UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 10-K

Annual report pursuant
to Section 13 of the Securities Exchange Act of 1934 for the fiscal year ended January 3,
2004 of

|FRESH BRANDS, INC.                        
|------------------------------------------
|2215 Union Avenue                         
|Sheboygan, Wisconsin 53081                
|(920) 457-4433                            
|A Wisconsin corporation                   
|IRS Employer Identification No. 39-2019963
|Commission file number 000-32825          

We do not have any securities
registered pursuant to Section 12(b) of the Act.

We have two classes of securities
registered pursuant to Section 12(g) of the Act: our Common Stock, $0.05 par value, and
our Common Stock Purchase Rights.

We have 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.

Disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not, to the best
of our knowledge, be contained in our definitive proxy statement incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.

We are an accelerated filer (as
defined in Rule 12b-2 of the Act).

The aggregate market value of Common
Stock held by non-affiliates as of July 12, 2003 was $70,736,259 and the aggregate market
value of Common Stock held by non-affiliates as of March 17, 2004 was $46,827,284. This
value includes all of the shares of our Common Stock, except for the shares beneficially
owned by our directors and the executive officers listed in Item 1A below.

The number of shares of our Common
Stock outstanding as of July 12, 2003 and March 17, 2004 was 5,039,613 and 4,911,575,
respectively.

Portions of our definitive Proxy
Statement for our 2004 annual meeting of shareholders, which will be filed with the
Commission under Regulation 14A within 120 days after the end of our fiscal year and, upon
such filing, will be incorporated by reference into Part III to the extent indicated
therein.

---

# PART I

# Special Note Regarding
Forward-Looking Statements

Certain matters discussed in this
annual report on Form 10-K, particularly in the in section titled Item 7. 
Managements Discussion and Analysis of Financial Condition and results of
Operations, are forward-looking statements intended to qualify for the
safe harbors from liability established by the Private Securities Litigation Reform Act of
1995. These forward-looking statements can generally be identified as such because the
context of the statement will include words such as we believe, anticipate, expect or
words of similar import. Similarly, statements that describe our future plans, objectives,
strategies or goals are also forward-looking statements. Specifically, forward-looking
statements include statements about: (a) the expected type, nature and amount of
charges associated with store closings that we expect to record in 2004; (b) the expected
effect that such charges will have on our future financial performance and condition; (c)
our new operational focus; (d) the expected effect that our operational focus will have on
our future financial performance and condition; (e) the anticipated benefits to our
shareholders of our new operational focus; (f) expectations regarding the effects of our
plans to close certain of our corporate and franchised stores, including the anticipated
reduction in our future sales and increases in our future earnings; (g) the anticipated
increased interest rate and annual interest expense that we will pay under our new credit
facility; and (h) the expected impact on our financial statements of our adoption of FIN
46R. Such forward-looking statements are subject to certain risks and uncertainties that
may materially adversely affect our anticipated results. Such risks and uncertainties
include, but are not limited to, the following: (1) our increasing capitalized lease
and guarantee amounts; (2) the presence of intense competitive market activity in our
market areas, including competition from warehouse club stores and deep discount
supercenters; (3) the cost advantages that our competitors have as a result of their
larger purchasing power and, in many cases, non-union workforces; (4) our ability to
identify and convert new franchisee stores; (5) our continuing ability to obtain
reasonable vendor marketing funds for promotional purposes; (6) our ability to continue to
recruit, train and retain quality franchise and corporate retail store operators; (7) the
potential recognition of additional repositioning charges resulting from potential
closures, conversions and consolidations of additional retail stores due principally to
the competitive nature of the industry and to the quality of our retail store operators;
(8) the potential recognition of additional charges relating to accounts receivable from
our franchise operators; (9) the vacancy in our chief executive officer position; (10) the
cost and results of our new business information technology systems replacement project;
and (11) the costs to implement the Sarbanes-Oxley Act of 2002. Shareholders, potential
investors and other readers are urged to consider these risks carefully in evaluating the
forward-looking statements made herein and are cautioned not to place undue reliance on
such forward-looking statements. The forward-looking statements made herein are only made
as of the date of this annual report on Form 10-K and we disclaim any obligation to
publicly update such forward-looking statements to reflect subsequent events or
circumstances.

# Item 1.  Business.

# General

We
are a supermarket retailer and grocery wholesaler principally through corporate-owned,
franchised and independent supermarkets. At the end of 2003, we owned and operated 28
supermarkets, a gas station, a convenience store and franchised an additional 73
supermarkets. Our corporate and franchised supermarkets are sometimes collectively
referred to in this Form 10-K as our supermarkets. Twenty of our
corporate supermarkets operate under the Piggly Wiggly® banner and eight of
them operate under the Dicks® Supermarkets banner. All of our
franchised supermarkets operate under the Piggly Wiggly banner. We are the primary
supplier to all 101 supermarkets and also serve as a wholesaler to a number of smaller,
independently operated supermarkets and convenience stores. All of our supermarkets and
other wholesale customers are located in Wisconsin, northern Illinois and eastern Iowa.

# Strategic Plan

In
2001, we adopted a strategic plan which included a goal of trying to achieve a 15%
compound annual growth rate in revenue for the five years beginning in 2001. To achieve
this goal, we would have had to acquire several multiple-store supermarket chains. In June
2001, we completed the acquisition of Dicks Supermarkets, Inc., our first
multiple-store supermarket chain acquisition. In 2001, our revenue increased by 15.7%
largely as a result of this acquisition and we achieved our 2001 revenue growth goal.
However, due to the difficult economic climate, intense competition in our markets and the
length of time since our most recent successful acquisition, our revenue increased by only
7.8% and 6.3% in 2002 and 2003, respectively, and we did not meet our revenue growth goal
in either 2002 or 2003.

2

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As
a result of these factors and our recent financial results, during the last half of 2003
our board of directors took action to terminate our Chief Financial Officer and Vice
President  Retail Operations and reached an agreement with our Chief Executive
Officer regarding the termination of our relationship with him. In December 2003, we hired
a new Executive Vice President  Operations, Louis E. Stinebaugh, and re-hired our
retired long-time Chief Financial Officer, John H. Dahly. With the input of our new
management team, our board of directors decided that we needed to change our operational
focus by intensifying our efforts on improving the results of our current operations,
reducing our debt and reinvigorating our franchise system, rather than trying to grow our
business through additional multiple-store supermarket acquisitions. As a result, we
intend to focus more on our wholesale operations while also improving the operating
results of our corporate retail stores.

# 2003 Actions

Our
activities in 2003 included:

| |  | expanding
the square footage at our Cross Plains,  Mayville and Mosinee,  Wisconsin  franchised
 supermarkets                   in July, July and December, 2003, respectively;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | closing
older franchised supermarkets and replacing them with new, larger and more competitive
supermarkets in Juneau, Omro and Union Grove, Wisconsin in February, July and November,
2003, respectively;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | opening
a replacement corporate  supermarket in Sheboygan,  Wisconsin in August 2003 that
includes a combined                   convenience store and Pig Stop(R)gas station;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | opening
a new market corporate supermarket in Kenosha, Wisconsin in January 2003;
| | - | ---------------------------------------------------------------------------------

| |  | acquiring
 and  remodeling  a new  market  corporate  supermarket  in  Racine,  Wisconsin  from
 one  of  our                   competitors that opened in September 2003;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | acquiring
a new,  larger and more  competitive  corporate  supermarket in Menasha,  Wisconsin from
one of our                   competitors in September 2003; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | closing
our corporate supermarket in Watertown, Wisconsin in December 2003.
| | - | ---------------------------------------------------------------------------

# Planned 2004 Activities

In
2004, we will replace our existing bakery/deli production facility in Platteville,
Wisconsin with a new, substantially larger facility also in Platteville. We believe that
this new facility will allow us to substantially increase our sale of bakery and deli
products to our franchisees and independent customers, including potentially adding new
independent customers that could not be served from our existing facility. We also opened
one new market corporate supermarket in January 2004 and plan to replace one franchised
supermarket with a new, larger and more competitive supermarket in 2004. Due to our new
operational focus that places a greater emphasis on improving the results of our current
operations through a new focus on our in-store value proposition, emphasizing our
wholesale business and reducing our debt, we do not anticipate purchasing or building
additional new corporate supermarkets in 2004. Finally, as discussed in greater detail in
section titled Item 7.  Managements Discussion and Analysis of Financial
Condition and results of Operations  Overview of 2003 and Our New Operational
Focus below, we plan to close five corporate supermarkets and one franchised
supermarket in 2004.

3

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# Retail Operations

Our
supermarkets stock a comprehensive selection of groceries, frozen foods, prepared foods,
fresh produce, meat, poultry, eggs and dairy products as well as non-food items, such as
health and beauty aids, housewares, magazines and periodicals, video cassette rentals,
flowers and plants, greeting cards and general merchandise. Similarly, to appeal to
value-conscious consumers, our supermarkets have areas in which all items are $1.00 or
less. Our supermarkets also have areas dedicated to addressing emerging consumer
purchasing preferences, including Naturally Good and Good For You sections
that stock organic and other items that appeal to health-conscious consumers. We believe
that these initiatives have helped us appeal to consumers who would otherwise choose to
purchase items in these sections from specialty health-based or dollar stores.
See Our Supermarkets below for more information.

The
products in our supermarkets fall within a broad range of branded merchandise and
private-label store branded product alternatives. In general, the private-label products
have lower selling prices, but higher gross profit margins, than branded merchandise.
Consistent with trends generally within the retail supermarket industry, we continue to
experience increases in customer demand for store brands and believe that our
Topco-procured line of branded products is satisfying this consumer trend. See
Purchasing and Distribution below for more information. Based on our internal
wholesale price index, inflation did not have a significant effect on sales between 2002
and 2003.

We
operate two customer incentive card programs, the Piggly Wiggly Preferred
Club® Card and the Dicks Savings Club® Card. We
designed our customer card programs to reward current customers and attract new customers
by offering clipless coupons on advertised specials, automatic
savings on store specials and point-of-sale coupons redeemable on future purchases. The
cards also double as check-cashing and video rental identification cards. The cards allow
us to maintain a valuable, integrated database that we use to identify our best customers
and their preferences so that our supermarkets can better serve them.

Our
Preferred Power Pricing program targets items that shoppers have traditionally purchased
from supermarkets, but for which there has been a trend toward purchasing these items in
large quantities from alternative sources such as warehouse club stores, supercenters,
department stores or pet stores. Under our Preferred Power Pricing program, we feature
aggressive month-long sales promotions on large or mega sizes of selected
items and offer prices below those associated with weekly supermarket sales. Specific
examples of product categories that we have featured in our Preferred Power Pricing
program include paper products (such as toilet paper, napkins and paper towels), laundry
supplies, pet supplies, coffee, cereal and certain perishable items.

We
believe that many customers choose their supermarket based on the attributes of the
produce department. Our Pampered to Perfection program is a comprehensive
program designed to ensure that our supermarkets provide our customers with the highest
quality produce possible. As a part of this program, we have thoroughly analyzed our
entire process of handling fresh merchandise and created several special warehouse storage
environments to assure the proper handling of produce. In addition, we are working with
our suppliers to ensure that they share the high standards that we have established. This
ensures the Pampered to Perfection program sets rigorous standards for fresh produce from
the time it is grown to the time it is taken home by customers. Finally, we designed a
comprehensive educational program for all of our supermarket produce managers to ensure
that they are able to implement the store-level aspects of our Pampered to Perfection
program, including our rigorous 128-point produce department inspection and certification.

Our
Preferred Power Pricing and Pampered to Perfection programs have increased average
customer transaction totals, contributed to same store sales increases and reversed sales
erosion and built incremental sales in key product categories.

4

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We
also operate a convenience store and a gas station located adjacent to one of our
supermarkets. We believe that these facilities provide an opportunity for us to increase
net sales through sales of gas and by capturing additional sales to customers who prefer
the ease of shopping at a convenience store. Although sales at these facilities accounted
for less than 1% of our 2003 net sales, we are evaluating the feasibility of adding gas
stations and convenience stores at several of our other supermarkets.

# Wholesale Operations

We
are the primary supplier to all of our supermarkets. We also serve as a wholesaler to
other smaller independent retail supermarkets, although such sales accounted for less than
1% of our 2003 net sales. In addition, in 2003, we served as a temporary secondary
wholesale supplier to a group of local supermarkets that were supplied by a competitor of
ours that had filed for bankruptcy. This arrangement, which ended in August 2003,
accounted for approximately 1% of our 2003 net sales. We supply a variety of products to
our supermarkets and other wholesale customers, primarily from our two distribution
centers in Sheboygan, Wisconsin. In addition, we provide our supermarkets and other
customers with bakery and deli items from our centralized bakery/deli production facility
in Platteville, Wisconsin and fresh, frozen and processed meat, eggs and deli products
from a third-party distribution facility in Milwaukee, Wisconsin. Additionally, through
arrangements with several vendors, we also offer a line of carbonated soft drinks, fruit
drinks and drinking and distilled water under our Springtime® label.

A
key part of our wholesale operations is the strong partnership between us and our
franchised supermarkets established by our Fresh Brands Program. This
partnership, which results in an integrated retail food distribution system that had over
$925 million in retail sales in 2003, allows us to leverage the combined buying power of
all of our franchised and corporate supermarkets and deliver a powerful and effective
promotional vehicle for our participating vendor partners. By operating in this manner, we
are able to achieve better performance than if we did not coordinate the promotions run by
our franchisee customers.

Our
franchisees, most of which own only one or two supermarkets, benefit from our Fresh Brands
Program because it provides them with cost-effective administrative support services and
financial resources that are associated with being a part of a large organization and are
difficult for independent operators to replicate or obtain on their own. We believe that
our Fresh Brands Program provides our franchisees with the support services and financial
resources they need to operate efficient, contemporary supermarkets that can compete with
supermarkets owned and operated by competitors with substantially greater resources, while
retaining the independent retail ownership, entrepreneurial spirit and community
involvement that we believe is an integral part of the success of many of our franchisees.
Among the services that we provide to our franchisees are:

| |  | retail
performance counseling and supervision;
| | - | ----------------------------------------------

| |  | retail
financial accounting;
| | - | ----------------------------

| |  | preparation
of supermarket payrolls;
| | - | ------------------------------------

| |  | preparation
of print, electronic and outdoor media advertising (including various point-of-sale
materials);
| | - | -----------------------------------------------------------------------------------------------------------

| |  | assistance
in the selection and analysis of supermarket locations;
| | - | ------------------------------------------------------------------

| |  | financing
and assistance with lease negotiations;
| | - | -------------------------------------------------

| |  | merchandise
planning;
| | - | ---------------------

| |  | equipment
selection and sourcing;
| | - | ---------------------------------

5

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| |  | engineering
services, including supermarket design, floor layout and facility project management;
| | - | -------------------------------------------------------------------------------------------------

| |  | retail
technology implementation and support;
| | - | ---------------------------------------------

| |  | labor
planning and scheduling; and
| | - | ----------------------------------

| |  | product
category supervision.
| | - | -----------------------------

Consistent with industry practice, in
certain situations, we also provide credit enhancements to certain qualified franchisees,
including by leasing the franchisees supermarket premises and, in turn, subleasing
the premises to the franchisee. We provide some of these services as part of the Fresh
Brands Program, while other services are provided under a separate fee arrangement
intended to cover our costs. In addition, our franchisees pay us fees determined by the
retail sales of their supermarkets. We do not charge an initial fee to franchisees for
granting a franchise.

Another
goal of our Fresh Brands Program is to present all of the supermarkets with a common
banner as operating under a unified program so that our customers can treat all such
supermarkets as a part of the same supermarket chain. We do this by
coordinating systemwide promotions and other merchandising events in which all of our
franchised and corporate supermarkets participate. For example, we control the selection
of sale items at all of our supermarkets and produce and distribute weekly newspaper
advertising inserts that advertise the same sales at all of the supermarkets operated
under the same banner. In addition, we establish various promotions that reward our
customers for aggregate amounts of selected items purchased over a period of several
weeks. These programs do not differentiate between purchases from our franchised or
corporate supermarkets. Other efforts that we undertake to present all of our supermarkets
that operate under the same banner as part of a single chain include:

| |  | outdoor
billboard advertising;
| | - | ------------------------------

| |  | television
and radio advertising; and
| | - | -------------------------------------

| |  | sponsorship
of sports entertainment and charitable events, including the Midwests largest
fireworks display at Milwaukees Summerfest lakefront music festival.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

We
are a franchisee of the Piggly Wiggly® brand name. Under our franchise
agreement, our franchise territory includes all of Wisconsin, the upper peninsula of
Michigan and designated counties in northern Illinois, southeastern Minnesota and eastern
Iowa. Our franchise rights are of unlimited duration and are not subject to any specific
termination provision. We are required to pay franchise fees to the current franchisor in
parts of our market areas. The only other material obligation imposed on us in our
franchise territory is that the supermarkets operated under the Piggly
Wiggly® name must comply with the standards imposed on supermarkets in the
Piggly Wiggly®system. We believe that our own supermarket standards exceed
the Piggly Wiggly® system standards. We own the Dicks
Supermarket® brand name.

# Our Supermarkets

Our
franchised supermarkets range in size from 10,400 square feet to 54,400 square feet, with
an average of 26,200 square feet and our corporate supermarkets range in size from 20,000
square feet to 68,500 square feet, with an average of 38,300 square feet. All of our
supermarkets contain several perishable or specialty service departments, including:

| |  | fresh
and processed meat;
| | - | -------------------------

| |  | take-home
entrees and snacks;
| | - | -----------------------------

| |  | fresh
fruits and vegetables;
| | - | ----------------------------

| |  | fresh
seafood;
| | - | --------------

6

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| |  | delicatessen;
| | - | -------------

| |  | flowers
and plants; and
| | - | -----------------------

| |  | baked
goods.
| | - | ------------

Several
supermarkets also contain or provide one or more of the following:

| |  | wine
and spirit sales;
| | - | ----------------------

| |  | video
rentals;
| | - | --------------

| |  | lottery
sales;
| | - | --------------

| |  | photo
processing services;
| | - | --------------------------

| |  | TicketMaster®ticket
centers;
| | - | ----------------------------

| |  | in-house
banking services; and
| | - | ------------------------------

| |  | automated
teller machines.
| | - | --------------------------

Certain franchised
and corporate supermarkets continue to fail to meet our financial performance goals and we
continue to evaluate various business alternatives relating to these supermarkets in order
to improve results of operations. Potential alternatives we consider include the sale or
conversion of these supermarkets, closing supermarkets and implementing other operational
changes.

The
following table shows our development of, and changes in, our franchised and corporate
retail supermarkets for the periods presented:

|                           
|---------------------------
|1999                       
|Beginning of Year          
|New Market Supermarkets(a) 
|Replacement Supermarkets(b)
|Converted to/from          
|Franchise(c)               
|Purchased Supermarkets(d)  
|Terminated Operations(e)   
|New Franchises(f)          
|End of Year                
|Remodeled and/or Expanded  
|Supermarkets(g)            

---

|(a) | New
market supermarkets are newly constructed supermarkets in market areas not
          recently served by us.
|--- | ---------------------------------------------------------------------------------------------------------------

|(b) | Replacement
supermarkets are newly constructed or           purchased supermarkets whose opening
corresponds with the closure of a nearby franchised or corporate supermarket.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Supermarkets
that are converted from corporate to franchise units, or vice                versa, are
included as reductions to supermarket totals in one category and
               corresponding additions to totals in the other category.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Purchased
supermarkets are those that we purchased from a party other than one                of
our franchisees.
|--- | -----------------------------------------------------------------------------------------------------------------

|(e) | Terminated
operations represent supermarkets that are no                longer going concerns,
including replaced supermarkets.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(f) | New
franchises are                additions to our franchise group other than through
conversion from corporate                supermarkets.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(g) | Remodeled
supermarkets represent supermarkets that have                undergone substantial
expansion and/or remodeling totaling at least $300,000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

7

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# Purchasing and
Distribution

We
purchase groceries in sufficient volume to qualify for favorable price brackets for most
items. We purchase brand name grocery merchandise directly from the manufacturers or
processors and purchase produce, meat and seafood from a variety of sources. We purchase
substantially all of our private label items and fresh meats through Topco Associates LLC.
Topco is a national purchasing cooperative whose member-owners consist of 51 regional
supermarket chains and food services organizations who collectively operate more than
3,400 supermarkets. According to Topco data, its member-owners accounted for approximately
10% of United States grocery store sales volume in 2003. In 2003, purchases through Topco
accounted for nearly 13% of our total wholesale and retail inventory purchases. We also
purchase supermarket and warehouse equipment and supplies, primarily bags and packaging
material, through Topco. Topcos size and purchasing power enable it to employ
large-volume, low-cost purchasing techniques on behalf of its member-owners.

We
also participate in Topcos World Brands program. World Brands is a Topco
division dedicated to using the combined purchasing power and marketing strength of its
members to obtain favorable treatment from national brand manufacturers. To attain this
goal, World Brands, together with its members, negotiates with each vendor for the benefit
of all of its members in a manner similar to the way that a retailer would do on behalf of
its entire organization. There are currently 31 participants in the World Brands program,
each of which is a member of Topco. According to World Brands data, the combined retail
sales of its members surpasses that of all but three of the grocery retailers in the
United States. We believe that World Brands presents us with an opportunity to qualify for
more favorable prices and promotions than we could attain on our own.

We
and our direct-contract, third-party distribution center supplied most of the products
supplied to our supermarkets in 2003. The remainder of products sold by our supermarkets
were supplied by direct store delivery vendors. We operate two distribution centers in
Sheboygan, Wisconsin with a total of approximately 425,000 square feet. We supply deli and
bakery products from our 20,000 square foot centralized bakery/deli production facility
located in Platteville, Wisconsin. While we perform the buying function, a third-party
contractor in Milwaukee, Wisconsin performs the distribution services for our meat and
dairy operations. We believe that this arrangement provides us with operating cost
efficiencies and the ability to expand our wholesale product offerings and better satisfy
wholesale customer delivery schedules through improved capacity.

We
operate a leased, full-service trucking fleet, which consists of 25 tractors and
44 refrigerated trailers. We augment our transportation requirements with temporary
leasing arrangements as conditions warrant. PW Trucking, Inc., our subsidiary, provides
contract and common carrier services throughout our operating territory. Revenues from
unrelated parties generated by this business were nominal in 2003 and are expected to be
nominal in 2004.

# Competition

The
wholesale and retail food industry is highly competitive. At the wholesale level, we
compete with regional and national wholesalers, such as Supervalu Inc., Roundys,
Inc. and Nash Finch Co. We believe that key competitive factors include the provision of
the following services to franchised customers:

| |  | credit
enhancements and working capital support;
| | - | ------------------------------------------------

| |  | advertising;
| | - | ------------

| |  | retail
performance and supervision counseling;
| | - | ----------------------------------------------

| |  | accounting
and financial services;
| | - | ----------------------------------

| |  | merchandising;
| | - | --------------

8

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| |  | facilities
engineering;
| | - | -----------------------

| |  | design
and project management; and
| | - | ----------------------------------

| |  | retail
technology support.
| | - | --------------------------

We
believe that our distribution and production facilities and the wide range of support and
marketing services provided to our supermarkets (including pursuant to the Fresh Brands
Program) allow us to provide prompt and efficient, low-priced, high-quality products and
important supplemental services to our supermarkets and other customers.

The
degree of competition at the retail level varies with supermarket location. Most of our
supermarkets compete primarily with local retail operators, virtually all of whom are
affiliated with competing wholesalers through arrangements similar to those we have with
our franchisees. In some of our supermarket locations, however, we also compete with
national and regional retail chain supermarkets, including Pick N Save, Cub Foods,
Jewel Food Stores, Sentry Food Stores, Dominicks Finer Foods, Festival Foods,
Woodmans Stores and Copps Supermarkets. Other competitors include the general
merchandise, wholesale club and supercenter format stores, including Wal-Mart
Supercenters, Big Kmart stores, SuperTarget stores and ShopKo stores and limited
assortment grocery stores, including Aldi and Sav-A-Lot stores. We believe that the
principal retail competitive factors include:

| |  | product
quality and variety;
| | - | ----------------------------

| |  | the
quality of a supermarket's perishable product and service departments;
| | - | --------------------------------------------------------------------------

| |  | price;
and
| | - | ----------

| |  | supermarket
location and appearance.
| | - | ------------------------------------

We
believe our supermarkets emphasis on low-cost, high-quality products,
community-based multi-media marketing and merchandising programs and a high degree of
in-store customer service and friendliness provide our franchised and corporate
supermarkets with a competitive advantage in many retail market areas.

Certain
of our competitors at both the wholesale and retail level may have a competitive advantage
resulting from utilizing lower-cost, non-union workforces. Certain of our competitors have
greater financial resources and marketing budgets than we do. Also, certain competitors
using the limited assortment grocery store format, general merchandise format, wholesale
club format or supercenter format may choose to carry and market a less extensive variety
of products, which may allow them to sell such items at a lower per unit cost than we do.

# Employees

As
of January 3, 2004, we employed approximately 3,000 persons, including approximately 2,200
in the operation of our corporate retail supermarkets. A majority of our corporate retail
supermarket employees are employed on a part-time basis. Of our remaining employees,
approximately 200 work at our centralized bakery/deli production facility, approximately
300 are engaged in warehousing and/or trucking activities and approximately 300 are
corporate and administrative personnel. Five of our 13 collective bargaining agreements
have already expired are being mutually extended on a meeting-to-meeting basis and an
additional five will expire later in 2004. Together these 10 collective bargaining
agreements cover approximately 40% of our employees. We cannot currently predict whether
any strikes, work stoppages or slowdowns will be incurred in connection with renewing such
agreements.

9

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# Web Site Information

Our
corporate web site is www.fresh-brands.com. All of our Form 10-Ks, Form 10-Qs and Form
8-Ks, and amendments thereto, are available free of charge on this web site at
http://www.fresh-brands.com/Investorfame.htmlas soon as practical after they have
been filed with the SEC.

# Risks and Uncertainties

As
noted above in Part I  Special Note Regarding Forward-Looking Statements, this
annual report contains statements that are forward-looking. These statements are based on
current expectations and assumptions that are subject to risks and uncertainties. Actual
results could differ materially because of risks and uncertainties such as those listed
below, which, among others, should be considered in evaluating our financial outlook.

We
Face Credit Risks Associated With Our Franchisees Operations. Consistent with
industry practice, in certain situations, we provide credit enhancements to certain
franchisees, including by leasing the franchisees supermarket premises and, in turn,
subleasing the premises to the franchisee. In addition, we have guaranteed the bank debt
of several of our franchisees and several of our franchisees owe us significant amounts
for past due invoices. Between December 28, 2002 and January 3, 2004, the sum of the
overdue amounts owed to us by franchisees and our franchisee guarantee obligations
increased while the aggregate net equity of the related franchisees decreased. As of
January 3, 2004, our franchisee guarantees totaled $13.7 million, compared to $15.5
million as of December 28, 2002. In connection with our entry into our new credit
facility in March 2004, we guaranteed an additional $4.7 million of franchisee bank
borrowings. As a result of these changes, in 2003 we recorded charges of $6.3 million
related to potentially uncollectible franchisee receivables and retail subsidies compared
to charges of $1.5 million recorded in 2002. Our franchisees face intense competition,
which could have a material adverse effect on the results of their operations. If we incur
additional significant charges related to existing or future obligations owed to us by our
franchisees, these charges could have a material adverse effect on our financial results
in the quarter and year that they are incurred.

Our
New Operational Focus May Reduce Our Margins And Ability To Borrow Funds From Our Banks
and Increase Certain Risks Associated With Our Business. Due to the difficult economic
climate, intense competition in our markets and the length of time since our last
successful acquisition, we did not meet our goal of increasing our net sales by 15% in
either 2002 or 2003. As a result of these factors and our recent financial results and
current financial condition, we revised our strategic plan to place a greater emphasis on
improving the results of our current operations through a new focus on our in-store value
proposition, emphasizing our wholesale business, and reducing our debt. Although we will
continue to pursue selected opportunities to grow our retail business, we do not expect to
acquire any multiple-store supermarket chains in 2004. If successful, our new focus on our
in-store value proposition may decrease our profit margins. In addition, the decrease in
our profit margins will decrease our earnings unless our sales increase by the amount
required to offset the decrease in our profit margins. If successful, our increased focus
on our wholesale operations will lead to an increased number of franchised supermarkets.
In certain situations, we may need to lease the supermarkets operated by these franchisees
and, in turn, sublease them to the franchisee. Such additional leases may make it more
difficult for us to borrow funds from our banks and may increase the risks associated with
our business if our franchisees are not able to operate their businesses profitably. In
addition, each of these new relationships will need to be assessed under FIN 46R to
determine if the franchisees will be required to be consolidated into our consolidated
financial statements. There can be no assurance that our efforts to improve our results of
operations, focus our efforts on our wholesale business and reduce our debt will be
successful. Our failure to, or delay in, successfully implementing our strategic plan may
have a material adverse effect on our results of operations and financial results.

10

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Our
Increased Debt, Capital Lease And Guaranty Obligations Increase Certain Risks Associated
With Our Business. As of January 3, 2004, our aggregate debt, capital lease and
guaranty obligations were $93.1 million, compared to $80.9 million as of December 28,
2002. The increase in these aggregate obligations was a principal reason why we were
required to pledge all of our assets as collateral under our new loan facility entered
into in March 2004, obtain a letter of credit to ensure payment of a portion of our
franchisee loan guarantees and increased our interest expense. As a result, the risks
associated with our business have also increased. There can be no assurance that our
efforts to improve our results of operations, focus our efforts on our wholesale business
and reduce our debt will be successful. Our failure to, or delay in, successfully
implementing our strategic plan may have a material adverse effect on our results of
operations and financial results.

Our
New Loan Facility Requires Collateral And Imposes Additional And More Restrictive
Covenants. Due to, among other things, our recent financial results, current financial
condition and the increases in our aggregate debt, lease and guaranty obligations, our
banks have required us to pledge all of our assets as collateral under our new loan
facility, guaranty additional amounts owed by our franchisees, obtain a letter of credit
to ensure repayment of our some of our franchisee loan guarantees, grant a second security
interest to a bank that has made the majority of the franchisee loans that we have
guaranteed and increased our interest rate. In addition, our new loan facility contains
covenants that require us to meet certain financial and operating performance targets and
prohibits us from taking certain other actions. For example, these covenants: (i) prohibit
us from guaranteeing additional franchisee bank debt; (ii) prohibit us from paying cash
dividends on our common stock; and (iii) limit our ability to repurchase our common
stock. The covenants in our new loan facility also limit our ability to incur additional
debt and other obligations, including capital lease obligations. Finally, our new loan
facility requires us to meet financial covenants, including covenants regarding our Fixed
Charge Coverage Ratio, Total Senior Debt Cash Flow Leverage Ratio and Paid Sublease Ratio
(all as defined in our new credit facility). These restrictions could limit our ability to
implement our strategic plan, which may have a material impact on our results of
operations and financial results.

Our
New Loan Facility Has Increased The Interest Rates We Pay. Our new credit facility
required us to pledge all of our assets as collateral, increased our non-default interest
rate by 25 to 50 basis points compared to the weighted average interest rate that we paid
in 2003. This increase in our interest rates may lower our earnings and increase the risks
associated with our business.

Our
Retail Union Workforce Is A Cost Disadvantage. As of January 3, 2004, approximately
65% of our retail employees were covered by union contracts, all of which expire during
the next five years. Our costs associated with our union employees, including the costs of
the benefits provided to our union employees, have increased significantly over the past
several years. We cannot assure you that we will be able to renew our union contracts or
that our labor costs, including employee benefit costs, will not continue to increase
significantly. We have been unable to recover recent significant cost increases associated
with our union employees by increasing the prices charged to our customers. We are
unlikely to be able to recover any future cost increases because several of our
competitors have a competitive advantage resulting from utilizing lower-cost, non-union
workforces. As a result, these increases have, and any future increases will likely
continue to have, a material adverse effect on our financial results. In addition, several
companies in our industry have recently experienced prolonged strikes that have had
significant adverse effects on their results of operations and financial results. We
cannot assure you that we will not suffer business interruptions as a result of strikes or
other work stoppages. Any significant labor stoppage or disruption would have a material
adverse effect on our results of operations and financial results.

Increasing
Health Care Costs Have Lowered, And May Continue To Lower, Our Earnings. Like many
other companies, we have experienced significant increases in our employee health care
expenses during the past few years. We believe that these cost increases are likely to
continue in the future. For example, we provide some of our union employees with benefits
through a health, welfare and benefits plan. From time to time, this plan may experience
shortfalls because its costs exceed the payments that it receives from the companies that
participate in the plan. When this happens, we are required to make a supplemental payment
to fund a portion of the shortfall. Since the beginning of 2001, we have made supplemental
payments of $666,000 to cover shortfalls in this plan and one other plan that we formerly
participated in. In addition, we have been notified that we will be required to make an
additional supplemental payment of at least approximately $126,000 in 2004. Because we have not been able to recover these cost increases from our
customers, these increases have had, and any similar future costs likely will have, a
material adverse effect on our financial results.

We
May Incur  Additional  Charges  Associated With The Withdrawal From One Of Our
 Multi-Employer  Health And Welfare  Benefit Plans.  Recently,  several  employers of one of
our  multi-employer  health and welfare benefit plans have  withdrawn from the plan.
 Because the plan is  underfunded  and our withdrawal is possible, we will be required to
pay a portion of the underfunded  liabilities  associated with the withdrawal.  In the
event of such  withdrawal, we estimate that our    withdrawal  obligation is
 approximately  $930,000.  Therefore,  we recorded a reserve in this  amount in the
fourth  quarter  of 2003.  If we are  required  to pay  significantly  more than this
amount,  the  related  charges may  materially  affect our  financial  results in the
quarter and year that they are incurred.

11

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Our
Corporate Supermarkets Have Suffered Significant Recent Losses. The profitability of
our corporate supermarkets decreased considerably in 2003. In early 2004, we decided to
close six supermarkets, including five corporate supermarket, because we did not believe
that we could turn around their performance in the foreseeable future given current market
conditions without significant additional cost and management distraction. We recorded
$0.6 million of after-tax charges in 2003 relating primarily to lease termination and
severance costs for stores we closed in 2003 and $1.6 million of after-tax charges
relating to the impairment of long-lived assets for the stores that we intend to close in
2004. We anticipate recognizing additional after-tax charges of up to $3.6 million,
relating primarily to lease termination and severance costs, when we take the final steps
to close six supermarkets in 2004. We expect that the majority of these charges will be
recorded in the first half of 2004. Our corporate supermarkets continue to face intense
competition from other supermarkets, alternative format food stores and warehouse club
stores. These competitors may have cost advantages compared to us related to their greater
purchasing power and, in many cases, non-union labor workforces. We do not believe that we
will record additional charges related to our corporate supermarkets in 2004. However,
there can be no assurances that additional charges will not be required in 2004 or
subsequent years. These charges could have a material adverse effect on our financial
results in the quarter and year that they are incurred.

We
May Incur Future Retail Repositioning Charges Associated With Our Franchised
Supermarkets. Certain of our franchised supermarkets continue to experience a variety
of operational problems and poor financial performance. In order to further improve our
overall financial results, we continue to actively evaluate various business alternatives
to these underperforming operations. These alternatives include the potential sale of
these supermarkets, conversion of franchised supermarkets into corporate supermarkets,
closing supermarkets and implementing other operational changes. Other than the charges
that we have already announced, we do not currently anticipate recording any charges
associated with any such actions that we will take in 2004. However, there can be no
assurance that we will not incur significant additional repositioning charges associated
with our franchised supermarkets in 2004 or in subsequent years. Any such charges would
likely have a material adverse effect on our financial results in the quarter and year
that they are incurred.

We
Experience Intense, Ongoing Competition. We compete with other national, regional and
local food wholesalers for new franchised supermarket operations, as well as independent
customers. Our wholesale competitors include Supervalu Inc., Roundys, Inc. and Nash
Finch Co. Most of our supermarkets are located in close proximity to, and experience
intense competition from, various national, regional and local chain, franchised and
independently operated supermarkets. Competing supermarkets include Pick N Save, Cub
Foods, Jewel Food Stores, Sentry Food Stores, Dominicks Finer Foods, Festival Foods,
Woodmans Stores and Copps Supermarkets. New supermarket openings or remodelings by
our competitors in our markets can have a material adverse effect on our results of
operations and financial results. Many of our competitors have substantially greater
financial, marketing and other resources than we have. Additionally, these competitors
have cost advantages compared to us related to their greater purchasing power and, in many
cases, non-union labor workforces.

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New
Supercenter And Other Alternative Format Store Openings May Hurt
Our Business. Our supermarkets also compete with alternative format food
stores, including warehouse club stores, such as Sams Clubs, deep discount
supercenters, such as Wal-Mart Supercenters, Big Kmart stores, SuperTarget
stores and ShopKo stores and limited assortment grocery stores, including Aldi and
Sav-A-Lot stores. Many of these competitors have substantially greater financial,
marketing and other resources than we have. Additionally, many of these competitors have a
cost advantage compared to us related to their greater purchasing power and, in many
cases, non-union labor workforces. Over the past several years, a number of these
supercenters, warehouse club stores and limited assortment grocery stores have opened in
our markets. We believe that additional supercenters, warehouse club stores and limited
assortment grocery stores will open in our existing and potential new markets in the
future. These competitors have had, and will likely continue to have, a material adverse
effect on our results of operations and financial results. The opening of additional new
supercenters and warehouse club stores and limited assortment grocery stores in our
markets may have a material adverse effect on our results of operations and financial
results.

A
Recent Financial Pronouncement May Significantly Impact Our Financial Statements.Under
current generally accepted accounting principles, the financial statements of our
franchisees are not consolidated with our financial statements. A new accounting
pronouncement, FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN
46R), which is scheduled to be implemented for quarterly and annual periods ending
on or after March 15, 2004, will require financial statement consolidation in some cases
where consolidation is not currently required. We currently expect that we will be
required to consolidate the financial statements of 15 to 20 of our franchisees to which
we have made loan guarantees with our financial statements. Such consolidation would have
a substantial impact on our consolidated financial statements, require us to incur
additional costs to audit the financial statements of our consolidated franchisees and
require management to devote significant time and efforts to such consolidation. As a
result, such consolidation could have a material adverse effect on the prevailing price
of our common stock.

We
May Issue Additional Shares And Dilute Our Existing Shareholders. In the future, we
may issue additional common stock to raise funds to reduce our debt or to raise funds.
Such issuances could be through a public offering, including one that would allow our
shareholders to purchase sufficient additional shares of our common stock to avoid a
decrease in the percent of our stock that they own, or they could be issued in one or more
so-called private placements to selected investors. As a result, any share
issuances would either have a dilutive effect on the relative percentage ownership
interests of our existing shareholders or would require our shareholders to invest
additional funds to prevent this dilution. In addition, such issuances would decrease our
earnings per share unless our earnings increase by the amount required to offset the
decrease in our earnings per share due to the additional shares of our common stock. A
decrease in our earnings per share may have a material adverse effect on the prevailing
market price of our common stock. There can be no assurance that we either would, or would
be able to, raise additional equity funds. A failure to raise equity funds may limit our
ability to implement our strategic plan and may have a material adverse effect on our
financial condition. If we are successful in raising additional equity capital, the
purchasers of our common stock may require us to appoint one or more directors that they
select and/or may require us to comply with operational or financial covenants.

13

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Our
Businesses Have Low Margins And Are Sensitive To Economic Conditions. Our wholesale
and retail supermarket operations have relatively low profit margins. Due to the difficult
economic climate, intense competition in our markets, the length of time since our last
successful acquisition, our recent financial results and current financial condition, we
recently revised our strategic plan to place a greater emphasis on improving the results
of our current operations through a new focus on our in-store value proposition,
emphasizing our wholesale business, and reducing our debt. If successful, our new focus on
our in-store value proposition will decrease our profit margins. In addition, the decrease
in our profit margins will decrease our earnings unless our sales increase by the amount
required to offset the decrease in our profit margins. Additionally, significant portions
of our sales are at prices that are based on product cost plus a percentage markup. As a
result, our results of operations may be negatively impacted when consumable goods prices
go down, even though our percentage markup may remain constant. The consumable goods
industry is also sensitive to national and regional economic conditions and the demand for
our consumable goods has been adversely affected from time to time by economic downturns.
Additionally, our wholesale business is sensitive to increases in fuel and other
transportation-related costs. Over the past several years, our results of operations and
financial condition have been adversely affected by stagnant consumable goods prices, the
downturn in the economy and increases in fuel costs. We believe that consumable goods
prices are likely to remain stagnant and may, in some cases such as beef products,
decrease in the near future. There can be no assurances that such factors will not
continue to materially adversely affect our results of operations and financial condition.

Recent
Trends In Consumers Purchasing Patterns Have Led, And May Continue To Lead, To
Reduced Sales, Margins And Profitability. Traditionally, many consumers have purchased
most or all of their paper products (such as toilet paper, napkins and paper towels),
laundry supplies, pet supplies, coffee, cereal and perishable items from traditional
supermarkets such as our supermarkets. However, there has been a recent trend toward
purchasing these items in large quantities from alternative sources such as warehouse club
stores, supercenters, discount stores or pet stores. In addition, many consumers have
recently increased the number of meals that they eat away from home and decreased their
purchases from supermarkets. Finally, due to the recent economic downturn in our markets,
many of our customers have recently begun trading down their purchases, buying
fewer and lower priced items than in the past. We believe that these recent trends have
reduced the sales, margins and profitability of our supermarkets and our wholesale
operations. If the strategies we have developed in response to these recent trends are not
successful, these trends could continue to have a material adverse effect on our financial
results.

We
Are Susceptible To Localized Economic Downturns. All of our operations are located in
Wisconsin, northern Illinois and eastern Iowa. As a result, downturns in the general
economy in this geographic region may have a material adverse effect on our financial
results. Over the past several years, the economic conditions in our markets have led
consumers to buy fewer and lower priced items from our supermarkets. There can be no
assurance that our customers will return to their historical purchasing patterns when the
economy recovers or that we will be able to open or acquire additional wholesale
distribution facilities or retail supermarkets in the number of new markets necessary to
achieve geographic diversification.

Unfavorable
Treatment By Our Vendors, Including A Decrease In Our Vendors Promotional Funds, May
Lower Our Earnings. Some of our vendors have been consolidating. This consolidation
could decrease the total amount of vendor funds available to grocery wholesalers and
retailers. In addition, vendors are trying to ensure that their promotional fees and
allowances are used more effectively to directly increase the vendors sales. As a
result of such efforts, we believe that vendors are increasingly directing the majority of
their promotional dollars to larger self-distributing supermarket chains. In addition,
vendors sometimes offer our larger competitors promotions, packaging, payment terms and
products that are not made available to us. We expect these trends to continue. Because we
are a relatively small company in our industry, we may not be able to maintain our
existing levels of vendor marketing and promotional funds. If we cannot at least maintain
our existing level of these funds, our financial results will be materially adversely
affected.

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Our
Business Information Systems Project Presents Additional Significant Risks. In August
2001, we announced a $15 million capital expenditure project to replace and expand our
current business information systems. We subsequently expanded this project to include the
front-end systems for our supermarkets, including our point-of-sale equipment and
software, which added approximately $5 million to the total project cost. Due to
uncertainties related to certain aspects of this project and our desire to reduce our
capital expenditures, we recently reviewed all aspects of this project to ensure that our
expenditures maximize the return on our investment. As a result of this review, we decided
to delay the roll-out of the front-end system phase of this project. The delay in our
front-end system roll-out will defer the benefits of this aspect of the project and could
have a material adverse effect on our results of operations. Our significant investment in
our business information systems project will increase our debt and interest expense and
result in higher future depreciation costs, which will reduce our net earnings and
earnings per share. In addition, we will devote significant management time to complete
the project. There can be no guarantee that our systems project will be successful, or
that it can be completed on budget. Any failure or any significant cost overruns, will
likely have a material adverse effect on our results of operations, financial results and
financial condition. Additionally, once we have our new business information systems in
place, we cannot guarantee that we will be able to realize any significant management,
operational or financial benefits.

Potential
Future Sales Of Our Franchised Supermarkets May Reduce Our Sales And Earnings. The
majority of our supermarkets are owned and operated by franchisees, most of whom own only
one or two supermarkets. Certain of our franchisees are approaching retirement age and
may, within the next few years, decide to sell their supermarkets. Historically, most of
our franchisees have sold their supermarkets to parties that want to continue to operate
the supermarkets as our franchisees. However, in some instances, our franchisees may be
able to sell the supermarkets for a higher price if they sell them to parties that do not
want to operate them as our franchisees. We have a right to purchase our franchised
supermarkets upon termination of our franchise agreements, but as a result of our
financial condition and restrictions on such transactions in our new loan facility, we may
not be able to borrow the funds required to exercise such rights. If we do not exercise
our right of first refusal and allow franchised supermarkets to be sold to parties that do
not want to operate them as our franchisees, we will lose the wholesale sales, earnings
and cash flow associated with these supermarkets. If we exercise our option to purchase a
significant number of such franchised supermarkets during a relatively short period, we
would likely be required to spend substantial amounts, probably funded through increased
borrowing. If we attempt to resell some or all such supermarkets to parties that want to
continue to operate them as our franchisees, we would retain the wholesale sales and
earnings associated with such supermarkets. However, we may be required to sell them for a
lower price than we paid for them, which would increase our debt and interest expense. Any
significant increased debt levels that would result from such transactions would increase
our interest expense, may make our financial condition more risky and susceptible to a
downturn in our business and may limit our ability to pursue other franchise acquisition
opportunities.

Our
Chief Executive Officer Position Is Vacant. Our senior executives, including
particularly our chief executive officer, have historically coordinated the formulation
and execution of our short- and long-term strategic plans. As a result, our success is
largely dependent on the efforts and abilities of our senior management team. Since
November 2003, our chief executive officer position has been vacant. There can be no
assurance that we will be able to hire a chief executive officer with appropriate
qualifications. A failure to hire a chief executive officer with appropriate
qualifications in the near future may have a material adverse effect on our results of
operations.

Our
Success Is Dependent On Our Senior Management. Our existing senior executives have
many years of experience in both the supermarket retail and grocery wholesale industries.
We do not have employment contracts or noncompetition agreements with any of our senior
executives and we do not have key-man insurance on any of our senior executives. If we
were to lose the services of one or more of our key senior executives, particularly before
we hire a new chief executive officer, our financial results may be materially adversely
affected.

Our
Success Is Dependent Upon Our Ability To Attract And Retain Quality Supermarket Managers
And Franchise Operators. The success of our supermarkets is dependent upon our ability
to attract and retain quality supermarket managers and franchise operators. There can be
no assurance that we will be able to attract or retain sufficient quality retail
supermarket managers and franchise operators to successfully operate our supermarkets.
Failure to successfully attract and retain high quality retail supermarket managers and
franchise operators could limit our ability to successfully implement our strategic plan
and may have a material adverse effect on our results of operations and financial results.

15

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Our
Financial Results May Be Adversely Impacted Due To Product Liability, Food Contamination
Or Other Claims. Like any other seller of food, we face an inherent risk of exposure
to product liability or food contamination claims if the products we sell cause injury or
illness. We cannot assure you that our insurance or contractual indemnification
protections will be adequate to cover these potential liabilities. If we do not have
adequate insurance or contractual indemnification available, product liability claims
could have a material adverse effect on our financial results. Additionally, consumers may
change their purchasing patterns due to publicized incidents of contamination, even if
such cases do not involve our supermarkets or occur in our markets. Future sudden shifts
in consumer behavior may have a material adverse effect on our results of operations and
financial results.

We
Do Not Expect To Continue To Repurchase As Many Of Our Shares As We Have In The Past.
As of January 4, 2004, only approximately $1.1 million of our $30 million board-authorized
common stock repurchase plan remained available for additional repurchases. In 2002 and
2003, we repurchased approximately 136,000 and 250,000 shares for $2.3 million and $3.4
million, respectively, under this plan. Due to the a prohibition on stock repurchases
included in our new loan facility, our recent financial results and current financial
condition and our focus on reducing our debt, we do not currently anticipate making any
stock repurchases during 2004. In light of the very low average daily trading volume for
our common stock on the Nasdaq National Market, our decision not to continue to repurchase
significant additional shares of our common stock may make it more difficult for our
shareholders who own significant amounts of our common stock to sell their shares without
substantially reducing the trading price of our shares. In addition, as a result of the
suspension of our stock repurchases, if the participants in our retirement savings plan
decide to sell a significant number of the shares of our common stock held in their plan
accounts, the plan may be required to sell such shares in the public market. Any
significant increase in the number of our shares sold publicly may have a material adverse
effect on the prevailing market price of our common stock.

Significant
Sales Of Our Common Stock May Adversely Affect The Prevailing Market Price For Our CommonStock. The average daily trading volume for our common stock on the Nasdaq National
Market is very low. As a result, significant purchases or sales of our common stock within
a short time period in the public market may result in significant changes in the
prevailing market price of our common stock. This relative lack of trading volume makes it
difficult to sell significant quantities of our common stock within a short time period in
the public market. Sales of significant quantities of our common stock by any of our
shareholders within a short period of time may have a material adverse effect on the
prevailing market price of our common stock. Additionally, there is typically a relatively
large spread between the bid and ask prices for our common stock.
This spread increases the risk associated with investments in our common stock compared to
stocks that have lower spreads between their bid and ask prices.

Certain
Wisconsin Laws May Discourage Certain Takeover Proposals. Wisconsin corporate law
contains several provisions which may discourage non-negotiated takeover proposals for us
or limit or block certain business combinations between us and one of our major
shareholders. Such provisions include (i) limiting the voting power of certain persons
owning in excess of 20% of our voting power; (ii) requiring a supermajority vote of
shareholders to approve certain business combinations not meeting certain price standards;
and (iii) prohibiting certain business combinations between us and one of our major
shareholders for a period of three years, unless such acquisition has been approved in
advance by our board of directors. Because these provisions may discourage certain
acquisition proposals, our shareholders who wish to participate in such a transaction may
not have an opportunity to do so.

Our
Shareholder Rights Plan Could Discourage Certain Takeover Proposals. Our shareholder
rights plan may discourage a third party from making a proposal to acquire us which we
have not solicited or do not approve, even if the acquisition would be beneficial to our
shareholders. As a result, our shareholders who wish to participate in such a transaction
may not have an opportunity to do so.

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Our
Articles Of Incorporation And Bylaws Contain Certain Anti-Takeover Provisions. Our
Articles of Incorporation and Bylaws contain certain provisions that, among other things,
provide for staggered terms for members of our board of directors, place certain
restrictions on the removal of directors, authorize our board of directors to issue
undesignated preferred stock in one or more series without shareholder approval, establish
certain procedures to call a special meeting of shareholders, require advance notice for
director nominations and certain other matters to be considered at meetings of
shareholders and impose supermajority voting requirements on certain amendments to our
Articles and Bylaws. These provisions could have the effect of delaying, deferring or
preventing a change of control of us or the removal of our board of directors or our
existing management, even if such actions would be beneficial to our shareholders.

# Item 1A  Executive
Officers of the Registrant.

|Name and Age            | Positions and Offices                                           
|----------------------- | ----------------------------------------------------------------
|Michael R. Houser, 52   | Vice Chairman of the Board, Executive Vice President and Chief  
|                        | Marketing Officer(a)                                            
|John H. Dahly, 63       | Executive Vice President, Chief Financial Officer, Secretary and
|                        | Treasurer                                                       
|Louis E. Stinebaugh, 47 | Executive Vice President - Operations                           
|Thomas J. Timler, 46    | Vice President and Chief Information Officer of Fresh Brands    
|                        | Distributing, Inc.                                              

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|(a) | Mr.
          Houser is also a member of our board of directors.
|--- | ----------------------------------------------------------------

All
of our executive officers have held the positions indicated above for at least the last
five years, except that:

| |  | Michael
R. Houser became our Chief Marketing Officer in May 2000 and became our Vice Chairman of
the Board in December 2000.
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | John
H. Dahly, became our Executive Vice President, Chief Financial Officer, Secretary and
Treasurer in December 2003, served as our Chief Financial Officer and Secretary from 1984
to 1990, served as our Executive Vice President, Chief Financial Officer and Secretary
from 1990 to January 2001 and served as a consultant to us from January 2001 to December
2003.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Louis
E. Stinebaugh became our Executive Vice President  Operations in December 2003 and
was the President of the Sentry division of Supervalu, Inc. from September 2003 to
December 2003, was the President of the Sentry Division in Milwaukee of Fleming
Companies, Inc. from March 2001 to September 2003 and was a Vice President of
Merchandising/Marketing at Fleming prior to March 2001.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Thomas
J. Timler was our Vice  President - Business  Systems  Support Group from January 1994
until  December                   2000.
| | - | -------------------------------------------------------------------------------------------------------------------------------------

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Executive
officers are generally elected annually at the annual meeting of our board of directors
held on the date of our annual meeting of shareholders. Each executive officer holds
office until his successor has been elected or until his death, resignation or removal.

# Item 2.  Properties.

As
is typical in our industry, all of our supermarkets are leased. We generally lease our
supermarkets from nonaffiliated real estate developers under long-term leases. Such leases
generally contain initial terms of 15 to 20 years, with several five-year renewal
options. None of our lease arrangements contain repurchase options and we do not own the
land underlying any of such supermarkets. A few of our leases, however, include rights of
first offer running in our favor, which give us the right to advance notice of
the land owners desire to sell its property, as well as an exclusive right to submit
offers to purchase these properties prior to them being made available to the general
public.

As
of January 3, 2004, we leased all 28 of our corporate supermarkets. As of January 3, 2004,
we subleased 59 of our leased supermarkets to independent operators who are our wholesale
customers and franchisees and one other supermarket to an independent operator.

We
own our combined distribution center and our headquarters complex in Sheboygan, Wisconsin
which occupies approximately nine acres of a 16-acre site. The facility provides
approximately 30,500 square feet of space for offices and related activities and
approximately 364,000 square feet of distribution center space. We lease:

| |  | an
additional  14,500 square feet of office space in Sheboygan  used for customer  support
 services  under a                   lease expiring in August 2006;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
20,000 square foot  centralized  bakery/deli  production  facility in Platteville,
 Wisconsin under a lease                   expiring in 2008; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | approximately
55,000 square feet of distribution center space in Sheboygan.
| | - | ---------------------------------------------------------------------------

# Item 3.  Legal
Proceedings.

There
are no material legal proceedings to which we are a party or to which any of our property
is subject, other than routine litigation incidental to our business. No material legal
proceedings were terminated during the fourth quarter of 2003.

# Item 4.  Submission of
Matters to a Vote of Security Holders.

No
matters were submitted to a vote of our shareholders during the fourth quarter of 2003.

# PART II

# Item 5.  Market for Our
Common Stock, Related Shareholder Matters and Issuer Repurchases of Equity Securities.

On January
5, 2004, we issued 1,839 shares of our common stock to Walter G. Winding, III, our
independent Chairman of the Board as a retainer for service as our chairman in 2004. On
February 26, 2004, pursuant to our program for compensating our independent directors, we
issued 606 shares of our common stock to each of our directors who were not employed by us
or one of our service providers as a retainer for service on our board of directors in
2004. We issued these shares in reliance upon the exemption from registration provided by
Section 4(2) under the Securities Act because the issuance did not involve a public
offering.

Our
common stock is traded over-the-counter on the Nasdaq Stock Market under the symbol FRSH.
There are approximately 2,100 shareholders of our common stock. An analysis of high and
low stock prices by quarter for the last three years is as follows:

18

---

|    
|----
|High
|2003
|2002
|2001

In
the first quarter of 2004, we indefinitely suspended payment of our cash dividends. Our
recent cash dividends paid per share were:

|     | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year 
|---- | ------------- | -------------- | ------------- | -------------- | -----
|2003 | $0.09         | $0.09          | $0.09         | $0.09          | $0.36
|2002 | 0.09          | 0.09           | 0.09          | 0.09           | 0.36 
|2001 | 0.09          | 0.09           | 0.09          | 0.09           | 0.36 

In
January 1992, our board of directors instituted a share repurchase plan. Since then, the
aggregate amount of our common stock that we can repurchase pursuant to this plan has been
increased several times, most recently to its current $30 million limit. Under this plan,
we may repurchase shares of our common stock from time to time in the open market,
pursuant to privately negotiated transactions or otherwise. The repurchased shares are
held in our treasury pending potential future issuance in connection with employee
benefit, option or stock ownership plans or other general corporate purposes. Since the
plan was authorized, we have repurchased approximately 4.6 million shares, or
approximately half of the then-outstanding shares of our common stock. Although the plan
does not have any expiration date, due to credit facility restrictions, the recent results
of our operations and our focus on reducing our debt, we do not currently anticipate
making significant additional repurchases under this plan during 2004.

The
following chart discloses information regarding the shares of our common stock repurchased
during the fourth quarter of fiscal 2003, all of which were purchased pursuant to this
plan:

|Period                   | Total Number of
Shares Purchased | Average Price
Paid Per Share | Approximate Value of Shares
that May Yet Be Purchased under
the Plan
|------------------------ | -------------------------------- | ---------------------------- | --------------------------------------------------------------------
|October 5 to November 4  | 34,920                           | $13.28                       | $1.7 million                                                        
|November 5 to December 4 | 37,428                           | $10.56                       | $1.3 million                                                        
|December 5 to January 3  | 21,556                           | $ 9.91                       | $1.1 million                                                        
|Total/Average            | 93,904                           | $11.42                       | $1.1 million                                                        

19

---

# Item 6. Selected
Financial Data.

# Five-Year Financial
Summary

|                                                        
|--------------------------------------------------------
|(Dollars and shares in thousands, except per share data)
|
|Consolidated statements of operations data:             
|Net sales                                               
|Gross profit (c)                                        
|Earnings (loss) before income taxes                     
|Income tax provision (benefit)                          
|Net earnings (loss)                                     
|Earnings (loss) per share - basic                       
|Earnings (loss) per share - diluted                     
|Cash dividends per share                                
|Weighted average shares and equivalents                 
|outstanding - diluted                                   
|Net earnings (loss)-to-sales ratio                      
|Consolidated balance sheet data                         
|(at fiscal year-end):                                   
|Working capital                                         
|Total assets                                            
|Current obligations under capital leases and            
|current maturities of long-term debt                    
|Long-term debt                                          
|Long-term obligations under capital leases              
|Total shareholders' investment                          
|Other data:                                             
|Capital expenditures                                    
|Depreciation and amortization                           

|NOTES: | (a) | Our fiscal year ends on the Saturday closest to December 31.  The 2003 fiscal year was
a 53-week                 period.  All other fiscal years presented were 52-week periods.
|------ | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | All
data should be read in conjunction with our audited consolidated financial
          statements and Managements discussion and analysis of financial
          condition and results of operations as set forth in this Annual Report.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | In
accordance with guidance under Emerging Issues Task Force (EITF)
          No. 02-16, Accounting by a Customer for Certain Consideration Received
          from a Vendor, certain previously reported amounts for fiscal years prior
          to 2003 have been reclassified to conform to the fiscal -year 2003
presentation.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

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# Item 7.  Management's
Discussion and Analysis of Financial Condition and Results of Operations.

# OUR BUSINESS

We
are a supermarket retailer and grocery wholesaler principally through corporate-owned,
franchised and independent supermarkets. At the end of 2003, we owned and operated 28
supermarkets, a gas station and a convenience store, and we franchised an additional 73
supermarkets. Our corporate and franchised supermarkets are sometimes collectively
referred to as our supermarkets. Twenty of our corporate supermarkets operate
under the Piggly Wiggly banner and eight of them operate under the Dicks
Supermarkets banner. All of our franchised supermarkets operate under the Piggly Wiggly
banner. We are the primary supplier to all 101 of our supermarkets. We also serve as a
wholesaler to a number of smaller, independently operated supermarkets and convenience
stores. All of our supermarkets and other wholesale customers are located in Wisconsin and
northern Illinois.

Our
operations are classified into two segments, wholesale and retail. Our wholesale business
derives its revenues primarily from the sale of groceries, produce, dairy, meat, bakery
and deli items and other products to our franchised supermarkets and independent retail
customers. We also supply these products to our corporate supermarkets, but those revenues
are eliminated for accounting purposes in our consolidated financial statements. We supply
grocery, frozen food and produce to our supermarkets through two distribution centers in
Sheboygan, Wisconsin. We also provide our supermarkets with fresh, frozen and processed
meats, dairy, eggs and deli items through a third-party distribution facility in
Milwaukee, Wisconsin. Additionally, we distribute items made in our Platteville, Wisconsin
centralized bakery/deli production facility to our corporate supermarkets, franchisees and
independent customers.

Our
retail business consists of our 28 corporate supermarkets, our gas station and our
convenience store. We earn our retail revenues by selling products purchased from our
wholesale segment and other merchandise to retail consumers. Compared to our wholesale
segment, our retail segment generates higher gross profit margins, but has higher selling
and administrative expenses.

# OVERVIEW OF 2003 AND OUR
NEW OPERATIONAL FOCUS

In
2003, our net sales increased, but our net earnings decreased from $8.0 million, or $1.54
per diluted share, in 2002 to a net loss of $0.5 million, or $0.09 per share in 2003. The
primary cause of the decrease in our 2003 net earnings was an increase of $8.0 million of
after-tax charges recorded in 2003, compared to 2002. These increased charges related to:

| |  | additional after-tax charges of $2.2 million due to the impairment of assets and other
related closing costs of certain of our supermarkets, the majority of which are related to
eight underperforming supermarkets, all of which we closed in 2003 or will close in 2004
(as noted below, we expect to take additional significant charges related to some of these
supermarket closings in 2004);
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | $2.9
million of increased after-tax charges related to potentially uncollectible franchisee
receivables;
| | - | --------------------------------------------------------------------------------------------------------

| |  | $1.4 million of after-tax charges related to the write-off of the entire value of certain
financial reporting and accounting software that was purchased in connection with our
business systems project, but which we will not use, compared to no similar charges
incurred in 2002;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | $0.6 million of additional after-tax charges for estimated underfunded liabilities
associated with one of our multi-employer union health, welfare and benefits plans;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an after-tax increase of $0.4 million in our provision for certain health care costs
related to a different, primarily self-funded health insurance plan; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | additional after-tax professional fees of $0.5 million associated primarily with these
charges, our executive officer searches and several acquisitions that did not occur.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

---

In
early 2004, we decided to close six supermarkets because we did not believe that we could
turn around their performance in the foreseeable future given current market conditions
without significant additional cost and management distraction. We recorded $0.6 million
of after-tax charges in 2003 relating primarily to lease termination and severance costs
for stores we closed in 2003 and $1.6 million of after-tax charges relating to the
impairment of long-lived assets for the stores that we intend to close in 2004. We
anticipate recognizing additional after-tax charges of up to $3.6 million, relating
primarily to lease termination and severance costs, when we take the final steps to close
six supermarkets in 2004. We expect that the majority of these charges will be recorded in
the first half of 2004. Together, the eight supermarket closures are expected to decrease
our annualized sales by approximately $37 million and increase our annualized net earnings
by approximately $2.0 million. The relative impact of these store closures on our reported
revenues and net earnings in 2004 will depend upon the actual timing of the closures.

Principally
due to the items noted above, our 2003 financial results were significantly lower than our
expectations, making 2003 our second consecutive year of disappointing financial results.
Our corporate owned supermarkets, particularly our corporate Piggly Wiggly supermarkets,
had an especially difficult year in 2003 due to increasing competition and significant
increased costs associated with our union health and other benefit plans. These cost
increases further contributed to our significant cost disadvantage compared to several of
our competitors that utilize non-union workforces.

As
a result of our financial performance over the past two years, our board of directors
terminated our chief financial officer and our vice president  retail operations and
agreed to end our relationship with our chief executive officer. We subsequently rehired
John H. Dahly, our retired former long-time chief financial officer, as our new chief
financial officer and hired Louis E. Stinebaugh, the former president of the Milwaukee,
Wisconsin based Sentry division of Fleming Companies, as our executive vice president
 operations. Our national search for a new chief executive officer is continuing and
we believe that we will fill this position in the first half of 2004. Our search includes
both internal and external candidates.

With
the input of our new management team, our board of directors reviewed our previous
strategic plan, which included a goal of trying to achieve a 15% compounded annual growth
rate in revenue over at least a five year period beginning in 2001. This strategic plan
was focused on significantly expanding our retail business, principally through
acquisitions. However, in light of our recent financial performance, current financial
condition and inability to meet our revenue growth goals in either 2002 or 2003, our board
and new management team determined that it would be in the best interests of our
shareholders to adopt a new operational focus that places a greater emphasis on improving
the results of our current operations through focusing on our in-store value proposition,
emphasizing our wholesale business and reducing our debt. This marks a return to our
successful strategy utilized for many years prior to 2000. We believe that successful
implementation of this new operational focus will reinvigorate our franchise system and
allow us to once again generate consistent, reliable cash flows and earnings.

As
a result of our focus on our in-store value proposition, we expect our profit margins to
decrease. However, we believe that this investment in our margins will
ultimately increase our earnings through increases in our sales. We do not expect to
realize the full benefits of our new operational focus until 2005. The focus on our
consistently profitable wholesale business will include increased efforts to add new
franchisees. We expect that most such potential new franchisees will be supermarket
operators that are currently supplied by one of our wholesale competitors, but we may
convert some of our existing Piggly Wiggly corporate supermarkets to franchised
supermarkets by selling them to existing or new franchisees. We may also acquire, or
arrange to acquire, certain of our existing franchisees with the intention of
refranchising them to other franchise operators in order to maintain our core franchise
base. Consistent with industry practice, in certain limited situations, we may continue to
provide credit enhancements to certain qualified new franchisees by leasing our
franchisees supermarkets and, in turn, subleasing them to franchisees and/or
guaranteeing a portion of the franchisees bank borrowings. However, we will
carefully analyze the benefits of each such circumstance, since these increased
obligations will increase the risks associated with our operations and limit our ability
to borrow funds to grow our business.

22

---

In
March 2004, we entered into a new, secured three-year, $40 million revolving credit
facility with LaSalle Bank National Association and U.S. Bank National Association. The
new asset-based credit facility replaced our former unsecured $35 million revolving credit
facility that was to expire on April 30, 2004. Our new credit facility required us to
pledge all of our assets as collateral, increased our non-default interest rate by 25 to
50 basis points compared to the weighted average interest rate that we paid in 2003 and
contains financial covenants and restrictions on certain corporate actions that are
described in the section titled Liquidity and Capital Resources  Summary
below. We believe that, combined with the expected cash flows from our operations, our new
asset-based credit facility will provide us with adequate liquidity through at least 2004.
However, in order to facilitate obtaining a new credit facility on the most favorable
terms, and in view of our recent results and financial condition and our focus on reducing
our debt, we indefinitely suspended our quarterly cash dividend payments in the first
quarter of 2004 and have suspended our stock repurchase program.

# RESULTS OF OPERATIONS

The
following tables set forth certain information regarding our results from 2001 through
2003 (in thousands, except per share data and percentages):

|                                    |  |  |   | Variance
|----------------------------------- |  |  | - | --------
|
|Net sales                           |  |  | $ | 657,957 
|Retail net sales                    |  |  |   | 330,909 
|Wholesale net sales                 |  |  |   | 327,048 
|Gross profit                        |  |  |   | 130,150 
|Selling and administrative expenses |  |  |   | 120,003 
|Depreciation and amortization       |  |  |   | 9,191   
|Operating income                    |  |  |   | 956     
|Earnings (loss) before income taxes |  |  |   | (1,300  
|Income tax expense (benefit)        |  |  |   | (827    
|Net earnings (loss)                 |  |  |   | (473    
|Diluted earnings (loss) per share   |  |  | $ | (0.09   

| | * | 2003
consisted of 53 weeks, but 2002 and 2001 consisted of 52 weeks.
| | - | --------------------------------------------------------------------

|                                    | Percent of net sales | Variance
|----------------------------------- | -------------------- | --------
|
|Retail net sales                    |                      |         
|Wholesale net sales                 |                      |         
|Gross profit                        |                      |         
|Selling and administrative expenses |                      |         
|Operating income                    |                      |         
|Earnings (loss) before income taxes |                      |         
|Income tax expense (benefit)        |                      |         
|Net earnings (loss)                 |                      |         

As
discussed in the section titled New Accounting Pronouncement below, in 2004 we
will likely be required to consolidate the financial statements of certain of our
franchisees with our financial statements. We currently expect this new accounting
pronouncement to require the financial statement consolidation of 15 to 20 of our
franchisees. Because we are in the process of evaluating the impact that this could have
on our consolidated financial statements, the forward-looking statements herein do not
include the impact of any such consolidations.

23

---

# 2003 vs. 2002

Comparable Store Sales

Comparable
store sales for all of our corporate and franchised supermarkets open throughout 2003 and
2002 increased 3.6% in 2003, compared to 2002. This increase was primarily due to the fact
that 2003 consisted of 53 weeks, whereas 2002 consisted of only 52 weeks. Excluding the
effects of the extra week in 2003, comparable store sales would have increased 1.6% during
2003, compared to 2002. This increase was due to:

| |  | higher
sales at our replacement and remodeled supermarkets;
| | - | -----------------------------------------------------------

| |  | the
closing of competitive stores in several of our markets in 2003; and
| | - | ------------------------------------------------------------------------

| |  | special
promotional efforts in several of our markets.
| | - | ------------------------------------------------------

The
increases in our comparable store sales were partially offset by:

| |  | increasingly
 intense  competition in many of our markets,  including the opening of new supermarkets,
 supercenters and value oriented food and general merchandise stores;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | recent
adverse trends in customers purchasing habits, including an increasing number of
customers limiting their purchases to deeply discounted items and by purchasing lower
priced items; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | decreases
in sales at many of our corporate Piggly Wiggly supermarkets.
| | - | -----------------------------------------------------------------------

Based on our internal price indices,
inflation did not have a significant effect on our sales in 2003.

We
expect our 2004 comparable store sales to increase nominally compared to 2003. We believe
that our new operational focus, as well as anticipated higher sales at our replacement
remodeled supermarkets, will be the primary contributors of such anticipated increase. We
expect that the anticipated increases due to these factors will be partially offset by
competitive openings in several of our markets in 2004.

Retail Net Sales

The
increases in our retail net sales for 2003, compared to 2002, were due primarily to the
factors summarized above and:

| |  | the
January 2003 opening of our new market corporate supermarket in Kenosha, Wisconsin;
| | - | ---------------------------------------------------------------------------------------

| |  | the
 August  2003  opening of our  replacement  corporate  supermarket  in  Sheboygan,
 Wisconsin.  This  50,000  square  foot                   supermarket features our first
combination Pig Stop fuel and convenience store;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
September 2003 opening of our new market corporate supermarket in Racine, Wisconsin; and
| | - | --------------------------------------------------------------------------------------------

| |  | the September 2003 purchase and consolidation of a Menasha, Wisconsin competitive
supermarket with our existing Menasha supermarket.
| | - | ------------------------------------------------------------------------------------------------------------------------------------

These
increases were partially offset by the factors summarized above and the December 2003
closure of our Watertown, Wisconsin corporate supermarket.

We
believe that our retail net sales at our continuing corporate supermarkets will increase
nominally in 2004, compared to 2003. We anticipate that the successful implementation of
our new operational focus will be the primary contribution to such anticipated increases.
Similarly, we anticipate that our 2003 corporate supermarket openings and replacements
will result in additional sales increases in 2004, the first year that we will benefit
from a full year of sales at such supermarkets. However, we anticipate that the closure of
one of our underperforming corporate supermarkets during 2003 and five additional
underperforming corporate supermarkets during 2004 will result in annual retail net sales
decreases of approximately $34 million. Depending on the timing of the closure of the
supermarkets to be closed in 2004, we anticipate approximately $23 million to $27 million
of such annual sales reductions will be realized in 2004.

24

---

Wholesale Net Sales

The
increase in our wholesale net sales for 2003 was due primarily to:

| |  | approximately $7.1 million of wholesale net sales to a group of local supermarkets
previously supplied by Fleming Companies under a temporary secondary wholesale supplier
arrangement. This arrangement ended in the third quarter of 2003;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
February 2003 opening of a replacement franchised supermarket in Omro, Wisconsin;
| | - | -------------------------------------------------------------------------------------

| |  | the
July 2003 opening of a replacement franchised supermarket in Juneau, Wisconsin; and
| | - | ---------------------------------------------------------------------------------------

| |  | the completion, during July and December 2003, of expansion and remodeling projects at
franchised supermarkets in Mosinee and Cross Plains, Wisconsin.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

The
increase as a result of these factors was partially offset by the factors summarized above
and the July 2003 closure of our Ripon, Wisconsin franchised supermarket.

We
believe that our wholesale net sales will increase nominally in 2004, compared to 2003,
due primarily to the successful implementation of our new operational focus. Similarly, we
anticipate that the franchised supermarkets that we replaced, expanded or remodeled in
2003 will result in additional wholesale net sales increases in 2004, the first year that
we will benefit from a full year of sales at such supermarkets. However, we anticipate
that the closure of one underperforming franchised supermarket in 2003 and one additional
underperforming franchised supermarket during 2004 will result in annual wholesale net
sales decreases of approximately $3 million. Depending on the timing of the closure of the
franchised supermarket during 2004, we anticipate approximately $2.0 million to $2.5
million of such annual sales reductions will be realized in 2004.

Gross Profit

Our
gross margin did not change in 2003, compared to 2002, but our gross profit increased due
to our increased sales. We expect that our new operational focus will likely result in a
decrease in our 2004 gross margin compared to 2003 as we invest in programs to
re-emphasize our in-store value proposition and to increase sales volume. However, we also
anticipate that successful implementation of our new operational focus will also increase
both our retail net sales and wholesale net sales, which we believe will ultimately
increase our net earnings. As a result of our 2003 and 2004 store closures, we expect the
percent of our net sales that will be generated by our wholesale business to increase in
2004, compared to 2003. Because our wholesale business has lower gross margins than our
retail business, such change is expected to further decrease our gross margins in 2004,
compared to 2003.

Selling and
Administrative Expenses

The
increase in our selling and administrative expenses from $99.9 million in 2002 to $120.0
million in 2003 was primarily due to the following:

| |  | additional charges of $3.6 million ($2.2 million after-tax) due to the impairment of
assets and other related closing costs of certain of our supermarkets, the majority of
which are related to eight underperforming supermarkets, all of which we closed in 2003 or
will close in 2004 (as noted below, we expect to take additional significant charges
related to some of these supermarket closings in 2004);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a $4.8 million increase ($2.9 million after-tax) in charges related to potentially
uncollectible franchisee receivables and retail subsidies, which increased from
$1.5 million in 2002 to $6.3 million in 2003;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25

---

| |  | $2.4 million of charges ($1.4 million after-tax) related to the write-off of the entire
value of certain financial reporting and accounting software that was purchased in
connection with our business systems project, but which we will not use, compared to no
similar charges incurred in 2002;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | $0.9 million of charges ($0.6 million after-tax) for estimated underfunded liabilities
associated with one of our multi-employer union health, welfare and benefits plans;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a $0.7 million increase ($0.4 million after-tax) in charges for certain health care costs
related to a different, primarily self-funded health insurance plan; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | additional professional fees of $0.8 million ($0.5 million after-tax) associated primarily
with these charges, our executive officer searches and several acquisitions that did not
occur.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, our selling and administrative expenses increased in 2003 due to increases in
our health care costs, particularly cost increases associated with our retail employees,
and promotional spending, including increased promotional spending in connection with the
opening of several new supermarkets.

The
increase in our selling and administrative expenses was partially offset by:

| |  | a reduction of corporate staff members early in the fourth quarter of 2003. We anticipate
the annual pretax payroll savings resulting from these staff reductions, along with other
reductions that have resulted from retirements, to be approximately $1.0 million. In 2003,
such savings were partially offset by related personnel severance costs and resulted in
net pretax savings of $0.2 million; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our other ongoing efforts to reduce our operating costs and increase our efficiency,
including increasing the use of technology in our corporate supermarkets and wholesale
operations.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
noted in the section titled Overview of 2003 and Our New Operational Focus
above, we anticipate recording charges of up to $5.9 million ($3.6 million after-tax) in
2004 as and when we take the final steps to close six supermarkets that, in the first
quarter of 2004, we announced that we would close. It is expected that the majority of
these charges will be recorded in the first half of 2004. Such charges will consist
primarily of lease termination and severance costs. We do not currently anticipate
recording any other similar charges in 2004. However, due to the increasingly competitive
nature of the supermarket industry and the challenging economic environment, some of our
supermarkets continue to experience operational challenges. In order to further improve
our overall financial results, we continue to actively evaluate various business
alternatives to these operations, including selling these supermarkets, converting
franchised supermarkets into corporate supermarkets, closing supermarkets and implementing
other operational changes. If any of these actions are taken, we may incur significant
charges related primarily to lease termination and severance costs. Similarly, if the
financial performance of some of our franchised supermarkets continue to deteriorate, then
we may incur significant additional charges for potentially uncollectible accounts
receivable and retail subsidies.

As
noted above, as a result of our 2003 and 2004 store closures, we expect the percent of our
net sales that will be generated by our wholesale business to increase in 2004, compared
to 2003. Because our wholesale business has lower selling and administrative expenses, as
a percentage of our sales, than our retail business, such change is expected to decrease
our selling and administrative expenses, as a percentage of our net sales, in 2004,
compared to 2003.

Net Earnings

Our
depreciation and amortization expense increased in 2003, compared to 2002, primarily as a
result of the new corporate supermarkets that we opened in 2002 and 2003. The increase in
interest expense in 2003, compared to 2002, was due to the additional capital lease
obligations entered into in connection with two of the new corporate supermarkets in 2003.
Our effective tax rate was 63.6% in 2003, compared to 38.6% in 2002, as the impact of
permanent tax benefits was relatively higher in relation to the narrow loss before income
taxes in 2003.

26

---

The
decreases in net earnings (from net earnings of $8.0 million in 2002 to a net loss of $0.5
million in 2003) and diluted earnings per share (from diluted net earnings per share of
$1.54 in 2002 to a net loss per diluted share of $0.09 in 2003) in 2003, compared to 2002,
were caused by the factors described above.

# 2002 vs. 2001

Retail Net Sales

The
increase in our retail sales for 2002, compared to 2001, was primarily due to:

| |  | our acquisition of the Dicks Supermarket chain, which added $97.7 million to our
retail sales for 2002, compared to $54.7 million for 2001 (when we only realized about six
months of retail sales from Dicks); and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | sales at our new replacement corporate supermarkets in Sheboygan, Wisconsin and Zion,
Illinois that opened in August 2001 and January 2002, respectively, which were higher than
sales at the supermarkets they replaced.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
increase in our retail sales as a result of these factors was partially offset by:

| |  | increased intense competitive activity in certain of our market areas, including
competitive store openings affecting about one-third of our corporate supermarkets and
several of our franchised supermarkets; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | overall softness of the economy and rising unemployment rates, which reduce discretionary
spending and tend to cause retail shoppers to reduce their spending by purchasing less
expensive products from our supermarkets.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Due
primarily to the above factors, comparable store sales for our corporate and franchised
supermarkets were virtually flat for 2002 compared to 2001. Because the Dicks
acquisition occurred in the second quarter of 2001, our Dicks sales were included in
our comparable store sales figures for the second half of 2002 only. The inclusion of our
Dicks supermarkets, which faced especially intense competition from several
competitive store openings, in our comparable store sales comparisons contributed to lower
than expected comparable store sales. In contrast, in 2001, we achieved significant
comparable store sales increases in part because of competitive store closures in several
of our markets. Based on our internal wholesale price index, inflation did not have any
significant effect on our retail sales in 2002.

Wholesale Net Sales

Our
net wholesale sales for 2002 increased nominally compared to 2001. The increase was
largely due to our conversion of independent supermarkets to Piggly Wiggly supermarkets in
Howard and Nekoosa, Wisconsin in October 2001 and in Cambridge, Wisconsin in August 2002.
Additionally, our wholesale sales increased due to our March 2002 addition of a wholesale
customer in Oostburg, Wisconsin that became a franchised supermarket in the fourth quarter
of 2002. These increases were offset by wholesale sales decreases due to the continued
softness in the economy and competitive store openings in several of our markets, which
decreased customer count at several of our franchised supermarkets and the amount that
customers, on average, spent at these supermarkets. Based on our internal wholesale price
index, inflation did not have any significant effect on our wholesale sales in 2002.

27

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Gross Profit

The
significant improvement in our gross margin during 2002 was attributable primarily to the
increase in our mix of retail sales to total sales resulting from the Dicks
acquisition, a change in the mix of items sold and reduced sale markdowns in our
supermarkets.

Selling and
Administrative Expenses

Our
selling and administrative expenses increased significantly, as a percent of sales, during
2002 compared to 2001. This increase was attributable to:

| |  | an
increase in our percentage of retail sales to total sales resulting from the Dick's
acquisition;
| | - | ---------------------------------------------------------------------------------------------------

| |  | a one-time $166,000 special assessment imposed by the Illinois United Food and Commercial
Workers Health Benefits Fund to eliminate the amount by which the plans liabilities
exceed the value of its assets (we paid this special assessment in 2002 and 2003, but we
recognized the entire charge in 2002);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | costs
of $200,000 associated with our reaudit of our consolidated financial statements; and
| | - | -------------------------------------------------------------------------------------------

| |  | a
loss of $220,000 recognized on the sale of vacant real estate.
| | - | ----------------------------------------------------------------

Like
many employers, in 2002, we were faced with the prospect of significant increases in our
health care costs. The impact of these increases during 2002 was mitigated, in part, by
our fall 2001 introduction of employee health plan cost sharing.

From
time to time, we incur significant realization charges or write-offs related to our
underperforming supermarkets and wholesale customers. Our total 2002 and 2001 realization
charges relating to wholesale bad debts and retail subsidies were $1.5 million and $2.1
million, respectively. These charges were included as a part of selling and administrative
expense in our consolidated statements of operations. The retail subsidy part of these
charges, which was $430,000 for 2002 and $1.1 million for 2001, and represents a
discretionary amount provided to certain new or underperforming retailers, generally
offset against our outstanding receivables balance for the supermarket provided the
subsidy.

Net Earnings

Our
increase in earnings was primarily due to the elimination of goodwill amortization as
required by SFAS No. 142. This was partially offset by increased interest expense. Our
interest expense increased due to our increased borrowings under our revolving line of
credit to fund our on-going business information systems project and working capital
requirements.

Our
earnings per share increased in 2002, compared to 2001, due to an increase in our earnings
and a nominal decrease in our weighted average common shares and equivalents. The decrease
in our diluted weighted average common shares and equivalents to 5,231,000 for 2002 from
5,269,000 for 2001 was due to repurchases of our shares, which was partially offset by the
sale of shares to two local investors during the fourth quarter of 2001.

28

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# LIQUIDITY AND CAPITAL
RESOURCES

# Summary

The
following tables summarize our cash flow during 2003 and 2002 and other information
related to our liquidity and capital resources (in thousands, except for ratios):

|                                                | 2003 | 2002 | Variance
|----------------------------------------------- | ---- | ---- | --------
|Cash and cash equivalents at beginning of year  |      |      | $       
|Cash provided by operating activities           |      |      |         
|Cash used in investing activities               |      |      |         
|Cash provided by (used in) financing activities |      |      |         
|Cash and cash equivalents at end of year        |      |      | $       

|                                                              | January 3,
2004 | December 28,
2002 | Variance
|------------------------------------------------------------- | --------------- | ----------------- | --------
|Working capital (current assets minus current liabilities)    |                 |                   | $       
|Current ratio (current assets divided by current liabilities) |                 |                   |         
|Ratio of total liabilities to shareholders' investment        |                 |                   |         

In
March 2004, we entered into a new, secured three-year, $40 million revolving credit
facility with LaSalle Bank and U.S. Bank. The new credit facility replaced our former
unsecured $35.0 million revolving credit facility that was to expire on April 30, 2004.
Beginning in 2003 and through the date that it was replaced with our new credit facility,
we were in default of certain financial covenants under our former credit facility. Our new credit facility requires us
to pledge all of our assets as collateral, increases our interest rate by 25 to 50 basis
points compared to the weighted average interest rate that we paid in 2003. In addition,
our new credit facility includes covenants that prohibit us from taking certain other
actions. For example, these covenants:

| |  | prohibit
us from guaranteeing additional franchisee bank debt;
| | - | --------------------------------------------------------------

| |  | prohibit us
from paying cash dividends on our common stock; and
| | - | ---------------------------------------------------------------

| |  | limit
our ability to repurchase our common stock.
| | - | -------------------------------------------------

The
covenants in our new credit facility also limit our ability to incur additional debt and
other obligations, including capital lease obligations. In addition, our new credit
facility requires us to comply with the following financial covenants at the end of each
quarter:

|Financial Covenant                          | Required Ratio | Ratio as of
January 3, 2004
|------------------------------------------- | -------------- | ---------------------------
|Fixed Charge Coverage Ratio*                |                |                            
|Total Senior Debt Cash Flow Leverage Ratio* |                |                            
|Paid Sublease Ratio*                        |                |                            

| | *      Each
of these ratios is defined in our revolving credit agreement.
| | -------------------------------------------------------------------------

# Cash Flows From
Operating Activities

Our
cash disbursements occur when we pay our suppliers and when we pay for the construction of
new or replacement supermarkets. Our cash inflows occur when our franchised supermarket
and other wholesale customers pay us, the customers of our corporate supermarkets pay us
and when we sell our new or replacement supermarkets to third parties who, in turn, lease
them to us or one of our franchisees. Except for the payments received by our corporate
supermarkets from their customers, all of these payments are relatively large. As a
result, our cash inflows and outflows from operating activities fluctuate depending on the
timing of our receipt of payments and the timing of payments to our suppliers.

29

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The
$10.3 million increase in our net cash generated from operating activities in 2003 was due
primarily to a $2.6 million decrease in our inventory, a $1.7 million decrease in our
accounts receivables, the timing of our receipt of payments and the timing of payments to
our suppliers. We anticipate substantial positive cash inflows from our operations in
2004.

# Cash Flows From
Investing Activities

For
2003, aggregate capital expenditures were $12.7 million, compared to $13.7 million for
2002. Our 2003 capital expenditures included $8.3 million for retail equipment and
fixtures primarily related to new supermarket openings, $1.8 million relating to
improvements at our distribution centers and bakery/deli facility, $2.1 million for our
ongoing systems projects and $0.5 million for other items. The decrease in our capital
expenditures in 2003 was a the primary cause of the decrease in cash used in investing
activities in 2003. As discussed in the section titled Liquidity and Capital
Resources  Major 2004 Commitments below, our 2004 capital budget is
approximately $7.6 million.

# Cash Flows From
Financing Activities

The
significant cash outflow from financing activities in 2003 was primarily due to the
reduction in our debt. During 2003, we repaid $8.3 million of our borrowings under our
former revolving credit agreement, leaving borrowings of $17.2 million at the end of 2003.
In contrast, we added $11.8 million of borrowings under this facility in 2002. Net
cash outflows in 2003 also increased as a result of increased stock repurchases. During
2003, we repurchased approximately 250,000 shares of our common stock, primarily to
provide liquidity to our shareholders in our retirement savings plan, for an aggregate
price of nearly $3.4 million (an average per share price of $13.58), compared to
approximately 136,000 shares aggregating $2.3 million for 2002 (an average per share price
of $17.07).

As
of the end of 2003 only approximately $1.1 million of the Board of Directors
authorized $30.0 million stock repurchase program remained available for additional
stock repurchases. Due to credit facility restrictions, the recent results of our
operations and our focus on reducing our debt, we do not currently anticipate making any
additional repurchases under our stock repurchase plan during 2004.

The
increase in the ratio of liabilities to shareholders investment since the end of
2002 was primarily due to the recognition of new capitalized leases for two corporate
supermarkets, which was partially offset by a decrease of $8.3 million in borrowings under
our revolving credit agreement.

# Major 2004 Commitments

In
2004, we will replace our existing bakery/deli production facility in Platteville,
Wisconsin with a new, substantially larger facility in Platteville. We believe that this
new facility will allow us to substantially increase our sales of bakery and deli products
to our corporate supermarkets, franchisees and independent customers, including
potentially adding new independent customers that could not be served from our existing
facility. We also opened one new market corporate supermarket in January 2004 and plan to
replace one franchised supermarket with a new, larger and more competitive supermarket in
2004. Due to our new operational focus, we do not anticipate purchasing or building
additional new corporate supermarkets in 2004.

Since
the fourth quarter of 2001, we have invested about $9.5 million in our business
information technology capital expenditure project and completed the infrastructure and
the wholesale business segments of this project. The remaining two segments are the retail
business and services segments. In the retail business segment, the new point-of-sale
hardware and software has been installed at three supermarkets. Although we are continuing
the rollout to all of our supermarkets, the schedule has been extended as we continue to
explore ways to maximize the benefits of the new point-of-sale hardware and integrate the
rollout with other projects at our supermarkets. We anticipate completing this segment of
our systems project in 2007.

As
noted in the section titled Results of Operations  2003 vs. 2002 
Selling and Administrative Expenses above, in 2003 we recorded a $2.4 million charge
associated with the write-off of the entire value of certain financial reporting and
accounting software purchased in connection with the services segment of our systems
project which we will not use. We continue to evaluate whether better and more cost
effective alternatives for this segment of our systems project exist. We anticipate
completing this segment of our systems project in 2006.

30

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Our
2004 capital budget is approximately $7.6 million, compared to our actual 2003 spending of
$12.7 million. Approximately $2.6 million of our 2004 budget has been committed for
corporate retail projects, upgrades and replacement supermarkets, $1.2 million for one of
our distribution centers and a new bakery/deli manufacturing facility, $2.7 million has
been committed to our business systems project and $1.1 million has been committed for
other technology-related projects and office renovations. We are not currently
anticipating purchasing any potential multiple-store supermarket chains in 2004, but we
may acquire supermarkets from one or more of our franchisees that decide to exit the
supermarket business. Any amounts that we spend in such transactions would be in addition
to our current 2004 capital budget of $7.6 million.

# OTHER CAPITAL
COMMITMENTS  CONTRACTUAL OBLIGATIONS

The
following chart sets forth information regarding our contractual obligations (in
thousands):

|                              | Payments Due by Period
|----------------------------- | ----------------------
|
|Long-term debt                |                       
|Capital lease obligations     |                       
|Operating lease obligations   |                       
|Purchase obligations          |                       
|Total contractual obligations |                       

# Long-Term Debt

Approximately
$17.2 million of the debt included in the table above was, as of January 3, 2004, borrowed
under our former credit facility and due on April 30, 2004. In March 2004, we refinanced
this debt with borrowings under our new secured credit facility. Because our new credit
facility expires on March 18, 2007, we have included the amounts we owe under this
agreement as a debt that must be repaid in one to three years.

The
other long-term debt included in the table above relates to loans, with interest rates
below those otherwise available to us, made by a local utility company in connection with
the construction of several of our supermarkets that meet certain energy efficiency
ratings.

# Capital Lease Obligations

Under
accounting principles generally accepted in the United States, leases are categorized as
capital leases if any of these conditions occur: (a) the lease transfers
ownership to us; (b) the lease contains a purchase option with a price that is well below
the expected market price; (c) the lease term is equal to 75% or more of the estimated
life of the asset being leased; or (d) the present value of the lease payments on the date
the lease is entered into equals or exceeds 90% of the market value of the leased
property. Our lease for one of our distribution centers and 26 of our 85 supermarket
leases are accounted for as capital leases because the present value of the total rent
payments equaled or exceeded 90% of the market value of the leased property on the date
that the leases were first entered into.

In
2003, the amount we owed under our capital leases, including interest, increased 64.9%
from $62.7 million to $103.4 million and the amount owed to us by our franchisees
under related supermarket subleases, including interest, increased 54.7% from $37.5
million to $58.0 million. These increases were due to two new corporate supermarket leases
and four new franchised supermarket leases and subleases that we entered into in 2003
being categorized as capital leases, partially offset by lease payments made during 2003.

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# Operating Lease
Obligations

We
have operating leases for both real estate and equipment used by our wholesale and retail
segments. The majority of our operating lease obligations are related to leases of our
supermarkets. We lease all of our corporate supermarkets and approximately 85% of our
franchised supermarkets. We sublease each of our franchised supermarkets to one of our
franchisees under a sublease with terms similar to those that we have with our landlords.
We enter into these transactions because they serve as credit enhancements
that allow our franchisees, most of whom own only one or two supermarkets, to obtain lease
terms through us that are more favorable to them than if we did not effectively guaranty
their rent payments. Our other operating lease obligations relate to leases for corporate
office space, transportation equipment (including tractors and trailers) and certain
office equipment.

In
2003, our future operating lease commitments (which included both real estate and
equipment subleases) increased from $122.7 million to $131.3 million primarily due to the
addition of two new corporate store leases and the extension of two other corporate store
leases. The amount committed to us in 2003 by our franchisees under real estate subleases
decreased from $91.3 million to $81.9 million primarily due to lease payments received
during 2003. Forty-four different franchisees have entered into subleases with us and no
single franchisee (or group of related franchisees) has committed to us more than $4.0
million under subleases. In addition to the amounts set forth in the table above, some of
our operating leases contain contingent rent provisions based on sales volume (for
supermarkets) or miles traveled (for transportation equipment). Contingent rent paid in
2003 and 2002 was $1.2 million and $1.3 million, respectively.

# Purchase Obligations

We
have two contracts with our vendors pursuant to which we receive upfront payments in
return for a commitment to purchase a minimum amount of products during the term of the
contract. If we fail to meet the minimum purchase requirements, we are typically required
to repay some or all of the payments received from our vendor. These amounts are included
as other liabilities on our consolidated balance sheets and reduce our cost of products
sold ratably over the length of the contracts. The amounts listed in the table above
represent the amounts that we may be required to pay if we do not meet the minimum
purchase requirements of contracts expiring during the applicable periods.

# OFF-BALANCE SHEET
ARRANGEMENTS

The
following chart sets forth information regarding our material obligations, including
contingent obligations, that do not appear on our balance sheet as of January 3, 2004 (in
thousands):

|                                     | Amount of Commitment Expiration by Period
|------------------------------------ | -----------------------------------------
|
|Standby letters of credit            |                                          
|Franchisee guarantees                |                                          
|Operating lease obligations          |                                          
|Total off-balance sheet arrangements |                                          

# Standby Letters of Credit

We
self-insure a portion of our workers compensation and general liability claims. We
currently have three standby letters of credit, all of which were established in
connection with our self-insurance programs. During 2003, the total fees for these
letters of credit were less than $50,000. Our letters of credit provide funds to cover
claims if we are unable to pay amounts under these programs. Letters of credit of this
type are common when a company self-insures these types of liabilities. Two of our
letters of credit expire on December 31, 2004, but we expect to renegotiate these letters
of credit or enter into one or more letters of credit effective as of January 1,
2005. Our other letter of credit has expired, but it is still subject to an insurance
company insolvency proceeding. We do not expect to renew this letter of credit, nor do we
expect to be required to pay any additional amounts pursuant to it. Finally, in
connection with our entry into a new credit facility in March 2004, we entered into an
additional $5 million standby letter of credit.  In March 2005, we expect to replace this
standby letter of credit with a new $4 million standby letter of credit.  Under
accounting principles generally accepted in the United States, our letters of credit
obligations are not recorded as liabilities on our financial statements because they are
contingent obligations that we do not expect to pay.

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# Franchisee Guarantees

As
is typical in our industry, we guarantee a portion of the bank debt of certain of our
franchisees. These guarantees are made to support the business growth of the both our
franchisees and our wholesale operations. Historically, many of these guarantees have been
made in pools whereby our guarantee obligations are initially 50% of the aggregate
franchisee bank debt in the pool. The dollar amount of our guarantee for each pool remains
at this amount until the aggregate franchisee debt balances in the pool are reduced below
our guarantee amount, at which time our guarantee obligations are reduced on a
dollar-for-dollar basis by each reduction in franchisee debt in the pool. In connection
with the execution of our new credit facility, we guaranteed 100% of the bank debt of
certain of our franchisees that were previously grouped in such pools. This increased our
franchisee guarantees by $4.7 million. However, we still have several guarantees that
limit our obligations to 50% of the franchisees bank borrowings.

All
of these loan guarantees are collateralized, principally by the franchisees
equipment and inventory and, in some cases, with their building facility. The guarantees
are also secured by corporate indemnification agreements and personal guarantees of the
franchisee. Prior to fiscal 2003 we did not record any liability related to these
guarantees. However, in 2003, we adopted the provisions of FIN 45 and have recorded a
liability for the estimated fair value of all guarantees entered into in 2003. Our
franchisees enter into a purchase commitment with us to purchase items from our wholesale
segment in exchange for our guarantee of their debt; accordingly, we record in other
non-current assets a purchase commitment asset equal to the estimated fair value of the
guarantee obligation. We amortize the estimated fair value of the guarantees on a
systematic basis as our guarantee exposure is reduced and we amortize our purchase
commitment asset on a straight-line basis over the life of the purchase commitment.

In
addition, we typically provide short-term financing to our franchisees and some of our
wholesale customers for costs associated with the purchase of facilities, equipment and
inventory for new or remodeled franchised supermarkets, as well as store construction or
remodeling costs. This financing is typically refinanced within one to two months
following project completion with bank loans.

# Operating Lease
Obligations

Under
accounting principles generally accepted in the United States, operating lease obligations
are not recorded on our consolidated balance sheets. All of our operating lease
obligations that are not reflected on our financial statements relate to the type of real
estate and equipment leases described in the section titled Other Capital
Commitments  Contractual Obligations  Operating Lease Obligations above.

# CRITICAL ACCOUNTING
POLICIES

The
preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and
assumptions that affect the amounts of assets and liabilities reported in the consolidated
financial statements, the disclosure of contingent assets and liabilities as of the date
of the financial statements and reported amounts of revenues and expenses during the
reporting period. We believe our estimates and assumptions are reasonable; however, future
results could differ from those estimates under different assumptions or conditions.

Our
significant accounting policies are discussed in the section titled Item 8 
Financial Statements and Supplementary Data  Notes to Financial Statements. We
believe that the following accounting policies are most critical in the preparation of our
financial statements because they involve the most difficult, subjective or complex
judgments about the effect of matters that are inherently uncertain.

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# Allowance for Doubtful
Accounts

We
make estimates of the uncollectibility of our accounts and capital sublease receivable
portfolios. We determine the adequacy of the allowance by analyzing the aging of
receivables, customer financial statements, historical collection experience, value of
collateral, other credit exposure with the customer including loan guarantees, 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 collectiblity based on the
information considered and further deterioration of the accounts.

# Inventories

Inventories,
substantially all of which consist of food, groceries and related products for resale, are
stated at the lower of cost or market value. Cost is determined primarily on the last-in,
first-out (LIFO) method. At January 3, 2004 and December 28, 2002, 88% and 87%,
respectively, of all inventories were accounted for under the LIFO method. The excess of
current cost over the stated LIFO cost of inventory was $10.5 million and
$10.0 million at January 3, 2004 and December 28, 2002, respectively.

# Retail Repositioning
Reserve and Asset Impairment

We
recognize liabilities for estimated repositioning and termination losses associated with
the closure, replacement, or disposal of stores, consisting primarily of lease payments,
net of anticipated sublease income, and severance payments. Calculating the estimated
losses requires significant judgments and estimates that could be impacted by factors such
as the extent of interested buyers, the ability to obtain subleases, the creditworthiness
of sublessees, and our success at negotiating early termination agreements with lessors.
These factors are significantly dependent on general economic conditions and resultant
demand for commercial property.

Impairment
charges for long-lived assets are recognized when expected undiscounted future cash flows
are less than the assets carrying value (including capital lease assets). The
impairment loss is estimated based on the excess of the assets carrying value over
the fair market value of those assets. The timing and extent of impairment losses are
significantly impacted by the estimates of future operating cash flows for the store, the
expectations on timing of disposition or sublease and the estimated sales price or
sublease income. These factors are estimated by management based on its experience and
knowledge of the markets in which they operate, inflation, general economic conditions,
and resultant demand for commercial property.

# Goodwill

We
assess the value of our goodwill of our retail segment on at least an annual basis by
comparing the fair value of the segment with its carrying value. The fair value is
estimated by management using a valuation technique based on a multiple of operating cash
flow and managements expectations for operating cash flow. A reduction in operating
cash flows in 2004 could trigger another assessment of the value of our goodwill prior to
our annual assessment, which is performed as of the end of our third quarter. Our
estimates could be materially impacted by factors such as competitive forces, customer
behavior, changes in growth trends, and specific industry factors.

# Self  Insurance

We
are primarily self-insured for certain of our health insurance, workers compensation
and general liability claims. Our self-insurance claim liability is determined based on
claims filed and an estimate of claims incurred but not yet reported. Projections of the
losses are employed due to the high degree of variability in the liability estimates. Some
factors affecting the uncertainty of claims include the timeframe of development,
settlement patterns, litigation and adjudication direction and medical treatment and cost
trends. Our liability is not discounted.

34

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# Vendor Marketing Funds

Our
vendor marketing funds consist of allowances provided to us by vendors including slotting
allowances, rebates and various other allowances. Earnings from these funds are recognized
when the earning process is complete based on the terms of the underlying agreements with
our vendors. Vendor marketing funds reduce our cost of products sold unless they represent
reimbursement for certain advertising costs that we incur on behalf of the vendor, in
which case they reduce our selling and administrative expenses.

# NEW ACCOUNTING
PRONOUNCEMENTS

# FIN 45 (Accounting for
Certain Guarantees)

As
discussed in the section titled Item 8  Financial Statements and Supplementary
Data  Notes to Consolidated Financial Statements  Note 2, we have
adopted Financial Accounting Standards Board FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45
elaborates on the disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. FIN 45 also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement provision were
applicable to guarantees issued or modified after December 31, 2002. As of January 3, 2004
we have accrued $1.1 million for our obligations under the guarantees, which represents
our estimate of the fair value of the guarantees we entered into during 2003. Our
franchisees enter into a purchase commitment to purchase items from our wholesale segment
in exchange for our guarantee of their debt; accordingly, we record in other non-current
assets a purchase commitment asset equal to the estimated fair value of the guarantee
obligation. We amortize the estimated fair value of the guarantees on a systematic basis
as our guarantee exposure is reduced and we amortize the purchase commitment asset on a
straight-line basis over the life of the purchase commitment.

# FIN 46R (Consolidation
of Certain Third Parties)

As
discussed in the section titled Item 8  Financial Statements and Supplementary
Data  Notes to Consolidated Financial Statements  Note 2, in December
2003, the FASB issued a revised Interpretation No. 46 (FIN 46R), Consolidation of
Variable Interest Entities. FIN 46R requires companies to consider whether entities,
in which they have financial interests, lack sufficient equity at risk to permit that
entity to finance its activities without additional subordinated financial support and to
consolidate those entities where the company would absorb the majority of any losses. The
consolidation requirements are effective for interim and annual periods ending after March
15, 2004. Based on our extension of loan guarantees to certain of our franchisees, we are
evaluating the requirements of FIN 46R and its applicability to our business arrangements.

We
currently expect that we will be required to consolidate the financial statements of 15 to
20 of the franchisees to which we have made loan guarantees with our financial statements.
The total net sales and shareholders deficit for the franchisees we expect to
consolidate in 2004 are approximately $106.0 million and $3.0 million.

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# Item 7A.  Quantitative
and Qualitative Disclosures About Market Risk.

Our
only variable rate financial instrument subject to interest rate risk is a secured $40
million revolving credit facility which permits us, at our option, to borrow at interest
rates based on adjusted LIBOR. As of January 3, 2004, approximately $17.2 million was
outstanding under our former unsecured revolving credit facility. In March 2004, we paid
off the amounts owed under our former facility by borrowing an equal amount under our new
facility.

As
a result of the amounts owed pursuant to our new credit facility, increases in market
interest rates would cause our interest expense to increase and our earnings before income
taxes to decrease. Based on our credit facility borrowings as of January 3, 2004, a 100
basis point increase in market interest rates would increase our annual interest expense
by approximately $172,000. Similarly, a 100 basis point decrease in the market interest
rate would reduce our annual interest expense by approximately $172,000.

We
believe that our exposure to other market risks (including risks related to changes in
foreign currency exchange rate, commodity prices, equity prices and trade accounts
receivable) is not significant.

36

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# Item 8.  Financial
Statements and Supplementary Data.

# Managements
Responsibilities For Financial Reporting

The management of Fresh Brands, Inc.
is responsible for the preparation, objectivity and integrity of the Companys
consolidated financial statements contained in the Companys 2003 Annual Report to
Shareholders. The consolidated financial statements have been prepared in accordance with
 accounting principles generally accepted in the United States and include amounts that are based on
managements best estimates and informed judgments.

To help assure that financial
information is reliable and assets are safeguarded, management maintains a system of
internal controls and disclosure controls and procedures which it believes are effective
in accomplishing these objectives. These controls and procedures are designed to provide
reasonable assurance, at appropriate costs, that transactions are executed and recorded in
accordance with managements authorization.

The Companys consolidated
financial statements have been audited by its independent auditors, KPMG LLP, whose report
was based on audits conducted in accordance with generally accepted auditing standards. As
part of their audits, they performed a review of the Companys system of internal
controls for the purpose of determining the amount of reliance to place on those controls
relative to the audit tests they performed.

The Audit Committee of the Board of
Directors, composed of independent directors, as defined by the rules
applicable to members of the Audit Committee, meets periodically with KPMG LLP and
management to inquire as to whether each is properly discharging its responsibilities. The
independent auditors report directly to the Audit Committee.

|/s/ Michael R. HouserMichael R. Houser  | /s/ John H. DahlyJohn H. Dahly           
|--------------------------------------- | -----------------------------------------
|Vice Chairman of the Board, Executive   | Executive Vice President, Chief Financial
|Vice President, Chief Marketing Officer | Officer, Secretary and Treasurer         

37

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# Independent
Auditors Report

To the Board of Directors
and ShareholdersFresh Brands, Inc.:

We have audited the accompanying
consolidated balance sheets of Fresh Brands, Inc. and subsidiaries as of January 3,
2004 and December 28, 2002, and the related consolidated statements of operations,
shareholders investment, and cash flows for each of the years in the three-year
period ended January 3, 2004. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Fresh Brands, Inc. and subsidiaries as of January 3, 2004 and
December 28, 2002, and the results of their operations and their cash flows for each
of the years in the three-year period ended January 3, 2004, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in note 2 to the
consolidated financial statements, effective December 30, 2001, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets.

/s/ KPMGMilwaukee, Wisconsin
February 26, 2004, except as to paragraphs 4 and 5 of note 4,       which are as of March 18, 2004

38

---

CONSOLIDATED BALANCE
SHEETS As of January 3, 2004 and December 28, 2002

|                                                                    | 
|------------------------------------------------------------------- | 
|Assets                                                             
|Current assets:                                                     | 
|Cash and equivalents                                                | 
|Receivables, net                                                    | 
|Inventories                                                         | 
|Land and building held for resale                                   | 
|Other current assets                                                | 
|Deferred income taxes                                               | 
|                                                                   
|Total current assets                                                | 
|                                                                   
|Noncurrent receivable under capital subleases                       | 
|Property and equipment, net                                         | 
|Property under capital leases, net                                  | 
|Goodwill, net                                                       | 
|Other noncurrent assets, net                                        | 
|                                                                   
|Total assets                                                        | 
|                                                                   
|Liabilities and Shareholders' Investment                            | 
|                                                                   
|Current liabilities:                                                | 
|Accounts payable                                                    | 
|Accrued salaries and benefits                                       | 
|Accrued insurance                                                   | 
|Other accrued liabilities                                           | 
|Current obligations under capital leases                            | 
|Current maturities of long-term debt                                | 
|                                                                   
|Total current liabilities                                           | 
|                                                                   
|Long-term obligations under capital leases                          | 
|Long-term debt under revolving line of credit                       | 
|Long-term debt                                                      | 
|Deferred income taxes                                               | 
|Other noncurrent liabilities, net                                   | 
|Shareholders' investment:                                           | 
|Common stock, $0.05 par value, authorized 20,000,000 shares, issued | 
|8,750,342 shares in 2003 and 2002                                   | 
|Additional paid-in capital                                          | 
|Retained earnings                                                   | 
|Treasury stock at cost, 3,843,436 shares as of January 3, 2004 and  | 
|3,648,744 shares as of December 28, 2002                            | 
|                                                                   
|Total shareholders' investment                                      | 
|                                                                   
|Total liabilities and shareholders' investment                      | 
|                                                                   

See notes to consolidated financial
statements.

39

---

CONSOLIDATED
STATEMENTS OF OPERATIONS For fiscal years 2003, 2002 and 2001

|                                    |  | 
|----------------------------------- |  | 
|
|Net sales                           |  | 
|Cost of products sold               |  | 
|                                   
|Gross profit                        |  | 
|Selling and administrative expenses |  | 
|Depreciation and amortization       |  | 
|                                   
|Operating income                    |  | 
|Interest income                     |  | 
|Interest expense                    |  | 
|                                   
|Earnings (loss) before income taxes |  | 
|Income tax provision (benefit)      |  | 
|                                   
|Net earnings (loss)                 |  | 
|                                   
|Earnings (loss) per share - basic   |  | 
|                                   
|Earnings (loss) per share - diluted |  | 
|                                   

See notes to consolidated financial
statements.

40

---

CONSOLIDATED
STATEMENTS OF CASH FLOWS For fiscal years 2003, 2002 and 2001

|                                                         |  | 
|-------------------------------------------------------- |  | 
|
|Cash flows from operating activities:                    |  | 
|Net earnings (loss)                                      |  | 
|Adjustments to reconcile net earnings (loss) to net cash |  | 
|provided by operating activities:                        |  | 
|Depreciation and amortization                            |  | 
|Deferred income taxes                                    |  | 
|Property, equipment and software impairment charges      |  | 
|                                                         |  | 
|Changes in assets and liabilities, net of acquisition:   |  | 
|Receivables, net                                         |  | 
|Inventories                                              |  | 
|Other current assets                                     |  | 
|Accounts payable                                         |  | 
|Accrued liabilities                                      |  | 
|                                                        
|Net cash provided by operating activities                |  | 
|                                                        
|Cash flows from investing activities:                    |  | 
|Capital expenditures                                     |  | 
|Acquisition, net of cash acquired                        |  | 
|Receipt of principal amounts under capital subleases     |  | 
|Sale of assets and other                                 |  | 
|                                                        
|Net cash used in investing activities                    |  | 
|                                                        
|Cash flows from financing activities:                    |  | 
|Net change in revolver activity                          |  | 
|Payment for acquisition of treasury stock                |  | 
|Principal payments on capital lease obligations          |  | 
|Payment of cash dividends                                |  | 
|Principal payments on long-term debt                     |  | 
|Receipt for private placement sale of treasury stock     |  | 
|Exercise of stock options                                |  | 
|Long-term debt borrowing                                 |  | 
|Other financing activities                               |  | 
|                                                        
|Net cash provided by (used in) financing activities      |  | 
|                                                        
|Cash and equivalents:                                    |  | 
|Net change                                               |  | 
|Balance, beginning of year                               |  | 
|                                                        
|Balance, end of year                                     |  | 
|                                                        

See notes to consolidated financial
statements.

41

---

CONSOLIDATED
STATEMENTS OF SHAREHOLDERS INVESTMENT For fiscal years 2003, 2002 and 2001

|                                      |  |  |   |    
|------------------------------------- |  |  | - | ---
|
|Balances at December 30, 2000         |  |  | $ | 438
|                                     
|Net earnings                          |  |  |   | -- 
|Cash dividends, common stock $0.36    |  | 
|per share                             |  |  |   | -- 
|Acquisition of 742,998 shares of      |  | 
|treasury stock                        |  |  |   | -- 
|Issuance of 200,000 shares of         |  | 
|treasury stock in private             |  | 
|placement sale                        |  |  |   | -- 
|Issuance of 117,000 shares of         |  | 
|treasury stock upon exercise of       |  | 
|stock options                         |  |  |   | -- 
|Tax benefits from exercise of stock   |  | 
|options                               |  |  |   | -- 
|Other                                 |  |  |   | -- 
|                                     
|Balances at December 29, 2001         |  |  |   | 438
|                                     
|Net earnings                          |  |  |   | -- 
|Cash dividends, common stock $0.36    |  | 
|per share                             |  |  |   | -- 
|Acquisition of 135,597 shares of      |  | 
|treasury stock                        |  |  |   | -- 
|Issuance of 65,700 shares of treasury |  | 
|stock upon exercise of stock          |  | 
|options                               |  |  |   | -- 
|Tax benefits from exercise of stock   |  | 
|options                               |  |  |   | -- 
|Other                                 |  |  |   | -- 
|                                     
|Balances at December 28, 2002         |  |  |   | 438
|                                     
|Net (loss)                            |  |  |   | -- 
|Cash dividends, common stock          |  | 
|$0.36 per share                       |  |  |   | -- 
|Acquisition of 250,359 shares of      |  | 
|treasury stock                        |  |  |   | -- 
|Issuance of 55,667 shares of treasury |  | 
|stock upon exercise of stock          |  | 
|options                               |  |  |   | -- 
|Tax benefits from exercise of stock   |  | 
|options                               |  |  |   | -- 
|Other                                 |  |  |   | -- 
|                                     
|Balances at January 3, 2004           |  | 
|                                      |  |  | $ | 438
|                                     

See notes to consolidated financial
statements

42

---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS For fiscal years 2003, 2002 and 2001

# Note 1Description of
Business

At
the Schultz Sav-O Stores, Inc. annual shareholder meeting held on May 30, 2001, the
shareholders of Schultz Sav-O Stores, Inc. approved a plan of share exchange to create a
holding company, Fresh Brands, Inc. (FBI). After the share exchange, each
Schultz Sav-O Stores, Inc. shareholder received one share of Fresh Brands, Inc. stock for
every share of Schultz Sav-O Stores, Inc. stock that he or she owned. On June 4, 2001, FBI
stock began trading on the Nasdaq National Market System under the symbol
FRSH.

As
a result of the share exchange, Schultz Sav-O Stores, Inc. became a wholly owned
subsidiary of FBI. Schultz Sav-O Stores subsequently changed its name to Fresh Brands
Distributing, Inc. (FBDI). FBDI, located in Sheboygan, Wisconsin, is engaged
in the food distribution business through franchised and corporate Piggly Wiggly®
retail supermarkets and as a supplier to independent food stores.
Dicks® Supermarkets, Inc. (DSI), a wholly owned
subsidiary of FBI located in Platteville, Wisconsin operates corporate retail Dicks
Supermarkets and is a wholesale supplier of bakery and deli goods. FBDI and DSI provide
delivery of wholesale goods to corporate retail stores and other customers through PW
Trucking, Inc., a wholly owned subsidiary of FBDI. The corporate-owned and franchised
retail supermarkets operating under the Piggly Wiggly and Dicks Supermarkets brands
and independent food stores we supply are located throughout Wisconsin and northern
Illinois.

# Note 2 Summary of
Significant Accounting Policies

# Fiscal year

Our
fiscal year ends on the Saturday closest to December 31. The 2003 fiscal year was a
53-week period ended January 3, 2004. The 2002 and 2001 fiscal years were 52-week periods
ended December 28, 2002 and December 29, 2001, respectively.

# Principles of
consolidation

The
consolidated financial statements include the accounts of FBI and its wholly-owned
subsidiaries FBDI, DSI (from date of acquisition of June 16, 2001) and PW Trucking, Inc.
Intercompany accounts and transactions have been eliminated.

# Revenue recognition

Wholesale
 revenue is  recognized at the time products are shipped,  as shipments are F.O.B.
 shipping  point. Retail revenue is recognized at the point of sale.

# Vendor Marketing Funds

Vendor
marketing funds consist of allowances provided to us by vendors including slotting
allowances, rebates and various other allowances. Earnings from these funds are recognized
when the earning process is complete based on the terms of the underlying agreements with
our vendors.

We
adopted Emerging Issues Task Force Issue (EITF) No. 02-16, Accounting
by a Customer (including a Reseller) for Certain Consideration Received from a Vendorin
2003. This EITF establishes that cash consideration received from a vendor is presumed to
be a reduction in the prices of the vendors products or services and should,
therefore, be characterized as a reduction in cost of products sold when recognized in
the resellers income statement unless (a) it is a payment for assets or services
delivered to the vendor, in which case the cash consideration should be characterized as
revenue or other income when recognized in the resellers income statement, or (b)
it is a reimbursement of costs, in which case the cash consideration should be
characterized as revenue or other income when recognized in the resellers income
statement. Applying the provision of EITF No. 02-16 resulted in the reclassification of
certain of our vendor rebates and advertising revenue received in excess of related
advertising costs. The reclassification of these items reduced cost of products sold and,
correspondingly, increased selling and administrative expenses by $3,987,000, $4,262,000
and $3,706,000 for fiscal 2003, 2002 and 2001 respectively.

# Cash and equivalents

Cash
and equivalents consist of demand deposits at commercial banks and highly liquid
investments with a maturity of three months or less when purchased. Cash equivalents are
stated at cost which approximates market value.

# Receivables

We
record receivables primarily from our wholesale customers, most of which are franchisees.
We monitor the financial viability of our customers and provide an allowance for doubtful
accounts related to both credit worthiness and retail subsidies that are provided to these
customers. Receivables are shown net of the allowance for doubtful accounts of $5,852,000
and $4,505,000 at January 3, 2004 and December 28, 2002, respectively. We recorded
provisions to the allowance for doubtful accounts of $6,292,000, $1,474,000 and $2,080,000
for 2003, 2002 and 2001, respectively.

43

---

# Inventories

Inventories,
substantially all of which consist of food, groceries and related products for resale, are
stated at the lower of cost or market value. Cost is determined primarily on the last-in,
first-out (LIFO) method. At FBDI, for meat and produce, cost is determined on the
first-in, first-out (FIFO) method. At January 3, 2004 and December 28, 2002, 88% and 87%,
respectively, of all inventories were accounted for under the LIFO method. During fiscal
2002, FBDI and DSI changed to a simplified LIFO method based on the IRC Reg.
§1.472-8. Since the internally generated indexes were similar to the government
published indexes used with simplified LIFO, there was no material adjustment to LIFO due
to the change. The change to simplified LIFO was advantageous because of the ability to
use published indexes which are more readily available.

The
excess of current cost over the stated LIFO cost of inventory was $10,505,000 and
$10,006,000 at January 3, 2004 and December 28, 2002, respectively.

# Goodwill

Goodwill
is comprised of amounts paid in excess of the fair value of acquired net assets. For
fiscal 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets.
Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, but are subject to impairment tests at least annually in accordance with
this statement. During fiscal 2003 and fiscal 2002, we performed the required impairment
tests of goodwill. As a result of the tests, it was deemed that there was no goodwill
impairment. Goodwill amortization expense was $602,000 for fiscal 2001. The following
table shows what net earnings would have been had SFAS No. 142 been applied in fiscal
2001:

|                                  |  |  |  
|--------------------------------- |  |  | -
|
|Reported net earnings (loss)      |  |  | $
|Add back:                         |  | 
|Goodwill amortization,            |  | 
|net of tax of $234                |  |  |  
|                                 
|Adjusted net income               |  |  |  
|                                 
|Earnings (loss) per share - Basic |  | 
|Reported net earnings (loss)      |  |  |  
|Adjusted net earnings (loss)      |  |  |  
|                                 
|Earnings (loss) per share -       |  | 
|diluted                           |  | 
|Reported net earnings (loss)      |  |  |  
|Adjusted net earnings (loss)      |  |  |  
|                                 

# Other current assets

Other
current assets at January 3, 2004 and December 28, 2002 consisted of the following:

|                         | 
|------------------------ | 
|
|Prepaid expenses         | 
|Receivable under capital | 
|subleases                | 
|Retail systems and       | 
|supplies for resale      | 
|                        
|Other current assets     | 
|                        

Receivables
under capital subleases represent amounts due to us under sublease agreements with our
franchised supermarkets (see note 8). The subleases are established with the franchisees
using terms similar to those existing under the primary lease agreement we have with the
original lessor.

# Land and building held
for resale

Land
and building held for resale consists of costs incurred for retail facility projects which
are to be completed in less than one year. Project costs which we fund are accumulated
until project completion. Upon project completion, and the subsequent sale of the
facility, lease arrangements are established.

44

---

# Property and equipment,
net

Property
and equipment are stated at cost, net of depreciation and amortization. Depreciation and
amortization is computed using the straight-line method over the estimated useful lives of
the assets. Equipment generally has a useful life of 4 to 7 years; computer hardware and
software have a useful life of 3 to 7 years; buildings and land improvements have a useful
life of 10 to 35 years; and leasehold improvements generally have a useful life of 10 to
20 years. Facility remodeling and upgrade costs on leased stores are capitalized as
leasehold improvements and are amortized over the shorter of the remaining lease term or
the useful life of the asset. Upon disposal, the appropriate asset cost and accumulated
depreciation or amortization are retired. Gains and losses on disposition are included in
earnings. Periodically, we evaluate all long-lived assets for impairment. Management
considers such factors as current results, trends and future prospects, current market
value, and other economic and regulatory factors, in performing these analyses.
Recoverability of assets to be held and used is measured by comparison of the carrying
value of an asset to the undiscounted future cash flows expected to be generated by the
asset. If the carrying value of an asset exceeds its estimated undiscounted future cash
flows, an impairment provision is recognized to the extent that the book value exceeds
fair market value. Assets to be disposed of are reported at the lower of the carrying
amount or the fair value of the asset, less all associated costs of disposition. In fiscal
2003 and fiscal 2001 impairment losses of $2,693,000 (including $1,815,000 for capital
lease assets) and $200,000 were recorded, respectively. No assets were determined to be
impaired in fiscal 2002.

Property
and equipment, net of accumulated depreciation and amortization, at January 3, 2004 and
December 28, 2002 consisted of the following:

|                            | 
|--------------------------- | 
|
|Land and buildings          | 
|Leasehold improvements      | 
|Equipment and fixtures      | 
|                           
|                            | 
|Less accumulated            | 
|depreciation and            | 
|amortization                | 
|                           
|Property and equipment, net | 
|                           

# Other noncurrent assets

Other
noncurrent assets, net of accumulated amortization of $5,576,000 and $4,618,000 at January
3, 2004 and December 28, 2002 consisted of the following:

|                          | 
|------------------------- | 
|
|Capitalized software, net | 
|Other intangibles, net    | 
|                         
|Total                     | 
|                         

We
capitalize certain costs associated with the development and implementation of software.
When events and circumstances warrant, we review the carrying value of capitalized
software costs. Capitalized software generally has a useful life of 3 to 7 years. A loss
may be recognized when the value of estimated undiscounted cash flow benefit related to
the asset falls below the unamortized cost. During fiscal 2003, a loss of $2,375,000 was
recorded for the entire write-off of certain financial reporting and accounting
capitalized software that we have decided not to use because there may be better and less
expensive alternatives that provide more effective management and operational solutions
for our business.

# Accounts payable

Accounts
payable includes $11,367,000 and $10,773,000 at January 3, 2004 and December 28, 2002,
respectively, of issued checks that have not cleared our disbursing bank accounts.

45

---

# Stock- based
compensation

We
have adopted the disclosure requirements of SFAS No. 123. Had we determined compensation
cost based on the fair value at the grant date for stock options under SFAS No. 123, our
net earnings (loss) would have been reduced (increased) to the following pro forma amounts
below:

|                |  | 
|--------------- |  | 
|
|Net earnings    |  | 
|(loss)          |  | 
|As reported     |  | 
|Pro forma       |  | 
|               
|Earnings (loss) |  | 
|per             |  | 
|share-diluted   |  | 
|As reported     |  | 
|Pro forma       |  | 
|               

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based Compensation
 Transition and Disclosure  an amendment of FASB statement No. 123. This
statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee compensation.
In addition, this Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method used on
reported results. SFAS No. 148 provides for voluntary adoption of the fair value method
for entities with fiscal years ending after December 15, 2002. We have elected to continue
to use the intrinsic value method for the fiscal year ended January 3, 2004 but have
adopted the prominent disclosure provisions. We have recorded no compensation expense in
our 2003, 2002 or 2001 consolidated statements of operations.

# SelfInsurance

The
company is primarily self-insured for certain of our health insurance, workers
compensation and general liability claims. The self-insurance claim liability is
determined based on claims filed and an estimate of claims incurred but not yet reported.
Projections of the losses are employed due to the high degree of variability in the
liability estimates. Some factors affecting the uncertainty of claims include the
timeframe of development, settlement patterns, litigation and adjudication direction and
medical treatment cost trends. The liability is not discounted. At January 3, 2004 and
December 28, 2002, the self-insurance claim liability was $4,356,000 and $4,005,000,
respectively.

# Multiemployer Insurance

Recently,
several members of one of our multiemployer health, welfare and benefits plans have
withdrawn from the plan.  As the plan is underfunded, and our withdrawal is possible, we
will be required to pay a portion of the underfunded liabilities associated with the
possible withdrawal.  We estimate that such after-tax withdrawal obligation is
approximately $0.6 million and, in the fourth quarter of 2003, we recorded a reserve in
this amount.

# Income taxes

Deferred
income taxes are accounted for under the asset and liability method whereby deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and there respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates. Deferred income tax provisions or benefits are based on
the change in the deferred tax assets and liabilities from period to period.

# Retail repositioning
reserve

We
estimate repositioning and termination expenses associated with the closure, replacement,
or disposal of stores, consisting primarily of lease and severance payments in accordance
with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS
No. 146 requires companies to recognize most costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an exit or
disposal plan. Severance payments are generally ongoing termination benefits and are
recorded when known and probable. Prior to the adoption of SFAS 146 in 2003, we charged
repositioning and termination expenses to selling and administrative expense upon the
decision to close, replace, or dispose of a store as soon as the amounts were reasonably
estimated. At January 3, 2004 and December 28, 2002, the remaining retail repositioning
reserve was $636,000 and $150,000, respectively. These amounts are included in other
accrued liabilities on the consolidated balance sheets. It is expected that these costs
will be completely expended by the end of 2004.

# Financial instruments

Our
financial instruments consist of various debt facilities and cash equivalents. At January
3, 2004, the fair market value of the financial instruments was not materially different
from the carrying value based on review of market quotes, where available, and market
yields for similar instruments.

# Supplementary disclosure
of cash flow information

Interest
and taxes paid included in our cash flow from operations were as follows:

|              |  | 
|------------- |  | 
|
|Interest paid |  | 
|Taxes paid    |  | 
|             

Non-cash investing
and financing activities include capital lease obligations incurred for properties of
$24,636,000, $18,608,000 and $13,933,000 for 2003, 2002 and 2001, respectively. Offsetting
capital sublease receivables for 2003, 2002 and 2001, respectively were $12,559,000,
$14,572,000, and $5,772,000, respectively.

# Use of estimates

The
preparation of 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 the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.

# Advertising costs

Costs
incurred for producing and communicating advertising are generally expensed when incurred.

46

---

# Shipping and handling
fees and costs

We
have historically presented shipping revenues as a component of net sales and the related
costs of transporting goods to the warehouse as part of cost of products sold and the
costs of shipping goods to customers as part of selling and administrative expenses.
Shipping and handling costs included in selling and administrative expenses were
$7,954,000, $8,106,000 and $6,660,000, in 2003, 2002, and 2001, respectively.

# Reclassifications

Certain
2002 and 2001 amounts previously reported have been reclassified to conform to the 2003
presentation.

# New accounting
pronouncements

We
have adopted Financial Accounting Standards Board FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45
elaborates on the disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. FIN 45 also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement provision were
applicable to guarantees issued or modified after December 31, 2002. As of January 3, 2004
we have accrued $1,116,000 for the Companys obligations under the guarantees, which
represents our estimate of the fair value of the guarantees we entered into during 2003.
Our franchisees enter into a purchase commitment with FBDI to purchase items from our
wholesale segment in exchange for our guarantee of their debt; accordingly, we record in
other non-current assets a purchase commitment asset equal to the estimated fair value of
the guarantee obligation. We amortize the estimated fair value of the guarantees on a
systematic basis as our guarantee exposure is reduced and we amortize the purchase
commitment asset on a straight-line basis over the life of the purchase commitment.

In
December 2003, the FASB issued a revised Interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities. FIN 46R requires companies to
consider whether entities, in which they have financial interests, lack sufficient equity
at risk to permit that entity to finance its activities without additional subordinated
financial support and to consolidate those entities where the company would absorb the
majority of any losses. The consolidation requirements are effective for interim and
annual periods ending after March 15, 2004. Based on our extension of loan guarantees to
certain of our franchisees, we are evaluating the requirements of FIN 46R and its
applicability to our business arrangements.

We
currently expect that we will be required to consolidate 15 to 20 of the franchises to
whom we have made loan guarantees. The total net sales and shareholders deficit
approximate $106.0 million and ($3.0) million, respectively, for the franchisees we expect
to consolidate in 2004. The allowance for doubtful accounts is evaluated, in part, on the
franchisee shareholders deficit position.

# Note 3Acquisition

On
June 16, 2001, we acquired all of the outstanding common stock of DSI for approximately
$30.2 million in cash (including assumption of funded debt). This acquisition has been
accounted for under the purchase method of accounting, and the results of DSI have been
included in our results from the date of acquisition. The purchase price was allocated to
the fair market value of the assets acquired and the liabilities assumed. The purchase
price allocation resulted in the recognition of goodwill of approximately $20.2 million.

# Note 4Long-Term Debt

Long-term
debt at January 3, 2004 and December 28, 2002 consisted of the following:

|                             | 
|---------------------------- | 
|
|Revolving line of credit     | 
|Note payable, 3.0%, due in   | 
|monthly installments of $5   | 
|including interest due       | 
|through July 2006            | 
|Note payable, 3.0%, due in   | 
|monthly installments of      | 
|$12 including interest due   | 
|through 2007                 | 
|Note payable, 2.0%, due in   | 
|monthly installments of $8   | 
|including interest due       | 
|through 2004                 | 
|Note payable, 3.0%, due in   | 
|monthly installments of $3   | 
|including interest due       | 
|through 2008                 | 
|Land contract, 10.0%, due in | 
|annual installments of $33   | 
|through March 2003           | 
|                            
|                             | 
|Less current maturities      | 
|                            
|Long-term debt               | 
|                            

47

---

Interest
expense consisted of the following:

|                 |  | 
|---------------- |  | 
|
|Imputed          |  | 
|interest-capital |  | 
|leases           |  | 
|Interest on      |  | 
|long-term debt   |  | 
|Other            |  | 
|                
|Interest expense |  | 
|                

We
entered  into a loan  agreement  in June 2001  providing  unsecured  revolving  credit
 facilities  totaling  $35 million,  which expires April 30, 2004. At January 3, 2004 we
had related debt  outstanding  from the revolving line of credit of $17,150,000  compared
to $25,400,000 at December 28, 2002.  Under this credit  arrangement the interest rates
on borrowings  were based on the banks prime rate.  Quarterly  commitment  fees under
this  arrangement  were also paid at a rate of .0625%  based on the  average  daily
 unused  amount of the  revolving  credit  facility.  At January 3, 2004, the interest
rate was 2.75%  compared to 2.88% at December 28, 2002 and there were no  compensating
balance  requirements.  As of January 3, 2004,  we were in default with certain of our
 covenants  under this credit facility.  At January 3, 2004, the fair value of the
long-term  debt was not materially  different from the carrying value.

In
March 2004, we entered into a new, secured  three-year  $40,000,000  revolving credit and
term note facility with our banks which expires on March 18, 2007. The new asset-based
 credit facility  replaced our former  unsecured $35,000,000  revolving  credit  facility
that was to expire on April 30, 2004. Our new credit  facility  requires us to pledge all
of our assets as  collateral,  increases  our interest  rate by 25 to 50 basis points
 compared to the weighted  average  interest rate that we paid in 2003,  and requires us
to guarantee an  additional  $4.7 million of franchisee  bank  borrowings.  The new
facility limits our ability to obtain  additional debt and other  liabilities including
capital lease obligations,  prohibits us from guaranteeing  additional franchisee bank
debt, prohibits the payment of cash  dividends,  and limits our ability to  repurchase
 common  stock.  In  addition,  the new  facility contains various financial covenants
 including,  among others,  certain fixed charge coverage ratios,  total senior debt cash
flow leverage ratios and paid sublease ratios.

After
giving  consideration to the terms of the March 2004 credit facility,  the total amount
of long-term debt due in each of the fiscal years 2004 through 2008 will be $316,000,
$243,000, $17,332,000 and $39,000 respectively.

# Note 5Income Taxes

The
difference between the statutory federal income tax rate and the effective rate is
summarized as follows:

|                          |  |  | 
|------------------------- |  |  | 
|
|Federal income tax        |  |  | 
|State income taxes, net   |  | 
|of federal income tax     |  | 
|benefit                   |  |  | 
|Permanent differences     |  |  | 
|Other, net                |  |  | 
|                         
|Effective income tax rate |  |  | 
|                         

48

---

Components
of the income tax (benefit) consisted of the following:

|           |  | 
|---------- |  | 
|
|Current:   |  | 
|Federal    |  | 
|State      |  | 
|Deferred   |  | 
|          
|Income tax |  | 
|provision  |  | 
|(benefit)  |  | 
|          

The
components of deferred income tax assets and liabilities at January 3, 2004 and December
28, 2002 were as follows:

|                               | 
|------------------------------ | 
|
|Deferred income tax assets:    | 
|Bad debt reserve               | 
|Accrued insurance              | 
|Vacation pay                   | 
|Capital leases                 | 
|Retail repositioning reserve   | 
|Other                          | 
|                              
|Total deferred income tax      | 
|assets                         | 
|                              
|Deferred income tax            | 
|liabilities:                   | 
|Property and equipment         | 
|Pension                        | 
|                              
|Total deferred income tax      | 
|liabilities                    | 
|                              
|Net deferred income tax assets | 
|                              

Realization
of the net deferred tax assets over time is dependent upon the Company generating
sufficient taxable income in future periods. In determining that realization of the net
deferred tax assets was more likely than not, the Company gave consideration to a number
of factors including its recent earnings history, expectations of earnings in the future,
the timing of reversal of temporary differences, tax planning strategies available to the
Company and the expiration dates associated with NOL carryforwards. If, in the future, the
Company determines that it is no longer more likely than not that the net deferred tax
assets will be realized, a valuation allowance will be established against all or part of
the net deferred tax assets through a charge to the income tax provision.

The
net deferred income tax assets as of January 3, 2004 and December 28, 2002 were classified
in the consolidated balance sheets as follows:

|                               | 
|------------------------------ | 
|
|Current deferred income tax    | 
|asset                          | 
|Noncurrent deferred income tax | 
|liability                      | 
|                              
|Net deferred income tax assets | 
|                              

49

---

# Note 6 Commitments and
Contingent Liabilities

We
have guaranteed bank loans of 33 franchisees and certain of their affiliates as of January
3, 2004. These guarantees were made to support the business growth of our franchisees and
our wholesale operations. The guarantees are for the terms of the loan agreements. Under
these guarantees, we generally would be required to make the loan payments if the
franchisee defaults on a payment. Generally, the guarantees are secured by corporate
indemnification agreements and personal guarantees of the franchisee owner and are
substantially collateralized with equipment and inventory, and in certain cases, with
buildings. At January 3, 2004 our loss exposure under these guarantees totaled
$13,725,000, and we have accrued $1,116,000 recorded in other long-term liabilities, for
the Companys obligations under these guarantees which represent an estimate of the
fair value of these guarantees.

Capital
expenditure commitments for 2004 are approximately $7,600,000.

# Note 7Retirement Plans

We
have a trusteed retirement savings defined contribution plan, which includes provisions of
Section 401(k) of the Internal Revenue Code, for the benefit of our non-union eligible
employees. For FBDI, annual provisions prior to fiscal 2003 were based on a mandatory 5%
of eligible participant compensation and additional amounts at the sole discretion of the
Board of Directors. During fiscal 2003, the contribution percentage of eligible
participant compensation was at the sole discretion of the Board of Directors. For DSI,
annual provisions for 2002 and 2001 were based on 1% of eligible participant compensation.
For fiscal 2003 DSI contributed no provision for eligible participants. Provisions for
fiscal years 2003, 2002 and 2001 were $205,000, $953,000 and $1,317,000, respectively.
Both plans allow participants to make pretax contributions. We then match certain
percentages of employee contributions. Our matching contributions for 2003, 2002 and 2001
were $335,000, $340,000 and $230,000.

We
have union-administered multi-employer pension plans covering all hourly paid employees
represented by collective bargaining agreements. Total pension expense was $2,305,000,
$2,216,000 and $2,010,000 in fiscal years 2003, 2002 and 2001, respectively.

# Note 8Leases

We
lease most of our retail stores under lease agreements with original lease periods of 15
to 20 years and typically with five-year renewal options. Exercise of such options is
dependent on, among others factors, the level of business conducted at the location.
Executory costs, such as maintenance and real estate taxes, are generally our
responsibility. In a majority of situations, we will enter into a lease for a store and
sublease the store to a wholesale customer. When leases of this type are established, the
future minimum lease payments due under the capital lease arrangements with our customers
are recorded on our consolidated balance sheets as sublease receivables. Additionally, we
lease transportation equipment, principally tractors and trailers, corporate office space
and certain office equipment. Some real estate leases contain contingent rental provisions
based on sales volume at retail stores and some equipment leases contain contingent rental
provisions based on miles traveled for tractors and trailers. Contingent rental expense
associated with our capital leases and sublease income was not material to our
consolidated financial statements.

Capitalized
leases were calculated using interest rates appropriate at the inception of each lease. A
summary of real property utilized by us under capital leases at January 3, 2004 and
December 28, 2002 is as follows:

|                               | 
|------------------------------ | 
|
|Investments in leased property | 
|under capital leases           | 
|Less accumulated amortization  | 
|                              
|Property under capital leases, | 
|net                            | 
|                              

As
previously discussed, we recorded an impairment charge of $1,815,000 in 2003 related to
our capital lease assets. Amortization of leased property under capital leases, included
in depreciation and amortization, amounted to $1,444,000, $1,023,000 and $619,000 in
fiscal years 2003, 2002 and 2001, respectively.

The
following is a schedule of future minimum lease payments under capital leases and
subleases and the present value of such payments as of January 3, 2004:

50

---

|                             | 
|---------------------------- | 
|
|2004                         | 
|2005                         | 
|2006                         | 
|2007                         | 
|2008                         | 
|2009-2022                    | 
|                            
|Total minimum lease payments | 
|Less interest                | 
|                            
|Present value of minimum     | 
|lease payments and amounts   | 
|receivable                   | 
|Less current portion         | 
|                            
|Long-term obligations and    | 
|receivable                   | 
|                            

The
following is a schedule of future minimum lease payments required under operating leases
for retail stores, transportation equipment, corporate office space and office equipment
that have noncancelable operating lease terms in excess of one year as of January 3, 2004:

|                               
|-------------------------------
|2004                           
|2005                           
|2006                           
|2007                           
|2008                           
|2009-2022                      
|                               
|                               
|Total minimum lease payments   
|Less minimum amounts receivable
|under noncancelable subleases  
|                               
|Net minimum lease payments     
|                               

Rental
expenses, net of rental income from subleases, for all operating leases amounted to
$7,393,000, $7,024,000 and $6,166,000 in fiscal years 2003, 2002 and 2001, respectively.
These amounts include $1,271,000, $1,187,000 and $1,278,000, respectively, for contingent
rentals.

# Note 9Stock Option
Plans

We
have stock option plans which provide for the grant of either incentive or nonqualified
stock options to key employees and nonqualified options to our independent directors. The
exercise price of each option is equal to the market price of our stock on the date of
grant. Options granted prior to year 2000, are exercisable for seven years from the date
of grant. Options granted beginning in January 2000, are exercisable for ten years from
the date of grant. The options granted to our key employees vest ratably over the first
three years and the options granted to our independent directors vest immediately. Such
vesting may be accelerated by the Stock Option Committee of the Board of Directors or upon
a change in control of FBI, as defined by the plans.

The
fair values of each option granted in 2003, 2002 and 2001 were $3.81, $5.45 and $3.85,
respectively. The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average assumptions
used for grants in 2003, 2002 and 2001:

51

---

|                        |  | 
|----------------------- |  | 
|
|Dividend yield          |  | 
|Expected volatility     |  | 
|Risk-free interest rate |  | 
|Expected term of grant  |  | 
|                       

As
of January 3, 2004, no incentive stock options have been granted. Following is a summary
of the status of nonqualified stock options for the fiscal years 2003, 2002 and 2001:

|Number
Of Shares       | Weighted
Average
Exercise Prices
|---------------------- | --------------------------------
|Shares under option at |                                 
|December 30, 2000      | 602,700                         
|Granted                | 332,000                         
|Exercised              | (117,000                        
|Forfeited              | (189,000                        
|                      
|Shares under option at
|December 29, 2001      | 628,700                         
|Granted                | 174,000                         
|Exercised              | (65,700                         
|Forfeited              | (20,167                         
|                      
|Shares under option at
|December 28, 2002      | 716,833                         
|Granted                | 219,000                         
|Exercised              | (55,667                         
|Forfeited              | (209,999                        
|                      
|Shares under option at
|January 3, 2004        | 670,167                         
|                      

The range of options outstanding at
January 3, 2004 is as follows:

|                        
|------------------------
|Price Range
   per Share
|Number of options       
|outstanding             
|Weighted average        
|exercise price          
|outstanding             
|Number of options       
|exercisable             
|Weighted average        
|exercise price          
|exercisable             
|Weighted average        
|remaining               
|contractual             
|life (in years)         
|                        

When
options are exercised, we realize certain income tax benefits. These benefits resulted in
a decrease in current income taxes payable and a corresponding increase in additional
paid-in capital.

52

---

Our
nonqualified stock options were exercisable at weighted average per share prices of
$13.64, $13.94 and $14.15 at January 3, 2004, December 28, 2002 and December 29, 2001,
respectively.

# Note 10Common Stock

On
October 11, 2001, the Board of Directors declared a dividend of one common share purchase
right for each outstanding share of our common stock, par value $.05. The dividend was
payable on November 23, 2001 to the shareholders of record on November 9, 2001. The rights
will be exercisable only if a person or group acquires 20% or more of our common stock or
announces a tender offer, consummation of which would result in ownership by a person or
group of 20% or more of the common stock. Each right will initially entitle shareholders
to buy one share of our common stock at an initial exercise price of $50.00 per share,
subject to adjustment. The rights do not have any voting rights or receive dividends and
may be redeemed at a price of $.001 per right. If any person becomes a 20% or more
shareholder of FBI, each right, other than those owned by the 20% shareholder, will
(subject to certain limitations) entitle its holder to purchase, at the rights
then-current exercise price, a number of common shares of FBI or of the acquirer having a
market value at that time of twice the rights per share exercise price. The Board of
Directors is also authorized to reduce the 20% threshold to not less than 10%. The rights
expire on November 9, 2011, subject to extension.

# Note 11Earnings (loss)
Per Share

Basic
earnings (loss) per share is computed by dividing net earnings (loss) by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings(loss) per share is computed by dividing net earnings (loss) by the weighted
average number of shares of common stock outstanding and common stock equivalents during
the year. Common stock equivalents used in computing diluted earnings (loss) per share
related to stock options which, if exercised, would have a dilutive effect on earnings
(loss) per share. We had antidilutive shares for 2003, 2002 and 2001 of 670,167, 174,000
and 217,500, respectively.

Our
calculations of earnings (loss) per share-basic and earnings (loss) per share-diluted were
as follows:

|                     |  | 
|-------------------- |  | 
|
|Net earnings (loss)  |  | 
|available for common |  | 
|shareholders         |  | 
|Weighted average     |  | 
|shares outstanding   |  | 
|Earnings (loss) per  |  | 
|share-basic          |  | 
|                    
|Net earnings (loss)  |  | 
|available for common |  | 
|shareholders         |  | 
|Weighted average     |  | 
|shares outstanding   |  | 
|Stock options'       |  | 
|dilutive effect      |  | 
|Weighted average     |  | 
|shares and           |  | 
|equivalents          |  | 
|outstanding          |  | 
|Earnings (loss) per  |  | 
|share-diluted        |  | 
|                    

# Note 12Segment Reporting

Our
operations are classified into two reportable business segments, wholesale and retail. The
operational performance of both wholesale and retail segments are managed and evaluated by
management.

The
wholesale segment represents our business activities relating to food wholesale
distribution. At January 3, 2004, we provided products to 73 franchised units, 28
corporate stores and a number of independent retail stores. The wholesale segment includes
warehousing, transportation, manufacturing and other logistical functions, and derives its
revenues primarily from the sale of groceries, produce, dairy, meat and cigarette products
to our franchised, corporate and independent retail customers. Topco LLC was a major
supplier to our wholesale segment in 2003 providing nearly 13.0% of total inventory for
each of the last three years. Inventory purchases from Topco for 2003, 2002 and 2001 were
$67,379,000, $58,193,000 and $55,703,000, respectively. The retail segment relates to our
retail supermarket activities. Revenues are realized through the sale of groceries, dairy,
produce, meat, bakery, deli and other merchandise by our corporate retail stores to retail
consumers.

53

---

The
accounting policies of the two segments are the same as those described in the Summary of
Significant Accounting Policies. Our management utilizes several measurement tools in
evaluating each segments performance and each segments resource requirements.
However, the principal measurement tools are consistent with our consolidated financial
statements and accordingly are reported on a similar basis. Wholesale operating profits on
sales through our corporate stores are allocated to the retail segment. The
corporate heading includes corporate-related items, principally cash and
equivalents. As it relates to operating income, the corporate heading includes
corporate-related items allocated to the appropriate segments.

Summarized
financial information concerning our reportable segments is shown in the following table:

|                    |      |     
|------------------- | ---- | ----
|Sales               | 2003 | 2002
|Wholesale sales     |      |     
|Inter/Intracompany  |      |     
|Sales               |      |     
|                   
|Net wholesale sales |      |     
|Retail sales        |      |     
|                   
|Total               |      |     
|                   

|                                   
|-----------------------------------
|Earnings (loss) before
income taxes
|Wholesale                          
|Retail                             
|                                   
|Total operating income             
|                                   
|Interest income                    
|Interest expense                   
|                                   
|Earnings (loss) before             
|income taxes                       
|                                   

|                    
|--------------------
|Capital Expenditures
|Wholesale           
|Retail              
|Corporate           
|                    
|Total               
|                    

|                             
|-----------------------------
|Depreciation and
Amortization
|Wholesale                    
|Retail                       
|Corporate                    
|                             
|Total                        
|                             
|                             
|Identifiable Assets          
|                             
|Wholesale                    
|Retail                       
|Corporate                    
|                             
|Total                        
|                             

54

---

# Unaudited Quarterly
Financial Information

We
generally include sixteen weeks in our first quarter and twelve weeks in each subsequent
quarter. In fiscal year 2003, the fourth quarter consisted of thirteen weeks. Summarized
quarterly and annual financial information for fiscal years 2003 and 2002 follows:

|                                                        
|--------------------------------------------------------
|(Dollars and shares in thousands, except per share data)
|First                                                   
|Net sales                                               
|Gross profit                                            
|Net earnings (loss)                                     
|Earnings (loss) per share - basic                       
|Earnings (loss) per share - diluted                     
|Weighted average shares and                             
|equivalents outstanding                                 
|                                                        
|                                                        
|(Dollars and shares in thousands, except per share data)
|First                                                   
|Net sales                                               
|Gross profit (1)                                        
|Net earnings                                            
|Earnings per share - basic                              
|Earnings per share - diluted                            
|Weighted average shares and                             
|equivalents outstanding                                 
|                                                        

(1)    
          In accordance with guidance under Emerging Issues Task Force (EITF)
          No. 02-16, Accounting by a Customer for Certain Consideration Received
          from a Vendor, certain fiscal 2002 amounts previously reported have been
          reclassified to conform to the fiscal -year 2003 presentation.

Common Stock Information

Our
common stock is traded over-the-counter on the Nasdaq Stock Market under the symbol FRSH.
There are approximately 2,100shareholders of our common stock. An analysis of high
and low stock prices by quarter for the last three years is as follows:

|             
|-------------
|First Quarter
|High         
|2003         
|2002         
|2001         
|             

Cash
dividends paid per share were:

|             
|-------------
|First Quarter
|2003         
|2002         
|2001         
|             

55

---

# Item 9.  Changes in
and Disagreements with Accountants on Accounting and Financial Disclosure.

On
June 25, 2002, our Board of Directors, upon a recommendation made by our Audit Committee,
dismissed Arthur Andersen, LLP (Andersen) as our independent auditor and
selected KPMG LLP (KPMG) as our independent auditor for our fiscal year ending
December 28, 2002.

During
the years ended December 29, 2001 and December30,2000 and through June 25, 2002, there were not any disagreements with
Andersen on any matter of accounting principle or practice, financial statement
disclosure, or auditing scope or procedure which, if not resolved to Andersens
satisfaction, would have caused them to make reference to the subject matter of the
disagreement in connection with their reports. None of the reportable events described
under Item 304(a)(1)(v) of Regulation S-K have occurred during the time that Andersen had
been engaged as our independent auditor.

Andersens
audit reports on our consolidated financial statements as of and for the years ended
December 29, 2001 and December 30, 2000 did not contain any adverse opinion or disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.

During
the years ended December 29, 2001 and December 30, 2000 and through June 25, 2002, we did
not, nor did anyone acting on our behalf, consult with KPMG regarding the application of
accounting principles to a specified transaction, either completed or proposed, the type
of audit opinion that might be rendered on our financial statements, or any reportable
events described under Items 304(a)(2)(ii) of Regulation S-K.

# Item 9A.  Controls and
Procedures.

| | a. | Evaluation
of disclosure controls and procedures
| | -- | ------------------------------------------------

| | Based
on their respective evaluation as of the end of the period covered by this Annual Report
on Form 10-K, our acting principal executive officer, Michael R. Houser, and chief
financial officer, John H. Dahly, have concluded that our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934 (the Exchange Act)) are effective to ensure that information required
to be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Changes
in internal controls
| | -- | ----------------------------

| | There
were no significant changes in our internal controls or in other factors that could
significantly affect these controls during the fourth quarter of 2003, including any
corrective actions with regard to significant deficiencies and material weaknesses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# PART III

# Item 10.  Directors and
Executive Officers of the Company.

Pursuant
to Instruction G, the information required by this Item (other than such information
regarding executive officers which appears in Item 1A hereof and information required by
Item 405 of Regulation S-K, which is inapplicable) is incorporated by reference from
information included under the caption entitled Election of Directors set
forth in our definitive Proxy Statement for our 2004 annual meeting of shareholders (our
Proxy Statement). Our Proxy Statement will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of our
fiscal year.

56

---

Our
Board of Directors has an Audit Committee, consisting of Walter G. Winding, III
(Chairman), G. William Dietrich and R. Bruce Grover, each of whom is an
independent director, as defined by Nasdaq and the Securities and Exchange
Commission. Mr. Dietrich is an audit committee financial expert, as
defined by the Securities and Exchange Commission.

We
have adopted a written code of conduct that applies to all of our non-union employees. A
copy of our code of conduct is available free of charge on our corporate web site at
http://www.fresh-brands.com/Investorfame.html. No amendments to, or waivers from,
our code of conduct have been made. If, in the future, we amend, or grant waivers to, our
code of conduct, we will make information regarding such amendments or waivers available
on our corporate web site http://www.fresh-brands.com/Investorfame.html for a
period of at least 12 months.

# Item 11.  Executive
Compensation.

Pursuant
to Instruction G, the information required by this Item is incorporated by reference
from information included under the caption entitled Executive Compensation
set forth in our Proxy Statement.

# Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.

The
following table lists certain information about our two stock option plans, our 1995
Equity Incentive Plan and our 2001 Nonemployee Director Stock Option Plan, both of which
were approved by our shareholders:

|Number of securities to be
issued upon the exercise of
outstanding options | Weighted-average
exercise price of
outstanding options | Number of securities remaining available for
future issuance under equity compensation
plans (excluding securities reflected in the
first column)
|-------------------------------------------------------------------------- | ------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------
|670,167                                                                    | $ 13.54                                                | 618,766                                                                                                                                          

Pursuant
to Instruction G, the other information required by this Item is incorporated herein by
reference from information included under the captions entitled Stock Ownership of
Management and Others and Election of Directors set forth in our Proxy
Statement.

# Item 13.  Certain
Relationships and Related Transactions.

Pursuant
to Instruction G, information required by this Item is incorporated by reference from
information under the captions entitled Compensation Committee and Stock Option
Committee Interlocks and Insider Participation and Certain Transactions
set forth in our Proxy Statement.

# Item 14.  Principal
Accountant Fees and Services.

Pursuant
to Instruction G, the other information required by this Item is incorporated herein
by reference from information included under the caption entitled Our Independent
Auditors set forth in our Proxy Statement.

57

---

# PART IV

# Item 15.  Exhibits,
Financial Statement Schedules and Reports on Form 8-K.

| | (a) | The
following documents are filed as a part of this Form 10-K:
| | --- | --------------------------------------------------------------

| | (1)    
Financial Statements. The information required by this item is set forth
          in Item 8. Financial Statements and Supplementary Data above.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2)    
Financial Statement Schedules.
| | --------------------------------------

|                                                            
|------------------------------------------------------------
|Independent Auditors' Report                                
|Schedule II - Valuation and Qualifying Accounts and Reserves

All
other schedules have been omitted as not required or not applicable, or the information
required to be shown thereon is included in the financial statements and related notes.

| | (3)    Exhibits.
The exhibits filed or incorporated by reference herewith are as           specified in
the Exhibit Index included herein.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Reports
of Form 8-K.
| | --- | --------------------

| | We
filed a current report on Form 8-K, dated November 4, 2003, pursuant to Item 12 with
respect to our press release announcing our quarterly financial results for the reporting
period ended October 4, 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
filed a current report on Form 8-K, dated November 14, 2003, pursuant to Item 12
with respect to our press release correcting the previously announced third quarter
financial results.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
filed a current report on Form 8-K dated November 17, 2003, pursuant to Item 9 with
respect to our press release announcing the commencement of our search for a new
President and Chief Executive Officer and the termination of our relationship with Elwood
F. Winn, our former President and Chief Executive Officer.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
filed a current report on Form 8-K dated December 17, 2003, pursuant to Item 9 with
respect to our press release announcing the hiring of John H. Dahly as our Executive Vice
President, Chief Financial Officer, Secretary and Treasurer, and Louis E. Stinebaugh as
our Executive Vice President  Operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

58

---

SIGNATURES

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

|                     | FRESH BRANDS, INC.                      
|-------------------- | ----------------------------------------
|Date: March 18, 2004 | By:  /s/ John H. Dahly                  
|                     | John H. Dahly, Executive Vice President,
|                     | Chief Financial Officer, Secretary and  
|                     | Treasurer                               

Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed as of the date above by the following persons on behalf of us in the
capacities indicated.

|By:  /s/ Walter G. Winding                     | By:  /s/ Michael R. Houser         
|---------------------------------------------- | -----------------------------------
|Walter G. Winding, III, Chairman of Board      | Michael R. Houser, Vice Chairman of
|and Director                                   | the Board, Executive Vice President
|                                               | and Director                       
|By:  /s/ John H. Dahly                         | By:  /s/ R. Bruce Grover           
|John H. Dahly, Executive Vice President, Chief | R. Bruce Grover, Director          
|Financial Officer, Secretary and Treasurer    
|By:  /s/ Steven R. Barth                       | By:  /s/ G. William Dietrich       
|Steven R. Barth, Director                      | G. William Dietrich, Director      
|By:  /s/ Bruce J. Olson                       
|Bruce J. Olson, Director                      

S-1

---

# Independent Auditors'
Report

The Board of DirectorsFresh
Brands, Inc.:

Under date of February 26, 2004,
except as to paragraphs 4 and 5 of note 4, which are as of March 18, 2004, we reported on the consolidated balance
sheets of Fresh Brands, Inc. and subsidiaries (the Company) as of January 3, 2004 and
December 28, 2002, and the related consolidated statements of operations,
shareholders investment, and cash flows for each of the years in the three-year
period ended January 3, 2004, which report appears in the January 3, 2004 annual
report on Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule as listed
in the accompanying index. The financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.

In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information
set forth therein.

As discussed in note 2 to the
consolidated financial statements, effective December 30, 2001, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets.

Milwaukee, Wisconsin
February 26, 2004, except as to paragraphs 4 and 5 of note 4,       which are as of March 18, 2004

F-1

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FRESH BRANDS, INC.

SCHEDULE II 
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

FOR THE FISCAL YEARS
2003, 2002 AND 2001

Allowance for Doubtful
Accounts 

Changes
in the allowance for doubtful accounts are summarized as follows:

|                             
|-----------------------------
|Balance, beginning of year   
|Provision charged to earnings
|(Writeoffs), net             
|                             
|Balance, end of year         
|                             

See Accompanying
Independent Auditors Report.

F-2

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# EXHIBIT INDEX

# FRESH BRANDS, INC.

# ANNUAL REPORT ON FORM
10-K

# FOR THE FISCAL YEAR
ENDED JANUARY 3, 2004

Exhibit No.                  Description

| | 3.1 | Restated
  Articles  of  Incorporation,   as  amended.   Incorporated  by  reference  to
                 Exhibit 3.1 to our Form S-4 filed on April 27, 2001.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | Bylaws,
as amended and restated.
| | --- | --------------------------------

| | 4.1 | Restated
Articles of Incorporation, as amended (included as Exhibit 3.1).
| | --- | -------------------------------------------------------------------------

| | 4.2 | Rights
 Agreement,  dated as of October 12,  2001, among Fresh Brands,  Inc. and Firstar
                 Bank,  N.A.  Incorporated by reference to Exhibit 4.1 to the
 Registration  Statement on                  Form 8-A of Fresh  Brands,  Inc.,  dated as
of October  12,  2001  (Commission  File No.                  000-32825).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.3 | Amendment
to Rights Agreement,  dated as of August 19, 2002 among Fresh Brands, Inc. and
                 American  Stock Transfer & Trust  Company.  Incorporated  by reference
to Exhibit 4.7 to                  our Annual Report on Form 10-K for the period ended
December 28, 2002.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.4 | Credit
 Agreement,  dated as of March 18, 2004, among Fresh Brands,  Inc.,  LaSalle Bank
                 National  Association,  as  Administrative  Agent,  Co-Lead Arranger and
Lender and U.S.                  Bank National Association, as Documentation Agent,
Co-Lead Arranger and Lender.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
summarized in Notes 4 and 8 of the Notes to Financial Statements in Item 8, we have various other outstanding long-term debt and capital lease
obligations. None of such other obligations individually exceeds 10% of our total assets.
We hereby agree to furnish to the Commission, upon its request, a copy of each instrument
with respect to such obligations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 | Master
Franchise Agreement, dated April 23, 1982, between Commodores Point Terminal Corporation
and Piggly Wiggly Corporation. Incorporated by reference to Exhibit 10.1 to Schultz
Sav-O Stores, Inc.s Annual Report on Form 10-K for the year ended January 1,
1982.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 | Agreement,
dated August 1, 1982, between Schultz Sav-O Stores, Inc. and Commodores Point
Terminal Corporation. Incorporated by reference to Exhibit 10.2 to Schultz Sav-O
Stores, Inc.s Annual Report on Form 10-K for the year ended January 1, 1982.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-1

---

Exhibit No.                  Description

| | 10.3 | Amendment
to Master Franchise Agreement, dated October 15, 1982, between Schultz Sav-O Stores,
Inc. and Piggly Wiggly Corporation. Incorporated by reference to Exhibit 10.3 to
Schultz Sav-O Stores, Inc.s Annual Report on Form 10-K for the year ended January 1,
1982.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4 | Amendment
 No. 2 to Piggly  Wiggly  Master  Franchise  Agreement,  dated  June 3,  1998,
                 between  Schultz  Sav-O  Stores,  Inc. and Piggly Wiggly  Corporation.
 Incorporated  by                  reference to Exhibit 10.2 to Schultz Sav-O Stores,
 Inc.'s Quarterly Report on Form 10-Q                  for the period ended April 25,
1998.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5 | Form
of Key Executive Employment and Severance Agreement, dated as of January 31,  2002,
                 between  Fresh  Brands,  Inc.  and  Michael R.  Houser and dated as of
December 15, 2003                  between Fresh Brands,  Inc. and John H. Dahly and
Louis E.  Stinebaugh.  Incorporated by                  reference  to  Exhibit 10.5  to
our  Annual  Report  on Form 10-K for the  period  ended                  December  29,
 2001.  This  agreement  is  required  to be filed as an  exhibit  to this
                 Form 10-K pursuant to Item 15(c) of Form 10-K.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.6 | Key
Executive Severance Agreement,  dated as of January 31,  2002, between Fresh Brands,
                 Inc. and Walter G.  Winding.  Incorporated  by reference to  Exhibit
10.6  to our Annual                  Report on Form 10-K for the period ended  December
29, 2001.  This agreement is required                  to be filed as an exhibit to this
Form 10-K pursuant to Item 15(c) of Form 10-K.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.7 | Termination
and Severance Agreement and Mutual Release,  dated as of November 14, 2003,  between
Fresh  Brands,  Inc. and                  Elwood F. Winn.  This  agreement is required to
be filed as an exhibit to this Form 10-K                  pursuant to Item 15(c) of Form
10-K.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8 | Form
of Key Executive  Employment and Severance Agreement dated as of January 31,  2002,
                 between  Fresh  Brands,  Inc.  and  Thomas  J.  Timler.  Incorporated
 by  reference  to                  Exhibit 10.8  to our Annual Report on Form 10-K for
the period ended  December 29, 2001.                  This  agreement  is  required  to
be filed as an exhibit to this  Form 10-K  pursuant to                  Item 15(c) of
Form 10-K.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9 | Membership
and Licensing Agreement dated August 1, 1973 by and between Topco Associates, Inc.
(Cooperative) and Schultz Sav-O Stores. Incorporated by reference to Exhibit 10.6 to
Schultz Sav-O Stores, Inc.s Annual Report on Form 10-K for the year ended December 30,
1996.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.10 | Articles
of  Incorporation  of Topco  Associates,  Inc.  (Cooperative).  Incorporated by
                 reference to Exhibit 10.12 to Schultz  Sav-O  Stores,  Inc.'s Annual
Report on Form 10-K                  for the year ended December 31, 1988.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11 | Bylaws
of Topco  Associates,  Inc.  (Cooperative),  as  amended  through  June 7,  1996.
                 Incorporated by reference to Exhibit 10.8 to Schultz Sav-O Stores,
 Inc.'s Annual Report                  on Form 10-K for the year ended December 30, 1996.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-2

---

Exhibit No.                  Description

| | 10.12 | 1995
Equity Incentive Plan, as amended and restated as of December 14, 2000. Incorporated
by reference to Exhibit 10.13 to Schultz Sav-O Stores, Inc.s Form 10-K for the year
ended December 30, 2000. This plan is required to be filed as an exhibit to this Form 10-K
pursuant to Item 15(c) of Form 10-K.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.13 | Form
of Nonqualified Stock Option Agreement under 1995 Equity Incentive Plan. Incorporated by
reference to Exhibit 10.14 to our Form 10-K for the year ended December 28, 2002.
This form of agreement is required to be filed as an exhibit to this Form 10-K
pursuant to Item 15(c) of Form 10-K.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.14 | Fresh
Brands Distributing, Inc. Executive Benefit Restoration Plan. Incorporated by reference
to Exhibit 10.10 to Schultz Sav-O Stores, Inc.s Annual Report on Form 10-K for the
year ended January 2, 1999. This Plan is required to be filed as an exhibit to this Form 10-K
pursuant to Item 15(c) of Form 10-K.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.15 | 2001
Nonemployee Director Stock Option Plan, as adopted by the Board of Directors as of
December 14, 2000. Incorporated by reference to Exhibit 10.19 to our Form S-4 filed on
April 27, 2001. This plan is required to be filed as an exhibit to this Form 10-K
pursuant to Item 15(c) of Form 10-K.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 | Form
of Nonqualified Stock Option Agreement under 2001 Nonemployee Director Stock Option Plan.
Incorporated by reference to Exhibit 10.20 to our Form S-4 filed on April 27, 2001. This
form of agreement is required to be filed as an exhibit to this Form 10-K pursuant
to Item 15(c) of Form 10-K.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 21 | Our
subsidiaries.
| | -- | -----------------

| | 23 | Consent
of KPMG LLP.
| | -- | --------------------

| | 31 | Certifications
by the acting principal executive officer and chief financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------

| | 32 | Certification
of Periodic Financial Report by the acting principal executive officer and chief
financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 99 | Definitive
Proxy Statement for the 2004 Annual Meeting of Shareholders (to be filed with the
Commission under Regulation 14A within 120 days after the end of our fiscal year
and, upon such filing, incorporated by reference herein to the extent indicated in this
Form 10-K).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-3