UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 29, 2007

Commission file number 333-112714

MICHAEL FOODS, INC.

(Exact name of registrant as specified in its charter)

Delaware	13-4151741
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

301 Carlson Parkway Suite 400 Minnetonka, Minnesota	55305
(Address of principal executive offices)	(Zip Code)

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 registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

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

The registrant’s common stock is not publicly traded. There were 3,000 shares of the registrant’s common stock outstanding as of March 24, 2008.

Documents incorporated by reference: None

PART I

ITEM 1—BUSINESS

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, 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 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 (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 cheese 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

Michael Foods, Inc. and its subsidiaries (together, the “Company,” “we,” “us,” and “our”) is a diversified producer and distributor of food products in three areas—egg products, cheese and other dairy case products and potato products. We believe, through our Egg Products Division, we are the largest producer of processed egg products in North America. Our Crystal Farms Division distributes a broad line of refrigerated grocery products to retail grocery outlets, including cheese, shell eggs, bagels, butter, margarine, muffins, potato products and ethnic foods. Our Potato Products Division processes and distributes refrigerated potato products sold to the foodservice and retail grocery markets in the United States. Please see Note J to our consolidated financial statements for additional information about our business segments.

Our strategy is to create value-added food and service solutions with our customers and suppliers to deliver profitable and sustainable growth.

In November 2003, we were acquired by an investor group comprised of a private equity firm and a management group through the merger of 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 “Company”). Any 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

The Egg Products Division, comprised of our wholly-owned subsidiaries M. G. Waldbaum Company (“Waldbaum”), Papetti’s Hygrade Egg Products, Inc. (“Papetti’s”), Abbotsford Acquisition Corp., MFI Food Canada, Ltd. and our majority owned subsidiary Trilogy Egg Products, Inc., produces, processes and distributes numerous egg products and shell eggs. Collectively, the entities are also referred to as the Michael Foods Egg Products Company. We believe that our Egg Products Division is the largest egg products producer and the fourth largest egg producer in North America. Principal value-added egg products are ultrapasteurized, extended shelf-life liquid eggs (“Easy Eggs^®” and “Excell”), egg white-based egg substitutes (“Better ‘n Eggs^®” and “All Whites^®”), and hardcooked and precooked egg products (“Table Ready^®”). Other egg products include frozen, liquid and dried egg whites, yolks and whole eggs. We 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 North America and is a leading supplier of frozen and liquid whole eggs, whites and yolks.

Our Egg Products Division distributes its egg products to food processors and foodservice customers primarily throughout North America, with some international sales in the Far East, South America and Europe. The largest selling

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product line within the Division, which is extended shelf-life liquid eggs, and other egg products are marketed to a wide variety of foodservice and food 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 Crystal Farms Division.

In 2007, the Division derived approximately 98% of net sales from egg products, with 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 value-added products, such as extended shelf-life liquid eggs, egg substitutes, and hardcooked and precooked egg products typically are not significantly affected by Urner Barry quoted price levels. Generally, 70-75% of the Egg Products Division’s annual net sales come from higher value-added egg products, such as extended shelf-life liquid and precooked products, with the remainder coming from products mainly used in the food ingredients market, or shell eggs. Prices for the Division’s other products, including short shelf-life liquid, certain dried and frozen products and, particularly, shell eggs, are significantly affected by market prices as reported by Urner Barry.

In 2007, approximately 30% of the Division’s egg needs were satisfied by production from our owned hens, with the balance being purchased under third-party egg procurement contracts and in the spot market. The cost of eggs from our owned facilities is largely dependent upon the cost of feed. Additionally, for an increasing proportion of eggs purchased under third-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 remaining portion of eggs purchased under third-party egg procurement contracts and 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 eggs generally have been lower in cost than 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. 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 egg sourcing costs and 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, Wisconsin and Manitoba. We closed a plant in St. Marys, Ontario 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 11,500,000 producing hens, are located in Nebraska, Minnesota and South Dakota. Approximately 1,700,000 of these hens are housed in contract facilities. Major laying facilities also maintain their own grain and feed storage facilities. Further, the production of approximately 18,000,000 hens is under long-term supply agreements, with an additional 14,000,000 hens under shorter-term agreements. The Division also maintains facilities with approximately 3,000,000 pullets located in Nebraska and Minnesota.

Crystal Farms Division

Our Crystal Farms Division, comprised of our wholly-owned subsidiaries Crystal Farms Refrigerated Distribution Company and Wisco Farm Cooperative, distributes a wide range of refrigerated grocery products directly to retailers and wholesale warehouses. We believe that the Division’s strategy of offering quality branded products at a good value relative to national brands has contributed to the Division’s growth. These distributed refrigerated products, which consist principally of cheese, shell eggs, bagels, butter, margarine, muffins, potato products and ethnic foods, are supplied by various vendors, or our other divisions, to the Division’s specifications. Cheese accounted for approximately 69% of the Division’s 2007 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 is the United States, with a large customer concentration in the central United States. Retail locations carrying the Division’s products exceed 10,000 stores. A majority of these retail stores are served via customers’ warehouses. The Division maintains a fleet of refrigerated tractor-trailers to deliver products daily to its retail customers from ten distribution centers centrally located in its key marketing areas.

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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. This division’s products consist of shredded hash browns and diced, sliced, mashed and other specialty potato products. In 2007, approximately 53% 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

Each of our three divisions has developed a marketing strategy which emphasizes high quality products and customer service. Michael Foods Sales, an internal sales group, coordinates the foodservice sales of the Egg Products and Potato Products Divisions, primarily for national and regional accounts, and is supported by a centralized order entry and customer service staff. A group of foodservice brokers is used by Michael Foods Sales to supplement its internal sales efforts. Furthermore, the Egg Products Division maintains a small sales group which handles certain food ingredient egg product sales. During 2007 the sales activities related to our nationally branded egg and potato retail products were combined with that of the Crystal Farms Division’s direct sales and broker activities to affect a more efficient selling effort. Our foodservice marketing staff executes egg products and potato products marketing plans in the foodservice market. A separate retail marketing staff executes plans for national retail egg and potato products brands and Crystal Farms, utilizing additional resources from outside marketing and advertising agencies and consultants as needed.

The Crystal Farms Division’s internal and external sales personnel obtain orders from retail stores for next day delivery, and warehouse accounts for delivery usually within 14 days. This Division’s marketing efforts are primarily focused on in-store, co-op, and select media advertising programs, which are executed with grocers on a market-by-market basis.

Customers

The Egg Products Division has long-standing preferred supplier relationships with many of its customers. Our customers include many of the major broad-line foodservice distributors and many 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 its market channels include leading foodservice distributors, such as Sysco and U.S. Foodservice, national restaurant chains, such as Burger King, 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 food ingredient customers, such as General Mills, Inc. and Unilever Bestfoods North America.

The Crystal Farms 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. In 2007, the Division served over 10,000 retail locations, inclusive of stores receiving products through warehouse delivery. SUPERVALU, the food industry’s largest distributor, is Crystal Farms’ largest customer. In 2007, sales to warehouse operations of SUPERVALU and SUPERVALU-owned and franchised stores accounted for approximately 40% 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 Target Corporation, 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.

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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 input prices, changes in supply due to weather, and production variances.

The egg processing industry is competitive, especially when compared to the shell egg industry. Cargill Kitchen Solutions is the Company’s largest higher value-added egg products competitor. The Company also competes with other egg products processors including Sonstegard Foods Company, Rose Acre Farms, Inc., Echo Lake Farm Produce, Golden Oval Eggs, LLC and ConAgra Foods, Inc.

The Crystal Farms Division competes with the refrigerated products of larger suppliers such as Kraft Foods, Inc., Dairy Farmers of America, Sargento Foods, Inc., and Sorrento Lactalis, Inc. We position Crystal Farms as an alternative mid-priced brand, operating at price points below national brands and above store (private label) brands. Crystal Farm’s emphasis on a high level of service and lower-priced branded products has enabled it to compete effectively 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 largest processor and distributor of refrigerated potato products in the U.S. The Potato Products Division’s major retail competitors are Unilever N. V. (Shedd’s Country Crock Side Dishes) and Reser’s Fine Foods Inc., a national 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, such as Ore-Ida Foods, Inc. (a subsidiary of H. J. Heinz Co.) and Lamb-Weston, Inc. (a subsidiary of ConAgra Foods, Inc.), sell frozen versions of potato products which are sold by the Division in refrigerated form.

Proprietary Technologies and Trademarks

We use a combination of patent, trademark and trade secrets laws to protect the intellectual property for our products. We own patents and have exclusive license agreements for several patents and technologies.

The Egg Products Division maintains numerous trademarks and/or trade names for its products, including “Michael Foods,” “Better ‘n Eggs,” “All Whites,” “Papetti’s^®,” “Quaker State Farms^®,” “Broke N’ Ready^®,” “Canadian Inovatech,” “Centromay,” “Emulsa^®,” and “Inovatech^®.” Ultrapasteurized liquid eggs are marketed using the “Easy Eggs” trade name. Crystal Farms Division products are marketed principally under the “Crystal Farms” trade name. Other Crystal Farms Division trademarks include “Crescent Valley, “Westfield Farms^®”, and “David’s Deli^®.” Within the Potato Products Division, we market our refrigerated potato products to foodservice customers under a variety of brands, including “Northern Star” and “Farm Fresh.” The “Simply Potatoes^®” and “Diner’s Choice^®” brands are used for retail refrigerated products.

Food Safety

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 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. 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.

We 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 Food and Drug Administration (“FDA”) regulation regarding grading, quality, labeling and sanitary control. Our 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.

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Crystal Farms cheese and butter 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 these supports were abolished.

Environmental Regulation

We are subject to federal and state 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. 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, and we use other consultants as may be required. As a result of our efforts, we believe we are currently in material compliance with all environmental regulations and requirements.

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 early 2008 we completed a new mechanical wastewater treatment facility in Wakefield, Nebraska. For further information on Nebraska environmental 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.

Employees

At December 29, 2007, we had 3,759 employees. The Egg Products Division employed 2,391 full-time and 274 part-time employees, none of whom are represented by a union. The Potato Products Division employed 278 persons, 199 of whom were represented by the Bakery, Laundry, Allied Sales Drivers and Warehousemen Union, which is affiliated with the Teamsters. Crystal Farms employed 407 employees, none of whom are represented by a union. Our corporate, sales, supply chain logistics and information systems groups collectively had 409 employees. We believe our employee relations to be good.

Executive Officers of the Registrant

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

ITEM 1A—RISK FACTORS

Our 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 prices of corn and soybean meal have risen dramatically since the summer of 2006. We view much of the corn price rise as relating to significant incremental demand from ethanol producers. With the rapid rise in grain costs, we have been unable, over the past two years, to adjust our egg products selling prices rapidly, and extensively, enough to offset this significant raw material cost increase. While we endeavor to keep our selling prices in-line with our input costs, we are not always able to do so and this may result in abnormally low operating profit margins for extended periods of time.

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 as Salmonella, 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

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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.

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.

Trademarks and patents 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 trademarks, patents, 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 historical

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competitors in the extended shelf-life liquid egg market, plus parties to whom we had granted sublicenses. Further, other parties are now producing and marketing processed egg products that are similar to ours because of the patents’ expiration. Such increased competitive activity may 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 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 constructed an approximate $16 million mechanical treatment plant, which was operational in early 2008. 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 three 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.

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 service staffs of the Egg Products, Potato Products and Crystal Farms divisions, as well as our customer service, distribution, sales, marketing and information services groups. This lease expires in 2013 and the annual base rent is approximately $1,000,000.

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

Location	Principal Use	Size (square feet)	Owned/Leased	Lease Expiration	Annual Payments
Elizabeth, New Jersey (a)	Processing	75,000	Leased	2012	$	583,000
Elizabeth, New Jersey (a)	Processing	125,000	Leased	2012		920,000
Bloomfield, Nebraska	Processing	80,000	Owned	—		—
LeSueur, Minnesota	Processing	29,000	Owned	—		—
Wakefield, Nebraska	Processing	380,000	Owned	—		—
Klingerstown, Pennsylvania (b)	Processing and Distribution	158,000	Leased	2017		662,000
Lenox, Iowa	Processing and Distribution	151,000	Owned	—		—
Gaylord, Minnesota	Processing and Distribution	230,000	Owned	—		—
Elizabeth, New Jersey (a)	Distribution	80,000	Leased	2012		648,000
Bloomfield, Nebraska	Egg Production	619,000	Owned	—		—
Wakefield, Nebraska	Egg Production	658,000	Owned	—		—
LeSueur, Minnesota	Egg Production	345,000	Owned	—		—
Gaylord, Minnesota	Egg Production	349,000	Owned	—		—
Gaylord, Minnesota	Pullet Houses	130,000	Owned	—		—
Wakefield, Nebraska	Pullet Houses	432,000	Owned	—		—
Plainview, Nebraska	Pullet Houses	112,000	Owned	—		—
Winnipeg, Manitoba (c)	Processing	102,000	Capital Lease	2012		573,000
Winnipeg, Manitoba (c)	Processing	32,000	Leased	2013		254,000
St. Mary’s, Ontario (c)	Processing	42,000	Capital Lease	2012		325,000
Mississauga, Ontario (c)	Distribution	8,000	Leased	2009		97,000
Abbotsford, Wisconsin (d)	Processing	20,000	Owned	—		—

(a) There is a five year extension available on these leases.

(b) There is a ten year and a five year extension available on this lease.

(c) There are four five year extensions available on these leases. The St. Marys, Ontario plant closed as of March 31, 2007, but remains under lease. See Note G to our consolidated financial statements.

(d) We acquired the assets of this processing facility on January 11, 2008 as part of the acquisition of Mr. B’s of Abbotsford, Inc. and related entities. See Note H to our consolidated financial statements.

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. The Potato Products Division owns a processing plant and land located in Minneapolis, Minnesota, consisting of approximately 175,000 square feet of production area. This division leases a building in North Las Vegas, Nevada, consisting of approximately 31,000 square feet. This lease expires in 2011 and we have the option to extend the lease for two successive five year periods. The annual payment amount on this lease is approximately $366,000.

9

Crystal Farms Division. The Crystal Farms Division leases office space in suburban Minneapolis and several small warehouses across the United States. The leases expire between 2008 and 2011. The annual base rent for all of the leases is approximately $330,000. The Division owns a distribution center located near LeSueur, Minnesota, which is approximately 33,000 square feet. The Division also owns and operates an 85,000 square foot refrigerated warehouse with offices and a 30,000 square foot cheese packaging facility on a 13-acre site in Lake Mills, Wisconsin.

The total annual lease payments for the facilities described above is approximately $5.8 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 three operating divisions, are adequate to meet anticipated requirements for our current lines of business for the foreseeable future. All of our owned property is pledged to secure repayment of our senior credit 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—LEGAL PROCEEDINGS

In 2004, the U.S. Environmental Protection Agency (“EPA”) issued “Findings of Violation and Order for Compliance” to the Company in connection with its discharge of wastewater to the municipal treatment facility in Wakefield, Nebraska (“City”). We provided EPA with a proposal for improving the Wakefield facility’s performance and compliance. Concurrently, related to the same matter, the Nebraska Department of Environmental Quality (“NDEQ”) issued two enforcement documents. In early 2006, the United States Department of Justice notified us and the City that it intended to seek civil penalties and injunctive relief for violation of various environmental laws relating to the above 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 settlement 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 agreed to a specific schedule for completing construction of a mechanical wastewater treatment facility in the City that we had previously voluntarily undertaken. The settlement payment was made in June 2007.

We are party to a suit Feesers, Inc. brought against Sodexho, Inc. and us alleging violation of the Robinson-Patman Act. We prevailed in summary judgment at the United States District Court for the Middle District of Pennsylvania. A decision by the United States Court of Appeals for the Third Circuit in August 2007 reversed the summary judgment decision, remanding the matter back to the District Court. A bench trial occurred in January 2008. We expect a ruling on the tried matters later this year.

In addition, we are from time to time party to litigation, administrative proceedings and union grievances that arise in the ordinary course of business, and occasionally pay small penalties to resolve alleged minor violations of regulatory requirements. There is no pending litigation that, separately or in the aggregate, would in the opinion of management have a material adverse effect on our operations or financial condition.

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

None.

PART II

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

(a) Our common equity is not traded in any market. We had one holder of our common equity as of March 24, 2008. No securities are authorized for issuance under equity compensation plans. No unregistered sales of securities were made during 2007.

(b) Not applicable.

(c) Not applicable.

ITEM 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 was derived from the Company’s and the Predecessor’s Consolidated Financial

10

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 property, plant and equipment and other intangible assets recorded. This information should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included elsewhere herein and Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	COMPANY											PREDECESSOR
	Year Ended December 29, 2007		Year Ended December 30, 2006		Year Ended December 31, 2005		Year Ended January, 1 2005		One Month Ended January 3, 2004			Eleven Months Ended November 22, 2003
(In Thousands)
Statement of Operations Data
Net sales	$	1,467,762	$	1,247,348	$	1,242,498	$	1,313,504	$	140,806		$	1,184,357
Cost of sales		1,223,416		1,016,832		1,005,418		1,077,126		121,442			973,004
Gross profit		244,346		230,516		237,080		236,378		19,364			211,353
Selling, general and administrative expenses		147,375		133,287		130,833		137,798		14,676			105,857
Transaction expenses		—		—		—		340		7,121			15,377
Plant closing expenses		1,525		3,139		—		—		—			—
Operating profit (loss)		95,446		94,090		106,247		98,240		(2,433	)		90,119
Interest expense, net		52,490		55,928		47,119		43,285		4,932			41,670
Loss on early extinguishment of debt		—		—		5,548		—		—			61,226
Loss on Dairy disposition		—		—		—		—		—			16,288
Earnings (loss) before income taxes and equity in losses of unconsolidated subsidiary		42,956		38,162		53,580		54,955		(7,365	)		(29,065	)
Income tax expense (benefit)		15,391		16,294		14,266		20,981		(2,836	)		(11,397	)
Earnings (loss) before equity in losses of unconsolidated subsidiary		27,565		21,868		39,314		33,974		(4,529	)		(17,668	)
Equity in losses of unconsolidated subsidiary		—		2,713		455		460		—			482
Net earnings (loss)	$	27,565	$	19,155	$	38,859	$	33,514	$	(4,529	)	$	(18,150	)
At Period End Balance Sheet Data
Working capital	$	94,581	$	78,358	$	79,923	$	60,544	$	108,876		$	118,750
Total assets		1,273,861		1,263,763		1,333,576		1,341,555		1,416,682			844,635
Long-term debt, including current maturities		601,783		645,794		709,723		750,783		790,076			307,998
Shareholder’s equity		360,089		324,794		304,015		257,393		287,538			256,384

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

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

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General

Overview. We are a leading producer and distributor of egg and refrigerated potato products to the foodservice, retail and food ingredient markets. We also distribute refrigerated food 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.

Acquisitions/Joint Ventures. 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 they remain a part of our growth plans. Effective January 11, 2008, we purchased the assets of Mr. B’s of Abbotsford, Inc. and related entities for $8.7 million. This was an acquisition of a processor of organic and cage-free egg products, which expanded our presence in the specialty egg products market.

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 table summarizes the historical results of our divisional operations and such data as a percentage of total net sales. The information contained in this table should be read in conjunction with “Item 6—Selected Financial Data” and the consolidated financial statements and related notes included elsewhere in this Form 10-K.

	2007				2006				2005
	$		%		$		%		$		%
(In Thousands)
Statement of Earnings Data:
External net sales:
Egg products division	1,014,588		69.1		858,352		68.8		860,925		69.3
Potato products division	119,033		8.1		113,980		9.1		102,245		8.2
Crystal Farms division	334,141		22.8		275,016		22.1		279,328		22.5
Total net sales	1,467,762		100.0		1,247,348		100.0		1,242,498		100.0
Cost of sales	1,223,416		83.4		1,016,832		81.5		1,005,418		80.9
Gross profit	244,346		16.6		230,516		18.5		237,080		19.1
Selling, general and administrative expenses	147,375		10.0		133,287		10.7		130,833		10.5
Plant closing expenses	1,525		0.1		3,139		0.3		—		—
Operating profit (loss):
Egg products division	75,539		5.1		67,660		5.4		82,012		6.6
Potato products division	18,941		1.3		19,243		1.5		17,199		1.4
Crystal Farms division	11,495		0.8		18,604		1.5		15,707		1.3
Corporate	(10,529	)	(0.7	)	(11,417	)	(0.9	)	(8,671	)	(0.7	)
Total operating profit	95,446		6.5		94,090		7.5		106,247		8.6
Interest expense, net	52,490		3.6		55,928		4.5		47,119		3.8
Net earnings	27,565		1.9		19,155		1.5		38,859		3.1

Results for the Year Ended December 29, 2007 Compared to results for the Year Ended December 30, 2006

Net Sales. Net sales for 2007 increased 18%, or $220.5 million, to $1,467.8 million from $1,247.3 million for 2006, as a result of an increase in external net sales in all our divisions.

12

Egg Products Division Net Sales. Egg Products Division external net sales for 2007 increased $156.2 million, or 18%, to $1,014.6 million from $858.4 million for 2006. External net sales increased for all product lines. The egg market was unusually strong in 2007, recording record highs. For the full year 2007, shell egg prices increased by approximately 55% from 2006 levels, as reported by Urner Barry. Our 2007 pricing for each product line increased year-over-year reflecting these market conditions and other rising costs, especially grains. Unit sales increased for most product lines in 2007, and for all higher value-added lines, with an overall increase of 2% recorded for the Division as compared to 2006 levels.

Potato Products Division Net Sales. Potato Products Division external net sales for 2007 increased $5.0 million, or 4%, to $119.0 million from $114.0 million for 2006. This increase was primarily attributable to unit sales growth for foodservice potato products, with retail sales being approximately unchanged, as compared to 2006 levels. Approximately 53% of the Division’s 2007 net sales were to the foodservice market, with 47% to the retail market. Pricing for the Division in 2007 rose slightly, led by increases for retail items, as compared to 2006 levels.

Crystal Farms Division Net Sales. Crystal Farms external net sales for 2007 increased $59.1 million, or 21%, to $334.1 million from $275.0 million for 2006. This increase was mostly due to notable market inflation in cheese, shell eggs and butter prices year-over-year. The key branded cheese business experienced flat unit sales, with butter units down slightly. New account activity drove private label cheese unit sales to roughly double. Overall, 2007 unit sales for the Division increased 2% from 2006 levels, with core distributed products ahead 7% and shell egg unit sales down 13%. The latter was the result of consumers’ response to high shell egg market pricing and the loss of low margin warehouse accounts.

Gross Profit. Gross profit for 2007 increased $13.8 million to $244.3 million from $230.5 million for 2006. Our gross profit margin was 16.6% of net sales for 2007, compared with 18.5% for 2006. The decrease in gross profit margin was due primarily to decreased gross profit margins from higher value-added egg product and branded cheese sales. Additionally, we experienced increases across all of our operations in energy, packaging and diesel costs, which we were not able to fully offset with selective price increases.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for 2007 increased $14.1 million, or 11%, to $147.4 million from $133.3 million for 2006. The increase in expenses was mainly due to increases in the incentive compensation accrual and selling and marketing costs, the latter coinciding with the increase in our net sales. Selling, general and administrative expenses were 10.0% of net sales in 2007 as compared to 10.7% in 2006.

Plant Closing Expenses. We announced in November 2006 we would be closing our egg processing facility in St. Marys, Ontario in 2007. In 2006 we recorded $3.1 million of employee termination costs and asset impairment on the leased building and certain plant equipment, as well as other plant assets. We closed the St. Marys plant in late March 2007. During 2007 we recorded $0.2 million of employee termination costs and $1.3 million of asset impairment charges related to plant equipment write-offs (see Note G to our consolidated financial statements).

Operating Profit. Operating profit for 2007 increased $1.3 million, or approximately 1%, to $95.4 million from $94.1 million for 2006. This increase was due to an increase in Egg Products profits, which was largely offset by a significant decrease in Crystal Farms profits and increases in incentive compensation and selling and marketing costs noted above.

Egg Products Division Operating Profit. Egg Products Division operating profit for 2007 increased $7.8 million, or 12%, to $75.5 million from $67.7 million for 2006. Operating profit for higher value-added egg products decreased by over $30 million, or 36%, from 2006 levels, mainly reflecting compressed margins due to significantly higher egg costs in 2007. With the rapid increase in our egg costs and other costs, particularly grains, we were unable to offset the cost increases in a timely manner with selective price increases. Operating results from other egg products showed a profit in 2007 as compared to a significant loss in 2006, reflecting more favorable market-driven pricing in 2007. Shell egg sales returned notable operating profits in 2007, as compared to a modest profit in 2006, reflecting significantly improved market pricing.

Potato Products Division Operating Profit. Potato Products Division operating profit for 2007 decreased $0.3 million, or 2% to $18.9 million from $19.2 million for 2006. This decrease reflected a decrease in margins for foodservice sector sales, the result of slightly lower selling prices.

Crystal Farms Division Operating Profit. Crystal Farms operating profit for 2007 decreased $7.1 million, or 38%, to $11.5 million from $18.6 million for 2006. Operating profit decreased mainly due to significantly higher cheese costs, which we were unable to offset in a timely manner with selective price increases.

Interest Expense. Interest expense decreased approximately $3.4 million in 2007 compared to 2006, reflecting the voluntary debt prepayment made in late 2006 and lower interest rates during 2007.

13

Income Taxes. Our effective rate was 35.8% in 2007 as compared to 42.7% in 2006. The reduction in the effective 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. Also, the 2007 effective rate was lower due to an increase in the allowable percentage used to calculate the tax deduction for qualified production activities in 2007 (see Note C to our consolidated financial statements).

Equity in Losses of Unconsolidated Subsidiary. In 2006, we recorded a $1.8 million valuation adjustment on our investment in the Belovo 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 (see Note C to our consolidated financial statements).

Results for the Year Ended December 30, 2006 Compared to results for the Year Ended December 31, 2005

Net Sales. Net sales for 2006 increased less than 1%, or $4.8 million, to $1,247.3 million from $1,242.5 million for 2005, as a result of an increase in external net sales in our Potato Products Division, partially offset by decreases in external net sales by our Egg Products Division and Crystal Farms Division.

Egg Products Division Net Sales. Egg Products Division external net sales for 2006 decreased less than 1%, or $2.5 million, to $858.4 million from $860.9 million for 2005. External net sales increased for most of our higher value-added products lines and declined for most of our lower value-added lines. The egg market was unusually volatile in 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 10% from 2005 levels, as reported by Urner Barry. Our pricing year-over-year varied by product line, with the overall divisional selling price per pound declining slightly in 2006 from 2005 levels. We experienced a pricing decline for higher value-added products, reflecting increased competition. Unit sales increased for most product lines in 2006, and all higher value-added lines, with an overall increase of 1.9% recorded for the Division as compared to 2005 levels.

Potato Products Division Net Sales. Potato Products Division external net sales for 2006 increased $11.8 million, or 12%, to $114.0 million from $102.2 million for 2005. This increase was primarily attributable to strong unit sales growth for retail potato products, which increased approximately 21% from 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.

Crystal Farms Division Net Sales. Crystal Farms external net sales for 2006 decreased $4.3 million, or 2%, to $275.0 million from $279.3 million for 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 2006 decreased $6.6 million to $230.5 million from $237.1 million for 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 2006 increased $2.5 million, or 2%, to $133.3 million from $130.8 million for 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 our consolidated financial statements). Without such unexpected expenses, operating expenses in 2006 would have decreased compared to 2005, largely due to reduced incentive expense.

Plant Closing Expenses. We announced in November 2006 that, due to rising operating costs, we would be consolidating our Canadian egg processing operations of our Egg Products Division to our facility in Winnipeg, Manitoba. This resulted in the closing of the egg processing facility located in St. Marys, Ontario in late March 2007. We recorded employee termination costs and asset impairment on the leased building and certain plant equipment, as well as other plant assets which were not transferred to other of our processing facilities.

14

Operating Profit. Operating profit for 2006 decreased $12.1 million, or approximately 11%, to $94.1 million from $106.2 million for 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 2006 decreased $14.3 million, or 17%, to $67.7 million from $82.0 million for 2005. Operating profit for higher value-added egg products decreased by approximately $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 2006 increased $2.0 million, or 12% to $19.2 million from $17.2 million for 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.

Crystal Farms Division Operating Profit. Crystal Farms operating profit for 2006 increased $2.9 million, or 18%, to $18.6 million from $15.7 million for 2005. Operating profit increased mainly due to lower market prices for our key product line, branded cheese.

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.

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 our consolidated 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 (see Note C to our consolidated financial statements).

Seasonality and Inflation

Our consolidated quarterly operating results are affected by the seasonal 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 quarters. Generally, Crystal Farms has higher net sales and operating profits in the fourth quarter, coinciding with incremental consumer demand during the holiday season. 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 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 our business, results of operations or financial condition since we can generally offset the impact of inflation through a combination of productivity gains and price increases. However, we had unusual inflationary impacts to our operations in 2005, 2006, and 2007, 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 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 advanced production facilities to enhance our competitive position.

15

Cash flow provided by operating activities was $98.0 million for 2007, compared to $76.8 million for 2006. The increase in our cash flow provided by operating activities was primarily attributable to an increase in net earnings and improved working capital management. Cash flow provided by operating activities was $76.8 million for 2006, compared to $104.4 million for 2005. The decrease in our cash flow provided by operating activities from 2005 to 2006 was primarily attributable to a decrease in net earnings of approximately $20 million.

As a result of the Merger, in 2003 we incurred approximately $780 million of long-term debt, including $495 million of borrowings under our senior credit facility, $135 million of borrowings 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 Merger currently provides a $100 million revolving credit facility maturing in 2009 and a $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, 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). As a result of the third amendment, which expanded the capacity of the senior credit facility, the $135 million senior unsecured term loan agreement was terminated, with the loan being paid-in-full.

As a result of the Merger, we continue to have substantial annual cash interest expense. Our senior credit facility requires us to meet a minimum interest coverage ratio and a maximum leverage ratio. In addition, the senior credit facility and the indenture relating to the 8% senior subordinated notes due 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 failure 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 debt covenants limit our discretion in operating our businesses. We were in compliance with all of the covenants in the credit agreement and the indenture as of December 29, 2007.

M-Foods Holdings, Inc. has outstanding $100 million of 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 our senior credit facility agreement, as amended, which agreement and amendments are included as exhibits to this Form 10-K.

	2007			2006
	(In Thousands)
Calculation of Interest Coverage Ratio:
Consolidated EBITDA (1)	$	175,908		$	180,865
Consolidated Cash Interest Expense (2)		49,531			53,233
Actual Interest Coverage Ratio (Ratio of consolidated EBITDA to consolidated interest expense)		3.55x			3.40x
Minimum Permitted Interest Coverage Ratio		2.75x			2.50x
Calculation of Leverage Ratio:
Funded Indebtedness (3)	$	614,325		$	658,193
Less: Cash and equivalents		(30,077	)		(21,576	)
		584,248			636,617
Consolidated EBITDA (1)		175,908			180,865
Actual Leverage Ratio (Ratio of funded indebtedness less cash and equivalents to consolidated EBITDA)		3.32x			3.52x
Maximum Permitted Leverage Ratio		4.50x			5.00x

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(1) Consolidated EBITDA (earnings before interest expense, taxes, depreciation and amortization) is defined in our senior credit facility as follows:

	2007		2006
	(In Thousands)
Net earnings	$	27,565	$	19,155
Interest expense, excluding amortization of debt issuance costs		48,090		51,890
Amortization of debt issuance costs		4,435		4,743
Income tax expense		15,391		16,294
Depreciation and amortization		75,043		74,858
Equity sponsor management fee		1,759		1,809
Expenses related to industrial revenue bonds guaranteed by certain of our subsidiaries		987		996
Other (a)		3,131		10,271
		176,401		180,016
Less: Unrealized (losses) gains on swap contracts		493		(849	)
Consolidated EBITDA, as defined in our senior credit facility	$	175,908	$	180,865

(a) Other reflects the following:

	2007		2006
	(In Thousands)
Equity in losses of unconsolidated subsidiaries	$	—	$	2,713
Losses from the disposition of assets not in the ordinary course of business		1,293		2,862
Non-cash compensation		1,378		1,847
Letter of credit fees		141		139
Other non-recurring charges		319		2,710
	$	3,131	$	10,271

(2) Consolidated cash interest expense, as calculated in our senior credit facility, was as follows:

	2007			2006
	(In Thousands)
Interest expense, net	$	52,490		$	55,928
Interest income		1,476			2,048
Gross interest expense		53,966			57,976
minus:
Amortization of debt issuance costs		(4,435	)		(4,743	)
Consolidated cash interest expense	$	49,531		$	53,233

(3) Funded Indebtedness was as follows:

	2007		2006
	(In Thousands)
Term loan facility	$	427,300	$	477,300
8% senior subordinated notes		150,000		150,000
Insurance bonds		470		404
Guarantee obligations (see Debt Guarantees described below)		21,098		15,781
Capital leases		5,708		5,657
Standby letters of credit (primarily with our casualty insurance carrier, Liberty Mutual)		6,899		6,464
Funded indebtedness of Trilogy Egg Products, Inc.		2,800		2,537
Other		50		50
	$	614,325	$	658,193

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The aggregate maturities of our long-term debt, our lease commitments and our long-term purchase commitments for the years subsequent to 2007, are as follows:

	Payments Due by Period
	(In Thousands)
Contractual Obligations	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Long-term debt (1)	$	596,075	$	1,097	$	429,769	$	2,928	$	162,281
Capital lease obligations		6,557		1,697		3,255		1,605		—
Operating lease obligations		28,679		6,462		11,441		6,566		4,210
Purchase obligations (2)		891,210		182,327		315,524		104,136		289,223
Deferred compensation		17,552		—		—		—		17,552
Interest on fixed rate debt and other		72,902		12,902		24,000		24,000		12,000
Total	$	1,612,975	$	204,485	$	783,989	$	139,235	$	485,266

(1) Does not include variable interest.

(2) A substantial portion relates to egg contracts. Estimates of future open market egg prices and feed costs were used to derive these figures. Hence, most of our purchase obligations are subject to notable market price risk.

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 49% 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 $139 million in 2008, $136 million in 2009, $91 million in 2010 and $21 million in 2011, and that the 2008 amount will account for approximately 39% of our total egg purchases this year. In addition, we have contracts to purchase potatoes that expire in 2008. These contracts will supply approximately 49% of the Potato Products Division’s raw potato needs in 2008. Three potato suppliers are each expected to provide more than 10% of our 2008 potato requirements. We had no forward buy cheese contracts at December 29, 2007. 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.

As discussed above, we have a credit agreement with various lenders, including commercial banks, other financial institutions and investment groups, which expires in 2009 and 2010 and provides credit facilities which originally provided $595 million. As amended in 2005, the credit agreement provides credit facilities of $640 million. Within the credit agreement, there is a $100 million revolving line of credit. As of December 29, 2007, $427 million was outstanding under the credit agreement, plus approximately $6.9 million was used under the revolving line of credit for letters of credit. In December 2007 and 2006, we made voluntary repayments under the credit agreement of $50 million and $60 million, respectively. The weighted average interest rate for our borrowings under the credit agreement was approximately 6.85% at December 29, 2007.

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 may 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, 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 senior credit 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 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.

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Capital Spending

We invested approximately $38.1 million in capital expenditures in 2007, $33.8 million in 2006, and $40.7 million in 2005. For each of these years capital expenditures mainly related to expanding capacity for value-added products, expanding warehouse space for all of our divisions, and upgrading information technology systems. Capital expenditures in 2007, 2006, and 2005 were funded from cash flows from operations and borrowings under our credit facility.

We plan to spend an amount comparable to recent historical averages on capital expenditures for 2008. Spending will focus on expanding capacity for higher value-added egg products, maintaining existing production facilities (in particular notable spending at the Northern Star plant), replacing tractors and trailers, and upgrading information technology systems, among other projects. This spending is expected to be funded largely from operating cash flows. We expect these investments to improve manufacturing efficiencies, customer service and product quality.

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 three municipalities where we have food processing facilities. In May 2007, a $6.0 million bond financing was completed by one of the three municipalities, the City of Wakefield, Nebraska, at an annual interest rate of 8.22%, with such proceeds to be used for the completion of construction of the wastewater treatment facility. The wastewater treatment facility became operational in early 2008. We have guaranteed the principal and interest payments related to these bonds, which mature September 15, 2017. These bonds, along with the original $10.25 million guaranteed in September 2005, are included in current maturities of long-term debt and long-term debt. The remaining principal balance for all guaranteed bonds at December 29, 2007 was approximately $21.1 million.

Insurance

In general, our insurance costs have declined over the past three years. Regarding our largest insurance programs, in 2007 our casualty insurance premiums declined from 2006 levels as did our property insurance premiums. We expect a further decline in our casualty insurance premiums in 2008 based upon counsel from our broker and we recently secured a decrease in property insurance rates for most of 2008. We have also experienced, and expect to continue to experience, rising premiums for our portion of health and dental insurance benefits offered to our employees.

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.

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

We estimate the uncollectibility of our accounts 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.

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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.

We recognize the excess cost of an acquired entity over the net amount assigned to assets acquired, including intangible assets with indefinite lives, and liabilities 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 of 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 related asset.

Accrued 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 estimate this accrual.

Accruals for Insurance

We are primarily self-insured for our medical and dental liability costs. We maintain high deductible insurance policies for our workers compensation, 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, 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.

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

We use derivative financial instruments to manage our cash flow exposure to various market risks, including certain interest 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 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.

Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial reporting amounts and the tax bases of existing assets and liabilities based on currently enacted tax laws and tax rates in effect for the periods in which the differences are expected to reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not expected to be realized. We are included in a consolidated federal income tax return with our Parent. State income taxes are generally filed on either a combined or separate company basis.

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We apply the interpretations prescribed by FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), in accounting for the uncertainty in income taxes recognized in our consolidated financial statements. FIN 48 provides guidance for the recognition and measurement in financial statements for uncertain tax positions taken or expected to be taken in a tax return.

The evaluation of a tax position in accordance with FIN 48 is a two-step process, the first step being recognition. We determine whether it is more-likely-than-not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. If a tax position does not meet the more-likely-than-not threshold, the benefit of that position is not recognized in our financial statements. The second step is measurement. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority.

Recent Accounting Pronouncements

In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. The Company adopted SAB 108, to adjust for the cumulative effect of not recognizing deferred financing costs under the effective interest method, by using the cumulative effect transition method provided for in SAB 108 as of January 1, 2006. The impact of adopting SAB 108 reduced our retained earnings by $3.3 million effective January 1, 2006. This impact represented a reduction in deferred financing costs of $5.3 million offset by the income tax effect of $2.0 million.

In September 2006, the Financial Accounting Standards Board “FASB” issued FAS No. 157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. FAS 157 is effective for us on January 1, 2008. We do not expect the adoption of FAS 157 to have a material impact on our financial position or operating results.

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement 115 (“FAS 159”). FAS 159 allows entities to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis under the fair value option. FAS 159 is effective for fiscal years beginning after November 15, 2007. The company is currently evaluating the impact of this statement, but we believe it will not have a material impact on our consolidated financial position or results of operations.

In December 2007, the FASB issued FAS No. 141R, Business Combinations (“FAS 141R”), and FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“FAS 160”). These new standards will significantly change the accounting for and reporting of business combinations and noncontrolling (minority) interest transactions completed after January 1, 2009. FAS 141R and FAS 160 are required to be adopted simultaneously and are effective for us beginning January 1, 2009. Early adoption is prohibited. We do not expect the adoption of FAS 141R and FAS 160 to have an impact on the consolidated financial statements; however, the adoption will impact the accounting for any business combinations completed after January 1, 2009.

There were no other new accounting pronouncements issued during the year ended December 29, 2007 that had a material impact on our financial position, operating results or disclosures.

Market Risk

Commodity Hedging

Commodity Risk Management. The principal market risks to which we are exposed that may adversely affect our results of operations and financial position 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 swap agreements, where practicable. We do not trade or use instruments with the objective of earning financial gains on the commodity price or interest rate fluctuations, nor do we use instruments where there are not underlying exposures.

The primary raw materials used in the production of eggs are corn and soybean meal. We purchase these materials to feed our approximately 11.5 million hens, which produce approximately 30% of our annual egg requirements. Shell and liquid eggs are purchased from third-party suppliers and in the spot market for the remainder of the Egg Products Division’s needs. Eggs, corn and soybean meal are commodities that are subject to significant price fluctuations due to market conditions which, in certain circumstances, can adversely affect the results of operations.

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

• We typically hedge a percentage of our grain commodity requirements, targeting to have, on average, any given forward 12 month period’s grain-for-feed needs up to 50% covered. This covers both internal egg production and third-party egg procurement contracts that are priced based on grain prices, which collectively account for approximately 70% of our egg requirements. This activity protects against unexpected increases in grain prices and provides predictability with respect to a portion of future raw materials costs. Hedging can diminish the opportunity to benefit from the improved margins that would result from an unanticipated decline in grain prices.

• We seek to align our procurement and sales volumes by matching the percentage of variable pricing contracts with our customers and the percentage of raw materials procured on a variable basis. This matching of our variable priced procurement contracts with that of variable priced sales contracts provides us with a natural hedge during times of grain and egg market volatility. As part of this effort, we are attempting to transition customers to variable pricing contracts that are priced off the same index used to purchase shell and liquid eggs. These efforts have generally been successful over the past few years.

• We have negotiated agreements with certain of our fixed price customers which allow us to raise prices by giving 30 to 60 days notice in response to increased commodity prices. The majority of these contracts are with major broad-line foodservice distributor customers who are generally less sensitive to price increases because their customers purchase food products from them on a cost-plus basis.

• We are continuing to transition customers from lower value-added egg products to higher margin, higher value-added specialty products. These products are less sensitive to fluctuations in underlying commodity prices because the raw material component is a smaller percentage of total cost and we generally have the ability to pass through certain cost increases related to our higher value-added egg products to customers.

We analyzed the estimated exposure to market risk associated with corn futures contracts we had at December 29, 2007. The notional value of $1.3 million for the commodity positions represents the notional value of the corn futures contracts. Market risk of $0.1 million is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in commodity prices to the corn futures contracts held at December 29, 2007.

During 2007, we settled forward buy cheese contracts of approximately 7.0 million pounds, or 9% of our Crystal Farms branded cheese purchases, at a discount to the market of approximately $3.2 million. No forward buy cheese contracts were outstanding at December 29, 2007.

We partially mitigate some of our natural gas requirements for producing our products by fixing the price for a portion of our natural gas usage. The monthly purchases for natural gas have been made for January through March, November, and December 2008 and cover approximately 66%, 51% and 55%, respectively, of our estimated usage requirements during that period, or approximately 28% of our annual needs. Also, we partially mitigate the risk of variability of our transportation-related fuel costs through the use of home heating oil futures contracts from time to time; however, we had no futures contracts for home heating oil at December 29, 2007. At December 29, 2007 the notional value of the fixed price purchases for natural gas was approximately $3.8 million, with a market risk of $0.4 million. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in price.

Interest Rates

Due to the Merger, we have fixed rate debt of $150 million, which we believe had a fair value of approximately $148.5 million as of the end of 2007. The market risk related to this fixed rate debt, which represents the impact on the fair value from a hypothetical 100 basis point change in interest rates, is $1.5 million. Our credit agreement debt obligations of approximately $427 million carry a variable rate of interest. We believe the fair value of this debt approximated $427 million as of the end of 2007. The interest paid on these obligations floats with market changes in interest rates, though a majority of the credit agreement debt is presently tied to six month LIBOR rates.

ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk, above.

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ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and related notes and schedules required by this Item are set forth in Part IV, Item 15 herein.

ITEM 9—CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A—CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of December 29, 2007. Based on this evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of December 29, 2007, the end of the period covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting

Michael Foods’ management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) of the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under these criteria, management concluded that our internal control over financial reporting was effective as of December 29, 2007, the end of the period covered by this annual report.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our fiscal quarter ended December 29, 2007, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B—OTHER INFORMATION

We do not have any information that was required to be reported on Form 8-K during the fourth quarter that was not reported.

PART III

ITEM 10—DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We are a wholly-owned subsidiary of M-Foods Holdings, Inc., a corporation owned by Michael Foods Investors, LLC, whose members include affiliates of Thomas H. Lee Partners, L.P. and members of our senior management. Each member of the management committee of Michael Foods Investors, LLC is also a director of the Company. Charles D. Weil is not on the management committee of Michael Foods Investors, LLC.

The names of the executive officers and directors of Michael Foods for 2007, and their ages and positions, are as follows:

Name	Age	Position
Gregg A. Ostrander (2)	55	Chief Executive Officer and Chairman of the Board
David S. Johnson	51	President, Chief Operating Officer and Chief Executive Officer - Elect
John D. Reedy	62	Executive Vice President and Chief Financial Officer
Mark W. Westphal	42	Senior Vice President - Finance
James G. Mohr	56	Senior Vice President – Supply Chain
Mark D. Witmer	50	Treasurer and Secretary
Mark B. Anderson	47	President—Crystal Farms Division
Todd M. Abbrecht (1)	39	Director
Anthony J. DiNovi (2)	45	Director
Jerome J. Jenko (1)	70	Director
Charles D. Weil (1)	63	Director
Kent R. Weldon (2)	40	Director

(1) Member of our audit committee

(2) Member of our compensation committee

Gregg A. Ostrander was our Chief Executive Officer and Chairman of the Board in 2007. He was also President prior to April 2007. He held the office of Chief Executive Officer from 1994 through 2007, has been our Chairman since 2001, and was President from 1994 – January 2006 and August 2006 through April 2007. Mr. Ostrander has been a director of Michael Foods since 1994. In 1993, Mr. Ostrander served as our Chief Operating Officer. As of January 1, 2008, Mr. Ostrander’s title is Executive Chairman of the Board. Mr. Ostrander is also a director of Arctic Cat Inc., a recreational vehicle manufacturer, and Birds Eye Foods, Inc., a food company.

David S. Johnson was our President, Chief Operating Officer and Chief Executive Officer – Elect as of April 2007, when he joined us. He was elected Chief Executive Officer and a Director as of January 1, 2008. Prior to joining us, Mr. Johnson served as an executive at Kraft Foods, Inc. for 20 years, most recently as President of Kraft Foods North America. Mr. Johnson is also a director of Arthur J. Gallagher & Co., an insurance broker.

John D. Reedy was our Executive Vice President and Chief Financial Officer in 2007. From 1988 to 2000, Mr. Reedy was our Vice President—Finance and Chief Financial Officer. He was Executive Vice President and Chief Financial Officer from 2000 through 2007. As of January 1, 2008, Mr. Reedy’s title is Vice Chairman.

Mark W. Westphal was our Senior Vice President – Finance in 2007. He became Chief Financial Officer as of January 1, 2008 and remains a Senior Vice President. Mr. Westphal has served us in various financial positions since 1995.

James G. Mohr is our Senior Vice President—Supply Chain and has held that position since 2004. From 1996 to 2003, Mr. Mohr was our Vice President—Supply Chain. Mr. Mohr has served us in various transportation and logistics management positions since 1994.

Mark D. Witmer is our Treasurer and Secretary. Mr. Witmer has held the former position since 2003 and the latter since 2001. Mr. Witmer joined us as the Director of Corporate Communications in 1989.

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Mark B. Anderson is the President of our Crystal Farms Division, a position he has held since 2004. From 2002 to 2003, Mr. Anderson served as Vice President/General Manager of the Division. From 1998 – 2002, Mr. Anderson held various business development and general manager positions within the Division.

Todd M. Abbrecht has been a director of Michael Foods since 2003 following the consummation of the Merger. Mr. Abbrecht is a Managing Director of Thomas H. Lee Partners, L.P., where he has been employed since 1992. Prior to Thomas H. Lee Partners, L.P., Mr. Abbrecht held a position in the mergers and acquisitions department of Credit Suisse First Boston. Mr. Abbrecht is a director of Simmons Bedding Company, a bedding products manufacturer and distributor, Dunkin’ Brands, Inc., a quick service restaurant franchisor, Aramark Corp., a food and support services business, and Warner Chilcott Corporation, a specialty pharmaceutical company.

Anthony J. DiNovi has been a director of Michael Foods since 2003 following the consummation of the Merger. Mr. DiNovi is Co-President of Thomas H. Lee Partners, L.P., where he has been employed since 1988. Prior to Thomas H. Lee Partners, L.P., Mr. DiNovi held various positions in the corporate finance departments of Goldman, Sachs & Co. and Wertheim Schroder & Co., Inc. Mr. DiNovi is a director of American Media Operations, Inc., a consumer magazine publisher, Nortek, Inc., a manufacturer and distributor of building products, Dunkin’ Brands, Inc., a quick service restaurant franchisor, West Corporation, a provider of business process outsourcing solutions and voice-related services, and Vertis, Inc., a provider of advertising, media, and marketing solutions.

Jerome J. Jenko has been a director and a member of the management committee of Michael Foods Investors since 2001 and a director of Michael Foods since 1998. Mr. Jenko had been a director and a member of the management committee of M-Foods Investor LLC, our Predecessor’s parent, prior to the 2003 Merger. He has been a Senior Advisor with Goldsmith, Agio, Helms and Company, an investment banking firm, since 1997. Mr. Jenko is a director of Ocean Spray Cranberries, Inc., a cranberry growing and processing cooperative, DecoPak, Inc., a privately-held cake decorating company, and Commodity Specialists Co., Inc., a privately-held commodity trading company.

Charles D. Weil has been a director of Michael Foods since 2004. He is President, Chief Executive Officer and a Director of the M. A. Gedney Company (“Gedney”). Previously, he was Acting President and Chief Executive Officer of Gedney from February 2003 – October 2003. Prior to joining Gedney, Mr. Weil was founder and Chief Executive Officer of C.E.O. Advisors, Inc., a consulting company, from January 2001 – February 2003, and was President and Chief Operating Officer of Young America Corporation, a fulfillment and customer service company, from 1993 – 2000.

Kent R. Weldon has been a director of Michael Foods since 2003 following the consummation of the Merger. Mr. Weldon is a Managing Director of Thomas H. Lee Partners, L.P, where he has been employed from 1991-1993 and 1995- present. Prior to Thomas H. Lee Partners, L.P., Mr. Weldon held a position in the corporate finance department of Morgan Stanley & Co. Incorporated. Mr. Weldon is a director of Nortek, Inc., a manufacturer and distributor of building products, CMP Susquehanna Corp. and CMP Susquehanna Holdings Corp., both radio broadcasting companies, and THL-PMPL Holding Corp., a manufacturer of plastic interior subsystems for cars and light trucks.

Audit Committee

The Board of Directors has a standing audit committee established in accordance with section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)). The members of the audit committee are Jerome J. Jenko, Chairman, Todd M. Abbrecht and Charles D. Weil.

Audit Committee Financial Expert

The Board of Directors is satisfied that the members of our audit committee each have sufficient expertise and business and financial experience necessary to perform their duties as the Company’s audit committee effectively. As such, no one member of our audit committee has been named by our Board of Directors as an “audit committee financial expert” as that term is defined in Item 407(d)(5) of Regulation S-K.

Code of Ethics

We have a Business Conduct Policy that applies to all of our employees. We have determined that this policy complies with Item 406 of Regulation S-K. We will provide, without charge, a copy of the Business Conduct Policy to any person who so requests in writing. Written requests may be made to Michael Foods, Inc., 301 Carlson Parkway, Suite 400, Minnetonka, Minnesota 55305; Attention: Secretary. Our Internet website at www.michaelfoods.com also contains the Business Conduct Policy.

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ITEM 11—EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The goal of our executive compensation program is to ensure that our executives are compensated effectively in a manner consistent with our strategy and competitive considerations, and based on management’s performance in achieving our corporate goals and objectives. Our executive compensation program is overseen by the compensation committee of our Board of Directors, which is composed of three members, one of whom was our Chief Executive Officer in 2007 and is now our Executive Chairman. The committee determines the compensation of our executive officers, reviews and approves our incentive, equity and other employee benefit plans and programs, and administers their application to our executive officers. Some aspects of the compensation of our Chief Executive Officer and other of our executives are determined by their employment agreements with the Company, as further discussed below. When making final compensation decisions regarding our Chief Executive Officer, the compensation committee acts without his participation. The committee generally meets twice yearly.

Compensation Philosophy and Objectives

We believe that the skill, talent, judgment and dedication of our executive officers are critical factors affecting the long-term value of our company. Therefore, our goal is to maintain an executive compensation program that will fairly compensate our executives, attract and retain qualified executives who are able to contribute to our long-term success, induce performance consistent with clearly defined corporate goals and align our executives’ long-term interests with those of our equityholders. Our current executive compensation program is mainly focused on EBITDA (earnings before interest, taxes, depreciation and amortization, as defined in our senior credit facility) growth.

Our goal is to provide overall compensation (assuming that targeted levels of performance are achieved) that is at least above the median compensation of comparable companies. The elements of compensation included in any competitive analysis generally are base salaries, annual cash incentive opportunities, and long-term incentives in the form of stock options in our parent and direct equity ownership in our parent’s parent.

Each year, our management provides the compensation committee historical and prospective breakdowns of the total compensation components for each executive officer. Our decisions on compensation for our executive officers are based primarily upon our assessment of each individual’s performance and potential to enhance long-term equityholder value. We rely upon judgment and not upon rigid guidelines or formulas in determining the amount and mix of compensation elements for each executive officer. Factors affecting our judgment include performance compared to goals established for the individual and the company at the beginning of the year and/or over a multi-year period, the nature and scope of the executive’s responsibilities, and effectiveness in leading our initiatives to achieve corporate goals.

When we make executive compensation decisions, we review individual performance and corporate performance. The compensation committee measures our performance against the specific goals established at the beginning of the fiscal year and determines the overall budget and targeted compensation for our executive officers. Our Chief Executive Officer, as the manager of the members of the executive team, assesses the executives’ individual contributions to our goals, as well as achievement of their individual goals, and makes a recommendation to the compensation committee with respect to any merit increase in salary and stock option grants for each member of the executive team, other than himself. Annual incentive opportunity is set forth at the start of each year, with the actual payment determined upon the relative achievement of our annual EBITDA target. Incentive payments are formula-driven using a pre-established grid (i.e., percentages over or under the target EBITDA level for the year). The committee has discretion to adjust the formula-derived incentive payments to take into account unusual factors that may have inhibited, or enhanced, achievement of the annual EBITDA target. The compensation committee evaluates, discusses and modifies or approves these recommendations and conducts a similar evaluation of the Chief Executive Officer’s contributions to our corporate goals and achievement of his or her individual goals.

Role of Executive Officers and Compensation Consultants

Our Chief Executive Officer, Chief Financial Officer and Vice President of Human Resources support the compensation committee in its work by providing information relating to our financial plans, performance assessments of our executive officers and other personnel-related data. In addition, the committee has the authority under its charter to engage the services of outside advisors, experts and others to assist it, but has not done so in recent years.

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Principal Elements of Executive Compensation

Our executive compensation program consists of the three components discussed below. In general, the compensation committee’s determination with regard to one component does not affect its determinations with regard to the other components.

Base Salaries. The minimum annual base salaries of our Chief Executive Officer and certain of our other executive officers are established under employment agreements, as described elsewhere herein. These agreements are negotiated with the compensation committee, but give consideration to the scope of each executive’s responsibilities, taking into account competitive market compensation based on occasional market surveys and salaries paid by comparable companies for similar positions. We conduct performance reviews of our employees, including our executive officers, annually. Based on the performance assessments, and considering changes in salaries provided comparable personnel of companies with whom we compete for management talent, any changes in job duties and responsibilities and our overall financial results, we make adjustments, usually on an annual basis, in base salary rates.

Annual Incentive Compensation. Annual cash incentives for our executive officers are designed to reward performance that furthers profitable growth. In 2007, the compensation committee approved an annual EBITDA target for the year. The annual incentive awards for executive officers are determined on the basis of our achievement of this target. Our executive officers participate in our executive officer incentive program which is designed to motivate management to achieve, or exceed, an EBITDA level relatively consistent with our annual operating plan. Incentive payments for the past fiscal year are made on, or before, March 15^th of the subsequent year. Incentive payments for 2007 were made on March 12, 2008.

The compensation committee has at times exercised discretion to increase or reduce the incentive amounts that resulted from the application of the formula in our executive officer incentive plan. While the committee made no such adjustments relative to amounts paid for 2007 performance, it has the authority to do so in the future if it determines that an adjustment would serve our interests and the goals of the executive officer incentive plan.

Long-Term Incentive Compensation. Generally, a significant stock option grant (at the M-Foods Holdings level) is made in the year when an executive officer commences employment. The Chief Executive Officer and/or President make a recommendation relative to each individual under consideration for a stock option grant, other than for themselves. The size of each grant is generally set at a level that the compensation committee deems appropriate to create a meaningful opportunity for equity ownership based upon past grant guidelines, the individual’s position with us and the individual’s potential for future responsibility and promotion. The relative weight given to each of these factors will vary from individual to individual at the compensation committee’s discretion based upon past grant levels for comparable positions, the individual’s potential to contribute to the growth of the Company’s business, and the individual’s potential for future promotion or to otherwise take on additional management responsibilities, as well as to induce a candidate’s acceptance of a position given the competition for management talent.

When a new executive officer is hired, an option grant will be made at the first regularly scheduled meeting of the compensation committee after the officer commences employment or by the committee’s consent resolution. The exercise price of stock options is always equal to the price of our common stock, as determined by a set formula, at the most recent quarter’s end, as there is no public market for our equity.

Subsequent option grants may be made at varying times and in varying amounts at the discretion of the compensation committee based upon the input of the Chief Executive Officer and/or the President. Historically, they have been made during our annual performance reviews in January or February. Changes in titles and responsibilities are considered when follow-on options are granted, as are other considerations taken into account in making grants when employment commences. Our policy is to have option awards vest over five years, on a pro rata basis, and for the number of shares for which options are awarded to be sufficient to provide the recipient with a meaningful incentive to remain in our employ on an on-going basis.

Executives are also given an opportunity to invest directly in our parent’s parent. This generally occurs at the time of hiring or at the time of a change-in-control. An opportunity is offered to buy units in Michael Foods Investors, LLC, with the determination of the equity opportunity based upon the executive’s responsibilities and value to the Company, and his or her perceived ability to enhance equity values over time. There are guidelines that have been used historically by our parent’s parent in considering the level of management co-investment, but there is discretion in determining the direct equity opportunity offered to any executive or other management team member. Generally, the individuals have agreed to fund the maximum equity amount they are offered.

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Perquisites

Our executive officers participate in the same group insurance and employee benefit plans as our other employees. The Chief Executive Officer, President/Chief Operating Officer and Chief Financial Officer are offered a club membership, at the Company’s expense, to facilitate business development. Historically, the Chief Executive Officer and President/Chief Operating Officer have availed themselves of this perquisite, while the Chief Financial Officer has not. The same officers are offered reimbursement for an annual executive physical, the usage of which varies by officer and by year, and have their income tax preparation expenses paid by us. Our use of perquisites as an element of compensation is limited and is largely based on the historical practices and policies of the Company. We do not view perquisites as a significant element of our comprehensive compensation structure, but do believe that they can be used in conjunction with our general compensation program to attract, motivate and retain desirable managers in a competitive environment.

Compensation Committee Report

The compensation committee has discussed and reviewed the Compensation Discussion and Analysis with management. Based upon this review and discussion, the compensation committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this report.

The compensation committee,

Anthony J. DiNovi, Chairman

Gregg A. Ostrander

Kent R. Weldon

Compensation Table

The following table sets forth information concerning the compensation of our Chief Executive Officer, Chief Financial Officer and each of our three most highly compensated executive officers, referred to as the named executive officers, during 2007.

Summary Compensation Table
Name and Principal Position	Year	Salary		Non-equity Incentive Plan Compensation (2)		Change in Pension Value and Non- qualified Deferred Compensation Earnings (3)		All Other Compensation (1)		Total
Gregg A. Ostrander	2007	$	825,000	$	582,368	$	199,778	$	30,972	$	1,638,118
Chief Executive Officer and Chairman of the Board (4)	2006		816,154		102,019		176,588		30,952		1,125,713
John D. Reedy	2007		500,000		352,950		71,500		10,873		935,323
Executive Vice President and Chief Financial Officer (5)	2006		495,192		53,629		63,201		10,766		622,788
David S. Johnson	2007		475,000		335,303		—		125,489		935,792
President, Chief Operating Officer and Chief Executive Officer – Elect (6)	2006		—		—		—		—		—
Mark B. Anderson	2007		209,769		148,076		6,769		9,269		373,883
President—Crystal Farms	2006		201,846		21,860		5,984		9,059		238,749
James G. Mohr	2007		217,000		114,880		18,926		9,794		360,600
Senior Vice President— Supply Chain	2006		215,961		16,888		16,729		9,257		258,835

(1) Reflects the value of contributions made under the Retirement Savings Plan (a defined contribution plan) and the value of life insurance premiums paid by us. Mr. Ostrander’s other compensation also includes perquisites, such as

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club membership, executive physicals, cellular telephone service and tax preparation fees. The tax preparation fees for Mr. Ostrander were $10,169 during 2007. Mr. Johnson received a Relocation, Commuting and Living Expenses payment of $125,000 pursuant to his employment agreement.

(2) Payments for 2007 and 2006 performance made in the following March under our incentive plans.

(3) The amounts in this column reflect amounts recorded by us for accounting purposes in connection with the M-Foods Holdings, Inc. 2003 Deferred Compensation Plan, but the amounts in this column are not currently receivable or accessible, nor do they necessarily reflect actual amounts that may become receivable. While an 8% return is recorded on funds contributed to the Deferred Compensation Plan for accounting purposes, the proceeds, if any, that the individuals listed in this table actually receive in the future in connection with the Deferred Compensation Plan will not necessarily track the recorded return and instead will depend on the amount of distributions to the holders of Class A Units of Michael Foods Investors, LLC. The amounts reflected in this column represent the difference between the 8% recorded return and 5.88%, which percentage is equal to 120% of the 4.9% federal long-term interest rate as of the adoption of the Deferred Compensation Plan.

(4) Mr. Ostrander’s title as of January 1, 2008 is Executive Chairman of the Board.

(5) Mr. Reedy’s title as of January 1, 2008 is Vice Chairman.

(6) Mr. Johnson was hired as President, Chief Operating Officer and Chief Executive Officer – Elect as of April 2, 2007. His title as of January 1, 2008 is President and Chief Executive Officer.

None of the named executive officers received stock option awards or stock awards in 2007.

Outstanding Equity Awards at December 29, 2007

	Option Awards (1)					Stock Awards
Name	Number of Securities Underlying Unexercised Options Exercisable	Number of Securities Underlying Unexercised Options Unexercisable	Option Exercise Price		Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested	Market Value of Shares or Units of Stock That Have Not Vested
Gregg A. Ostrander	6,856	1,713	$	626.99	11/20/2013	—	—
John D. Reedy	2,432	607		626.99	11/20/2013	—	—
David S. Johnson	—	—		—	—	—	—
Mark B. Anderson	428	107		626.99	11/20/2013	—	—
James G. Mohr	828	206		626.99	11/20/2013	—	—

(1) Stock options are with our parent, M-Foods Holdings, Inc., but are accounted for by us. All stock options vest ratably over a five year period from date of grant.

Employment Agreements

General Provisions. The employment agreement with Gregg A. Ostrander provides for automatic one year renewals beginning with the second anniversary of the closing of the Merger. The Ostrander employment agreement provides that Mr. Ostrander’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Ostrander for good reason. The Ostrander employment agreement provides that Mr. Ostrander will receive an annual base salary of at least $715,000 and that he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods on a basis no less favorable than available to any other executive officer. The Ostrander employment agreement provides that Mr. Ostrander’s annual base salary is subject to periodic review, and once increased, the increased base salary becomes a minimum. For 2007, Mr. Ostrander was eligible to receive up to 100% of his salary as an incentive bonus under the Michael Foods, Inc. Executive Officers Incentive Plan. Mr. Ostrander is subject to a noncompetition covenant and a nonsolicitation provision.

The employment agreement with John D. Reedy provides for automatic one year renewals beginning with the second anniversary of the closing of the Merger. The Reedy employment agreement provides that Mr. Reedy’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Reedy for good reason. The Reedy employment agreement provides that Mr. Reedy will receive an annual base salary of at least $400,000 and that he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods. For 2007, Mr. Reedy was eligible to receive up to 100%

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of his salary as an incentive bonus under the Michael Foods, Inc. Executive Officers Incentive Plan. In 2008, Mr. Reedy has moved to less-than-full-time status and his base salary has been prorated accordingly. Mr. Reedy is subject to a noncompetition covenant and a nonsolicitation provision.

The employment agreement with David S. Johnson provides for automatic one year renewals beginning with the first anniversary of the agreement’s effective date. The Johnson employment agreement provides that Mr. Johnson’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Johnson for good reason. The Johnson employment agreement provides that Mr. Johnson will receive an annual base salary of at least $650,000, that his base salary increases to $750,000 upon being promoted to Chief Executive Officer and that he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods. For 2007, Mr. Johnson was eligible to receive up to 100% of his salary as an incentive bonus under the Michael Foods, Inc. Executive Officers Incentive Plan, prorated for his time of employment by us in 2007. Mr. Johnson is subject to a noncompetition covenant and a nonsolicitation provision.

The employment agreement with James G. Mohr provides for automatic one year renewals beginning with the second anniversary of the closing of the Merger. The Mohr employment agreement provides that Mr. Mohr’s employment (i) shall terminate automatically upon his death or disability, (ii) may terminate at the option of the Company with or without cause and (iii) may terminate at the option of Mr. Mohr for good reason. The Mohr employment agreement provides that Mr. Mohr will receive an annual base salary of at least $189,000 and that he will participate in certain bonus arrangements, long-term incentive plans and employee benefit plans of Michael Foods. For 2007, Mr. Mohr was eligible to receive up to 75% of his salary as an incentive bonus under the Michael Foods, Inc. Executive Officers Incentive Plan. Mr. Mohr is subject to a noncompetition covenant and a nonsolicitation provision.

Termination Provisions. The Ostrander employment agreement provides that if Mr. Ostrander’s employment is terminated by his death or disability, Mr. Ostrander, or his estate or beneficiaries, will receive a payment equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus three times the total of Mr. Ostrander’s current annual base salary and target bonus. In addition, Mr. Ostrander will receive for three years following the termination date, or until such earlier time as Mr. Ostrander becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

If Mr. Ostrander’s employment is terminated for cause or he terminates without good reason, as described below, Mr. Ostrander will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. “Good reason” includes, among other things, any diminution in position, authority, duties and responsibilities or any requirement to relocate or travel extensively. If Mr. Ostrander terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Ostrander will receive a lump sum in an amount equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus three times the total of Mr. Ostrander’s current annual base salary and target bonus. In addition, Mr. Ostrander will receive for three years following the termination date, or until such earlier time as Mr. Ostrander becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

Mr. Ostrander may also be eligible to receive an additional payment of any excise tax imposed by Section 4999 of the Internal Revenue Code in connection with payments made in connection with the Merger and any future transactions, as well as an additional payment to cover any applicable taxes such that he will retain an amount equal to the excise taxes, after all income taxes, interest and penalties associated with all such payments. In no event shall the Company be obligated to make any such payments in connection with the Merger in excess, in the aggregate, of $6,300,000. With respect to any such payments in connection with any future transactions, the Company shall not be obligated to pay any amount in excess, in the aggregate, of $16,300,000.

The Reedy employment agreement provides that if Mr. Reedy’s employment is terminated by his death or disability, Mr. Reedy, or his estate or beneficiaries, will receive a payment equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus two times the total of Mr. Reedy’s current annual base salary and target bonus. In addition, Mr. Reedy will receive for two years following the termination date, or until such earlier time as Mr. Reedy becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

If Mr. Reedy’s employment is terminated for cause or he terminates without good reason, such term having a meaning substantially similar to the meaning given such term in the Ostrander employment agreement, Mr. Reedy will receive his

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annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. If Mr. Reedy terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Reedy will receive a lump sum in an amount equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus two times the total of Mr. Reedy’s current annual base salary and target bonus. In addition, Mr. Reedy will receive for two years following the termination date, or until such earlier time as Mr. Reedy becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

Mr. Reedy may, under certain circumstances, also be eligible to receive an additional payment of any excise tax imposed by Section 4999 of the Internal Revenue Code in connection with payments made in connection with the Merger and any future transactions, as well as an additional payment to cover any applicable taxes such that he will retain an amount equal to the excise taxes, after all income taxes, interest and penalties associated with all such payments. In no event shall the Company be obligated to make any such payments in connection with the Merger in excess, in the aggregate, of $6,300,000. With respect to any such payments in connection with any future transactions, the Company shall not be obligated to pay any amount in excess, in the aggregate, of $16,300,000.

The Johnson employment agreement provides that if Mr. Johnson’s employment is terminated by his death or disability, Mr. Johnson, or his estate or beneficiaries, will receive a payment equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus two times the total of Mr. Johnson’s current annual base salary and target bonus. In addition, Mr. Johnson will receive for two years following the termination date, or until such earlier time as Mr. Johnson becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

If Mr. Johnson’s employment is terminated for cause or he terminates without good reason, such term having a meaning substantially similar to the meaning given such term in the Ostrander employment agreement, Mr. Johnson will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. If Mr. Johnson terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Johnson will receive a lump sum in an amount equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus two times the total of Mr. Johnson’s current annual base salary and target bonus. In addition, Mr. Johnson will receive for two years following the termination date, or until such earlier time as Mr. Johnson becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

Mr. Johnson may, under certain circumstances, also be eligible to receive an additional payment of any excise tax imposed by Section 4999 of the Internal Revenue Code in connection with any payments made in connection with any future transactions, as well as an additional payment to cover any applicable taxes such that he will retain an amount equal to the excise taxes, after all income taxes, interest and penalties associated with all such payments. In no event shall the Company be obligated to make any such payments in connection with any future transactions in excess, in the aggregate, of $16,300,000.

The Mohr employment agreement provides that if Mr. Mohr is terminated by his death or disability, Mr. Mohr, or his estate or beneficiaries, will receive a payment equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year pro rated for the months of employment in that year, plus any eligible unpaid other benefits, plus an amount equal to Mr. Mohr’s current annual base salary.

If Mr. Mohr’s employment is terminated for cause or he terminates without good reason, such term having a meaning substantially similar to the meaning given such term in the Ostrander employment agreement, Mr. Mohr will receive his annual base salary through the date of termination and other benefits not yet paid under any plan, program, policy, contract or agreement with or practice of Michael Foods. If Mr. Mohr terminates his employment for good reason or if Michael Foods terminates his employment other than for cause, death or disability, Mr. Mohr will receive a lump sum in an amount equal to any annual base salary through the date of termination not yet paid, plus the target bonus for the year prorated for the months of employment in that year, plus any eligible unpaid other benefits, plus a payment equal to Mr. Mohr’s current annual base salary. In addition, Mr. Mohr will receive for one year following the termination date, or until such earlier time as Mr. Mohr becomes eligible to receive comparable benefits, certain medical, dental and life insurance benefits for himself and his family.

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Mr. Anderson has a severance agreement which provides for payment of his pro rated compensation through the date of termination, a lump sum payment of two years’ total annual compensation, and the continuation of certain benefits should he be terminated under certain conditions within two years of a change in control of our Crystal Farms subsidiary.

Mr. Westphal and Mr. Witmer are not subject to any severance agreement.

Compensation Committee Interlocks and Insider Participation

The members of the compensation committee are Gregg A. Ostrander, Anthony J. DiNovi and Kent R. Weldon. The compensation arrangements for our Chief Executive Officer and certain of our executive officers were established pursuant to the terms of the respective employment agreements between us and each executive officer. The terms of the employment agreements were established pursuant to arms-length negotiations between representatives of Thomas H. Lee Partners, L.P. and each executive officer. Mr. Ostrander was our Chief Executive Officer in 2007. No compensation committee interlock relationships existed in 2007.

Deferred Compensation Plan

Upon the closing of the Merger, certain members of management became participants in the M-Foods Holdings, Inc. (“Holdings”) 2003 Deferred Compensation Plan. Each participant contributed certain proceeds to the Deferred Compensation Plan. The Deferred Compensation Plan is a nonqualified, unfunded obligation of Holdings. Each participant’s deferred compensation account under the plan will track certain distributions to be made to the Class A Units of Michael Foods Investors, LLC, however, the plan will not hold actual Class A Units of Michael Foods Investors, LLC. Participants in the plan will be entitled to a distribution from their deferred compensation account upon the earlier of (i) a change of control of Holdings (ii) the tenth anniversary of the date of the plan and (iii) upon the exercise of any put or call of the participants Class B Units of Michael Foods Investors, LLC. All payments made under the plan shall be made in cash by Holdings.

Incentive Plans

Each of the named executive officers is a participant in the Michael Foods, Inc. Executive Officers Incentive Plan or the Michael Foods, Inc. Senior Management, Officers and Key Employee Incentive Plan, which provide for cash bonuses of up to 100% of base salary, subject to our achieving certain financial performance objectives in any given fiscal year. The target goals set forth in these incentive plans change from year to year and are determined by our compensation committee.

Director Compensation

All members of our Board of Directors are reimbursed for their usual and customary expenses incurred in connection with attending all Board and other committee meetings. Members of the Board of Directors who are also our employees, or employees of Thomas H. Lee Partners, L.P., do not receive remuneration for serving as members of the board. Other non-employee directors receive a quarterly retainer of $4,000 and are paid $3,000 for each Board meeting attended, or $500 for a meeting held telephonically.

For all committees except the audit committee, non-employee outside directors (excludes affiliates of Thomas H. Lee Partners, L.P.) are paid $1,000 for each regular committee meeting they attend, except for committee chairs who are paid $1,500 for each committee meeting they attend and chair. Non-employee outside directors are paid $1,500 for each regular audit committee meeting they attend, and the audit committee chair is paid $2,000 for each audit committee meeting they attend and chair.

For all committees except the audit committee, non-employee outside directors are paid $500 for each telephonic committee meeting in which they participate, except for committee chairs who are paid $1,000 for each telephonic committee meeting in which they participate and chair. Non-employee outside directors are paid $1,000 for each telephonic audit committee meeting in which they participate, except for the audit committee chair who is paid $1,500 for each telephonic audit committee meeting in which they participate and chair.

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Directors’ fees and travel and reimbursed meeting expenses incurred by us in 2007 totaled $132,510. Fees earned or paid in cash by us to non-employee directors in 2007 were as follows:

Name	Fees Earned or Paid in Cash		Other Compensation		Total
Mr. Abbrecht	$	—	$	—	$	—
Mr. DiNovi		—		—		—
Mr. Jenko		31,500		—		31,500
Mr. Weil		29,500		—		29,500
Mr. Weldon		—		—		—

M-Foods Holdings, Inc. Amended and Restated 2003 Stock Option Plan

In order to provide additional financial incentives to our management, certain members of our management and other key employees may be granted stock options to, collectively, purchase up to 6.36% of the common stock of M-Foods Holdings, Inc., our parent company. The exercise price of options granted reflects the fair market value of the underlying shares, as determined by the compensation committee in its best judgment.

Fifty percent of the then 25,000 option shares initially reserved for issuance under this stock option plan were issued to Messrs. Ostrander, Reedy, James Clarkson (our deceased former President), Mohr and Max Hoffmann (Vice President and Chief Financial Officer for the Crystal Farms Division) in 2003. As amended in 2004, the plan provides for a total of 32,277 shares being reserved (including the 25,000 initially reserved). The plan provides that the exercise price is payable (1) in cash, (2) after an initial public offering of Michael Foods’ common stock, through simultaneous sales of underlying shares by brokers or (3) through the exchange of M-Foods Holdings, Inc. securities held by the optionee for longer than six months.

Options vest ratably over a five-year period starting at the Merger date for those grants made in 2003 and for certain grants made in 2004, or the date of grant for other grants. On termination of employment for any reason, all unvested options of the terminated employee are cancelled. Vested options not exercised within 90 days after termination are cancelled, unless such employee is terminated for cause or leaves without good reason, in which case such vested options shall be cancelled upon termination. If employment is terminated for any reason other than for cause or a termination without good reason, M-Foods Holdings will provide a notice setting forth the fair market value of the common stock within 90 days of such termination. In the event of a change in control of M-Foods Holdings, Inc. or Michael Foods Investors, LLC, all options which have not become vested will automatically become vested. The options are subject to other customary restrictions and repurchase rights. Accounting for these stock options is recorded in our financial statements.

ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

M-Foods Holdings, Inc. is a corporation owned, in part, by Michael Foods Investors, LLC, whose members include affiliates of Thomas H. Lee Partners, L.P. and certain members of our management.

The following table sets forth certain information, as of March 24, 2008, regarding beneficial ownership of Michael Foods Investors, LLC by: (i) each person or entity owning any class of Michael Foods Investors, LLC’s outstanding securities and (ii) each member of Michael Foods Investors, LLC’s management committee (which, with the exception of Charles Weil, is identical to the board of directors of Michael Foods), each of our currently serving named executive officers and all members of the management committee and executive officers as a group. Michael Foods Investors, LLC’s outstanding securities consist of approximately 2,966,818.01 Class A Units, 263,681.99 Class B Units, 330,000 Class C Units, and 7,500 Class D Units. The Class A Units, Class B Units, Class C Units and Class D Units generally have identical rights and preferences, except that the Class C and D Units are non-voting and have different rights with respect to certain distributions as described, relative to the Class C Units, in our Form 10-K for 2003. To our knowledge, each of these securityholders has sole voting and investment power as to the units shown unless otherwise noted. Beneficial ownership of the securities listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Securities Exchange Act of 1934.

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	Securities Beneficially Owned
Name and Address	Number of Class A Units	Number of Class B Units	Percentage of Class A and B Units		Number of Class C Units	Percentage of Class C Units		Number of Class D Units	Percentage of Class D Units
Principal Security holders:
Thomas H. Lee Partners L.P. and affiliates (1)	2,900,000.00	—	89.8	%	—	—		—	—
Management Committee Members and Executive Officers:
Gregg A. Ostrander (2)(3)	22,806.09	70,916.91	2.9	%	84,600	25.6	%	—	—
John D. Reedy (2)(4)	7,707.96	17,292.04	0.8	%	25,000	7.6	%	—	—
David S. Johnson (2)(5)	—	—	—		—	—		7,500	100	%
James G. Mohr (2)	5,728.70	11,271.30	0.5	%	17,000	5.2	%	—	—
Mark Westphal (2)	84.18	1,915.82	0.1	%	2,000	0.6	%	—	—
Mark D. Witmer (2)	13.68	4,986.32	0.2	%	5,000	1.5	%	—	—
Mark B. Anderson (2)	10.95	3,989.05	0.1	%	4,000	1.2	%	—	—
Anthony J. DiNovi (1)	—	—	—		—	—		—	—
Kent R. Weldon (1)	—	—	—		—	—		—	—
Todd M. Abbrecht (1)	—	—	—		—	—		—	—
Charles D. Weil (6)	—	—	—		—	—		—	—
Jerome J. Jenko (7)	500.00	—	0.0	%	—	—		—	—
All management committee members and named executive officers as a group (12 persons)	36,851.56	110,371.44	4.6	%	137,600	41.7	%	7,500	100	%

(1) Includes interests owned by each of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V, L.P., Thomas H. Lee Investors Limited Partnership, 1997 Thomas H. Lee Nominee Trust, Great-West Investors LP. Thomas H. Lee Equity Fund V, L.P. and Thomas H. Lee Parallel Fund V, L.P. are Delaware limited partnerships, whose general partner is THL Equity Advisors V, LLC, a Delaware limited liability company. Thomas H. Lee Equity (Cayman) Fund V, L.P. is an exempted limited partnership formed under the laws of the Cayman Islands, whose general partner is THL Equity Advisors V, LLC, a Delaware limited liability company registered in the Cayman Islands as a foreign company. Thomas H. Lee Advisors, LLC, a Delaware limited liability company, is the general partner of Thomas H. Lee Partners, L.P., a Delaware limited partnership, which is the sole member of THL Equity Advisors V, LLC. Thomas H. Lee Investors Limited Partnership (f/k/a THL-CCI Limited Partnership) is a Massachusetts limited partnership, whose general partner is THL Investment Management Corp., a Massachusetts corporation. The 1997 Thomas H. Lee Nominee Trust is a trust with U.S. Bank, N.A. serving as Trustee. Thomas H. Lee has voting and investment control over common shares owned of record by the 1997 Thomas H. Lee Nominee Trust. Each of Anthony J. DiNovi, Kent R. Weldon and Todd M. Abbrecht is a managing director of Thomas H. Lee Advisors, LLC. As managing directors of Thomas H. Lee Advisors, LLC, each of Mr. DiNovi, Mr. Weldon and Mr. Abbrecht has shared voting and investment power over, and therefore, may be deemed to beneficially own member units of Michael Foods Investors, LLC held of record by Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P. and Thomas H. Lee Equity (Cayman) Fund V, L.P. Each of these individuals disclaims beneficial ownership of these units except to the extent of their pecuniary interest therein. The address of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V, L.P., Thomas H. Lee Investors Limited Partnership, the 1997 Thomas H. Lee Nominee Trust, Anthony J. DiNovi, Todd M. Abbrecht and Kent R. Weldon is 100 Federal Street, 35th Floor, Boston, MA 02110. Great-West Investors LP is a co-investment entity of Thomas H. Lee Partners and disclaims beneficial ownership of any securities other than the securities held directly by it. The address for Great-West Investors LP is c/o Great-West Life and Annuity Company, 8515 E. Orchard Road,3T2, Greenwood Village, CO 80111.

(2) The address for Messrs. Ostrander, Reedy, Johnson, Mohr, Westphal, Witmer and Anderson is c/o Michael Foods, Inc., 301 Carlson Parkway, Suite 400, Minnetonka, MN 55305.

(3) In 2004, Mr. Ostrander placed 47,277 Class B units and 56,400 Class C units into irrevocable trusts for two adult children and one minor child. Mr. Ostrander disclaims beneficial ownership of these units.

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(4) In 2003, Mr. Reedy gifted 15,000 Class B units and 15,000 Class C units to his two adult children. In 2004, Mr. Reedy gifted 10,000 Class B units and 10,000 Class C units to his two adult children. Mr. Reedy disclaims beneficial ownership of these units.

(5) In April 2007, Mr. Johnson was hired as our President, Chief Operating Officer and Chief Executive Officer-Elect. He concurrently purchased Class D units which vest one-third each year for the next three years beginning April 1, 2008.

(6) The address for Mr. Weil is c/o M.A. Gedney Company, 2100 Stoughton Ave., Chaska, MN 55318.

(7) The address for Mr. Jenko is c/o Goldsmith, Agio, Helms and Company, First Bank Place, Suite 4600, 601 Second Avenue South, Minneapolis, MN 55402.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 29, 2007.

Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
	(a)	(b)		(c)
Equity compensation plans approved by securityholders (1)	27,195	$	662.27	3,663
Equity compensation plans not approved by securityholders	—		—	—
Total	27,195	$	662.27	3,663

(1) Stock options are granted by our parent, M-Foods Holdings, Inc.

ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Director Independence Statement

We are not a listed issuer, but have evaluated the independence of our Board of Directors and committee members using the independence standards of the New York Stock Exchange. Our Board has determined that Jerome J. Jenko and Charles D. Weil are independent directors within the meaning of the rules of the New York Stock Exchange. Messrs. Jenko and Weil are members of our audit committee. In addition, Mr. Abbrecht is a member of our audit committee, but as a result of his position with Thomas H. Lee Partners, L. P., Mr. Abbrecht has not been determined by our Board of Directors to be independent within the meaning of the applicable rules. Messrs. DiNovi and Weldon are non-management members of our compensation committee, but as a result of their positions with Thomas H. Lee Partners, L. P., Messrs. DiNovi and Weldon have not been determined by our Board of Directors to be independent within the meaning of the applicable rules.

Certain Agreements Relating to the Merger

Securityholders Agreement

Pursuant to the securityholders agreement entered into in connection with the Merger, units of Michael Foods Investors, LLC (or common stock following change in corporate form) beneficially owned by our executives and any other employees of Michael Foods Investors and its subsidiaries, which we collectively refer to as the management investors, are subject to certain restrictions on transfer, other than certain exempt transfers as defined in the securityholders agreement, as well as the other provisions described below. When reference is made to “units” of Michael Foods Investors in the discussion that follows, that reference is deemed to include common stock of Michael Foods Investors following a change in corporate form, whether in preparation for an initial public offering or otherwise.

The securityholders agreement provides that Thomas H. Lee Partners, L.P., the management investors and all other parties to the agreement will vote all of their units to elect and continue in office management committees or boards of directors of Michael Foods Investors and each of its subsidiaries, other than subsidiaries of the Company, consisting of up to five members or directors composed of:

• one person designated by Thomas H. Lee Equity Fund V, L.P.;

• one person designated by Thomas H. Lee Parallel Fund V, L.P.;

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• one person designated by Thomas H. Lee Cayman Fund V, L.P.;

• the chief executive officer of Michael Foods Investors, LLC; and

• one person designated by the chief executive officer of Michael Foods Investors, LLC.

The securityholders agreement also provides:

• the management investors with the right to participate proportionally in transfers of Michael Foods Investors units beneficially owned by Thomas H. Lee Partners, L.P., its partners or their transferees, except in connection with transfers (i) in a public sale, (ii) among the partners of Thomas H. Lee Partners, L.P. and the partners, securityholders and employees of such partners, (iii) incidental to the conversion of securities or any recapitalization or reorganization, (iv) to employees, directors and/or consultants of Michael Foods Investors and its subsidiaries, (v) that are exempt individual transfers and (vi) pursuant to a pledge of securities to an unaffiliated financial institution;

• Thomas H. Lee Partners, L.P. with the right to notify management investors that it shall cause Michael Foods Investors to effect a sale and the management investors shall consent to and raise no objection with respect to Michael Foods Investors units owned by the management investors in a sale of Michael Foods Investors; and

• Thomas H. Lee Partners, L.P. with registration rights to require Michael Foods Investors to register units held by them under the Securities Act.

If Michael Foods Investors issues or sells any new units to Thomas H. Lee Partners, L.P., subject to certain exceptions, each management investor shall have the right to subscribe for a sufficient number of new Michael Foods Investors units to maintain its respective ownership percentage in Michael Foods Investors.

Management Unit Subscription Agreements

Under the management unit subscription agreements, management, immediately prior to the Merger, contributed to Michael Foods Investors shares of prior M-Foods Holdings common stock for Class A Units, Class B Units and Class C Units of Michael Foods Investors based on a $100 per Class A Unit price and a $2.00 per Class B and Class C Unit price. Following the Merger, the executives held approximately 10% of the outstanding Class A and Class B units combined, and 100% of the outstanding Class C units. Class D units were added in 2007 upon the hiring of Mr. Johnson. The Class D units for Mr. Johnson vest one-third each year on the anniversary date of his hiring, with the first one-third vesting on April 1, 2008, second one-third on April 1, 2009 and the last one-third on April 1, 2010.

Upon the death, disability or retirement of the executive prior to the earlier of a public offering or sale of Michael Foods Investors, Michael Foods Investors may be required to purchase all of an executive’s units. However, with respect to Mr. Reedy, if Mr. Reedy’s employment is terminated due to his retirement, Mr. Reedy may require Michael Foods Investors to purchase his units after he turns age 65. Michael Foods Investors has the right to purchase all or a portion of an executive’s units if an executive’s employment is terminated or that executive is deemed to be engaging in certain competitive activities. However, with respect to Mr. Reedy, if Mr. Reedy’s employment is terminated due to retirement, Michael Foods Investors will have the right to purchase his units only after Mr. Reedy turns 65. However, if Michael Foods Investors elects or is required to purchase any units pursuant to the call and put options described in the preceding sentences, and that payment would result in a violation of law applicable to Michael Foods Investors or a default under certain of its financing arrangements, Investors may make the portion of the cash payment so affected by the delivery of preferred units of Michael Foods Investors with a liquidation preference equal to the amount of the cash payment affected.

In addition, each management stock purchase and unit subscription agreement contains customary representations, warranties and covenants made by the respective executive or party thereto.

Management Agreement

Pursuant to the management agreement entered into in connection with the transactions, THL Managers V, LLC, an affiliate of Thomas H. Lee Partners, L.P., renders to Michael Foods and each of its subsidiaries, certain advisory and consulting services. In consideration of those services, we pay to THL Managers V, LLC semi-annually an aggregate per annum management fee equal to the greater of:

• $1,500,000; or

• An amount equal to 1.0% of our consolidated earnings before interest, taxes, depreciation and amortization for that fiscal year, but before deduction of any such fee.

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We also indemnify THL Managers V, LLC and its affiliates from and against all losses, claims, damages and liabilities arising out of, or related to, the performance by THL Managers V, LLC of the services pursuant to the management agreement.

Policies and Procedures for Reviewing Related Party Transactions

We have not adopted any written policies or procedures governing the review, approval or ratification of related party transactions. However, our Board of Directors reviews, approves or ratifies, when necessary, all transactions with related parties. The related party transactions described herein were entered into as part of the Merger. Such agreements have not been amended since the Merger. We did not enter into any new related party transactions during 2007.

ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) was our principal accountant for the years ended December 29, 2007 and December 30, 2006. Total fees paid to PricewaterhouseCoopers for audit services rendered during 2007 and 2006 were $370,000 and $354,000, respectively.

Audit-Related Fees

Total fees paid to PricewaterhouseCoopers for audit-related services rendered during 2007 and 2006 were $50,145 and $170,149, respectively, consisting primarily of consultation on matters related to proposed transactions, employee benefit plans, potential acquisitions and accounting consultation.

Tax Fees

Total fees paid to PricewaterhouseCoopers for tax services rendered during 2007 and 2006 were $100,075 and $116,250, respectively, related primarily to tax planning, compliance and consultation.

All Other Fees

There were no fees paid to PricewaterhouseCoopers under this category during 2007 or 2006.

Audit Committee Pre-Approval Policy

Under policies and procedures adopted by the audit committee of our Board of Directors, our principal accountant may not be engaged to provide non-audit services that are prohibited by law or regulation to be provided by it, nor may our principal accountant be engaged to provide any other non-audit service unless the audit committee or its Chairman pre-approve the engagement of our accountant to provide both audit and permissible non-audit services. If the Chairman pre-approves any engagement or fees, he is to make a report to the full audit committee at its next meeting. One hundred percent (100%) of all services provided by our principal accountant in 2007 were pre-approved by the audit committee or its Chairman.

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PART IV

ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following consolidated financial statements of the Company, and the related Report of Independent Registered Public Accounting Firm, are included in this report:

1. Financial Statements

MICHAEL FOODS, INC.

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 29, 2007 and December 30, 2006

Consolidated Statements of Earnings for the fiscal years ended December 2007, 2006 and 2005

Consolidated Statements of Shareholder’s Equity and Comprehensive Income for the fiscal years ended December 2007, 2006 and 2005

Consolidated Statements of Cash Flows for the fiscal years ended December 2007, 2006 and 2005

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

The following financial statement schedules are included in this report and should be read in conjunction with the financial statements and Report of Independent Registered Public Accounting Firm referred to above:

Michael Foods, Inc. and Subsidiaries—Valuation and Qualifying Accounts

All other schedules are omitted, as the required information is not applicable or the information is presented in the financial statements or related notes.

3. Exhibits

Reference is made to Item 15 (b) for exhibits filed with this form. Exhibits 10.3, 10.4, 10.5, 10.6, 10.7 and 10.19 are management contracts. Exhibits 10.13, 10.14, 10.15, 10.16, 10.17, 10.18, 10.28, 10.29, 10.30 and 10.31 are compensatory plans.

(b) Exhibits and Exhibit Index

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated October 10, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co., M-Food Holdings, Inc. and certain shareholders of M-Foods Holdings, Inc. (1)
2.2	Letter Agreement, Amending Merger Agreement dated October 17, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co. and M-Foods Holdings, Inc. (6)
2.3	Letter Agreement, Amending Merger Agreement dated October 24, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co. and M-Foods Holdings, Inc. (6)
2.4	Letter Agreement, Amending Merger Agreement dated November 17, 2003, by and among M-Foods Investors, LLC, THL Food Products Holdings Co., THL Food Products Co. and M-Foods Holdings, Inc. (6)
3.1	Amended and Restated Certificate of Incorporation of Michael Foods, Inc. (f/k/a M-Foods Holdings, Inc.) (2)

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Exhibit No.	Description
3.2	Certificate of Merger of THL Food Products Co. with and into M-Foods Holdings, Inc., dated November 20, 2003 (2)
3.3	Agreement and Plan of Merger, dated November 20, 2003, by and among M-Foods Holdings, Inc. and Michael Foods, Inc. (2)
3.4	Certificate of Merger of Michael Foods, Inc. with and into M-Foods Holdings, Inc., dated November 20, 2003 (2)
3.5	Bylaws of Michael Foods, Inc. (f/k/a M-Foods Holdings, Inc.) (2)
4.1	Indenture, dated March 27, 2001, between Michael Foods Acquisition Corp. and BNY Midwest Trust Company, as trustee (3)
4.2	Supplemental Indenture, dated as of April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc., Michael Foods of Delaware, Inc., Northern Star Co., Minnesota Products, Inc., Farm Fresh Foods of Nevada, Inc., Crystal Farms Refrigerated Distribution Company, WFC, Inc., Wisco Farm Cooperative, M. G. Waldbaum Company, Papetti’s Hygrade Egg Products, Inc., Casa Trucking, Inc., Papetti Electroheating Corporation, Kohler Mix Specialties, Inc., Midwest Mix, Inc., Kohler Mix Specialties of Connecticut, Inc. and BNY Midwest Trust Company, as trustee (3)
4.3	Fourth Supplemental Indenture, dated as of October 31, 2003, by and among Michael Foods, Inc. and BNY Midwest Trust Company (2)
4.4	Collateral Pledge and Security Agreement, dated March 27, 2001, between Michael Foods Acquisition Corp., and Banc of America Securities, LLC and Bear, Stearns & Co. and BNY Midwest Trust Company as collateral agent and securities intermediary (3)
4.5	Indenture, dated November 20, 2003, among Michael Foods, Inc., the Guarantors party thereto and Wells Fargo Bank Minnesota, National Association, as trustee (2)
4.6	Registration Rights Agreement, dated November 20, 2003, among Michael Foods, Inc., the Subsidiary Guarantors party thereto and Banc of America Securities LLC, Deutsche Bank Securities Inc. and UBS Securities LLC (2)
10.1	Credit Agreement dated as of November 20, 2003, among THL Food Products Co., as Borrower, THL Food Products Holding Co., Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, the other lenders party thereto, Banc of America Securities LLC and Deutsche Bank Securities Inc., as Joint Lead Arrangers and Joint Book Managers, Deutsche Bank Securities Inc. and UBS Securities LLC, as Co-Syndication Agents, and General Electric Capital Corporation and Cooperative Centrale Raiffeisen—Boerenleenbank B.A., “Rabobank International,” New York Branch, as Co-Documentation Agents (2)
10.2	Senior Unsecured Term Loan Agreement dated as of November 20, 2003, among THL Food Products Co., as Borrower, THL Food Products Holding Co., Bank of America, N.A., as Administrative Agent, the lenders party thereto, Bank of America Securities LLC and Deutsche Bank Securities, Inc., as Joint Lead Arrangers and Joint Book Managers, and Deutsche Bank Securities Inc. and UBS Securities LLC, as Co-Syndication Agents (2)
10.3	Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and Gregg A. Ostrander (6)
10.4	Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and John D. Reedy (6)
10.5	Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and James D. Clarkson (6)

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Exhibit No.	Description
10.6	Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and James Mohr (6)
10.7	Employment Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and Max R. Hoffmann (6)
10.8	Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and Gregg A. Ostrander (6)
10.9	Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and John D. Reedy (6)
10.10	Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and James D. Clarkson (6)
10.11	Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and James Mohr (6)
10.12	Senior Management Unit Subscription Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and Max R. Hoffmann (6)
10.13	Stock Option Agreement, dated November 20, 2003, between Gregg A. Ostrander and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (6)
10.14	Stock Option Agreement, dated November 20, 2003, between John D. Reedy and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (6)
10.15	Stock Option Agreement, dated November 20, 2003, between James D. Clarkson and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (6)
10.16	Stock Option Agreement, dated November 20, 2003, between James Mohr and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (6)
10.17	Stock Option Agreement, dated November 20, 2003, between Max R. Hoffmann and M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) (6)
10.18	M-Foods Holdings, Inc. Amended and Restated 2003 Stock Option Plan (9)
10.19	Management Agreement, dated November 20, 2003, by and among Michael Foods, Inc. and THL Managers V, LLC (6)
10.20	Securityholders Agreement, dated November 20, 2003, between Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) and the other parties thereto (6)
10.21	Amended and Restated Limited Liability Company Agreement of Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC), dated November 20, 2003, between THL-MF Investors, LLC and the other parties thereto (6)
10.22	Subscription and Share Purchase Agreement, dated November 20, 2003, between M-Foods Holdings, Inc. (formerly known as THL Food Products Holding Co.) and Michael Foods Investors, LLC, (f/k/a THL-MF Investors, LLC) (6)
10.23	Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation and A&A Urban Renewal, relating to the lease of a facility located at 100 Trumbull St., Elizabeth, NJ (4)
10.24	Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation, and Papetti Holding Company, et al., relating to the lease of a facility located at 877-879 E. North Ave., Elizabeth, NJ (4)
10.25	Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation, and Papetti Holding Company, relating to the lease of a facility located at 847-855 E. North Ave., Elizabeth, NJ (4)

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Exhibit No.	Description
10.26	Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc. as successor to Michael Foods, Inc., a Delaware corporation, and Jersey Pride Urban Renewal, relating to the lease of a facility located at One Papetti Plaza, Elizabeth, NJ (4)
10.27	North Carolina State University Consolidated, Restated and Amended License Agreement, dated June 9, 2000, by and between North Carolina State University and the Company (5)
10.28	Form of Stock Option Agreement pursuant to the M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) 2003 Stock Option Plan (6)
10.29	M-Foods Holdings, Inc. (f/k/a THL Food Products Holding Co.) Deferred Compensation Plan, dated November 20, 2003 (6)
10.30	Michael Foods, Inc. Executive Officers Incentive Plan (6)
10.31	Michael Foods, Inc. Senior Management, Officers and Key Employees Incentive Plan (6)
10.32	Amendment No. 1 to the Senior Unsecured Term Loan Agreement dated as of September 17, 2004, among Michael Foods, Inc., M-Foods Holdings, Inc., the banks, financial institutions and other institutional lender parties to the Senior Unsecured Term Loan Agreement and Bank of America, N.A., as administrative agent (7)
10.33	Amendment No. 1 to Credit Agreement dated as of September 17, 2004, among Michael Foods, Inc., M-Foods Holdings, Inc., the banks, financial institutions and other institutional lender parties to Credit Agreement and Bank of America, N.A., as administrative agent (7)
10.34	Amendment No. 2 to Credit Agreement dated as of May 18, 2005, among Michael Foods, Inc., M-Foods Holdings, Inc., the banks, financial institutions and other institutional lender parties to Credit Agreement and Bank of America, N.A., as administrative agent (8)
10.35	Amendment No. 3 to Credit Agreement dated as of November 22, 2005, among Michael Foods, Inc., M-Foods Holdings, Inc., the banks, financial institutions and other institutional lender parties to Credit Agreement and Bank of America, N.A., as administrative agent (9)
10.36	First Amendment, dated as of September 30, 2006, to Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation and A&A Urban Renewal, relating to the lease of a facility located at 100 Trumbull St., Elizabeth, NJ (11)
10.37	First Amendment, dated as of September 30, 2006, to Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation, and Papetti Holding Company, et al., relating to the lease of a facility located at 877-879 E. North Ave., Elizabeth, NJ (11)
10.38	First Amendment, dated as of September 30, 2006, to Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc., as successor to Michael Foods, Inc., a Delaware corporation, and Papetti Holding Company, relating to the lease of a facility located at 847-855 E. North Ave., Elizabeth, NJ (11)
10.39	First Amendment, dated as of September 30, 2006, to Lease, dated as of February 26, 1997, by and between Michael Foods of Delaware, Inc. as successor to Michael Foods, Inc., a Delaware corporation, and Jersey Pride Urban Renewal, relating to the lease of a facility located at One Papetti Plaza, Elizabeth, NJ (11)
10.40	Employment Agreement, dated as of the 2nd day of April, 2007, by and among Michael Foods, Inc. and David S. Johnson (12)
10.41	First Amendment to Michael Foods Investors, LLC Amended and Restated Limited Liability Company Agreement (12)
10.42	First Amendment to Michael Foods Investors, LLC Securityholders Agreement (12)
10.43	Senior Management Unit Subscription Agreement dated as of April 2, 2007, by and among Michael Foods Investors, LLC and David S. Johnson
10.44	David S. Johnson Indemnity Agreement
12.1	Computation of ratio of earnings to fixed charges
14.1	Business Conduct Policy (10)
21.1	Subsidiaries of Michael Foods, Inc.

41

31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer

(1) Incorporated by reference from the Predecessor’s current report on Form 8-K filed with the Commission on October 16, 2003.

(2) Incorporated by reference from the Company’s Form S-4 Registration Statement (Registration No. 333-112714) filed with the Commission on February 11, 2004.

(3) Incorporated by reference from Amendment No. 1 to the Predecessor’s Form S-4 Registration Statement (Registration No. 333-63722) filed with the Commission on July 18, 2001.

(4) Incorporated by reference from the 2001 predecessor’s current report on Form 8-K filed with the Commission on November 22, 2000.

(5) Incorporated by reference from the 2001 predecessor’s quarterly report on Form 10-Q filed with the Commission on November 22, 2000.

(6) Incorporated by reference from the Company’s report on Form 10-K filed with the Commission on March 30, 2004.

(7) Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on September 22, 2004.

(8) Incorporated by reference from the Company’s current report on Form 8-K filed with the Commission on May 23, 2005.

(9) Incorporated by reference from the Company’s report on Form 10-K filed with the Commission on March 23, 2006.

(10) Incorporated by reference from the Company’s report on Form 10-K filed with the Commission on March 29, 2005.

(11) Incorporated by reference from the Company’s report on Form 10-K filed with the Commission on March 29, 2007.

(12) Incorporated by reference from the Company’s report on Form 10-Q filed with the Commission on May 14, 2007.

42

SCHEDULE II

MICHAEL FOODS, INC. AND SUBSIDIARIES

(A wholly owned subsidiary of M-Foods Holdings, Inc.)

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Column A	Column B		Column C		Column D		Column E
Description	Balance at Beginning of Period		Additions		Deductions		Balance at End of Period
Allowance for Doubtful Accounts
2005	$	4,682	$	0	$	358	$	4,324
2006	$	4,324	$	0	$	174	$	4,150
2007	$	4,150	$	0	$	230	$	3,920

43

SIGNATURES

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

MICHAEL FOODS, INC.
Date: March 24, 2008	By:	/S/ DAVID S. JOHNSON
		David S. Johnson
		(Chief Executive Officer, President and Director)
Date: March 24, 2008	By:	/s/ MARK W. WESTPHAL
		Mark W. Westphal
		(Senior Vice President, Chief Financial Officer, and Principal Accounting Officer)

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

/s/ TODD M. ABBRECHT	March 24, 2008
Todd M. Abbrecht
(Director)
/s/ ANTHONY J. DINOVI	March 24, 2008
Anthony J. DiNovi
(Director)
/s/ JEROME J. JENKO	March 24, 2008
Jerome J. Jenko
(Director)
/s/ CHARLES D. WEIL	March 24, 2008
Charles D. Weil
(Director)
/s/ KENT R. WELDON	March 24, 2008
Kent R. Weldon
(Director)
/s/ GREGG A. OSTRANDER	March 24, 2008
Gregg A. Ostrander
(Executive Chairman)

44

MICHAEL FOODS, INC.

(A Wholly Owned Subsidiary of M-Foods Holdings, Inc.)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder

of Michael Foods, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15 (a)(1) present fairly, in all material respects, the financial position of Michael Foods, Inc. and its subsidiaries (the Company), a wholly owned subsidiary of M-Foods Holdings, Inc., at December 29, 2007, December 30, 2006 and December 31, 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2007, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note C to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007.

/s/ PricewaterhouseCoopers LLP

Minneapolis, MN

March 24, 2008

45

MICHAEL FOODS, INC.

(A Wholly Owned Subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED BALANCE SHEETS

For the Years Ended December 29, 2007 and December 30, 2006

(In Thousands, Except Share and Per Share Data)

	2007		2006
ASSETS
Current Assets
Cash and equivalents	$	30,077	$	21,576
Accounts receivable, less allowances		132,922		105,305
Inventories		114,758		103,420
Prepaid expenses and other		7,711		8,201
Total Current Assets		285,468		238,502
Property, Plant And Equipment
Land		4,044		4,044
Buildings and improvements		123,839		118,890
Machinery and equipment		333,755		301,656
		461,638		424,590
Less accumulated depreciation		222,772		165,527
		238,866		259,063
Other Assets
Goodwill		518,264		521,435
Intangible assets, net		201,449		216,680
Other assets		29,814		28,083
		749,527		766,198
	$	1,273,861	$	1,263,763
LIABILITIES AND SHAREHOLDER’S EQUITY
Current Liabilities
Current maturities of long-term debt	$	2,479	$	837
Accounts payable		95,419		72,246
Accrued liabilities
Compensation		20,651		11,894
Customer programs		40,094		39,766
Other		32,244		35,401
Total Current Liabilities		190,887		160,144
Long-term debt, less current maturities		599,304		644,957
Deferred income taxes		102,284		117,575
Other long-term liabilities		21,297		16,293
Commitment and contingencies		—		—
Shareholder’s Equity
Common stock, $0.01 par value, 3,000 shares authorized, issued and outstanding in 2007 and 2006		—		—
Additional paid-in capital		265,819		260,935
Retained earnings		88,393		61,466
Accumulated other comprehensive income		5,877		2,393
		360,089		324,794
	$	1,273,861	$	1,263,763

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

46

MICHAEL FOODS, INC.

(A Wholly Owned Subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF EARNINGS

For the Years Ended December 29, 2007, December 30, 2006 and December 31, 2005

(In Thousands)

	2007		2006		2005
Net sales	$	1,467,762	$	1,247,348	$	1,242,498
Cost of sales		1,223,416		1,016,832		1,005,418
Gross profit		244,346		230,516		237,080
Selling, general and administrative expenses		147,375		133,287		130,833
Plant closing expenses		1,525		3,139		—
Operating profit		95,446		94,090		106,247
Interest expense, net		52,490		55,928		47,119
Loss on early extinguishment of debt		—		—		5,548
Earnings before income taxes and equity in losses of unconsolidated subsidiary		42,956		38,162		53,580
Income tax expense		15,391		16,294		14,266
Earnings before equity in losses of unconsolidated subsidiary		27,565		21,868		39,314
Equity in losses of unconsolidated subsidiary		—		2,713		455
Net earnings	$	27,565	$	19,155	$	38,859

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

47

MICHAEL FOODS, INC.

(A Wholly Owned Subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

AND COMPREHENSIVE INCOME

For the Years Ended December 29, 2007, December 30, 2006 and December 31, 2005

(In Thousands)

	Common Stock
	Shares Issued	Amount		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income			Total Shareholder’s Equity
Balance at January 1, 2005	3	$	—	$	254,617	$	6,751		$	(3,975	)				$	257,393
Net earnings	—		—		—		38,859			—		$	38,859
Interest rate cap	—		—		—		—			64			64
Foreign currency translation adjustment	—		—		—		—			590			590
Futures gain	—		—		—		—			7,109			7,109
Comprehensive income	—		—		—		—			—		$	46,622			46,622
Balance at December 31, 2005	3		—		254,617		45,610			3,788						304,015
Adoption of Staff Accounting Bulletin No. 108 (net of $2,021 of income tax)	—		—		—		(3,299	)		—			—			(3,299	)
Capital invested by parent	—		—		4,909		—			—			—			4,909
Stock option exercise	—		—		766		—			—			—			766
Non-cash stock option compensation	—		—		643		—			—			—			643
Net earnings	—		—		—		19,155			—		$	19,155
Interest rate cap	—		—		—		—			559			559
Foreign currency translation adjustment	—		—		—		—			(1,012	)		(1,012	)
Futures loss	—		—		—		—			(942	)		(942	)
Comprehensive income	—		—		—		—			—		$	17,760			17,760
Balance at December 30, 2006	3		—		260,935		61,466			2,393						324,794
Capital invested by parent	—		—		4,806		—			—			—			4,806
Non-cash stock option compensation	—		—		78		—			—			—			78
Adoption of FASB Interpretation No. 48	—		—		—		(638	)		—			—			(638	)
Net earnings	—		—		—		27,565			—		$	27,565
Foreign currency translation adjustment	—		—		—		—			3,124			3,124
Futures gain	—		—		—		—			360			360
Comprehensive income	—		—		—		—			—		$	31,049			31,049
Balance at December 29, 2007	3	$	—	$	265,819	$	88,393		$	5,877					$	360,089

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

48

MICHAEL FOODS, INC.

(A Wholly Owned Subsidiary of M-Foods Holdings, Inc.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 29, 2007, December 30, 2006 and December 31, 2005

(In Thousands)

	2007			2006			2005
Cash flow from operating activities:
Net earnings	$	27,565		$	19,155		$	38,859
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		59,712			59,305			54,531
Amortization of intangibles		15,331			15,553			15,561
Amortization of deferred financing costs		4,435			4,743			1,993
Write-off of assets related to plant closing		1,293			2,894			—
Write-off of Belgian joint venture		—			2,713			—
Write-off deferred financing costs		—			—			4,134
Deferred income taxes		(15,578	)		(15,530	)		(12,259	)
Preferred return on deferred compensation		1,300			1,204			968
Non-cash stock option compensation		78			643			—
Changes in operating assets and liabilities:
Accounts receivable		(26,551	)		(2,115	)		(1,348	)
Inventories		(9,833	)		(5,634	)		(6,678	)
Prepaid expenses and other		548			493			6,633
Accounts payable		20,597			2,872			3,532
Accrued liabilities		19,065			(9,530	)		(1,524	)
Net cash provided by operating activities		97,962			76,766			104,402
Cash flows from investing activities:
Capital expenditures		(38,120	)		(33,806	)		(40,690	)
Purchase of other assets		(102	)		(98	)		(817	)
Net cash used in investing activities		(38,222	)		(33,904	)		(41,507	)
Cash flows from financing activities:
Payments on revolving line of credit		(18,000	)		(1,200	)		—
Proceeds from revolving line of credit		18,000			1,200			—
Payments on long-term debt		(51,777	)		(64,070	)		(140,372	)
Proceeds from long-term debt		—			—			88,188
Proceeds from stock option exercise		—			766			—
Payments on stock option exercises/ share repurchases		(93	)		—			—
Additional capital invested by parent		500			—			—
Deferred financing costs		(162	)		(162	)		(378	)
Net cash used in financing activities		(51,532	)		(63,466	)		(52,562	)
Effect of exchange rate changes on cash		293			1			30
Net increase (decrease) in cash and equivalents		8,501			(20,603	)		10,363
Cash and equivalents at beginning of period		21,576			42,179			31,816
Cash and equivalents at end of period	$	30,077		$	21,576		$	42,179
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	45,383		$	51,448		$	47,693
Income taxes		22,618			26,101			30,387
Non-cash industrial revenue bond guarantees	$	6,000		$	—		$	10,250
Non-cash capital investment by parent		4,306			4,909			—

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

49

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

The Company is a diversified producer and distributor of food products in three areas—egg products, cheese and other dairy case products, and potato products.

Michael Foods, Inc. is a wholly-owned subsidiary of M-Foods Holdings, Inc. (“Holdings” or “Parent”). M-Foods Holdings, Inc. is a wholly-owned subsidiary of Michael Foods Investors, LLC, whose members include affiliates of Thomas H. Lee Partners L.P. and certain members of our management.

Principles of Consolidation and Fiscal Year

The consolidated financial statements include the accounts of Michael Foods, Inc. and all wholly and majority owned subsidiaries in which it has control. All significant intercompany accounts and transactions have been eliminated. The Company’s investments in non-controlled entities in which it has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest to December 31. The periods presented are as follows:

Fiscal year 2007 contained a fifty-two week period and ended December 29, 2007.

Fiscal year 2006 contained a fifty-two week period and ended December 30, 2006.

Fiscal year 2005 contained a fifty-two week period and ended December 31, 2005.

Use of Estimates

Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, related revenues and expenses and disclosure about contingent assets and liabilities at the date of the financial statements. Actual results could differ from the estimates used by management.

Cash and Equivalents

We consider all highly liquid temporary investments with original maturities of three months or less to be cash equivalents. Substantially all of our cash and equivalents are with one mutual fund family. At times, bank deposits may be in excess of federally insured limits.

Accounts Receivable

We grant credit to our customers in the normal course of business, but generally do not require collateral or any other security to support amounts due. Management performs on-going credit evaluations of customers. We maintain an allowance for potential credit losses based on historical write-off experience which, when realized, have been within management’s expectations. The allowance was $3,920,000 and $4,150,000 at December 29, 2007 and December 30, 2006, respectively.

Inventories

Inventories, other than flocks, are stated at the lower of cost (determined on a first-in, first-out basis) or market. Flock inventory represents the cost of purchasing and raising flocks to laying maturity, at which time their cost is amortized to operations over their expected useful lives of generally one to two years.

Inventories consisted of the following as of the years ended, (in thousands):

	2007		2006
Raw materials and supplies	$	20,225	$	18,485
Work in process and finished goods		67,340		62,220
Flocks		27,193		22,715
	$	114,758	$	103,420

50

Accounting for Hedging Activities

Certain of our operating segments enter into derivative instruments, such as corn, soybean meal, cheese and fuel futures that we believe provide an economic hedge of future transactions and are designated as cash flow hedges. As the commodities being hedged are either grain ingredients fed to our flocks, raw materials or production inputs, the changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of these items. In 2004, we entered into a 6% interest cap arrangement that corresponds with the interest payment terms on $210 million borrowed under the variable portion of our credit agreement for a one-year period starting in November 2004, then declining to $180 million for one year starting in November 2005. The interest cap arrangement expired in November 2006.

We actively monitor exposure to commodity price risks and use derivative commodity instruments to manage the impact of certain of these risks. We use derivatives, primarily futures contracts, only for the purpose of managing risks associated with underlying exposures. Our futures contracts are cash flow hedges of firm purchase commitments and anticipated production requirements, as they reduce our exposure to changes in the cash price of the respective items and generally extend for less than one year. We expect that within the next twelve months we will reclassify, as earnings, the amount recorded in accumulated other comprehensive income related to futures at year end.

We do not trade or use instruments with the objective of earning financial gains on the commodity price, nor do we use instruments where there are not underlying exposures. All derivatives are recognized at their fair value. The fair values at December 29, 2007 resulted in an asset of approximately $853,000 included in prepaid expenses and other current assets. As of December 29, 2007 we have a gain on corn and soybean meal futures contracts of $360,000 deferred as a component of Accumulated Other Comprehensive Gain or (Loss) (“AOCG” or “AOCL”) in the equity section of our balance sheet and a corresponding amount is recorded in other current assets or liabilities, as appropriate. The amounts deferred are subsequently recognized in cost of sales when the associated products are sold. The cost or benefit of contracts closed prior to the execution of the underlying purchase is deferred until the anticipated purchase occurs. As a result of the volatility of the markets, deferred gains and losses in AOCG or AOCL may fluctuate until the related contract is closed.

We document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategy for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedge transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness will be assessed. Both at the inception of the hedge and on an ongoing basis, we assess whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. If it is determined that a derivative ceases to be a highly effective hedge, the derivative expires or is sold, terminated or exercised or the forecasted transaction being hedged will no longer occur, we will discontinue hedge accounting, and any deferred gains or losses on the derivative instrument will be recognized in earnings during the period in which it no longer qualifies as a hedge. The amount of ineffectiveness, included in cost of sales, was immaterial for 2007, 2006 and 2005.

Property, Plant and Equipment

Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, principally on the straight-line basis. Estimated service lives range from 10-30 years for buildings and improvements and 3-15 years for machinery and equipment. Maintenance and repairs are charged to expense in the year incurred and renewals and betterments are capitalized. The costs and accumulated depreciation of assets sold or disposed of are removed from the accounts and the resulting gain or loss is reflected in earnings.

We capitalized $93,000, $803,000 and $461,000 of interest relating to the construction and installation of property, plant and equipment in 2007, 2006 and 2005, respectively.

Goodwill and Intangible Assets

We recognize the excess cost of an acquired entity over the net amount assigned to assets acquired, including intangible assets with indefinite lives, and liabilities 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 of 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 than the carrying value of the related asset.

51

Each segment’s share of goodwill as of the years ended, (in thousands):

	2007		2006
Egg Products	$	426,340	$	428,940
Crystal Farms		32,068		32,290
Potato Products		59,856		60,205
	$	518,264	$	521,435

The change in the carrying amount of goodwill for the period ended December 29, 2007 of $3,171,000 was due to the reversal of unrecognized tax benefits related to expiring statute of limitations.

We recognize an acquired intangible asset apart from goodwill whenever the asset arises from contractual or other legal rights, or whenever it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. An intangible asset other than goodwill is amortized over its estimated useful life unless that life is determined to be indefinite. Straight-line amortization reflects an appropriate allocation of the cost of intangible assets to earnings in proportion to the amount of economic benefit obtained by the Company in each reporting period. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows, and its carrying amount exceeds its fair value.

Our intangible assets as of the years ended, (in thousands):

	2007			2006
Amortized intangible assets, principally customer relationships	$	229,915		$	230,615
Accumulated amortization		(62,591	)		(47,960	)
		167,324			182,655
Indefinite lived intangible assets, trademarks		34,125			34,025
	$	201,449		$	216,680

The aggregate amortization expense in 2007, 2006, and 2005 was $15,331,000, $15,553,000, and $15,561,000, respectively. The estimated amortization expense for years 2008 through 2012 is as follows (in thousands):

2008	$	15,331
2009		15,331
2010		15,331
2011		15,331
2012		15,331

The above amortization expense forecast is an estimate. Actual amounts may change from such estimated amounts due to additional intangible asset acquisitions, potential impairment, accelerated amortization, or other events.

Deferred Financing Costs

Deferred financing costs are included in other assets and are being amortized using the effective interest rate method over the lives of the respective debt agreements. Our deferred financing costs are as follows for the years ended (in thousands):

	2007			2006
Deferred financing costs	$	31,597		$	31,435
Accumulated amortization		(18,707	)		(14,272	)
	$	12,890		$	17,163

52

Foreign Joint Ventures and Currency Translation

We have invested in foreign joint ventures in Europe and Canada related to our Egg Products Division. The financial statements for the Canadian entity are measured in the local currency and then translated into U.S. dollars. The balance sheet accounts are translated using the current exchange rate at the balance sheet date and the operating results are translated using the average rates prevailing throughout the reporting period. Accumulated translation gains or losses are recorded in AOCG or AOCL and are included as a component of comprehensive income. We own 67% of the Canadian joint venture and, therefore, its financial statements are included in our consolidated financial statements.

In September 2006 we evaluated our investment in Belovo S.A. and, based on continuing losses and the financial position of Belovo, recorded a valuation adjustment on the investment. In September 2006 we recorded approximately $900,000 of losses related to Belovo’s 2006 operations and we adjusted the value of our investment in Belovo to zero by recording approximately $1,800,000 of a valuation adjustment. In September 2007 Belovo’s management completed a recapitalization of Belovo S. A. As of December 29, 2007 we held a 12.05% ownership in the successor entity BNL Food Investments Limited.

Revenue Recognition

Sales are recognized when goods are received by the customer and are recorded net of estimated customer programs and returns. In accordance with Staff Accounting Bulletin (“SAB”) 104, we recognize revenue when all of the following conditions have been met:

(1) Persuasive evidence of an arrangement exists—A revenue transaction is initiated and evidenced by receipt of a purchase order from our customer.

(2) Delivery has occurred or services have been rendered—An invoice is created from the bill of lading at our shipping plant and revenue is recognized when proof of delivery of the receipt of goods is received from our carriers.

(3) The seller’s price to the buyer is fixed or determinable—Our sales invoice includes an agreed upon selling price.

(4) Collectibility is reasonably assured—We have a documented credit and collection policy and procedure manual for determining collectibility from our customers.

Our shipping policy is FOB destination; therefore, title to goods remains with us until delivered by the carrier to our customer.

Only a minor portion of our sales result in customer returns. An accrual is estimated based on historical trends and reviewed periodically for adequacy. Revenue is appropriately reduced to reflect estimated returns.

We are able to make a reasonable estimate of customer returns due to the fact that our sales are not susceptible to significant external factors, the return period is short, we have no history of not being able to estimate this accrual and our sales are high volume and homogeneous in nature.

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 estimate this accrual.

Advertising

Advertising costs are expensed as incurred. Our advertising expense in 2007, 2006, and 2005 was $11,406,000, $12,449,000, and $12,083,000, respectively.

Income 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.

Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial reporting amounts and the tax bases of existing assets and liabilities based on currently enacted tax laws and tax rates in effect for the periods in

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which the differences are expected to reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not expected to be realized. We are included in a consolidated federal income tax return with our Parent. State income taxes are generally filed on either a combined or separate company basis.

We apply the interpretations prescribed by FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) in accounting for the uncertainty in income taxes recognized in our consolidated financial statements. FIN 48 provides guidance for the recognition and measurement in financial statements for uncertain tax positions taken or expected to be taken in a tax return.

The evaluation of a tax position in accordance with FIN 48 is a two-step process, the first step being recognition. We determine whether it is more-likely-than-not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on only the technical merits of the position. If a tax position does not meet the more-likely-than-not threshold, the benefit of that position is not recognized in our financial statements. The second step is measurement. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority.

Fair Value of Financial Instruments

We consider that the carrying amount of financial instruments, including accounts receivable, accounts payable, accrued liabilities and notes payable, approximates fair value. Interest on our senior credit facility is payable at rates which approximate fair value. The fair value of the credit facility approximated the carrying value at the end of the 2007. The fair value of the senior notes, based on the quoted market price for the same or similar issues of debt at the end of 2007, would be approximately $148,500,000, compared to its carrying value of $150,050,000.

Comprehensive Income

Total comprehensive income is disclosed in the consolidated statements of shareholder’s equity and included in net earnings and other comprehensive income, which is comprised of unrealized gains (losses) on cash flow hedges and foreign currency translation adjustments.

The components of and changes in accumulated other comprehensive income, net of taxes, were as follows (in thousands):

	Cash Flow Hedges			Foreign Currency Translation			Interest Rate Cap			Total AOCG/AOCL
Balance at January 1, 2005	$	(6,167	)	$	2,815		$	(623	)	$	(3,975	)
Foreign currency translation adjustment		—			590			—			590
Change due to cash flow hedges		7,109			—			—			7,109
Interest rate cap		—			—			64			64
Balance at December 31, 2005		942			3,405			(559	)		3,788
Foreign currency translation adjustment		—			(1,012	)		—			(1,012	)
Change due to cash flow hedges		(942	)		—			—			(942	)
Interest rate cap		—			—			559			559
Balance at December 30, 2006		—			2,393			—			2,393
Foreign currency translation adjustment		—			3,124			—			3,124
Change due to cash flow hedges		360			—			—			360
Balance at December 29, 2007	$	360		$	5,517		$	—		$	5,877

Recent Accounting Pronouncements

In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. The Company adopted SAB 108, to adjust for the cumulative effect of not recognizing deferred financing costs under the effective interest method, by using the cumulative effect transition method provided for in SAB 108 as of January 1, 2006. The impact of adopting SAB 108 reduced our retained earnings by $3.3 million effective January 1, 2006. This impact represented a reduction in deferred financing costs of $5.3 million offset by the income tax effect of $2.0 million.

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In September 2006, the Financial Accounting Standards Board “FASB” issued FAS No. 157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. FAS 157 is effective for us on January 1, 2008. We do not expect the adoption of FAS 157 to have a material impact on our financial position or operating results.

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement 115 (“FAS 159”). FAS 159 allows entities to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis under the fair value option. FAS 159 is effective for fiscal years beginning after November 15, 2007. The company is currently evaluating the impact of this statement, but we believe it will not have a material impact on our consolidated financial position or results of operations.

In December 2007, the FASB issued FAS No. 141R, Business Combinations (“FAS 141R”), and FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“FAS 160”). These new standards will significantly change the accounting for and reporting of business combinations and noncontrolling (minority) interest transactions completed after January 1, 2009. FAS 141R and FAS 160 are required to be adopted simultaneously and are effective for us beginning January 1, 2009. Early adoption is prohibited. We do not expect the adoption of FAS 141R and FAS 160 to have an impact on the consolidated financial statements; however, the adoption will impact the accounting for any business combinations completed after January 1, 2009.

There were no other new accounting pronouncements issued during the year ended December 29, 2007 that are expected to have a material impact on our financial position, operating results or disclosures.

NOTE B—DEBT

Long-term debt consisted of the following as of the years ended, (in thousands):

	2007		2006
Revolving lines of credit	$	—	$	—
Senior term loan		427,300		477,300
Senior subordinated notes payable		150,050		150,050
Guaranteed bonds		15,925		10,250
Capital leases		5,708		5,657
Other		2,800		2,537
		601,783		645,794
Less current maturities		2,479		837
	$	599,304	$	644,957

In November 2003, we entered into a senior credit agreement, which consisted of a $100,000,000 revolving credit facility and $495,000,000 senior term loan. The revolving credit facility is due November 2009 and the senior term loan is due in November 2010. As amended in 2005, the credit agreement now provides $640,000,000. Our senior credit facility bears interest at a floating base rate plus an applicable margin, as defined in the agreement (effective rate of 6.85% at December 29, 2007). At December 29, 2007, approximately $6,899,000 was used under the revolving line of credit for letters of credit.

In November 2003, we also issued $150,000,000 of 8.0% senior subordinated notes due April 2013, which are subordinated to the senior credit agreement. In November 2003, we also issued a $135,000,000 senior unsecured term loan that was due in November 2011, but was repaid in November 2005, at which time the senior unsecured term loan was terminated. In conjunction with the repayment of the senior unsecured term loan we incurred a $1,350,000 prepayment penalty and wrote-off $4,134,000 of debt financing costs, which along with other costs were included in the $5,548,000 charged against the statement of earnings in 2005.

The revolving credit facility and senior term loan are collateralized by substantially all of our assets. The revolving credit loan, the term loan, and senior subordinated notes contain restrictive covenants, including restrictions on dividends and

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distributions to shareholders and unit holders, a maximum leverage ratio, and a minimum interest coverage ratio, in addition to limitations on additional indebtedness and liens. Covenants related to operating performance are primarily based on earnings before interest expense, income taxes, and depreciation and amortization expense. Our failure 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 debt covenants limit our discretion in the operation of our businesses. We were in compliance with all of the financial covenants in the credit agreement and the indenture as of December 29, 2007. In addition, the revolving credit and term loan agreements include guarantees by substantially all of our domestic subsidiaries.

On September 30, 2005, a $10,250,000 bond financing was completed by the City of Wakefield, Nebraska at an annual interest rate of 7.6%, with such proceeds to be used for the construction of a wastewater treatment facility. In May 2007, a $6,000,000 bond financing was completed at an annual interest rate of 8.22%, with such proceeds to also be used for the completion of construction of the wastewater treatment facility. The wastewater treatment facility became operational in early 2008. We have guaranteed the principal and interest payments related to these bonds, which mature September 15, 2017. These bonds were recorded as long-term debt on our balance sheet in accordance with current accounting literature, FASB Interpretation No.45. The remaining other debt consists primarily of funded indebtedness to the partner in our joint venture -Trilogy Egg Products, Inc.

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.

Aggregate maturities of our long-term debt and capital leases are as follows (in thousands):

Year Ending,	Capital Leases		Debt		Total
2008	$	1,697	$	1,097	$	2,794
2009		1,647		3,389		5,036
2010		1,608		426,380		427,988
2011		1,503		1,433		2,936
2012		102		1,495		1,597
Thereafter		—		162,281		162,281
		6,557		596,075		602,632
Less: Amounts representing interest		849		—		849
	$	5,708	$	596,075	$	601,783

The components of net interest expense for the years ended follows (in thousands):

	2007			2006			2005
Interest expense	$	49,624		$	54,036		$	46,859
Amortization of deferred financing costs		4,435			4,743			1,993
Capitalized interest		(93	)		(803	)		(461	)
Interest income		(1,476	)		(2,048	)		(1,272	)
Interest expense, net	$	52,490		$	55,928		$	47,119

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NOTE C—INCOME TAXES

Income tax expense consists of the following for the years ended (in thousands):

	2007			2006			2005
Current:
Federal	$	27,831		$	28,908		$	28,621
State		3,138			2,916			2,264
		30,969			31,824			30,885
Deferred:
Federal		(14,125	)		(15,536	)		(13,548	)
Foreign		161			1,794			(2,109	)
State		(1,614	)		(1,788	)		(962	)
		(15,578	)		(15,530	)		(16,619	)
	$	15,391		$	16,294		$	14,266

The components of the deferred tax assets and (liabilities) associated with the cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes follows for the years ended (in thousands):

	2007			2006
Current deferred income taxes:
Flock inventories	$	(5,479	)	$	(5,776	)
Other, primarily accrued expenses		6,426			4,796
Total current deferred income taxes		947			(980	)
Non-current deferred income taxes:
Depreciation	$	(29,600	)	$	(41,834	)
Customer relationships		(62,746	)		(68,496	)
Trademarks and licenses		(11,479	)		(11,426	)
Deferred compensation		6,495			6,008
Net operating loss carryforwards		2,056			2,497
Other		(1,939	)		329
		(97,213	)		(112,922	)
Valuation allowance		(5,071	)		(4,653	)
Total non-current deferred income taxes		(102,284	)		(117,575	)
Total deferred income taxes	$	(101,337	)	$	(118,555	)

A valuation allowance was recorded in 2006 against the deferred tax assets of certain of our foreign joint ventures and subsidiaries. The valuation allowance was recorded based on management’s judgment that it is more likely than not that the benefits of those deferred tax assets will not be realized in the future. At the end of 2007 that determination had not changed. The 2007 change in the valuation allowance relating to those deferred tax assets was due to a combination of currency rate fluctuations during 2007 and a decrease in tax rate used to calculate the deferred tax assets relating to our foreign subsidiary.

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The following is a reconciliation of the federal statutory income tax rate to the consolidated effective tax rate based on earnings before equity in losses of unconsolidated subsidiary for the years ended:

	2007		2006		2005
Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal impact	2.3		1.9		1.6
Qualified production activities deduction	(3.8	)	(2.1	)	(1.5	)
Other permanent differences	.5		(0.7	)	(0.6	)
Tax benefit from change in tax rate on cumulative temporary differences	—		—		(7.5	)
Valuation allowance	.6		8.8		—
Other	1.2		(0.2	)	(0.4	)
	35.8	%	42.7	%	26.6	%

The American Jobs Creation Act of 2004 created a new tax deduction equal to the applicable percentage of the qualified production activities income for tax years beginning after December 31, 2004. The applicable percentage for 2005 and 2006 is 3%, for 2007, 2008 and 2009 the rate is at 6%, and 9% thereafter.

The tax rate used to calculate the tax expense or benefit on the cumulative temporary differences between the tax bases of the assets and liabilities and their carrying amounts for financial reporting purposes was reduced in 2005. This reduction was due to a change in the state tax rate as determined in the fourth quarter of 2005.

We have foreign net operating loss carryforwards of approximately $6,139,000 which expire from 2009 through 2016.

Accounting for Uncertainty in Income Taxes

We adopted the provisions of FIN 48 effective January 1, 2007. As a result of the adoption of FIN 48, we recognized a charge of approximately $0.7 million to the January 1, 2007 retained earnings balance.

Following is a roll-forward of our 2007 unrecognized tax benefits (in thousands):

Total unrecognized tax benefits at adoption	$	7,654
Gross increase for tax positions taken in current period		430
Reductions as a result of a lapse of applicable statute of limitations		(3,414	)
Total unrecognized tax benefits at end of period	$	4,670

The total liabilities associated with unrecognized tax benefits that, if recognized, would impact the effective tax rates were $3,000,000 and $3,300,000 at January 1, 2007 and December 29, 2007, respectively.

The company accrues interest and penalties associated with unrecognized tax benefits as interest expense in the consolidated statement of earnings, and the corresponding liability in accrued interest in the consolidated balance sheet. The expense for interest and penalties reflected in the consolidated statement of earnings for 2007 was approximately $182,000. The corresponding liabilities in the consolidated balance sheets were approximately $1,700,000 at January 1, 2007 and December 29, 2007.

Included in the balance of unrecognized tax benefits for 2007 are tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. We estimate that it is reasonably possible that $400,000 to $800,000 of unrecognized tax benefits could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised of items related to state income tax audits and expiring statutes.

Our uncertain tax positions are related to tax years that remain subject to examination. As of December 29, 2007, the United States and Minnesota jurisdictions remain subject to examination for tax years 2004 through 2007 and the New Jersey jurisdiction for tax years 2000 through 2007. We are currently under examination by the Internal Revenue Service for tax years 2005 and 2006.

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NOTE D—EMPLOYEE RETIREMENT PLAN

Employees who meet certain service requirements are eligible to participate in a defined contribution retirement plan. We match up to 4% of each participant’s eligible compensation. Our matching contributions for the years 2007, 2006 and 2005 were $3,058,000, $2,911,000, and $2,932,000, respectively.

We also contribute to one union defined contribution retirement plan which totaled $44,000, $49,000, and $31,000 for the years ended 2007, 2006 and 2005.

NOTE E—RELATED PARTY TRANSACTIONS

Pursuant to a management agreement with THL Managers V, LLC, an affiliate of Thomas H. Lee Partners, L.P., we pay them an annual fee of $1,500,000 or 1.0% of consolidated earnings before interest, taxes, depreciation and amortization, whichever is greater. The management fee for 2007, 2006 and 2005 was $1,759,080, $1,808,650 and $1,805,850, respectively, and was included in selling, general and administrative expenses.

NOTE F—COMMITMENTS AND CONTINGENCIES

Lease Commitments

Our corporate offices and several of our manufacturing facilities are leased under operating leases expiring at various times through February 2017. The leases provide that real estate taxes, insurance, and maintenance expenses are our obligations. In addition, we lease some of our transportation and manufacturing equipment under operating leases.

Rent expense, including real estate taxes and maintenance expenses, was approximately $8,803,000, $7,133,000 and $6,380,000 for the years ended 2007, 2006 and 2005, respectively.

The following is a schedule of minimum rental commitments for base rent for the years ending (in thousands):

2008	$	6,462
2009		6,541
2010		4,900
2011		4,260
2012		2,306
Thereafter		4,210
	$	28,679

Debt Guarantees

We have guaranteed the repayment of certain industrial revenue bonds used for the expansion of the wastewater treatment facilities of several municipalities where we have manufacturing facilities. The repayment of these bonds is funded through the wastewater treatment charges paid by 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 29, 2007 was approximately $21,098,000, of which $15,925,000 was included our debt balance ($1.1 million is included in current maturities and $14.8 million included in long-term debt) (see Note B).

Procurement Contracts

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 49% 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 $139 million in 2008, $136 million in 2009, $91 million in 2010, and $21 million in 2011, and that the 2008 amount will account for approximately 39% of our total egg purchases this year. In addition, we have contracts to purchase potatoes that expire in 2008. These contracts will supply approximately 49% of the Potato Products Division’s estimated raw potato needs in 2008. Three potato suppliers are each expected to provide more than 10% of our 2008 potato requirements.

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Fuel Commitments

We partially mitigate some of our natural gas requirements for producing our products by fixing the price for a portion of our natural gas usage. The monthly purchases for natural gas have been made for January through March, November and December 2008 and cover approximately 66%, 51% and 55%, respectively, of our estimated usage requirements during those periods, or approximately 28% of our annual needs. Also, we partially mitigate the risk of variability of our transportation-related fuel costs through the use of home heating oil futures contracts from time to time; however, we had no futures contracts for home heating oil at December 29, 2007.

Deferred Compensation Plan

M-Foods Holdings, Inc. (“Holdings”) sponsors a 2003 Deferred Compensation Plan (“Plan”) covering certain members of management of the Company. Under terms of the Plan, certain members of management were allowed to roll-over approximately $25,181,000 of option and bonus value from the company and its parent into Holdings. The Plan is nonqualified and unfunded. Each participant’s deferred compensation account under the Plan will accrue an annual 8% return. Participants in the Plan will be entitled to a distribution from their deferred compensation account upon the earlier of (i) a change in control of Holdings (ii) the tenth anniversary of the date of the Plan and (iii) upon the termination or death of a participant. We recorded approximately $1,300,000, $1,204,000 and $968,000 of preferred return on the deferred compensation for the years ended 2007, 2006 and 2005, respectively.

Litigation

We are party to a suit Feesers, Inc. brought against Sodexho, Inc. and us alleging violation of the Robinson-Patman Act. We prevailed in summary judgment at the United States District Court for the Middle District of Pennsylvania. A decision by the United States Court of Appeals for the Third Circuit in August 2007 reversed the summary judgment decision, remanding the matter back to the District Court. A bench trial occurred in January 2008. We expect a ruling on the tried matters later this year.

We are engaged in routine litigation incidental to our business. Management believes the ultimate outcome of this litigation will not have a material effect on our consolidated financial position, liquidity or results of operations.

Other Matters

In 2004, the U.S. Environmental Protection Agency (“EPA”) issued “Findings of Violation and Order for Compliance” to the Company in connection with its discharge of wastewater to the municipal treatment facility in Wakefield, Nebraska (“City”). We provided EPA with a proposal for improving the Wakefield facility’s performance and compliance. Concurrently, related to the same matter, the Nebraska Department of Environmental Quality (“NDEQ”) issued two enforcement documents. In early 2006, the United States Department of Justice notified us and the City that it intended to seek civil penalties and injunctive relief for violation of various environmental laws relating to the above 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 settlement 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 agreed to a specific schedule for completing construction of a mechanical wastewater treatment facility in the City that we had previously voluntarily undertaken. The settlement payment was made in June 2007.

Officer Severance

On August 26, 2006 our former President, James D. Clarkson, passed away. As provided by the employment agreement between Mr. Clarkson and the Company, we expensed a one time payment to Mr. Clarkson’s estate for $2,400,000 in September 2006 to satisfy our severance obligations. We also recorded $558,000 of stock option compensation expense with respect to the fair market value of the vested stock options held by Mr. Clarkson’s estate.

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NOTE G—PLANT CLOSING

In November 2006, we announced our decision to close the St. Marys, Ontario egg processing plant due to rising operating costs. The facility was closed on March 31, 2007. The costs related to the closing have been reflected in the Egg Products Division’s operating income. Costs were recorded as follows (in thousands):

	2007		2006		Cumulative
Asset impairment charges	$	1,293	$	2,894	$	4,187
Employee termination costs		232		245		477
Total plant closing costs	$	1,525	$	3,139	$	4,664

As of December 29, 2007, we have no remaining accrual for the St. Marys employee termination costs. The roll- forward of our employee termination costs reserve follows (in thousands):

Reserve balance as of January 1, 2006	$	—
Employee termination costs incurred in 2006		245
Reserve balance as of December 30, 2006		245
Employee termination costs incurred in 2007		232
Employee termination costs paid in 2007		(477	)
Reserve balance as of December 29, 2007	$	—

No additional plant closing costs are expected.

NOTE H—SUBSEQUENT EVENT

Effective January 11, 2008, we purchased the assets of Mr. B’s of Abbotsford, Inc. and related entities (“Abbotsford”) for $8,652,000. This was an acquisition of a processor of organic and cage-free egg products, and the transaction will expand our specialty egg products business. The acquisition was financed through available cash and will be accounted for in the first quarter of fiscal 2008 using the purchase method in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Accordingly, the net assets will be recorded at their estimated fair values and operating results will be included in our financial statements from the date of acquisition.

NOTE I—SHAREHOLDER’S EQUITY

Common Stock

At December 29, 2007 and December 30, 2006, we had authorized, issued and outstanding common stock of 3,000 shares with a $.01 par value. All common shares were issued to M-Foods Holdings, Inc., a wholly owned subsidiary of Michael Foods Investors, LLC.

Additional Paid In Capital

We recorded non-cash capital contributions from our parent, M-Foods Holdings, Inc. (“Holdings”) of $4.3 million in March 2007 and $4.9 million in March 2006 related to the tax benefit the Company receives on Holdings’ interest deduction due to filing a consolidated Federal tax return with Holdings.

Stock Option Plan

In November 2003, Holdings adopted the 2003 Stock Option Plan (the “Plan”). Under the Plan, Holdings may grant incentive stock options to our employees. The accounting and disclosure for the Holdings Plan are included in our financial statements. A total of 32,277 shares are reserved for issuance under the Plan. Any unexercised options will terminate ten years after the grant date. Options are generally granted with option prices based on the estimated fair market value of Holdings common stock at the date of grant as determined by Michael Foods Investors LLC.

Stock-Based Compensation

Prior to January 1, 2006, we applied the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for stock-based compensation. As a result, no compensation expense was recognized for stock options granted with exercise prices equivalent to the fair market value of stock on date of grant. Effective January 1, 2006, we adopted SFAS No.123(R), Share Based Payment, using the modified prospective application method. Under this method, as of January 1, 2006, we will apply the provisions of this Statement to new and modified awards.

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The adoption of this pronouncement had no effect on compensation cost related to stock options granted in 2005 and prior, which will continue to be disclosed on a pro forma basis only. As a result of adopting SFAS No. 123(R) on January 1, 2006, our net income for 2007 is $78,000 lower and for 2006 was $85,000 lower than if we had continued to account for stock-based compensation under APB Opinion No. 25.

As there is no established market for Holdings common stock, the value is determined by a formula and fixed periodically by the Board of Directors. Our options vest over five years, with potential for earlier vesting upon a change in control of the Company. Employees forfeit unvested options when they terminate their employment with the Company and must exercise their vested options at that time or they will also be forfeited. Per the Plan, the options have a put right and a call right. If a participant’s employment is terminated under certain circumstances (i.e., disability or death) the participant has a limited right to sell any exercised shares to the Company and if the participant is terminated for any reason the Company has certain rights to purchase any exercised shares. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on the straight-line basis over the options’ vesting periods.

As of December 29, 2007, the total compensation cost for nonvested awards not yet recognized in our statements of earnings was $261,000. This amount will be expensed over the vesting period. Information regarding our outstanding stock options is as follows:

										2007
	2007			2006			2005			Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Outstanding at period beginning		27,731			29,337			28,955
Granted		150			1,650			700
Exercised		(202	)		(1,215	)		—
Cancelled		(484	)		(2,041	)		(318	)
Outstanding at period end		27,195			27,731			29,337		6.20	$	18,010
Exercisable at period end		20,562			15,519			11,526		6.17		13,106
Weighted-Average Exercise Price Per Share
Granted	$	1,089.69		$	1,115.60		$	957.36
Exercised		626.99			626.99			—
Cancelled		750.31			662.93			664.70
At period end,
Outstanding		662.27			661.24			634.38
Exercisable		637.41			629.78			626.99

The total fair value of shares vested during the years ended 2007, 2006 and 2005 was $4,096,000, $3,310,000 and $3,660,000. A summary of the status of the Company’s nonvested shares as of December 29, 2007, and changes during the years ended 2007 and 2006, is presented below:

Nonvested shares	Shares		Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2006	17,811		$	639.16
Granted	1,650			938.01
Vested	(5,208	)		635.31
Cancelled	(2,041	)		662.93
Nonvested at December 30, 2006	12,212			701.20
Granted	150			833.16
Vested	(5,043	)		812.19
Repurchased	(202	)		626.99
Cancelled	(484	)		750.31
Nonvested at December 29, 2007	6,633			739.33

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The weighted-average grant-date fair value of options granted under the Plan was $833.16, $938.01 and $609.96 in 2007, 2006 and 2005, respectively. The weighted-average grant-date fair value of options under the Plan was determined by using the fair value of each option grant on the date of grant, utilizing the Black-Scholes option-pricing model and the following key assumptions:

	2007		2006		2005
Risk-free interest rate	4.99	%	4.34	%	4.56	%
Expected term (in years)	10		10		10
Expected volatility	21.17	%	26.15	%	0.00	%
Expected dividends	None		None		None

The risk-free interest rate for periods within the ten year contractual life of the option is based on the U.S. Treasury yield curve in effect at the grant date. Expected volatility used in 2007 is based on the historical volatility of the stock of companies within our peer group.

Prior to January 1, 2006, we measured compensation expense for our stock-based compensation plan using the intrinsic value method in accordance with APB 25 as allowed under SFAS 123. Under the intrinsic value method, no stock-based compensation expense had been recognized in our consolidated financial statements. Accordingly, compensation cost for stock options granted to employees was measured as the excess, if any, of the value of our stock at the date of the grant over the amount an employee must pay to acquire the stock. Had compensation cost for our stock option plans been determined based on the fair value at the grant date for awards, our net income would have changed to the pro forma amounts indicated below for 2005 (in thousands):

	2005
Net earnings as reported	$	38,859
Add: Stock-based employee compensation included in reported net income		—
Less: Total stock-based employee compensation expense under fair value-based method		(638	)
Pro forma net earnings	$	38,221

NOTE J—BUSINESS SEGMENTS

At December 29, 2007, we operated in three reportable segments:

Egg Products processes and distributes numerous egg products and shell eggs primarily through its facilities in the Midwest and Eastern United States and Canada. Sales of egg products are made through an internal sales force and independent brokers to the foodservice, food ingredient and retail markets primarily throughout North America, and to certain export markets.

Crystal Farms distributes a wide range of refrigerated grocery products, including various cheese products packaged at its Wisconsin cheese packaging facility. Sales of refrigerated grocery products are made through an internal sales force to retail and wholesale markets throughout much of the United States.

Potato Products processes and distributes refrigerated potato products from its manufacturing facilities in Minnesota and Nevada. Sales of potato products are made through an internal sales force to foodservice and retail markets throughout the United States.

We identify our segments based on its organizational structure, which is primarily by principal products. Operating profit represents earnings before interest expense, interest income, income taxes and allocations of corporate costs to the respective divisions. Intersegment sales are made at market prices. Our corporate office maintains a majority of our cash under our cash management policy. The value of our long-lived assets in Canada as of December 29, 2007 was $19,662,000.

We have the following sales and accounts receivable for two customers, primarily in the Egg Products segment:

	Sales						Accounts Receivable
	2007		2006		2005		2007		2006
Customer A	17	%	18	%	18	%	12	%	14	%
Customer B	15	%	18	%	18	%	12	%	15	%

63

Certain financial information for our operating segments is as follows (in thousands):

	Egg Products		Potato Products		Crystal Farms		Corporate & Eliminations			Total
2007
External net sales	$	1,014,588	$	119,033	$	334,141	$	—		$	1,467,762
Intersegment sales		16,190		18,122		—		(34,312	)		—
Operating profit (loss)		75,539		18,941		11,495		(10,529	)		95,446
Total assets		970,408		130,105		125,527		47,821			1,273,861
Depreciation and amortization		64,392		6,240		4,401		10			75,043
Capital expenditures		28,469		7,022		2,629		—			38,120
2006
External net sales	$	858,352	$	113,980	$	275,016	$	—		$	1,247,348
Intersegment sales		9,915		5,494		—		(15,409	)		—
Operating profit (loss)		67,660		19,243		18,604		(11,417	)		94,090
Total assets		974,637		132,083		114,799		42,244			1,263,763
Depreciation and amortization		64,443		5,913		4,492		10			74,858
Capital expenditures		24,361		7,474		1,971		—			33,806
2005
External net sales	$	860,925	$	102,245	$	279,328	$	—		$	1,242,498
Intersegment sales		9,515		4,425		—		(13,940	)		—
Operating profit (loss)		82,012		17,199		15,707		(8,671	)		106,247
Total assets		1,005,885		126,691		118,628		82,372			1,333,576
Depreciation and amortization		59,214		6,243		4,624		11			70,092
Capital expenditures		36,874		1,247		2,552		17			40,690

NOTE K—SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

Our senior credit agreement and senior subordinated notes have been guaranteed, on a joint and several basis, by us and our domestic subsidiaries. The senior credit agreement is also guaranteed by our parent, M-Foods Holdings, Inc.

The following condensed consolidating financial information presents our consolidated balance sheets at December 29, 2007 and December 30, 2006, and the condensed consolidating statements of earnings and cash flows for the years ended December 29, 2007, December 30, 2006 and December 31, 2005. These financial statements reflect Michael Foods, Inc. (the parent), the wholly-owned guarantor subsidiaries (on a combined basis), the non-guarantor subsidiary (MFI Food Canada, Ltd.), and elimination entries necessary to combine such entities on a consolidated basis.

64

Condensed Consolidating Balance Sheet

December 29, 2007

(In Thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Assets
Current Assets
Cash and equivalents	$	28,505		$	—		$	1,572		$	—		$	30,077
Accounts receivable, less allowances		7,366			136,177			6,654			(17,275	)		132,922
Inventories		—			108,414			6,344			—			114,758
Prepaid expenses and other		505			7,134			72			—			7,711
Total current assets		36,376			251,725			14,642			(17,275	)		285,468
Property, Plant and Equipment—net		14			224,626			14,226			—			238,866
Other assets:
Goodwill		—			515,238			3,026			—			518,264
Other assets		13,563			230,648			2,410			(15,358	)		231,263
Investment in subsidiaries		913,370			(7,358	)		—			(906,012	)		—
		926,933			738,528			5,436			(921,370	)		749,527
Total assets	$	963,323		$	1,214,879		$	34,304		$	(938,645	)	$	1,273,861
Liabilities and Shareholder’s Equity
Current Liabilities
Current maturities of long-term debt	$	(6,143	)	$	7,240		$	1,382		$	—		$	2,479
Accounts payable		252			102,276			10,166			(17,275	)		95,419
Accrued liabilities		18,541			72,873			1,575			—			92,989
Total current liabilities		12,650			182,389			13,123			(17,275	)		190,887
Long-term debt, less current maturities		577,350			14,830			27,358			(20,234	)		599,304
Deferred income taxes		(8,063	)		110,427			(215	)		135			102,284
Other long-term liabilities		21,297			—			—			—			21,297
Shareholder’s equity		360,089			907,233			(5,962	)		(901,271	)		360,089
Total liabilities and shareholder’s equity	$	963,323		$	1,214,879		$	34,304		$	(938,645	)	$	1,273,861

65

Condensed Consolidating Balance Sheet

December 30, 2006

(In Thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Assets
Current Assets
Cash and equivalents	$	20,727		$	—		$	849		$	—		$	21,576
Accounts receivable, less allowances		4,278			110,775			7,065			(16,813	)		105,305
Inventories		—			93,480			9,940			—			103,420
Prepaid expenses and other		538			7,393			270			—			8,201
Total current assets		25,543			211,648			18,124			(16,813	)		238,502
Property, Plant and Equipment—net		24			244,070			14,969			—			259,063
Other assets:
Goodwill		—			518,409			3,026			—			521,435
Other assets		17,836			242,225			2,410			(17,708	)		244,763
Investment in subsidiaries		923,218			(7,452	)		—			(915,766	)		—
		941,054			753,182			5,436			(933,474	)		766,198
Total assets	$	966,621		$	1,208,900		$	38,529		$	(950,287	)	$	1,263,763
Liabilities and Shareholder’s Equity
Current Liabilities
Current maturities of long-term debt	$	—		$	—		$	837		$	—		$	837
Accounts payable		265			73,023			15,753			(16,795	)		72,246
Accrued liabilities		19,398			65,853			1,810			—			87,061
Total current liabilities		19,663			138,876			18,400			(16,795	)		160,144
Long-term debt, less current maturities		615,064			22,536			27,581			(20,224	)		644,957
Deferred income taxes		(9,152	)		126,727			—			—			117,575
Other long-term liabilities		16,252			41			—			—			16,293
Shareholder’s equity		324,794			920,720			(7,452	)		(913,268	)		324,794
Total liabilities and shareholder’s equity	$	966,621		$	1,208,900		$	38,529		$	(950,287	)	$	1,263,763

66

Condensed Consolidating Statement of Earnings

For the Year Ended December 29, 2007

(In Thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Net sales	$	—		$	1,452,148		$	65,833		$	(50,219	)	$	1,467,762
Cost of sales		—			1,214,933			58,702			(50,219	)		1,223,416
Gross profit		—			237,215			7,131			—			244,346
Selling, general and administrative expenses		10,529			139,266			4,495			(6,915	)		147,375
Plant closing expenses		—			—			1,525			—			1,525
Operating profit (loss)		(10,529	)		97,949			1,111			6,915			95,446
Interest expense, net		51,414			(779	)		1,855			—			52,490
Other expense (income)		(6,915	)		—			—			6,915			—
Earnings (loss) before equity in earnings (loss) of subsidiaries and income taxes		(55,028	)		98,728			(744	)		—			42,956
Equity in earnings (loss) of subsidiaries		63,415			(905	)		—			(62,510	)		—
Earnings (loss) before income taxes		8,387			97,823			(744	)		(62,510	)		42,956
Income tax expense (benefit)		(19,178	)		34,408			161			—			15,391
Net earnings (loss)	$	27,565		$	63,415		$	(905	)	$	(62,510	)	$	27,565

67

Condensed Consolidating Statement of Earnings

For the Year Ended December 30, 2006

(In Thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Net sales	$	—		$	1,213,399		$	55,466		$	(21,517	)	$	1,247,348
Cost of sales		—			986,195			52,154			(21,517	)		1,016,832
Gross profit		—			227,204			3,312			—			230,516
Selling, general and administrative expenses		11,417			122,054			4,713			(4,897	)		133,287
Plant closing expenses		—			—			3,139			—			3,139
Operating profit (loss)		(11,417	)		105,150			(4,540	)		4,897			94,090
Interest expense, net		54,287			(59	)		1,700			—			55,928
Other expense (income)		(4,897	)		—			—			4,897			—
Earnings (loss) before equity in earnings (loss) of subsidiaries, income taxes and equity in losses of unconsolidated subsidiary		(60,807	)		105,209			(6,240	)		—			38,162
Equity in earnings (loss) of subsidiaries		59,242			(7,839	)		—			(51,403	)		—
Earnings (loss) before income taxes and equity in losses of unconsolidated subsidiary		(1,565	)		97,370			(6,240	)		(51,403	)		38,162
Income tax expense (benefit)		(20,720	)		35,415			1,599			—			16,294
Earnings (loss) before equity in losses of unconsolidated subsidiary		19,155			61,955			(7,839	)		(51,403	)		21,868
Equity in losses of unconsolidated subsidiary		—			2,713			—			—			2,713
Net earnings (loss)	$	19,155		$	59,242		$	(7,839	)	$	(51,403	)	$	19,155

68

Condensed Consolidating Statement of Earnings

For the Year Ended December 31, 2005

(In Thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Net sales	$	—		$	1,205,909		$	56,619		$	(20,030	)	$	1,242,498
Cost of sales		—			970,920			54,528			(20,030	)		1,005,418
Gross profit		—			234,989			2,091			—			237,080
Selling, general and administrative expenses		8,671			122,078			5,516			(5,432	)		130,833
Operating profit (loss)		(8,671	)		112,911			(3,425	)		5,432			106,247
Interest expense, net		44,970			362			1,787			—			47,119
Other (income) expense		(5,432	)		—			—			5,432			—
Loss on early extinguishment of debt		5,548			—			—			—			5,548
Earnings (loss) before equity in earnings (loss) of subsidiaries, income taxes and equity in losses of unconsolidated subsidiary		(53,757	)		112,549			(5,212	)		—			53,580
Equity in earnings (loss) of consolidated subsidiaries		73,874			(3,221	)		—			(70,653	)		—
Earnings (loss) before income taxes and equity in losses of unconsolidated subsidiary		20,117			109,328			(5,212	)		(70,653	)		53,580
Income tax expense (benefit)		(18,742	)		34,999			(1,991	)		—			14,266
Earnings (loss) before equity in losses of unconsolidated subsidiary		38,859			74,329			(3,221	)		(70,653	)		39,314
Equity in losses of unconsolidated subsidiary		—			455			—			—			455
Net earnings (loss)	$	38,859		$	73,874		$	(3,221	)	$	(70,653	)	$	38,859

69

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 29, 2007

(In Thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidated
Net cash provided by (used in) operating activities	$	(1,707	)	$	97,369		$	2,300		$	97,962
Cash flows from investing activities:
Capital expenditures		—			(37,702	)		(418	)		(38,120	)
Other assets		—			(102	)		—			(102	)
Net cash used in investing activities		—			(37,804	)		(418	)		(38,222	)
Cash flows from financing activities:
Payments on revolving line of credit		(18,000	)		—			—			(18,000	)
Proceeds from revolving line of credit		18,000			—			—			18,000
Payments on long-term debt		(50,000	)		(325	)		(1,452	)		(51,777	)
Payments on stock option exercises/share repurchases		(93	)		—			—			(93	)
Additional capital invested by parent		500			—			—			500
Deferred financing costs		(162	)		—			—			(162	)
Investment in subsidiaries		59,240			(59,240	)		—			—
Net cash (used in) provided by financing activities		9,485			(59,565	)		(1,452	)		(51,532	)
Effect of exchange rate changes on cash		—			—			293			293
Net increase in cash and equivalents		7,778			—			723			8,501
Cash and equivalents at beginning of year		20,727			—			849			21,576
Cash and equivalents at end of year	$	28,505		$	—		$	1,572		$	30,077
Supplemental Disclosures:
Non-cash industrial revenue bond guarantees	$	—		$	6,000		$	—		$	6,000
Non-cash capital investment by parent		4,306			—			—			4,306

70

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 30, 2006

(In Thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidated
Net cash provided by (used in) operating activities	$	(30,613	)	$	105,784		$	1,595		$	76,766
Cash flows from investing activities:
Capital expenditures		—			(33,219	)		(587	)		(33,806	)
Other assets		(84	)		(14	)		—			(98	)
Net cash used in investing activities		(84	)		(33,233	)		(587	)		(33,904	)
Cash flows from financing activities:
Payments on revolving line of credit		(1,200	)		—			—			(1,200	)
Proceeds from revolving line of credit		1,200			—			—			1,200
Payments on long-term debt		(62,700	)		(184	)		(1,186	)		(64,070	)
Proceeds from stock option exercise		766			—			—			766
Deferred financing costs		(162	)		—			—			(162	)
Investment in subsidiaries		72,367			(72,367	)		—			—
Net cash (used in) provided by financing activities		10,271			(72,551	)		(1,186	)		(63,466	)
Effect of exchange rate changes on cash		—			—			1			1
Net decrease in cash and equivalents		(20,426	)		—			(177	)		(20,603	)
Cash and equivalents at beginning of year		41,153			—			1,026			42,179
Cash and equivalents at end of year	$	20,727		$	—		$	849		$	21,576
Supplemental Disclosures:
Non-cash capital investment by parent	$	4,909		$	—		$	—		$	4,909

71

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 31, 2005

(In Thousands)

	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Consolidated
Net cash provided by (used in) operating activities	$	(7,937	)	$	108,713		$	3,626		$	104,402
Cash flows from investing activities:
Capital expenditures		(17	)		(39,103	)		(1,570	)		(40,690	)
Investments in joint ventures and other assets		2,462			(45	)		(3,234	)		(817	)
Net cash provided by (used in) investing activities		2,445			(39,148	)		(4,804	)		(41,507	)
Cash flows from financing activities:
Payments on long-term debt		(43,907	)		(5,134	)		(3,143	)		(52,184	)
Additional capital invested by parent		—			(3,455	)		3,455			—
Deferred financing costs		(378	)		—			—			(378	)
Investment in subsidiaries		60,976			(60,976	)		—			—
Net cash provided by (used in) financing activities		16,691			(69,565	)		312			(52,562	)
Effect of exchange rate changes on cash		—			—			30			30
Net increase (decrease) in cash and equivalents		11,199			—			(836	)		10,363
Cash and equivalents at beginning of year		29,954			—			1,862			31,816
Cash and equivalents at end of year	$	41,153		$	—		$	1,026		$	42,179
Supplemental Disclosures:
Non-cash industrial revenue bond guarantees	$	—		$	10,250		$	—		$	10,250

72

NOTE L—QUARTERLY FINANCIAL DATA

	Quarter
	(Unaudited, In Thousands)
	First		Second		Third		Fourth
2007
Net sales	$	327,931	$	347,943	$	381,111	$	410,777
Gross profit		56,123		56,615		63,127		68,481
Net earnings		3,950		3,700		7,203		12,712
2006
Net sales	$	307,391	$	298,913	$	308,940	$	332,104
Gross profit		54,887		55,713		58,654		61,262
Net earnings		4,119		6,543		3,902		4,591

73