatment systems at the Egg Products Division’s facility in Gaylord, Minnesota and the Dairy Products Division’s facility in White Bear Lake, Minnesota are also underway. We may elect to upgrade the wastewater controls at these facilities or we may be required to upgrade such

8

controls at these or other facilities in the future. However, we do not anticipate making any material capital expenditures for environmental controls for the foreseeable future.

EMPLOYEES

At December 31, 2002,2006, we had approximately 4,3713,875 employees. Of this total, theThe Egg Products Division employed approximately 2,9752,512 full-time and 252250 part-time employees, with 17none of these employeeswhom are represented by the Teamsters Union.a union. The Potato Products Division employed approximately 262267 persons, approximately 180199 of whichwhom were represented by the Bakery, Laundry, Allied Sales Drivers and Warehousemen Union, which is affiliated with the Teamsters. The Dairy Products Division employed approximately 292 people, approximately 92 of which were represented by the Milk Drivers and Dairy Employees Union. The Refrigerated Distribution Division employed approximately 450437 employees, none of whom are represented by a union. The Michael FoodsOur corporate, sales, distribution and customer service and information systems groups collectively employed approximately 140 peoplehad 409 employees at December 31, 2002.2006. We believe our employee relations to be good.

EXECUTIVE OFFICERS OF THE REGISTRANT6

Executive Officers of the Registrant

See Item 10 — 10—Directors and Executive Officers of the Registrant.

ITEM 1A—RISK FACTORS

ITEM 2 – PROPERTIESOur operating results are significantly affected by egg, potato and cheese market prices and the prices of other raw materials, such as grain, which can fluctuate widely.

Our operating results are affected by egg, potato and cheese prices and the prices of corn and soybean meal, which are the primary feedstock used in the production of eggs. Historically, the prices of these raw materials have fluctuated widely. Changes in the price of such items may have a material adverse effect on our business, prospects, and results of operations or financial condition. In general, the pricing of eggs is affected by an inelasticity of supply and demand, resulting often times in small changes in production or demand having a large effect on prices. Historically, our operating profit has been, at times, adversely affected when egg and grain prices rise significantly. In addition, our operating profit has historically been negatively affected during extended periods of low egg prices. We also can experience similar negative effects on our results of operations because of increases in the price of potatoes and cheese. Although we can take steps to mitigate the effects of changes to our raw material costs, fluctuations in prices are outside of our control. For example, the price of corn has nearly doubled since the summer of 2006, due mainly to significant incremental demand from ethanol producers. It is unclear if we can adjust our egg products selling prices rapidly, and extensively, enough to offset this significant raw material cost increase.

We produce and distribute food products that are susceptible to microbial contamination.

Many of our food products, particularly egg products, are vulnerable to contamination by disease producing organisms, or pathogens, contained in food, such asSalmonella, which are found in the environment. Shipment of adulterated products, even if inadvertent, is a violation of law and may lead to an increased risk of exposure to product liability claims (as discussed below), product recalls and increased scrutiny by federal and state regulatory agencies. Any shipment of adulterated products may have a material adverse effect on our reputation, business, prospects, results of operations and financial condition. The risk may be controlled, but not eliminated, by adherence to good manufacturing practices and finished product testing. Also, products purchased from others for repacking or distribution may contain contaminants that may be inadvertently redistributed by us. Once contaminated products have been shipped for distribution, illness and death may result if the pathogens are not eliminated by processing at the foodservice or consumer level.

As a result of selling food products, we face the risk of exposure to product liability claims.

We face the risk of exposure to product liability claims and adverse public relations in the event that our quality control procedures fail and the consumption of our products cause injury or illness. If a product liability claim is successful, our insurance may not be adequate to cover all liabilities we may incur, and we may not be able to continue to maintain such insurance, or obtain comparable insurance at a reasonable cost, if at all. We generally seek contractual indemnification and insurance coverage from parties supplying us products, but this indemnification or insurance coverage is limited by the creditworthiness of the indemnifying party, and their insurance carriers, if any, as well as the insured limits of any insurance provided by suppliers. If we do not have adequate insurance or contractual indemnification available, product liability claims relating to defective products could have a material adverse effect on our business reputation and earnings. In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could have a material adverse effect on our reputation with existing and potential customers and on our business, prospects, results of operations and financial condition.

A decline in egg consumption or in the consumption of processed food products could have a material adverse effect on our net sales and results of operations.

Adverse publicity relating to health concerns and the nutritional value of eggs and egg products could adversely affect egg consumption and consequently demand for our processed egg products, which could have a material adverse effect on our business, prospects, and results of operations or financial condition. In addition, as almost all of our operations consist of the production and distribution of processed food products, a change in consumer preferences relating to processed food products or in consumer perceptions regarding the nutritional value of processed food products could adversely affect demand, which would have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition.

FACILITIES7

The categories of the food industry in which we operate are highly competitive, and our inability to compete successfully could adversely affect our business, prospects, results of operations and financial condition.

Competition in each of the categories of the food industry within which we operate is notable. Increased competition against any of our products could result in price reduction, reduced margins and loss of market share, which could negatively affect our business, prospects, results of operations and financial condition. In particular, we compete with major companies such as Cargill, Kraft Foods, Inc., Unilever N. V. and ConAgra Foods, Inc. Each of these companies has substantially greater financial resources, name recognition, research and development, marketing and human resources than we have. In addition, our competitors may succeed in developing new or enhanced products which could be superior to our products. These companies may also prove to be more successful than we are in marketing and selling these products. We may not be able to compete successfully with any or all of these companies.

Our largest customers have historically accounted for a significant portion of our net sales volume. Accordingly, our business may be adversely affected by the loss of, or reduced purchases by, one or more of our large customers.

Our largest customers have historically accounted for a significant portion of the net sales volume of each of our three divisions. If, for any reason, one of our key customers were to purchase significantly less of our products in the future or were to terminate its purchases from us altogether, and we are not able to sell our products to new customers at comparable or greater levels, our business, prospects, financial condition and results of operations may be materially adversely effected.

Patents and trademarks have historically been important to our business. The loss or expiration of a patent, whether licensed or owned, or the loss of any trademark could negatively impact our ability to produce and sell the products associated with such patent or trademark, which could have a material adverse effect on our sales volume and net income.

We utilize patents, trademarks, trade secrets and other intellectual property in our business, the loss or expiration of which could negatively impact our ability to produce and sell the associated products, which could have a material adverse effect on our results of operations. In 1988, we obtained an exclusive license to use patented processes developed and owned by North Carolina State University for the ultrapasteurization of liquid eggs. The patents under this license expired in 2006. We use the previously patented technology in the production of extended shelf-life liquid egg products. We have competitors in the extended shelf-life liquid egg market, plus parties to whom we had granted sublicenses to, and we believe additional parties may begin to produce and market processed egg products that are similar to ours because of the patents’ expiration. Such an increase in competitive activity would be expected to negatively affect selling prices, and margins, for certain higher value-added egg products.

We also own many registered and unregistered trademarks that are used in the marketing and sale of our products. We have invested a substantial amount of money in promoting our trademarked brands. However, the degree of protection that these trademarks afford us is uncertain.

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

Our manufacturing, processing, packaging, storage, distribution and labeling of food products are subject to extensive federal, state and local regulation, including regulation by the FDA, the USDA, and various state and local health and agricultural agencies. Some of our facilities are subject to continuous on-site inspections. Applicable statutes and regulations governing food products include rules for identifying the content of specific types of foods, the nutritional value of that food and its serving size. Many jurisdictions also provide that food manufacturers adhere to good manufacturing practices (the definition of which may vary by jurisdiction) with respect to production processes, which include proper personal hygiene, wearing and proper handling of company-issued uniforms and footwear, using footbaths, proper hand washing procedures, proper storage of equipment, not wearing jewelry, not eating or drinking in production areas, and not carrying objects above the waist so as to prevent anything from falling into our products. In addition, our production and distribution facilities are subject to various federal, state and local environmental and workplace regulations. Failure to comply with all applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, and criminal sanctions, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, compliance with current or future laws or regulations could require us to make material expenditures or otherwise adversely affect the way we operate our business, our prospects, results of operations and financial condition.

We may incur unexpected costs associated with compliance with environmental regulations.

We are subject to federal, state, and local environmental requirements, including those governing discharges to air and water, the management of hazardous substances, the disposal of solid and hazardous wastes, and the remediation of contamination. If we do not fully comply with environmental regulations, or if a release of hazardous substances occurs at or from one of our facilities, we may be subject to penalties and fines, and/or be held liable for the cost of remedying the

CORPORATE.8

condition. The operational and financial effects associated with compliance with the variety of environmental regulations we are subject to could require us to make material expenditures or otherwise adversely affect the way we operate our business and our prospects, results of operations and financial condition. To address wastewater issues at our Wakefield, Nebraska location, we are constructing an approximate $16 million mechanical treatment plant, which is to be operational in late 2007. The financing to build and equip the plant was secured via the City of Wakefield. However, this debt is guaranteed by us.

Extreme weather conditions, disease (such as avian influenza) and pests could harm our business.

Many of our business activities are subject to a variety of agricultural risks. Unusual weather conditions, disease and pests can materially and adversely affect the quality and quantity of the food products we produce and distribute. In particular, avian influenza occasionally affects the domestic poultry industry, leading to hen deaths. A virulent form of avian influenza has emerged in Southeast Asia over the past several years and has spread elsewhere in the Eastern Hemisphere in the past two years. It has caused deaths in wild bird populations and, in limited instances, domesticated chicken and turkey flocks. It has also been linked to illness and death among some persons who have been in contact with diseased fowl. It is not clear if this form of avian influenza will manifest itself in North America, or if sheltered flocks, such as ours, have significant exposure risk. However, to protect against this risk, we have intensified biosecurity measures at our layer locations. Weather, disease and pest matters could affect a substantial portion of our production facilities in any year and could have a material adverse effect on our business, prospects, and results of operations or financial condition.

ITEM 1B—UNRESOLVED STAFF COMMENTS

Not applicable.

9

ITEM 2—PROPERTIES

FACILITIES

Corporate. We maintain leased space for our corporate headquarters in suburban Minneapolis, Minnesota. Leased space within the same building houses the headquarters, financial and administrative servicesservice staffs of the Egg Products Potato Products and DairyPotato Products divisions, as well as our customer service, distribution, sales, marketing and information services groups. We relocated all such staffs to our present locationThis lease expires in mid-2002 in order to enhance work flow2012 and communications among our foodservice businesses.the annual base rent is approximately $776,000.

EGG PRODUCTS DIVISION.Egg Products Division. The following table summarizes information relating to the primary facilities of our Egg Products Division:egg products division:

910

The Egg Products Division also owns or leases, primarily for egg production operations, approximately 1,600 acres of land in Nebraska and Minnesota.

POTATO PRODUCTS DIVISION.Potato Products Division. The Potato Products Division owns a processing plant and land located in Minneapolis, Minnesota, consisting of approximately 175,000 square feet of production area. TheThis division leases a building in North Las Vegas, Nevada, consisting of approximately 31,000 square feet.

DAIRY PRODUCTS DIVISION. This lease expires in 2011 and we have the option to extend the lease for two successive five year periods. The Dairy Products Division’s facilities in White Bear Lake, Minnesota, consist of three owned buildings, with the main plant containing approximately 95,000 square feet. It also leases a dairy plant in Sulphur Springs, Texas, whichannual payment amount on this lease is approximately 40,000 square feet, and a dairy plant in Newington, Connecticut, which is approximately 70,000 square feet.$352,000.

REFRIGERATED DISTRIBUTION DIVISION.Refrigerated Distribution Division. The Refrigerated Distribution Division leases administrative and sales offices in suburban Minneapolis and several small warehouses across the United States. ItThe leases expire between 2007 and 2011. The administrative and sales office lease may be extended at our option for five years. The annual base rent for all of the leases is approximately $312,000. The Division owns a distribution center located near LeSueur, Minnesota, which is approximately 33,000 square feet. The refrigerated distribution divisionDivision also owns and operates a 48,200an 85,000 square foot refrigerated warehouse with offices and a 19,00030,000 square foot cheese packaging facility on a 19 acre13-acre site in Lake Mills, Wisconsin.

The total annual base rent oflease payments for the facilities described above is approximately $7$5.1 million. The leases for these facilities have varying length terms ranging from month-to-month to 2017. We believe that our owned and leased facilities, together with budgeted capital projects in each of our fourthree operating divisions, are adequate to meet anticipated requirements for our current lines of business for the foreseeable future. All of our owned property serves as collateral under the termsis pledged to secure repayment of our senior credit agreement.facility.

For additional information on contractual obligations relating to operating leases see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

ITEM 3 – 3—LEGAL PROCEEDINGS

Four patentsIn May 2004, the U.S. Environmental Protection Agency (“EPA”) issued “Findings of Violation and Order for ultrapasteurizing liquid eggs licensed to us by North Carolina State University were involved in proceedings before the PTO. In 1996, an examiner rejected certain claims under these patents as a result of challenges from competitors. We and North Carolina State University appealed this rejectionCompliance” to the PTO’s BoardCompany in connection with its discharge of Patent Appealswastewater to the municipal treatment facility in Wakefield, Nebraska (“City”). The findings alleged that wastewater from the Wakefield egg processing operations caused interference or process upset at the City’s facility. EPA ordered the Company to identify interim measures and Interferences.a long-term proposal for addressing the issues that it had identified. In September 1999,June 2004, the PTO Board reversedCompany provided EPA with a proposal for improving the examiner’s rejection ofWakefield facility’s performance and compliance, and supplemented the claims made under the patents. As a result of these proceedings, process claims of all four patents continue to be validproposal in August 2004. Concurrently, and in full forceconnection with the same matter, the Nebraska Department of Environmental Quality (“NDEQ”) issued two enforcement documents:

(a) In June 2004, NDEQ issued a Notice of Violation alleging that Company wastewater had contributed to upset, interference and effect. Also,pass-through at the fourth patentCity’s wastewater treatment facility. We responded to the Notice of Violation in August 2004.

(b) In June 2004, NDEQ issued a Complaint and Notice for Opportunity for Hearing alleging that Company wastewater was reissued in 2001causing interference or process upset at our pretreatment facility. In October 2004, the Company entered into an Administrative Consent Order with NDEQ under which it agreed to include product claims.

land-apply certain egg solids rather than sending them to the City’s wastewater treatment facility.

In September 2000, Sunny Fresh Foods, Inc., a division of Cargill Inc., filed a declaratory judgment action inearly 2006, the United States District CourtDepartment of Justice notified us and the City that it intended to seek civil penalties and injunctive relief for the Districtviolation of Minnesota requesting the adjudication of the unenforceability and invalidity of those patents exclusively licensed to us by North Carolina State University. We have filed a counter-claim against Sunny Fresh Foods, claiming willful

10

infringement by Sunny Fresh Foods of these patents. This litigation is on-going and is expected to go to trial in June 2003.

Macartney Farms, a Canadian company that formerly distributed our egg productsvarious environmental laws relating to the Canadian market, has filedabove matters and other issues. A series of meetings were held during 2006 with the Department of Justice, EPA, NDEQ and the Nebraska attorney general. In early 2007, a complaint against us seeking damagessettlement among the parties was announced, under which we agreed to pay a $1,050,000 civil penalty, agreed to take certain environmentally proactive measures, and asserting wrongful terminationagreed to a specific schedule for completing construction of its alleged exclusive marketing and distribution rights of Easy Eggs, intentional interference with economic relations, breach of fiduciary duty and recoupment of monies invested for the benefit of Michael Foods. Macartney also seeks an injunction against Michael Foods from soliciting Macartney’s customers. The litigation, which is pendinga mechanical wastewater treatment facility in the Ontario Superior Court in Ottawa, is on-going and is expected to reach trial this fall.

City that we had previously voluntarily undertaken.

In addition, we are from time to time party to other litigation, administrative proceedings and union grievances that arise in the ordinary course of our business. We do not havebusiness, and occasionally pay small penalties to resolve alleged minor violations of regulatory requirements. There is no pending any litigation that, separately or in the aggregate, would in ourthe opinion of management have a material adverse effect on our results of operations liquidity, or financial condition.

ITEM 4 – 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

11

PART II

ITEM 5 – 5—MARKET FOR REGISTRANT’S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

None. As a result of the Merger, our stock ceased to be publicly traded.

ITEM 6 – 6—SELECTED FINANCIAL DATA

The following table sets forth selected consolidated historical financial data with respect to the Company and the Predecessor. The data presented below has beenwas derived from the Company’s and the Predecessor’s Consolidated Financial Statements. Due to the Merger, which was accounted for as a purchase, different bases of accounting have been used to prepare the Company and Predecessor Consolidated Financial Statements. The Merger resulted in additional interest expense for new debt incurred and higher depreciation and amortization of fixed assetsproperty, plant and equipment and other intangible assets recorded. The accompanying Predecessor Balance Sheet and Statements of Operations data as of and for the three months ended March 31, 2001, and for the years ended December 31, 2000, 1999 and 1998 were prepared from the historical books and records of the Predecessor. Such dataThis information should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included elsewhere herein and Item 7 – 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.

11

12

ITEM 7 – 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY’S CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS FORM 10-K. THIS DISCUSSION CONTAINSMAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN FORWARD-LOOKING STATEMENTS. SEE ITEM“ITEM 1—BUSINESS – FORWARD–LOOKINGBUSINESS—FORWARD-LOOKING STATEMENTS.”

General

GENERAL

Overview. We are a diversifiedleading producer and distributor of specialty egg potato and dairyrefrigerated potato products to the foodservice, retail and industrialfood ingredient markets. We also distribute refrigerated groceryfood items, primarily cheese and other dairy products, to the retail grocery market predominantly in the central United States. We focus our growth efforts on the specialty segments within our food categories and strive to be a market leader in product innovation and low-cost production. Our strategic focus on value-added processing of food products is designed to capitalize on key food industry trends, such as the desire for improved safety and convenience, reduced labor and waste, and growth of food consumption away from home. We believe our operational scale, product breadth and geographic scope make us an attractive and important strategic partner for our customers, which include foodservice distributors, major restaurant chains and food ingredient companies.

Capital Expenditures. From 1998 through 2006, we invested approximately $341 million in capital expenditures, excluding capital expenditures made in the Dairy Products Division, which was sold in late 2003. More than half of this cumulative amount was used for growth investments to expand our manufacturing capacity for value-added egg products, to upgrade our potato products operations, to improve and expand our distribution centers, to install a new company-wide management information system and to otherwise position ourselves for future growth. These expenditures included the installation of new precooked egg production lines, a new dried egg facility, automated packaging machines and quality control systems. We expect these investments to improve manufacturing efficiencies, customer service and product quality. The remainder of capital spending over the past nine years was on routine major equipment and facilities betterment activities, and rolling stock upgrades.

Acquisitions/Joint Ventures. We have grown both organically and through acquisitions. Since 1988, we have completed 17 acquisitions and three joint ventures, including the $106 million acquisition of Papetti’s in 1997. The acquisition of Papetti’s significantly increased our Egg Products Division’s market share, scale, geographic scope and product offerings. We have focused in recent years on making small acquisitions that expand our current product offerings and/or geographic scope and broaden our technological expertise. We continue to evaluate potential acquisitions and acquisitions remain a part of our growth plans.

13

Commodity Risk Management. Our principal exposure to market risks that may adversely affect our results of operations and financial condition include changes in future commodity prices and interest rates. We seek to minimize or manage these market risks through normal operating and financing activities and through the use of commodity contracts and interest rate cap agreements, where practicable. We do not trade or use instruments with the objective of earning financial gains on commodity prices or interest rate fluctuations, nor do we use instruments where there are not underlying exposures. See “—Market Risk —Commodity Hedging—Commodity Risk Management.”

Results of Operations

The following sets forth selectedtable summarizes the historical financialresults of our divisional operations and such data as a percentage of total net sales for the years ended December 31, 2006, 2005 and 2004. The information contained in this table should be read in conjunction with respect to the Company and its subsidiaries,“Item 6—Selected Financial Data” and the Predecessor. The data has been derived from the Company’sconsolidated financial statements and the Predecessor’s audited Consolidated Financial Statementsrelated notes included elsewhere in this document. It is suggested that readers combine 2001 three month (Predecessor) and 2001 nine month (Company) periods in order to compare full-year 2002 to full-year 2001.Form 10-K.

12

RESULTS OF OPERATIONS

RESULTS FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE COMBINED RESULTS FOR THE YEAR ENDED DECEMBER 31, 2001

NET SALES.Net Sales. Net sales for the year ended December 31, 20022006 increased $6.9less than 1%, or $4.8 million, approximately 1%, to $1,168.2$1,247.3 million from $1,161.3$1,242.5 million for the Company and the Predecessor for the year ended December 31, 2001. The strongest divisional2005, as a result of an increase in external net sales growth occurred in theour Potato Products Division, which recorded an 8%partially offset by decreases in external net sales increase. External net sales growth of 2% and 3% was recorded by theour Egg Products Division and Dairy Products divisions, respectively, with the former benefiting from an acquisition in August 2002. Refrigerated Distribution external net sales declined by 6% due to lower commodity prices for butter, lower unit sales, and customer store closings.Division.

EGG PRODUCTS DIVISION SALES.Egg Products Division Net Sales. Egg Products Division external net sales for the year ended December 31, 2002 increased $11.92006 decreased less than 1%, or $2.5 million, or 2%, to $657.8$858.4 million from $645.9$860.9 million for the Company and the Predecessor for year ended December 31, 2001. Sales rose2005. External net sales increased for most of our higher value-added products in total, including pre-cooked items, egg substitutes and hardcooked eggs,lines and declined for the commodity-sensitive lines, such as frozen and dried products. As partmost of our strategy to sell more further-processed eggs, shelllower value-added lines. The egg sales declined by 6%market was unusually volatile in 2002, while shell egg dozens sold decreased by over 12%. During 2002,2006, with low levels seen early in the year and very high levels seen later in the year. For the full year 2006, shell egg prices increased by approximately 3%10% from 2005 levels, as reported by Urner Barry, resulting

14

Barry. Our pricing year-over-year varied by product line, with the overall divisional selling price per pound declining slightly in somewhat better margins2006 from 2005 levels. We experienced a pricing decline for frozenhigher value-added products, reflecting increased competition. Unit sales increased for most product lines in 2006, and dried egg products. However, in some cases, we declinedall higher value-added lines, with an overall increase of 1.9% recorded for the Division as compared to renew contracts for frozen products last year because of a lack of margin contribution. The Canadian egg products business acquired in August 2002, and the related consolidation of a joint venture, added approximately 3% to 2002 divisional net sales.2005 levels. Sales of higher value-added egg products represented approximately 60%74% of the egg products division’sEgg Products Division’s external net sales in both 2002 and 2001.2006 compared with 72% in 2005.

13

POTATO PRODUCTS DIVISION SALES.Potato Products Division Net Sales. Potato Products Division external net sales for the year ended December 31, 20022006 increased $5.3$11.8 million, or 8%12%, to $72.2$114.0 million from $66.9$102.2 million for the Company and the Predecessor for the year ended December 31, 2001.2005. This increase was mainly dueprimarily attributable to strong unit sales growth for retail refrigerated potato products, which increased approximately 16%21% from 2001.2005 levels. Foodservice unit sales increased approximately 6%. Sales to new customers, growth in sales to existing customers and, particularly, growth in the retail category all contributed to the sales increase. Approximately 55% of the Division’s 2006 net sales were to the foodservice market, with 45% to the retail market. The retail component has grown significantly in recent years. Pricing for the Division in 2006 was comparable to 2005 levels.

Refrigerated Distribution Division Net Sales. Refrigerated Distribution Division external net sales for the year ended December 31, 2006 decreased $4.3 million, or 2%, to $275.0 million from $279.3 million for the year ended December 31, 2005. This decrease was mostly due to notable market deflation in cheese and butter prices year-over-year. The key distributed products business was strong, with branded cheese unit sales up 2% and butter unit sales up 11%. Overall, 2006 unit sales for the Division decreased 1% from 2005 levels, with core distributed products ahead 5% and shell egg unit sales down 14% .

Gross Profit. Gross profit for the year ended December 31, 2006 decreased $6.6 million to $230.5 million from $237.1 million for the year ended December 31, 2005. Our gross profit margin was 18.5% of net sales for 2006, compared with 19.1% for 2005. The decrease in gross profit margin was due to decreased gross profit margins from certain higher value-added egg products and negative gross profits from the sale of our lower value-added egg products collectively. Additionally, we experienced increases in energy, packaging and freight costs, which we were not able to fully offset with selective price increases.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2006 increased $2.5 million, or 2%, to $133.3 million from $130.8 million for the year ended December 31, 2005. Selling, general and administrative expenses were 10.7% of net sales in 2006 as compared to 10.5% in 2005. The main reason for the increase in operating expenses during 2006 was approximately $3 million for officer severance and related stock option compensation expense (see Note F to the financial statements). Without such unexpected expenses, operating expenses in 2006 would have decreased compared to 2005, largely due to reduced incentive expense.

Operating Profit. Operating profit for the year ended December 31, 2006 decreased $12.1 million, or approximately 11%, to $94.1 million from $106.2 million for the year ended December 31, 2005. This decrease was due to a significant decrease in Egg Products gross profits, which increases from the other two divisions could not fully offset and the increase in selling, general and administrative expenses related to officer severance and related stock option compensation expense noted above.

Egg Products Division Operating Profit. Egg Products Division operating profit for the year ended December 31, 2006 decreased $14.3 million, or 17%, to $67.7 million from $82.0 million for the year ended December 31, 2005. Operating profit for higher value-added egg products decreased by approximately 4%$14 million, or 13%, from 2005 levels, mainly reflecting compressed margins due to the lower egg market early in the year, which then strengthened substantially during the fourth quarter. We also experienced a substantial run-up in corn costs in the fourth quarter. With the rapid increase in our costs, we were unable to offset the cost increases in a timely manner with selective price increases. Operating losses from other egg products increased from 2005 levels, reflecting unfavorable market-driven pricing during a period of increased costs.Shell eggs had a modest profit in 2006, as compared to a modest loss in 2005, reflecting improved market pricing.

Potato Products Division Operating Profit. Potato Products Division operating profit for the year ended December 31, 2006 increased $2.0 million, or 12% to $19.2 million from $17.2 million for the year ended December 31, 2005. This increase reflected significant volume growth in our more profitable retail operations, which resulted in an increase in that sector’s profitability. The foodservice business also had an increase in volume in 2006, compared to 2005 levels, which drove operating earnings growth.

Refrigerated Distribution Division Operating Profit. Refrigerated Distribution Division operating profit for the year ended December 31, 2006 increased $2.9 million, or 18%, to $18.6 million from $15.7 million for the year ended December 31, 2005. Operating profit increased mainly due to lower market prices for our key product line, cheese, and significant volume growth for that product line.

15

Interest Expense.Interest expense increased approximately $8.8 million in 2006 compared to 2005, reflecting higher interest rates and additional amortization of debt issuance costs.

Plant Closing Expenses. We announced in late November that, due to rising operating costs, we will be consolidating our Canadian egg processing operations of our Egg Products Division to our facility in Winnipeg, Manitoba. The result will be the closing of the egg processing facility located in St. Marys, Ontario in late March 2007. We recorded severance costs and asset impairment on the leased building and certain plant equipment as well as other plant assets which can not be transferred to other of our processing facilities.

Income Taxes.Our effective tax rate was 42.7% in 2006 compared to 26.6% in 2005. The increase in the effective tax rate was related to several factors, with the recording of a valuation allowance against the deferred tax assets of one of our foreign subsidiaries in 2006 being the most significant (see Note C to the financial statements). Also, the 2005 effective tax rate was lower than our historical effective tax rates mainly due to a change in the tax rate used to calculate the deferred tax benefit as a result of a reduction in our state income tax rate.

Equity in Losses of Unconsolidated Subsidiary. An equity loss of $2.7 million was recorded in 2006 compared to a loss of $0.5 million in 2005. The losses relate to our Belgian joint venture. In the third quarter of 2006, we recorded a $1.8 million valuation adjustment on the investment in the joint venture and $0.9 million of losses related to Belovo’s 2006 operations. We also recorded a tax valuation allowance of $1.0 million against the full amount of the deferred tax asset that resulted from the investment valuation adjustment taken. The tax valuation allowance was recorded because we believe it is more likely than not that the deferred tax asset that resulted from the investment valuation adjustment will not be realized.

Results for the Year Ended December 31, 2005 Compared to results for the Year Ended December 31, 2004

Net Sales. Net sales for the year ended December 31, 2005 decreased $71.0 million, or approximately 5%, to $1,242.5 million from $1,313.5 million for the year ended December 31, 2004, as a result of a decrease in external net sales in our Egg Products Division and our Refrigerated Distribution Division, partially offset by an increase in external net sales by our Potato Products Division.

Egg Products Division Net Sales. Egg Products Division external net sales for the year ended December 31, 2005 decreased $80.5 million, or 9%, to $860.9 million from $941.4 million for the year ended December 31, 2004. External net sales increased for most of our higher value-added products lines and declined for lower value-added lines. Egg market deflation had a notable impact in 2005, as the egg market declined from historically high levels in 2004 to a multi-decade low in mid-2005. During 2005, shell egg prices decreased by approximately 20% from 2004 levels, as reported by Urner Barry, resulting in weak pricing for market-sensitive (food ingredient) egg products. In late 2005 egg prices returned to more normal levels. Unit sales increased for most product lines in 2005, with an overall increase of 2.1% recorded for the Division as compared to 2004 levels. Sales of higher value-added egg products represented approximately 72% of the Egg Products Division’s external net sales in 2005 compared with 65% in 2004. Sales diminished for our most commodity-sensitive products—short shelf-life liquid and shell eggs.

Potato Products Division Net Sales. Potato Products Division external net sales for the year ended December 31, 2005 increased $18.4 million, or 22%, to $102.2 million from $83.8 million for the year ended December 31, 2004. This increase was primarily attributable to strong unit sales growth for retail potato products, which increased approximately 26% from 2004 levels. Foodservice unit sales increased approximately 8%. Sales to new customers, growth in sales to existing customers, increased marketing and, new product introductionsparticularly, growth in the retail category all contributed to the sales increase,increase. Approximately 57% of the Division’s 2005 net sales were to the foodservice market, with mashed products showing43% to the greatest growthretail market. Pricing in both business segments.market segments was higher in 2005 than in 2004.

DAIRY PRODUCTS DIVISION SALES. Dairy ProductsRefrigerated Distribution Division external net sales for the year ended December 31, 2002 increased $4.7 million, or 3%, to $190.6 million from $185.9 million for the Company and the Predecessor for the year ended December 31, 2001. This increase mainly was due to strong unit sales volumes for certain specialty cartoned items contract packed for other dairies and notable growth in non-refrigerated creamer sales. National dairy ingredient prices decreased during the year, resulting in a lower pricing environment of approximately 4%, on average,  for the products sold by the Division. Hence, deflation was a factor in limiting divisional external net sales growth in 2002.

REFRIGERATED DISTRIBUTION DIVISION SALES.Net Sales. Refrigerated Distribution Division external net sales for the year ended December 31, 20022005 decreased $15.1$9.0 million, or 6%3%, to $247.6$279.3 million from $262.7$288.3 million for the Company and the Predecessor for the year ended December 31, 2001.2004. This decrease was mostly due in part, to notably lower market pricing for shell eggs. The key distributed products business was strong, with branded cheese unit sales for cheese, margarine and baked items. Customers’ store closings and a sluggish domestic groceryup approximately 6%. Dollar sales environment contributed to this sales decline. While dollar net sales declined 6%, quantities offor distributed products fell by less thanincreased over 1%. Further, shell egg dozens sold declined by 6%,In addition to eggs, deflation of markets was seen in cheese and butter sales, which was in line with our plans.  Deflation also contributed significantly toare the divisional sales decline, with lower market prices prevailing for butter (down 34% in 2002) and margarine.Division’s largest product lines.

GROSS PROFIT.Gross Profit. Gross profit for the year ended December 31, 20022005 increased $15.2$0.7 million or approximately 7%, to $214.8$237.1 million from $199.6$236.4 million for the Company and Predecessor in the year ended December 31, 2001.2004. Our gross profit margin was 18.4%19.1% of net sales in 2002, whereas the combined gross profit margin was 17.2% in 2001.for 2005, compared with 18.0% for 2004. The increase in gross profit margin was due to increased gross profitsprofit margins from many products, including egg substitutes, precookedhigher value-added egg products cheese and specialty dairypotato products.  In general, raw material costs were more favorable in 2002 than in 2001, and cost savings were realized from production efficiencies in several product categories.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.16

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2002 increased $1.52005 decreased $7.3 million, or 1%5%, to $116.4$130.8 million from $114.9$138.1 million for the Company and the Predecessor for the year ended December 31, 2001.2004. Selling, general and administrative expenses were nearly consistent at 10%10.5% of net sales in 2002 versus 9.9% for2005 and 2004. The decrease in expenses was caused by a reduction in incentive accrual based on the Companylevel of achievement of the incentive plan target and Predecessoroverall expense management. Additionally, the decrease of expenses in 2001. Whereas 2002 expenses no longer included goodwill amortization, there were increases2005 was in depreciation and incentives accruals in 2002.  The former reflected a full year of increased asset values (i.e.,part due to the purchase accounting at the timehigher levels of the Merger) being depreciated as comparedbad debt expense recorded in 2004. The increased bad debt expense recorded in 2004 related primarily to a partial yearspecific pasta company and bakery company customers that had filed for bankruptcy in 2001.  Separate from selling, general and administrative expenses in 2001, the Predecessor recorded non-recurring expenses related to the Merger for financial, legal, advisory and regulatory filing fees. These expenses of approximately $11.1 million are reflected in the Predecessor’s Consolidated Statements of Earnings as transaction expenses.2004.

OPERATING PROFIT.Operating Profit. Operating profit for the year ended December 31, 20022005 increased $24.8$8.0 million, or approximately 34%8%, to $98.4$106.2 million from $73.6$98.2 million for the Company and the Predecessor for the year ended December 31, 2001.2004. This increase wasis due mainly to thea notable increase in gross profit, as described above. Also, 2001 results included one-time transaction expenses for the Predecessor,Potato Products operating profits and also described above.an increase in Refrigerated Distribution operating profits, which more than offset a decrease from Egg Products.

14

EGG PRODUCTS DIVISION OPERATING PROFIT.Egg Products Division Operating Profit. Egg Products Division operating profit for the year ended December 31, 2002 increased $10.12005 decreased $5.6 million, or 16%6%, to $71.7$82.0 million from $61.6$87.6 million for the Company and the Predecessor for the year ended December 31, 2001.2004. Operating profit for higher value-added egg products increased by $9.3approximately $27.0 million, or 15%39%, from 2001, while operating2004, mainly reflecting lower egg costs. Operating profits from other egg products were near break-evendeclined significantly from 2004 levels, collectively, as comparedreflecting unfavorable market-driven pricing. Shell egg profitability went from a profit in 2004 to modest profitabilitya loss in 2001.2005, reflecting substantially lower Urner Barry pricing levels in 2005. The increase2004 period included approximately $2.0 million in Divisionalincome related to amounts received under patent infringement settlements. The Division incurred unusual operating margin was due mainlyexpenses in 2004 related to increased gross profits from value-added items, resulting from favorable raw material costs and production efficiencies. The 2001 operating profit for the handling of wastewater, particularly at the Wakefield, Nebraska location (see Item 3).

Potato Products Division was affected by an approximate $1.6 million loss from the Division’s termination of a European joint venture.

POTATO PRODUCTS DIVISION OPERATING PROFIT.Operating Profit. Potato Products Division operating profit for the year ended December 31, 20022005 increased $2.5$10.3 million or 30%, to $10.8$17.2 million from $8.3$6.9 million for the Company and the Predecessor for the year ended December 31, 2001.2004. This increase reflected gross profit improvement tied tosignificant volume growth particularly from thein our more profitable retail segment, and continuing improvementsoperations which resulted in plant operations.an increase in that sector’s profitability. Also, there was significant profitability in the foodservice business in 2005, compared to break-even operations in 2004.

DAIRY PRODUCTS DIVISION OPERATING PROFIT. Dairy ProductsRefrigerated Distribution Division operating profit for the year ended December 31, 2002 decreased $1.9 million, or 16%, to $9.9 million from $11.8 million for the Company and the Predecessor for the year ended December 31, 2001.  Divisional operating profit in 2001 included a $3.2 million final insurance settlement payment related to a 1999 recall.  Exclusive of this settlement amount, the Division’s operating profit increased $1.3 million in 2002.  This reflected more favorable ingredient costs, which more than offset higher than expected production costs at one of our three dairy plants.

REFRIGERATED DISTRIBUTION DIVISION OPERATING PROFIT.Operating Profit. Refrigerated Distribution Division operating profit for the year ended December 31, 20022005 increased $5.1$2.5 million, or 60%19%, to $13.7$15.7 million from $8.6 million for the Company and the Predecessor for the year ended December 31, 2001. Profit margin for our key product line, cheese, rose in 2002 due to more normalized product costs prevailing through much of the year.  However, profit results for the first several months of 2002 were depressed due to cheese hedging, which resulted in cheese costs being in excess of market levels.  When cheese inventory costs returned to more normal levels, due to a reduction in hedging, operating profits for the Division increased significantly in the latter part of the year.

15

POTATO PRODUCTS DIVISION SALES. Potato Products Division external net sales for the year ended December 31, 2001 increased $6.2 million, or 10%, to $66.9 million from $60.7 million for the year ended December 31, 2000. This increase was mainly due to a strong unit saleslower market prices for our key product line, cheese, and significant volume growth for retail refrigerated potato products, whichthat product line.

Interest Expense and Income Taxes.Interest expense increased approximately 25% from 2000. Also, foodservice unit sales increased by approximately 7%. Sales$3.8 million in 2005 compared to new customers, growth2004, reflecting higher interest rates. Our effective tax rate was 26.6% in sales2005 compared to existing customers, marketing spending and new product introductions all contributed to the sales increase.

DAIRY PRODUCTS DIVISION SALES. Dairy Products Division external net sales for the year ended December 31, 2001 increased by $44.5 million, or 31%, to $185.9 million from $141.4 million for the year ended December 31, 2000. This increase was mainly due to strong unit sales volumes for certain specialty cartoned items contract packed for other dairies and notable growth38.2% in non-refrigerated creamer sales. National dairy ingredient price increases during the year resulted in a higher pricing environment for the products sold by the Division. Hence, inflation was also a significant factor2004.The reduction in the higher divisional external net saleseffective tax rate for 2005 was related to several factors, with a change in 2001. Salesthe tax rate used to calculate the deferred tax benefit being the most meaningful factor. The change in 2000 were adversely impacted as a result of volume declines and operating inefficiencies associated with the aftermath of a 1999 recall of cartoned milk.

REFRIGERATED DISTRIBUTION DIVISION SALES. Refrigerated Distribution Division external net sales for the year ended December 31, 2001 increased $21.6 million, or 9%, to $262.7 million from $241.1 million for the year ended December 31, 2000. This increasetax rate was mainly due to unit sales growth in cheese, margarine and bagels. Cheese sales growth was somewhat constrained, and butter sales declined, as a result of high retail price points during much of the yearprimarily due to a high national butterfat market. Divisional volume growthreduction in 2001 resulted from sales to new customers, particularlyour state income tax rate.

Equity in new territories, promotional activityLosses of Unconsolidated Subsidiary. We had equity losses of approximately $0.5 million in both 2005 and increased consumer advertising. Inflation also contributed to divisional sales growth due to higher dairy prices.

16

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the year ended December 31, 2001 increased $10.2 million, or 10%, to $114.9 million from $104.7 million for the Predecessor for the year ended December 31, 2000. Selling, general and administrative expenses increased as a percent of sales in 2001, as compared to Predecessor results in 2000. Higher expenses were incurred in 2001 to support retail and foodservice marketing efforts and broadened sales efforts, and to establish a centralized purchasing department. Additionally, operating expenses reflected the impact of incremental amortization2004 related to the Merger, of approximately $3.0 million, which resulted in the slightly higher expense as a percentage of sales. Separate from selling, generalour Belgian joint venture.

Seasonality and administrative expenses in 2001, the Predecessor recorded non-recurring expenses related to the Merger for financial, legal, advisory and regulatory filing fees. These expenses of approximately $11.1 million are reflected in the Predecessor’s Consolidated Statements of Earnings as transaction expenses.Inflation

OPERATING PROFIT. Operating profit for the year ended December 31, 2001 decreased $13.2 million, or approximately 15%, to $73.6 million from $86.8 million for the Predecessor for the year ended December 31, 2000. This decrease was mainly due to the Merger transaction expenses incurred by the Predecessor in the first three months of 2001, as discussed above.

EGG PRODUCTS DIVISION OPERATING PROFIT. Egg Products Division operating profit for the year ended December 31, 2001 decreased $6.1 million, or 9%, to $61.6 million from $67.7 million for the year ended December 31, 2000. Operating profit for higher value-added egg products decreased by $5.5 million, or 8%, from 2000, while operating profits from other egg products remained relatively flat. The decrease in operating margins was mainly due to an approximately $4.0 million increase in amortization of goodwill and increased depreciation of approximately $6.2 million as a result of asset appraisals related to the Merger. The 2001 operating profit for the Division was also affected by an approximately $1.6 million loss from the Division’s termination of a European joint-venture. A break-even return was recorded from the same joint-venture in 2000.

POTATO PRODUCTS DIVISION OPERATING PROFIT. Potato Products Division operating profit for the year ended December 31, 2001 increased $0.7 million, or 9%, to $8.3 million from $7.6 million for the year ended December 31, 2000. This increase reflected benefits from volume growth, particularly from the more profitable retail segment, and continuing improvements in plant operations.

DAIRY PRODUCTS DIVISION OPERATING PROFIT. Dairy Products Division operating profit for the year ended December 31, 2001 increased significantly, up $10.5 million to $11.8 million from $1.3 million for the year ended December 31, 2000. Divisional operating profit increased substantially as a result of strong unit sales growth, particularly from specialty items such as non-refrigerated creamers, and improved plant operating costs. Operating profits were also favorably impacted by a $3.2 million final insurance settlement payment related to a 1999 recall and reduced amortization expense of $1.2 million resulting from the appraisal of a non-compete agreement due

17

to the Merger. Divisional operating profitability was depressed in 2000 due to the loss of a major industrial customer, increased bad debt expense resulting from a foodservice distributor’s bankruptcy filing, higher overhead expenses and above-average operating expenses as a result of a 1999 product recall.

REFRIGERATED DISTRIBUTION DIVISION OPERATING PROFIT. Refrigerated Distribution Division operating profit for the year ended December 31, 2001 decreased $7.4 million, or 46%, to $8.6 million from $16.0 million for the year ended December 31, 2000. Profit margins for key lines, such as cheese and butter, were depressed due to a rapid and sustained increase in dairy market-based ingredient costs through much of the year, without a comparable increase in retail selling prices. These market conditions were in sharp contrast to those which prevailed in 2000.

SEASONALITY AND INFLATION

ConsolidatedOur consolidated quarterly operating results are affected by the seasonalityseasonal fluctuations of our net sales and operating profits. Specifically, shell egg prices typically rise seasonally in the first and fourth quarters of the year due to increased demand during holiday periods. Consequently, net sales in the Egg Products Division may increase in the first and fourth quarter.quarters. Generally, the Refrigerated Distribution Division has higher net sales and operating profits in the fourth quarter, coinciding with incremental consumer demand during the holiday season. Net sales and operating profits from the Dairy Products Division typically are significantly higher in the second and third quarters due to increased consumption of ice cream products during the summer months. Operating profits from the Potato Products Division are less seasonal, but tend to be higher in the second half of the year coinciding with the potato harvest. In recent years,harvest and incremental consumer demand.

Generally, other than fluctuations in certain raw material costs, largely related to short-term supply and demand variances, inflation has not been a significant factor in our operations. Inflation is not expected to have a significant impact on theour business, financial condition or results of operations or financial condition since we can generally offset the impact of inflation through a combination of productivity gains and price increases. However, we had unusual inflationary impacts to our operations in 2004, 2005, and 2006, as we experienced notable inflation for key purchased items such as natural gas, diesel fuel and packaging materials. We were unable to fully offset these impacts through selective price increases to our customers.

LIQUIDITY AND CAPITAL RESOURCES17

Liquidity and Capital Resources

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

Cash flow provided by operating activities was $83.0$76.8 million for the year ended December 31, 2002,2006, compared to $114.8$104.4 million combining Company and Predecessor results, for the year ended December 31, 2001, and $69.1 million for the Predecessor’s year ended December 31, 2000.2005. The decrease in our cash flow provided by operating activities from 2001was primarily attributable to 2002a decrease in net earnings of approximately $20 million. Cash flow provided by operating activities was due principally$104.4 million for the year ended December 31, 2005, compared to an increase$121.6 million for the year ended December 31, 2004. The decrease in operating working capital related to our Canadian acquisition. The increase in the Company’s and Predecessor’s cash flow provided by operating activities from 2000in 2005 was primarily attributable to 2001 was due principally to significantly reduced operating working capital.

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the year ended December 31, 2002 were $155,487,000, an increase of 7% comparedin working capital, largely related to an increase in inventories, a tax receivable recorded at the Company’s and Predecessor’s combined $145,753,000 for the year ended December 31, 2001. EBITDA increased becausetime of the factors discussedMerger, and changes in the above results of operations divisional reviews. We believe that EBITDA isdeferred income taxes (see Note C to consolidated financial statements).

As a relevant measurement of our financial results, as it is indicativeresult of the relative strengthMerger, in 2003 we incurred approximately $780 million of our cash flows and is a key measurement contained in the financial covenantslong-term debt, including $495 million of our senior indebtedness. In addition, as a highly leveraged company, the holders of our debt

18

have a significant interest in our cash flows. We compute EBITDA as it is defined inborrowings under our senior credit agreement (see Exhibit 10.1facility, $135 million of our Amendment No. 1 to Form S-4 filedborrowings under a senior unsecured term loan facility and $150 million from the issuance of 8% senior subordinated notes due 2013. The senior credit facility that we entered into in connection with the SecuritiesMerger currently provides a $100 million revolving credit facility maturing in 2009 and Exchange Commission on Julya $540 million term loan facility maturing in 2010. The senior unsecured term loan facility of $135 million was to mature in 2011. The senior credit facility (“credit agreement”) and senior unsecured term loan agreement were amended as of September 17, 2004 (see our Form 8-K of September 22, 2004; incorporated by reference herein). The credit agreement was amended a second time as of May 18, 2001)2005 (see our Form 8-K of May 23, 2005; incorporated by reference herein) and a third time as of November 22, 2005 (see our Form 8-K of November 4, 2005; incorporated by reference herein). This definition may not be comparable to that used by other companies reporting similar financial information.

We believe EBITDA isAs a widely accepted financial indicator used to analyze and compare companies onresult of the basisthird amendment, which expanded the capacity of operating performance. It should not be considered in isolation or as a substitute for measures of performance prepared in accordancethe senior credit facility, the $135 million senior unsecured term loan agreement was terminated, with generally accepted accounting principles and is not indicative of operating profit or cash flow from operations as determined under generally accepted accounting principles. The following table reconciles our net earnings to EBITDA for the past two years:

loan being paid-in-full.

As a result of the Merger, we incurred approximately $580 million of long-term debt, including $380 million of borrowings under ourcontinue to have substantial annual cash interest expense. Our senior credit agreementfacility requires us to meet a minimum interest coverage ratio and $200 million of indebtedness througha maximum leverage ratio. In addition, the issuance of 11.75%senior credit facility and the indenture relating to the 8% senior subordinated notes due 2011.2013 contain certain restrictive covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in these agreements. Our total annual interest expense relatedfailure to comply with these covenants could result in an event of default, which if not cured or waived could have a material adverse effect on our results of operations, financial position and cash flow. In general, the term loans underdebt covenants limit our discretion in operating our businesses. We were in compliance with all of the covenants in the credit agreement and the notes wasindenture as of December 31, 2006.

M-Foods Holdings, Inc. has incurred $100 million 9.75% Senior Notes due October 1, 2013. As a wholly-owned subsidiary of M-Foods Holdings, Inc., we are responsible for servicing these notes.

The following is a calculation of our minimum interest coverage and maximum leverage ratios under our senior credit facility. The terms and related calculations are defined in excess of $50 million in 2002. In addition,our senior credit facility agreement, as amended, which agreement and amendments are included as exhibits to this Form 10-K.

18

19

The aggregate maturities of our long-term debt, our lease commitments and our long-term purchase commitments for the years subsequent to December 31, 2002,2006, are as follows:

We have entered into substantial purchase obligations to fulfill our egg, potato and cheese requirements. We maintain long-term egg procurement contracts with numerous cooperatives and egg producers throughout the Midwestern and Eastern United States and Canada, which supply approximately 45% of our annual egg requirements. Most of these contracts vary in length from 18 to 120 months. The egg prices are primarily indexed to grain or Urner Barry market indices. One egg supplier provides more than 10% of our annual egg requirements. Based upon the best estimates available to us for grain and egg prices, we project our purchases from our top five contracted egg suppliers will approximate $106 million in 2007, $104 million in 2008, $99 million in 2009, $80 million in 2010 and $17 million in 2011, and that the 2007 amount will account for approximately 34% of our total egg purchases this year. In addition, we have contracts to purchase potatoes that expire in 2007. These contracts will supply approximately 49% of the Potato Products Division’s raw potato needs in 2007. Two potato suppliers are each expected to provide more than 10% of our 2007 potato requirements. We had no forward buy cheese contracts at December 31, 2006. Please see our Contractual Obligations chart above for our estimated breakdown of these obligations during the coming year, one to three year, three to five year, and more than five year periods.

WeAs discussed above, we have a credit agreement with various lenders, including commercial banks, other financial institutions and investment groups, which expires in 20072009 and 20082010 and provides credit facilities which originally provided $470$595 million. As amended in 2005, the credit agreement provides $640 million. Within thesethe credit facilitiesagreement, there is a $100 million revolving line of credit. As of December 31, 2002, approximately $3002006, $477 million was outstanding

19

under the credit agreement, withplus approximately $7.5$6.5 million securedwas used under the revolving line of credit for letters of credit. After paying our stockholder approximately $70.1 million in dividends in 2004, we made a voluntary repayment of $35 million under the credit agreement in December 2004. During 2005, we effectively made, as part of the credit agreement amendment process in November 2005, another voluntary repayment of approximately $49 million. In December 2006, we made another voluntary repayment of $60 million. At the time of the Merger, largely the same lender group provided us with a $135 million senior unsecured term loan agreement, which was to expire in 2011. The senior unsecured term loan was repaid in 2005, at which time the senior unsecured term loan was terminated.

20

The weighted average interest rate for our borrowings under the credit agreement adjusted for the effects of hedging activities, was 6.76%approximately 7.35% at December 31, 2002.2006. Given our business trends and cash flow forecast, we do not anticipate a significantany use of the revolving line of credit during 2003.2007, except for letters of credit purposes. However, it is possible that one or more acquisitions could arise, which could result in much of the revolving line of credit being utilized at some point.

The credit agreement contains various restrictive covenants. It prohibits us from prepaying other indebtedness, including the notes, and it requires us to maintain specified financial ratios, such as a minimum ratio of EBITDA to interest expense, a minimum fixed charge coverage ratio, a maximum ratio of senior debt to EBITDA and a maximum ratio of total debt to EBITDA. In addition, the credit agreement prohibits us from declaring or paying any dividends and prohibits us from making any payments with respect to the notes if we fail to perform our obligations under, or fail to meet the conditions of, the credit agreement or if payment creates a default under the credit agreement. The indenture governing the subordinated notes, among other things: (i) restricts our ability and the ability of our subsidiaries to incur additional indebtedness, issue shares of preferred stock, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; (ii) prohibits certain restrictions on the ability of certain of our subsidiaries to pay dividends or make certain payments to us; and (iii) places restrictions on our ability and the ability of our subsidiaries to merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. The indenture related to the notes and the credit agreement also contain various covenants which will limit our discretion in the operation of our businesses. We were in compliance with all of the covenants in the indenture and the credit agreement as of December 31, 2002.

We may repurchase from time to time a portion of our senior subordinated notes, subject to market conditions and other factors. No assurance can be given as to whether or when, or at what prices, such repurchases willmay occur. Any such repurchases would be limited by certain restrictions found in our credit agreement and in the indenture governing the subordinated notes.

The indenture requires the Company to pay certain amounts, as set forth in the indenture, if repurchases occur before the specified dates.

Our ability to make payments on and to refinance our debt, including the senior subordinated notes, and to fund planned capital expenditures and otherwise satisfy our obligations will depend on our ability to generate sufficient cash in the future. This, to some extent, is subject to general economic, financial, competitive and other factors that are beyond our control. We believe that, based on current levels of operations, we will be able to meet our debt service and other obligations when due. Significant assumptions underlie this belief, including, among other things, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. If our future cash flows from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, including the senior subordinated notes, on or before maturity. We can provide no assurances that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of our existing and future indebtedness, including the senior subordinated notes and our newsenior credit agreement,facility may limit our ability to pursue any of these alternatives.

Our longer-term planning is focused on growing our sales, earnings and cash flows primarily by focusing on our existing business lines, through expanding product offerings, increasing production capacity for value-added products and broadening customer bases. We believe our financial resources are sufficient to meet the working capital and capital spending necessary to execute our

20

longer-term plans. In executing these plans, we expect to reduce debt over the coming years. However, possible significant acquisition activity could result in us seeking additional financing resources, which we would expect would be available to us if they are sought.

CAPITAL SPENDING

Capital Spending

We invested approximately $27$33.8 million in capital expenditures during the year ended December 31, 2002, and the Company and Predecessor made capital investments of approximately $34in 2006, $40.7 million in 20012005, and approximately $37$37.7 million in 2000.2004. Capital expenditures each year mainly related to expanding capacity for value-added products, especially in the egg and dairy products divisions, to expandexpanding warehouse space for all of our divisions, and the upgrading of computer technology. Also, during 2002, we purchased substantially all of the egg-related assets of Canadian Inovatech Inc. for approximately $18 million.information technology systems. Capital expenditures in 2002, 20012006, 2005, and 20002004 were funded from cash flowflows from operations and borrowings under our credit facilities.

facility.

We plan to spend approximately $39.5$41.0 million in total capital expenditures for 2003,2007, which will be used to expand capacity for higher value-added egg products, maintain existing production facilities, expand refrigerated warehouse capacity,replace tractors and trailers, and to expand production capacity for value-added products, such as specialty potato and dairy products.upgrade information technology systems, among other projects. This spending willis expected to be funded from operating cash flow, plus available capacity under our revolving line of credit, if need be.flows.

DEBT GUARANTEES

Debt Guarantees

We have guaranteed, through our Waldbaum subsidiary, the repayment of certain industrial revenue bonds used for the expansion of the wastewater treatment facilities of severalthree municipalities where we have food processing facilities. The repayment of these bonds is funded through the wastewater treatment charges paid by the Company.us. However, should those charges not be sufficient to pay the bond payments as they become due, we have agreed to pay any shortfall. The remaining principal balance of these bonds at December 31, 20022006 was approximately $6,700,000.$15.8 million.

INSURANCE

Insurance

In general, our insurance costs have increaseddeclined over the past three years. TheRegarding our largest insurance industry trends toward significantly higher premiums were accelerated by global geo-political eventsprograms, in the fall of 2001. We anticipate2006 our 2003 property and casualty insurance premiums will rise by approximately 15%declined from 20022005 levels withand, due to an extended term, we did not have a change in premium for our property coverage in 2006. We expect a further premium increases likelydecline in 2004.our casualty insurance premiums in 2007 based upon counsel from our broker and we recently secured a decrease in property insurance rates for 2007. We have also experienced, and expect to continue to see,experience, rising premiums for the Company’sour portion of health and dental insurance benefits offered to our employees.employees, although the past three years we have succeeded in maintaining such increases below prevailing market rates.

CRITCIAL ACCOUNTING POLICIES AND ESTIMATES21

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate estimates, including those related to the allowance for doubtful accounts, goodwill and intangible assets, accrued promotion costs, accruals for insurance, accruals for environmental matters, financial instruments and income tax provision. We base these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

21

We believe the following critical accounting policies reflect the significant judgments and estimates used in the preparation of our consolidated financial statements.

Allowance for doubtful accounts

Doubtful Accounts

We make estimates ofestimate the uncollectibility of our accounts receivable.receivable and record an allowance for uncollectible accounts. In determining the adequacy of the allowance, we analyze the value of our customer’s financial statements, historical collection experience, aging of receivables and other economic and industry factors. It is possible that the accuracy of the estimation process could be materially impacted by different judgments as to collectibility based on the information considered and further deterioration of accounts.

Goodwill, Customer Relationships and Other Intangibles

We assess the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors which could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the use of acquired assets or our strategy and significant negative industry or economic trends.  For

We recognize the excess cost of an acquired entity over the net amount assigned to assets acquired, including intangible assets with indefinite lives, and long-livedliabilities assumed, as goodwill. Goodwill and intangible assets with indefinite lives (trademarks) are tested for impairment on an annual basis during the fourth quarter, and between annual tests whenever there is an impairment indicated. Fair values are estimated based on our best assessment may occur ifof market value compared with the corresponding carrying value of the reporting unit, including goodwill. Impairment losses will be recognized whenever the implied fair value is less then the carrying value of the asset exceeds the undiscounted cash flows from therelated asset.

When we determine that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of an impairment, we measure any potential impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business model.  On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” and were required to assess our goodwill for impairment issues upon adoption, and are required to do so at least annually now.

Accrued promotion costs

Promotion Costs

The amount and timing of expense recognition for customer promotion activities involve management judgment related to estimated participation, performance levels, and historical promotion data and trends. The vast majority of year-end liabilities associated with these activities are resolved within the following fiscal year and, therefore, do not require highly uncertain long-term estimates.

Customer incentive programs include customer rebates, volume discounts and allowance programs. We have contractual arrangements with our customers and utilize agreed-upon discounts to determine the accrued promotion costs related to these customers. In addition, we have contractual arrangements with end-user customers and utilize historical experience to determine this accrual.

Accruals for insurance

Insurance

We are primarily self-insured for our medical and dental liability costs. We maintain “high deductible”high deductible insurance policies for our workers compensation, and general liability and automobile liability costs. It is our policy to record our self-insurance liabilities based on claims filed and an estimate of claims incurred but not yet reported. Any projection of losses concerning medical, dental, workers compensation, and general liability and automobile liability is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.

22

Accruals for Environmental Matters

We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. Accruals are adjusted periodically as assessment and remediation efforts progress or when additional technical or legal information becomes available. Accruals for environmental liabilities are included in the balance sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties.

Financial instruments

Instruments

We use derivative financial instruments to manage our cash flow exposure to various market risks, including certain interest rates,rate, cheese, grain and feed costs. The fair value of these derivative financial instruments is based on estimated amounts which may fluctuate with market conditions.

Income tax provision

Taxes

Income tax expense involves management judgment as to the ultimate resolution of any tax issues. Historically, our assessments of the ultimate resolution of tax issues have been reasonably accurate. The current open issues are not dissimilar from historical items.

22