##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K/A-1




|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the Fiscal Year Ended August 31,
    2003                                               
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to           .                                 

Commission file number: 0-50150



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CHS Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                                         |  |                                                                       
|------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------
|Minnesota                                                                                                                |  | 41-0251095                                                            
|(State or other jurisdiction of
    incorporation or organization)                                                       |  | (I.R.S. Employer
    Identification Number)                           
|                                                                                                                        
|5500 Cenex Drive
    Inver Grove Heights, Minnesota 55077(Address of principal executive
    office, including zip code) |  | (651) 355-6000(Registrants Telephone
    number, including area code)



---

Securities Registered Pursuant to
Section 12(b) of the Act:

None


Securities Registered Pursuant to
Section 12(g) of the Act:


8% Cumulative Redeemable Preferred
Stock


(Title of Class)




---

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

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

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes o          No þ

State the aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold,
or the average bid and asked price of such common equity, as of
the last business day of the registrants most recently
completed second fiscal quarter:

The registrants voting and non-voting
common equity has no market value (the registrant is a member
cooperative).

Indicate the number of shares outstanding of each
of the registrants classes of common stock, as of the
latest practicable date: The registrant has no common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.



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TABLE OF CONTENTS



|                                              |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.                                      
|                                              | Item 1. Business                                                                             
|                                              | CAUTIONARY STATEMENT                                                                         
|                                              | THE COMPANY                                                                                  
|                                              | AGRONOMY                                                                                     
|                                              | ENERGY                                                                                       
|                                              | COUNTRY OPERATIONS AND SERVICES                                                              
|                                              | GRAIN MARKETING                                                                              
|                                              | PROCESSED GRAINS AND FOODS                                                                   
|                                              | PRICE RISK AND HEDGING                                                                       
|                                              | EMPLOYEES                                                                                    
|                                              | MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL                                             
|                                              | Item 2. Properties                                                                           
|                                              | Item 3. Legal Proceedings                                                                    
|                                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II.                                     
|                                              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                              | Item 6. Selected Financial Data                                                              
|                                              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                              | Item 8. Financial Statements and Supplementary Data                                          
|                                              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|                                              | Item 9A. Controls and Procedures                                                             
|PART III.                                    
|                                              | Item 10. Directors and Executive Officers of the Registrant                                  
|                                              | BOARD OF DIRECTORS                                                                           
|                                              | EXECUTIVE OFFICERS                                                                           
|                                              | Section 16(a) Beneficial Ownership Reporting Compliance                                      
|                                              | Code of Ethics                                                                               
|                                              | Audit Committee Matters                                                                      
|                                              | Item 11. Executive Compensation                                                              
|                                              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV.                                     
|                                              | Item 14. Principal Accountant Fees and Services                                              
|                                              | Item 15. Exhibits, Financial Statements and Reports Filed on Form 8-K                        
|Supplemental Information                     
|SIGNATURES                                   
|EX-23.1 Consent of Independent Accountants   
|EX-23.2 Independent Auditors' Consent        
|EX-31.1 Certification Pursuant to Section 302
|EX-31.2 Certification Pursuant to Section 302
|EX-32.1 Certification Pursuant to Section 906
|EX-32.2 Certification Pursuant to Section 906



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##### Table of Contents



INDEX




|                         |  |                                                                                           |    |      |    | 
|------------------------ |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                         |  |                                                                                           |    | Page
|                         |  |                                                                                           |    | No. 
|                         |  |                                                                                           |    |     
|PART I.                 
|Item 1.                  |  | Business                                                                                  |    |      | 2  | 
|                         |  | Cautionary Statement Regarding Forward-Looking
    Statements                             |    |      | 2  | 
|                         |  | The Company                                                                               |    |      | 6  | 
|                         |  | Agronomy                                                                                  |    |      | 7  | 
|                         |  | Energy                                                                                    |    |      | 9  | 
|                         |  | Country Operations and Services                                                           |    |      | 12 | 
|                         |  | Grain Marketing                                                                           |    |      | 13 | 
|                         |  | Processed Grains and Foods                                                                |    |      | 15 | 
|                         |  | Price Risk and Hedging                                                                    |    |      | 18 | 
|                         |  | Employees                                                                                 |    |      | 19 | 
|                         |  | Membership in the Company and Authorized Capital                                          |    |      | 19 | 
|Item 2.                  |  | Properties                                                                                |    |      | 22 | 
|Item 3.                  |  | Legal Proceedings                                                                         |    |      | 23 | 
|Item 4.                  |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 24 | 
|PART II.                
|Item 5.                  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |    |      | 25 | 
|Item 6.                  |  | Selected Financial Data                                                                   |    |      | 25 | 
|Item 7.                  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 27 | 
|Item 7A.                 |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 43 | 
|Item 8.                  |  | Financial Statements and Supplementary Data                                               |    |      | 44 | 
|Item 9.                  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |    |      | 45 | 
|Item 9A.                 |  | Controls and Procedures                                                                   |    |      | 45 | 
|PART III.               
|Item 10.                 |  | Directors and Executive Officers of the Registrant                                        |    |      | 46 | 
|                         |  | Board of Directors                                                                        |    |      | 46 | 
|                         |  | Executive Officers                                                                        |    |      | 49 | 
|                         |  | Section 16(a) Beneficial Ownership Reporting
    Compliance                               |    |      | 51 | 
|                         |  | Code of Ethics                                                                            |    |      | 51 | 
|                         |  | Audit Committee Matters                                                                   |    |      | 51 | 
|Item 11.                 |  | Executive Compensation                                                                    |    |      | 52 | 
|Item 12.                 |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 59 | 
|Item 13.                 |  | Certain Relationships and Related Transactions                                            |    |      | 59 | 
|PART IV.                
|Item 14.                 |  | Principal Accountant Fees and Services                                                    |    |      | 60 | 
|Item 15.                 |  | Exhibits, Financial Statements and Reports Filed
    on Form 8-K                          |    |      | 61 | 
|SUPPLEMENTAL INFORMATION |  |                                                                                           |    |     
|SIGNATURES               |  |                                                                                           | 65 |     




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PART I.







Item
1.     Business










CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS





The information in this Annual Report on
Form 10-K for the year ended August 31, 2003, includes
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to
the Company. In addition, the Company and its representatives
and agents may from time to time make other written or oral
forward-looking statements, including statements contained in
the Companys filings with the Securities and Exchange
Commission and its reports to its members and securityholders.
Words and phrases such as will likely result,
are expected to, will continue, is
anticipated, estimate, project and
similar expressions identify forward-looking statements. The
Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date
made.




The Companys forward-looking statements
are subject to risks and uncertainties that could cause actual
results to differ materially from those discussed in the
forward-looking statements. This Cautionary Statement is for the
purpose of qualifying for the safe harbor provisions
of the Act and is intended to be a readily available written
document that contains factors which could cause results to
differ materially from those projected in the forward-looking
statements. The following matters, among others, may have a
material adverse effect on the business, financial condition,
liquidity, results of operations or prospects, financial or
otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement shall be
deemed to be a statement that any one or more of the following
factors may cause actual results to differ materially from those
which might be projected, forecasted, estimated or budgeted by
the Company in the forward-looking statement or
statements.







The following factors are in addition to any
other cautionary statements, written or oral, which may be made
or referred to in connection with any particular forward-looking
statement. The following review should not be construed as
exhaustive.




The Company undertakes no obligation to revise
any forward-looking statements to reflect future events or
circumstances.




OUR REVENUES AND OPERATING RESULTS COULD BE
ADVERSELY AFFECTED BY CHANGES IN COMMODITY PRICES.Our revenues and earnings are affected
by market prices for commodities such as crude oil, natural gas,
grain, oilseeds, and flour. Commodity prices generally are
affected by a wide range of factors beyond our control,
including the weather, disease, insect damage, drought, the
availability and adequacy of supply, government regulation and
policies, and general political and economic conditions. We are
also exposed to fluctuating commodity prices as the result of
our inventories of commodities, typically grain and petroleum
products, and purchase and sale contracts at fixed or partially
fixed prices. At any time, our inventory levels and unfulfilled
fixed or partially fixed price contract obligations may be
substantial. Increases in market prices for commodities that we
purchase without a corresponding increase in the prices of our
products or our sales volume or a decrease in our other
operating expenses could reduce our revenues and net income.







In our energy operations, profitability depends
largely on the margin between the cost of crude oil that we
refine and the selling prices that we obtain for our refined
products. Prices for both crude oil and for gasoline, diesel
fuel, and other refined petroleum products fluctuate widely.
Factors influencing these prices, many of which are beyond our
control, include:






| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | levels of worldwide and domestic supplies;                                                                                                                  
|
|
|
| |  | capacities of domestic and foreign refineries;                                                                                                              
|
|
|
| |  | the ability of the members of OPEC to agree to
    and maintain oil price and production controls, and the price
    and level of foreign imports generally;
|

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| |   |                                                                      
| | - | ---------------------------------------------------------------------
|
| |  | political instability or armed conflict in
    oil-producing regions;
|
|
|
| |  | the level of consumer demand;                                        
|
|
|
| |  | the price and availability of alternative fuels;                     
|
|
|
| |  | the availability of pipeline capacity; and                           
|
|
|
| |  | domestic and foreign governmental regulations and
    taxes.         
|




The long-term effects of these and other
conditions on the prices of crude oil and refined petroleum
products are uncertain and ever-changing. Accordingly, we expect
our margins on and the profitability of our energy business to
fluctuate, possibly significantly, over time.







OUR OPERATING RESULTS COULD BE ADVERSELY
AFFECTED IF OUR MEMBERS WERE TO DO BUSINESS WITH OTHERS RATHER
THAN WITH US.We do not have an
exclusive relationship with our members and our members are not
obligated to supply us with their products or purchase products
from us. Our members often have a variety of distribution
outlets and product sources available to them. If our members
were to sell their products to other purchasers or purchase
products from other sellers, our revenues would decline and our
results of operations could be adversely affected.







WE PARTICIPATE IN HIGHLY COMPETITIVE BUSINESS
MARKETS IN WHICH WE MAY NOT BE ABLE TO CONTINUE TO COMPETE
SUCCESSFULLY.We operate in several
highly competitive business segments and our competitors may
succeed in developing new or enhanced products that are better
than ours, and may be more successful in marketing and selling
their products than we are with ours. Competitive factors
include price, service level, proximity to markets, product
quality and marketing. In some of our business segments, such as
Energy, we compete with companies that are larger, better known
and have greater marketing, financial, personnel and other
resources. As a result, we may not be able to continue to
compete successfully with our competitors.







CHANGES IN FEDERAL INCOME TAX LAWS OR IN OUR
TAX STATUS COULD INCREASE OUR TAX LIABILITY AND REDUCE OUR NET
INCOME.Current federal income tax
laws, regulations and interpretations regarding the taxation of
cooperatives, which allow us to exclude income generated through
business with or for a member (patronage income) from our
taxable income, could be changed. If this occurred, or if in the
future we were not eligible to be taxed as a cooperative, our
tax liability would significantly increase and our net income
significantly decrease.







WE INCUR SIGNIFICANT COSTS IN COMPLYING WITH
APPLICABLE LAWS AND REGULATIONS. ANY FAILURE TO MAKE THE CAPITAL
INVESTMENTS NECESSARY TO COMPLY WITH THESE LAWS AND REGULATIONS
COULD EXPOSE US TO FINANCIAL LIABILITY. We are subject to
numerous federal, state and local provisions regulating our
business and operations and we incur and expect to incur
significant capital and operating expenses to comply with these
laws and regulations. We may be unable to pass on those expenses
to customers without experiencing volume and margin losses. For
example, capital expenditures for upgrading our refineries,
largely to comply with regulations requiring the reduction of
sulfur levels in refined petroleum products, are expected to be
approximately $87.0 million for our Laurel, Montana
refinery and $324.0 million for National Cooperative
Refinery Associations McPherson, Kansas refinery, of which
$8.7 million had been spent at the Laurel refinery and
$36.5 million had been spent by NCRA at the McPherson
refinery as of August 31, 2003. We expect all of these
compliance capital expenditures at the refineries to be complete
by December 31, 2005, and anticipate funding these projects
with a combination of cash flows from operations and debt
proceeds.







We establish reserves for the future cost of
meeting known compliance obligations, such as remediation of
identified environmental issues. However, these reserves may
prove inadequate to meet our actual liability. Moreover,
amended, new or more stringent requirements, stricter
interpretations of existing requirements or the future discovery
of currently unknown compliance issues may require us to make
material expenditures or subject us to liabilities that we
currently do not anticipate. Furthermore, our




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failure to comply with applicable laws and
regulations could subject us to administrative penalties and
injunctive relief, civil remedies including fines and
injunctions, and recalls of our products.








ENVIRONMENTAL LIABILITIES COULD ADVERSELY
AFFECT OUR RESULTS AND FINANCIAL CONDITION.Many of our current and former
facilities have been in operation for many years and, over that
time, we and other operators of those facilities have generated,
used, stored and disposed of substances or wastes that are or
might be considered hazardous under applicable environmental
laws, including chemicals and fuels stored in underground and
above-ground tanks. Any past or future actions in violation of
applicable environmental laws could subject us to administrative
penalties, fines and injunctions. Moreover, future or unknown
past releases of hazardous substances could subject us to
private lawsuits claiming damages and to adverse publicity.







ACTUAL OR PERCEIVED QUALITY, SAFETY OR HEALTH
RISKS ASSOCIATED WITH OUR PRODUCTS COULD SUBJECT US TO LIABILITY
AND DAMAGE OUR BUSINESS AND
REPUTATION.If any of our food or feed
products became adulterated or misbranded, we would need to
recall those items and could experience product liability claims
if consumers were injured as a result. A widespread product
recall or a significant product liability judgment could cause
our products to be unavailable for a period of time or a loss of
consumer confidence in our products. Even if a product liability
claim is unsuccessful or is not fully pursued, the negative
publicity surrounding any assertion that our products caused
illness or injury could adversely affect our reputation with
existing and potential customers and our corporate and brand
image. Moreover, claims or liabilities of this sort might not be
covered by our insurance or by any rights of indemnity or
contribution that we may have against others. In addition,
general public perceptions regarding the quality, safety or
health risks associated with particular food or feed products,
such as the concern in some quarters regarding genetically
modified crops, could reduce demand and prices for some of the
products associated with our businesses. To the extent that
consumer preferences evolve away from products that our members
or we produce for health or other reasons, such as the growing
demand for organic food products, and we are unable to develop
products that satisfy new consumer preferences, there will be a
decreased demand for our products.







OUR OPERATIONS ARE SUBJECT TO BUSINESS
INTERRUPTIONS AND CASUALTY LOSSES; WE DO NOT INSURE AGAINST ALL
POTENTIAL LOSSES AND COULD BE SERIOUSLY HARMED BY UNEXPECTED
LIABILITIES.Our operations are
subject to business interruptions due to unanticipated events
such as explosions, fires, pipeline interruptions,
transportation delays, equipment failures, crude oil or refined
product spills, inclement weather and labor disputes. For
example:






| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | our oil refineries and other facilities are
    potential targets for terrorist attacks that could halt or
    discontinue production;              
|
|
|
| |  | our inability to negotiate acceptable contracts
    with unionized workers in our operations could result in strikes
    or work stoppages; and     
|
|
|
| |  | the significant inventories that we carry could
    be damaged or destroyed by catastrophic events, extreme weather
    conditions or contamination.
|




We maintain insurance against many, but not all,
potential losses or liabilities arising from these operating
hazards, but uninsured losses or losses above our coverage
limits are possible. Uninsured losses and liabilities arising
from operating hazards could have a material adverse effect on
our financial position or results of operations.







OUR COOPERATIVE STRUCTURE LIMITS OUR ABILITY
TO ACCESS EQUITY CAPITAL.As a
cooperative, we may not sell common equity in our company. In
addition, existing laws and our articles of incorporation and
bylaws contain limitations on dividends of 8% of any preferred
stock that we may issue. These limitations restrict our ability
to raise equity capital and may adversely affect our ability to
compete with enterprises that do not face similar restrictions.







CONSOLIDATION AMONG THE PRODUCERS OF PRODUCTS
WE PURCHASE AND CUSTOMERS FOR PRODUCTS WE SELL COULD ADVERSELY
AFFECT OUR REVENUES AND OPERATING




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RESULTS. Consolidation has occurred among the
producers of products we purchase, including crude oil and
grain, and is likely to continue in the future. Consolidation
could increase the price of these products and allow suppliers
to negotiate pricing and other contract terms that are less
favorable to us. Consolidation also may increase the competition
among consumers of these products to enter into supply
relationships with a smaller number of producers resulting in
potentially higher prices for the products we purchase.








Consolidation among purchasers of our products
and in wholesale and retail distribution channels has resulted
in a smaller customer base for our products and intensified the
competition for these customers. For example, ongoing
consolidation among distributors and brokers of food products
and food retailers has altered the buying patterns of these
businesses, as they have increasingly elected to work with
product suppliers who can meet their needs nationwide rather
than just regionally or locally. If these distributors, brokers,
and retailers elect not to purchase our products, our sales
volumes, revenues, and profitability could be significantly
reduced.







IF OUR CUSTOMERS CHOSE ALTERNATIVES TO OUR
REFINED PETROLEUM PRODUCTS OUR REVENUES AND PROFITS MAY DECLINE.Numerous alternative energy sources
currently under development that could serve as alternatives to
our gasoline, diesel fuel and other refined petroleum products.
If any of these alternative products become more economically
viable or preferable to our products for environmental or other
reasons, demand for our energy products would decline. Demand
for our gasoline, diesel fuel and other refined petroleum
products also could be adversely affected by increased fuel
efficiencies.







OUR AGRONOMY BUSINESS IS DEPRESSED AND COULD
CONTINUE TO UNDERPERFORM IN THE FUTURE.Demand for agronomy products in
general has been adversely affected in recent years by drought
and poor weather conditions, idle acreage and development of
insect and disease-resistant crops. These factors could cause
Agriliance, LLC, an agronomy marketing and distribution venture
in which we own a minority interest, to be unable to operate at
profitable margins. In addition, these and other factors,
including fluctuations in the price of natural gas and other raw
materials, an increase in recent years in domestic and foreign
production of fertilizer, and intense competition within the
industry, in particular from lower-cost foreign producers, have
created particular pressure on producers of fertilizers. As a
result, CF Industries, Inc., a fertilizer manufacturer in which
we hold a minority cooperative interest, has suffered
significant losses in recent years as it has incurred increased
prices for raw materials but has been unable to pass those
increased costs on to its customers.







TECHNOLOGICAL IMPROVEMENTS IN AGRICULTURE
COULD DECREASE THE DEMAND FOR OUR AGRONOMY PRODUCTS.Technological advances in agriculture
could decrease the demand for crop nutrients, and other crop
input products and services that we provide. Genetically
engineered seeds that resist disease and insects or meet certain
nutritional requirements could affect the demand for our crop
nutrients and crop protection products, as well as the demand
for fuel that we sell and which is used to operate application
equipment relating to these products.







WE OPERATE SOME OF OUR BUSINESS THROUGH JOINT
VENTURES IN WHICH OUR RIGHTS TO CONTROL BUSINESS DECISIONS ARE
LIMITED.Several parts of our
business, including in particular our agronomy business segment
and portions of our grain marketing, wheat milling and foods
businesses, are operated through joint ventures with
unaffiliated third parties. By operating a business through a
joint venture, we have less control over business decisions than
we have in our wholly owned businesses. In particular, we
generally cannot act on major business initiatives in our joint
ventures without the consent of the other party or parties in
that venture.









THE COMPANY


CHS Inc. (CHS or the Company) is one of the
nations leading integrated agricultural companies. As a
cooperative, the Company is owned by farmers and ranchers and
their local cooperatives from the Great Lakes to the Pacific
Northwest and from the Canadian border to Texas. CHS buys
commodities from and

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provides products and services to its members and
other customers. The Company provides a wide variety of products
and services, from initial agricultural inputs such as fuels,
farm supplies, crop nutrients and crop protection products, to
agricultural outputs that include grains and oilseeds, grain and
oilseed processing and food products. A portion of the
Companys operations are conducted through equity
investments and joint ventures whose operating results are not
fully consolidated with the Companys results; rather, a
proportionate share of the income or loss from those entities is
included as a component in the Companys net income under
the equity method of accounting. For the fiscal year ended
August 31, 2003, the Companys total revenues were
$9.4 billion.


The Companys operations are organized into
five business segments: Agronomy, Energy, Country Operations and
Services, Grain Marketing and Processed Grains and Foods.
Together these business segments create vertical integration to
link producers with consumers. The first two segments, Agronomy
and Energy, produce and provide for the wholesale distribution
of inputs that are essential for crop production. The third
segment, Country Operations and Services, serves as the
Company-owned retailer of a portion of these crop inputs and
also serves as the first handler of a significant portion of the
crops marketed and processed by the Company. The fourth segment,
Grain Marketing, purchases and resells grains and oilseeds
originated by the Country Operations and Services segment, by
member cooperatives and also by third parties. The fifth
business segment, Processed Grains and Foods, converts grains
and oilseeds into value-added products.




Only producers of agricultural products and
associations of producers of agricultural products may be
members of CHS. The Companys earnings derived from
business conducted with these members are allocated to members
based on the volume of business they do with the Company.
Members receive earnings in the form of patronage refunds (which
are also called patronage dividends) in cash and patrons
equities, which may be redeemed over time. Earnings derived from
non-members are taxed at regular corporate rates and are
retained by the Company as unallocated equity. The Company also
receives patronage refunds from the cooperatives in which it is
a member if those cooperatives have earnings to distribute and
the Company qualifies for patronage refunds from them.




The origins of CHS date back to the early 1930s
with the founding of the predecessor companies of Cenex, Inc.
and Harvest States Cooperatives. CHS emerged as the result of
the merger of the two entities in 1998, and is headquartered in
Inver Grove Heights, Minnesota. In August 2003, the Company
changed its name from Cenex Harvest States Cooperatives to CHS
Inc.

The international sales information and segment
information in Notes 2 and 11 to the consolidated financial
statements are incorporated by reference into the following
business segment descriptions.

The business segment financial information
presented below does not represent the results that would have
been obtained had the relevant business segment been operated as
an independent business.






AGRONOMY


Overview




Through the Agronomy business segment, the
Company is engaged in the manufacture of crop nutrients and the
wholesale distribution of crop nutrients and crop protection
products. The Company conducts its agronomy operations primarily
through two investments  a 20% cooperative ownership
interest in CF Industries, Inc. (CF Industries) and, effective
January 2000, a 25% ownership interest in Agriliance, LLC
(Agriliance). CF Industries manufactures crop nutrient products,
particularly nitrogen and phosphate fertilizers, and is one of
the largest suppliers to Agriliance. Agriliance is one of North
Americas largest wholesale distributors of crop nutrients,
crop protection products and other agronomy products based on
sales.




There is significant seasonality in the sale of
crop nutrients and crop protection products and services, with
peak activity coinciding with the planting and input seasons.

6



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The Companys minority ownership interests
in CF Industries and Agriliance are treated as investments, and
therefore, those entities revenues and expenses are not
reflected in the Companys operating results. CF Industries
is treated as a cost method investment and Agriliance is treated
as an equity method investment. CF Industries and Agriliance
each have their own line of financing, without recourse to the
Company.

Operations




CF Industries.CF
Industries is an interregional agricultural cooperative involved
in the manufacturing of crop nutrient products. It is one of
North Americas largest producers of nitrogen and phosphate
fertilizers based on plant capacity. Through its members, CF
Industries nitrogen and phosphate fertilizer products
reach farmers and ranchers in 48 states and two Canadian
provinces. CF Industries conducts its operations primarily from
the following facilities:






| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | a nitrogen manufacturing and processing facility
    at Donaldsonville, Louisiana;                             
|
| |  | a phosphate mine and phosphate fertilizer plant
    in central Florida; and                                    
|
| |  | a 66% ownership interest in a nitrogen fertilizer
    manufacturing and processing facility in Alberta, Canada.




Agriliance.Agriliance is the one of the
nations largest wholesale distributors of crop nutrients
(fertilizers) and crop protection products (insecticides,
fungicides and pesticides) based on sales, accounting for an
estimated 19% of the U.S. market for crop nutrients and
approximately 26% of the U.S. market for crop protection
products. As a wholesale distributor, Agriliance has warehouse,
distribution and service facilities located throughout the
country. Agriliance also owns and operates retail agricultural
units in the southern United States. Agriliance purchased
approximately 36% of its fertilizer from CF Industries during
fiscal year 2003, and purchases most of its crop protection
products from Monsanto and Sygenta.




Agriliance was formed in 2000 when CHS, Farmland
Industries Inc. (Farmland) and Land OLakes, Inc. (Land
OLakes) contributed their respective agronomy businesses
to the new company in consideration for ownership interests (25%
each for CHS and Farmland and 50% for Land OLakes) in the
venture. CHS and Farmland hold their interests in Agriliance
through United Country Brands, LLC, a 50/50 jointly-owned
holding company.

In April, 2003, CHS acquired a 13.1% additional
economic interest in the crop protection products business of
Agriliance (the CPP Business) for a cash payment of
$34.3 million. After the transaction, the economic
interests in Agriliance are owned 50% by Land O Lakes, 25%
plus an additional 13.1% of the CPP Business by CHS and 25% less
13.1% of the CPP Business by Farmland. The ownership or
governance interests in Agriliance did not change with the
purchase of this additional economic interest. Agriliances
earnings are split among the members based upon the respective
economic interests of each member.

Products and Services

CF Industries manufactures crop nutrient
products, primarily nitrogen and phosphate fertilizers and
potash. Agriliance wholesales crop nutrient products and crop
protection products that include insecticides, fungicides, and
pesticides. Agriliance also provides field and technical
services, including soil testing, adjuvant and herbicide
formulation, application and related services.

Sales and Marketing; Customers

CF Industries sells its crop nutrient products to
large agricultural cooperatives and distributors. Its largest
customers are Land OLakes, CHS and seven other regional
cooperatives that wholesale the products to their members.
Agriliance distributes agronomy products through approximately
2,200 local cooperatives from Ohio to the West Coast and from
the Canadian border south to Kansas. Agriliance also provides
sales and services through 48 Agriliance Service Centers and
other retail outlets. Agriliances

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largest customer is the Companys Country
Operations and Services business segment. In 2003, Agriliance
sold approximately $1.3 billion of crop nutrient products
and approximately $1.2 billion of crop protection and other
products.


Industry; Competition

CF Industries.North
American fertilizer producers operate in a highly competitive,
global industry. Commercial fertilizers are world-traded
commodities and producers compete principally on the basis of
price and service. Many of the raw materials that are used in
fertilizer production, such as natural gas, are often more
expensive in the U.S. than other parts of the world. Crop
nutrient margins and earnings have historically been cyclical;
large profits generated throughout the mid-1990s attracted
additional capital and expansion and the industry now suffers
from excess capacity. These factors have produced depressed
margins for North American fertilizer manufacturers over the
past several years, although recently fertilizer margins have
stabilized.

CF Industries competes with numerous domestic and
international crop nutrient manufacturers.

Agriliance.The
wholesale distribution of agronomy products is highly
competitive and dependent upon relationships with agricultural
producers and local cooperatives, proximity to producers and
local cooperatives and competitive pricing. Moreover, the crop
protection products industry is mature with slow growth
predicted for the future, which has led distributors and
suppliers to turn to consolidation and strategic partnerships to
benefit from economies of scale and increased market share.
Agriliance competes with other large agronomy distributors, as
well as other regional or local distributors and retailers.
Agriliance competes on the strength of its relationships with
the members of the Company, Farmland and Land OLakes, its
purchasing power and competitive pricing, and its attention to
service in the field.

Major competitors of Agriliance in crop nutrient
distribution include Agrium, Growmark, Cargill, United Suppliers
and West Central. Major competitors of Agriliance in crop
protection products distribution include Helena, ConAgra (UAP),
Tenkoz and numerous smaller distribution companies.

Summary Operating Results

The Company accounts for its Agronomy business
segment as follows:

CF Industries.The
Companys investment in CF Industries of $153 million
on August 31, 2003 is carried on the balance sheet at cost,
including allocated patronage. Since CF Industries is a
cooperative, the Company recognizes income from the investment
only if it receives patronage refunds. Over the past five years
CF Industries has realized operating losses and, as a result, it
has not issued any patronage refunds to its members.
Historically, crop nutrients manufacturing earnings have been
cyclical in nature. CHS management has performed the appropriate
impairment tests of this investment, and based upon those tests,
believes that fair market value exceeds its carrying value. The
Company will continue to perform impairment tests annually,
including reviewing operating results, or as circumstances
dictate, which could result in an impairment to its CF
Industries investment.




Agriliance.At
August 31, 2003 the Companys equity investment in
Agriliance was $129.3 million. The Company recognizes
earnings from Agriliance using the equity method of accounting,
which results in the Company including its economic interest
percentage of Agriliances net earnings as equity income
from investments. The Company applies related internal expenses
against those earnings.




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Summary operating results and identifiable assets
for the Agronomy business segment for the fiscal years ended
August 31, 2003, 2002 and 2001 are shown below:

|                                      |                     |                        |         |      |   |      |         |     |   |   |         |     | 
|------------------------------------- | ------------------- | ---------------------- | ------- | ---- | - | ---- | ------- | --- | - | - | ------- | --- | 
|                                      |                     | 2003                   |         | 2002 |   | 2001
|                                      |                     |                        |         |      |   |     
|                                      |                     |                       
|                                      |                     | (dollars in thousands)
|Revenues:                             |                     |                        |         |      |   |      |         |     |   |   |         |    
|                                      | Net sales           |                        |         |      |   |      |         |     |   |   |         |     | 
|                                      | Patronage dividends |                        | $       | (84  | ) |      | $       | (89 | ) |   | $       | 196 | 
|                                      | Other revenues      |                        |         |      |   |      |         |     |   |   |         |     | 
|                                      |                     |                        |         |      |   |      |         |     |   |   |         |    
|                                      |                     |                        | (84     | )    |   |      | (89     | )   |   |   | 196     |    
|Cost of goods sold                    |                     |                        |         |      |   |      |         |     |   |   |         |    
|Marketing, general and administrative |                     |                        | 8,138   |      |   |      | 8,957   |     |   |   | 8,503   |    
|                                      |                     |                        |         |      |   |      |         |     |   |   |         |    
|Operating losses                      |                     |                        | (8,222  | )    |   |      | (9,046  | )   |   |   | (8,307  | )  
|Interest                              |                     |                        | (974    | )    |   |      | (1,403  | )   |   |   | (4,529  | )  
|Equity income from investments        |                     |                        | (20,773 | )    |   |      | (13,425 | )   |   |   | (7,360  | )  
|                                      |                     |                        |         |      |   |      |         |     |   |   |         |    
|Income before income taxes            |                     | $                      | 13,525  |      |   | $    | 5,782   |     |   | $ | 3,582   |    
|                                      |                     |                        |         |      |   |      |         |     |   |   |         |    
|Total identifiable assets  August 31 |                     | $                      | 285,906 |      |   | $    | 242,015 |     |   | $ | 230,051 |    
|                                      |                     |                        |         |      |   |      |         |     |   |   |         |    






ENERGY


Overview




CHS is the nations largest cooperative
energy company based on sales, with operations that include
petroleum refining and pipelines; the supply, marketing and
distribution of refined fuels (gasoline, diesel, and other
energy products); the blending, sale and distribution of
lubricants; and the wholesale supply of propane. The Energy
business segment processes crude oil into refined petroleum
products at refineries in Laurel, Montana (wholly-owned) and
McPherson, Kansas (an entity in which CHS has an approximately
74.5% ownership interest) and sells those products under the
Cenex brand to CHSs member cooperatives and others,
through a network of approximately 1,500 independent retailers,
including approximately 800 that operate Cenex/ Ampride
convenience stores.




Operations

Laurel Refinery.The
Companys Laurel, Montana refinery processes medium and
high sulfur crude oil into refined petroleum products that
primarily include gasoline, diesel, and asphalt. The Laurel
refinery sources approximately 90% of its crude oil supply from
Canada, with the balance obtained from domestic sources. Laurel
has access to Canadian and northwest Montana crude through the
Companys wholly-owned Front Range Pipeline, LLC and other
common carrier pipelines. The Laurel refinery also has access to
Wyoming crude via common carrier pipelines from the south.

The Laurel facility processes approximately
55,000 barrels of crude oil per day to produce refined products
that consist of approximately 42% gasoline, 30% diesel and other
distillates and 28% asphalt and other residual products. Refined
fuels produced at Laurel, Montana are available via the
Yellowstone Pipeline to western Montana terminals and to Spokane
and Moses Lake, Washington, south via common carrier pipelines
to Wyoming terminals and Denver, Colorado, and east via the
Companys wholly-owned Cenex Pipeline, LLC to Glendive,
Montana, and Minot and Fargo, North Dakota.

McPherson Refinery.The McPherson, Kansas refinery is
owned and operated by the National Cooperative Refinery
Association (NCRA), of which the Company owns approximately
74.5%. The McPherson refinery processes low and medium sulfur
crude oil into gasoline, diesel and other distillates,

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propane, and other products. McPherson sources
approximately 95% of its crude oil from Kansas, Oklahoma, and
Texas through NCRA-owned and common carrier pipelines.


The McPherson refinery processes approximately
80,000 barrels of crude oil per day to produce refined products
that consist of approximately 57% gasoline, 34% diesel and other
distillates, and 9% propane and other products. Approximately
90% of the refined fuels are shipped via NCRAs proprietary
products pipeline to its terminal in Council Bluffs, Iowa and to
other markets via common carrier pipelines. The balance of the
fuels are loaded into trucks at the refinery.

Other Energy Operations.The Company owns and operates three
propane terminals, four asphalt terminals and three lubricants
blending and packaging facilities. The Company also owns and
leases a fleet of liquid and pressure trailers and tractors
which are used to transport refined fuels, propane and anhydrous
ammonia.

Products and Services

The Energy business segment produces and sells
(primarily wholesale) gasoline, diesel, propane, asphalt,
lubricants and other related products and provides
transportation services. It obtains the petroleum products that
it sells both from the Laurel and McPherson refineries and from
third parties.

Sales and Marketing; Customers




The Company makes approximately 75% of its
refined fuel sales to members, with the balance sold to
non-members. Sales are made wholesale to member cooperatives and
through a network of independent retailers that operate
convenience stores under the Cenex/ Ampride tradename. The
Company sold approximately 1.5 billion gallons of gasoline
and approximately 1.3 billion gallons of diesel fuel in
fiscal year 2003. The Company also wholesales auto and farm
machinery lubricants to both members and non-members. In fiscal
year 2003, energy operations sold approximately 23 million
gallons of lube oil. The Company is one of the nations
largest propane wholesalers based on gallons sold. In fiscal
year 2003, energy operations sold approximately 844 million
gallons of propane. Most of the propane sold in rural areas is
for heating and agricultural consumption. Annual sales volumes
of propane vary greatly depending on weather patterns and crop
conditions.




Industry; Competition

Governmental regulations and policies,
particularly in the areas of taxation, energy and the
environment, have a significant impact on the Companys
Energy business segment. Like many other refineries, the Energy
business segments refineries are currently focusing their
capital spending on reducing pollution. In particular, these
refineries are currently working to comply with the
Environmental Protection Agency low sulfur fuel regulations
required by 2006, which are intended to lower the sulfur content
of gasoline and diesel. The Company currently expects that the
cost of compliance will be approximately $87.0 million for
the Companys Laurel, Montana refinery and
$324.0 million for NCRAs McPherson, Kansas refinery,
of which $8.7 million had been spent at the Laurel refinery
and $36.5 million had been spent by NCRA at the McPherson
refinery as of August 31, 2003. The Company expects all of
these compliance capital expenditures at the refineries to be
complete by December 31, 2005, and anticipates funding these
projects with a combination of cash flows from operations and
debt proceeds.

The energy business is highly cyclical. Demand
for crude oil and its products are driven by the condition of
local and worldwide economies, local and regional weather
patterns and taxation relative to other energy sources. Most of
the Companys energy product market is located in rural
areas, so sales activity tends to follow the planting and
harvesting cycles. More fuel efficient equipment, reduced crop
tillage, depressed prices for crops, warm winter weather, and
government programs which encourage idle acres may all reduce
demand for the Companys energy products.

The refining and wholesale fuels business is very
competitive. Among the Companys competitors are some of
the worlds largest integrated petroleum companies, which
have their own crude oil supplies,

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distribution and marketing systems. The Company
also competes with smaller domestic refiners and marketers in
the midwestern and northwestern United States, with foreign
refiners who import products into the United States and with
producers and marketers in other industries supplying other
forms of energy and fuels to consumers. Given the commodity
nature of the end products, profitability in the refining and
marketing industry depends largely on margins, as well as
operating efficiency, product mix, and costs of product
distribution and transportation. The retail gasoline market is
highly competitive, with much larger competitors that have
greater brand recognition and distribution outlets throughout
the country and the world. CHS owned and non-owned retail
outlets are located primarily in the southern, midwestern and
northwestern United States.


Summary Operating Results

Summary operating results and identifiable assets
for the Energy business segment for the fiscal years ended
August 31, 2003, 2002 and 2001 are shown below:

|                                      |                     |                        |           |           |  |      |           |           |  |   |           |           | 
|------------------------------------- | ------------------- | ---------------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                      |                     | 2003                   |           | 2002      |  | 2001
|                                      |                     |                        |           |           |  |     
|                                      |                     |                       
|                                      |                     | (dollars in thousands)
|Revenues:                             |                     |                        |           |           |  |      |           |           |  |   |           |          
|                                      | Net sales           |                        | $         | 3,648,093 |  |      | $         | 2,657,689 |  |   | $         | 2,781,243 | 
|                                      | Patronage dividends |                        |           | 415       |  |      |           | 458       |  |   |           | 712       | 
|                                      | Other revenues      |                        |           | 10,461    |  |      |           | 6,392     |  |   |           | 4,036     | 
|                                      |                     |                        |           |           |  |      |           |           |  |   |           |          
|                                      |                     |                        | 3,658,969 |           |  |      | 2,664,539 |           |  |   | 2,785,991 |          
|Cost of goods sold                    |                     |                        | 3,475,947 |           |  |      | 2,489,352 |           |  |   | 2,549,099 |          
|Marketing, general and administrative |                     |                        | 63,740    |           |  |      | 66,731    |           |  |   | 48,432    |          
|                                      |                     |                        |           |           |  |      |           |           |  |   |           |          
|Operating earnings                    |                     |                        | 119,282   |           |  |      | 108,456   |           |  |   | 188,460   |          
|Interest                              |                     |                        | 16,401    |           |  |      | 16,875    |           |  |   | 25,097    |          
|Equity (income) loss from investments |                     |                        | (1,353    | )         |  |      | 1,166     |           |  |   | 4,081     |          
|Minority interests                    |                     |                        | 20,782    |           |  |      | 14,604    |           |  |   | 34,713    |          
|                                      |                     |                        |           |           |  |      |           |           |  |   |           |          
|Income before income taxes            |                     | $                      | 83,452    |           |  | $    | 75,811    |           |  | $ | 124,569   |          
|                                      |                     |                        |           |           |  |      |           |           |  |   |           |          
|Total identifiable assets  August 31 |                     | $                      | 1,449,652 |           |  | $    | 1,305,828 |           |  | $ | 1,154,036 |          
|                                      |                     |                        |           |           |  |      |           |           |  |   |           |          






COUNTRY OPERATIONS AND SERVICES


Overview

The Country Operations and Services business
segment purchases a variety of grains from the Companys
producer members and provides cooperative members and producers
with access to a full range of products and services including
farm supplies, programs for crop and livestock production,
hedging and insurance services, and agricultural operations
financing. Country Operations and Services operates at 282
locations dispersed throughout Minnesota, North Dakota, South
Dakota, Nebraska, Montana, Idaho, Washington and Oregon. Most of
these locations purchase grain from farmers and sell agronomy
products, energy products and feed to those same producers and
others, although not all locations provide every product and
service.

Products and Services




Grain Purchasing.The Company is one of the largest country elevator operators in
North America based on the number of country elevators. Through
a majority of its elevator locations, the Country Operations and
Services business segment purchases grain from member and
non-member producers and other elevators and grain dealers. Most
of the grain purchased is either sold through the Companys
Grain Marketing business segment or used for local feed and
processing operations. For the year ended August 31, 2003,
the Country Operations and Services business segment purchased
approximately




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298 million bushels of grain, primarily
wheat (136 million bushels), corn (79 million bushels)
and soybeans (46 million bushels). Of these bushels,
274 million were purchased from members and
204 million were sold through the Grain Marketing business
segment.


Other Products.Country Operations and Services
manufactures and sells other products, both directly and through
ownership interests in other entities. These include seed; plant
food; energy products; animal feed ingredients, supplements and
products; animal health products; crop protection products; and
processed sunflowers. The Company sells agronomy products at
155 locations, feed products at 128 locations and energy
products at 93 locations. Farm supplies are purchased
through cooperatives whenever possible.

Financial Services.The Company has provided open account financing to more than 150
CHS members that are cooperatives (cooperative association
members) in the past year. These arrangements involve the
discretionary extension of credit in the form of term and
seasonal loans and can also be used as a clearing account for
settlement of grain purchases and as a cash management tool. A
substantial part of the term and seasonal loans are sold to the
National Bank for Cooperatives (CoBank), with CoBank purchasing
up to 90% of any loan. The Companys guarantee exposure on
these loans at August 31, 2003 was approximately
$6.7 million. Through its wholly-owned subsidiary Fin-Ag,
Inc. the Company provides seasonal cattle feeding and swine
financing loans, facility financing loans and crop production
loans. It also provides consulting services to member
cooperatives. Most loans are sold to CoBank under a separate
program from that described above, under which the Company has
guaranteed a portion of the loans. The Companys exposure
at August 31, 2003 was approximately $43.0 million.
The Companys borrowing arrangements allow for the Company
to retain up to $110.0 million of loans in aggregate for
both finance programs, or to sell the loans and extend
guarantees up to $150.0 million in aggregate.

The Companys wholly-owned subsidiary
Country Hedging, Inc., which is a registered futures commission
merchant and a clearing member of both the Minneapolis Grain
Exchange and the Kansas City Board of Trade, is a full service
commodity futures and options broker.

Ag States Agency, LLC is an independent insurance
agency in which the Company holds a majority ownership interest.
It sells insurance, including group benefits, property and
casualty, and bonding programs. Its approximately 1,600
customers are primarily agricultural businesses, including local
cooperatives and independent elevators, oil stations, agronomy
and feed/seed plants, implement dealers, fruit and vegetable
packers/warehouses, and food processors.

Industry; Competition

Competitors for the purchase of grain include
other elevators and large grain marketing companies. Competitors
for farm supply include a variety of cooperatives, privately
held and large national companies. The Company competes
primarily on the basis of price, services and patronage.




Competitors to the Companys financing
operations are primarily other financial institutions. The
Company competes primarily on the basis of price, services and
patronage. Country Hedgings competitors include
international brokerage firms, national brokerage firms,
regional brokerage firms (both cooperatives and
non-cooperatives) as well as local introducing brokers, with
competition driven by price and level of service. Ag States
Agency, LLC competes with other insurance agencies, primarily on
the basis of price and services.




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Summary Operating Results

Summary operating results and identifiable assets
for the Country Operations and Services business segment for the
fiscal years ended August 31, 2003, 2002 and 2001 are shown
below:

|                                      |                     |                        |           |           |  |      |           |           |  |   |           |           | 
|------------------------------------- | ------------------- | ---------------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                      |                     | 2003                   |           | 2002      |  | 2001
|                                      |                     |                        |           |           |  |     
|                                      |                     |                       
|                                      |                     | (dollars in thousands)
|Revenues:                             |                     |                        |           |           |  |      |           |           |  |   |           |          
|                                      | Net sales           |                        | $         | 1,885,825 |  |      | $         | 1,474,553 |  |   | $         | 1,577,268 | 
|                                      | Patronage dividends |                        |           | 2,467     |  |      |           | 2,572     |  |   |           | 3,683     | 
|                                      | Other revenues      |                        |           | 81,739    |  |      |           | 80,789    |  |   |           | 80,479    | 
|                                      |                     |                        |           |           |  |      |           |           |  |   |           |          
|                                      |                     |                        | 1,970,031 |           |  |      | 1,557,914 |           |  |   | 1,661,430 |          
|Cost of goods sold                    |                     |                        | 1,876,811 |           |  |      | 1,474,392 |           |  |   | 1,569,884 |          
|Marketing, general and administrative |                     |                        | 55,887    |           |  |      | 47,995    |           |  |   | 53,417    |          
|                                      |                     |                        |           |           |  |      |           |           |  |   |           |          
|Operating earnings                    |                     |                        | 37,333    |           |  |      | 35,527    |           |  |   | 38,129    |          
|Gain on legal settlements             |                     |                        | (10,867   | )         |  |      | (2,970    | )         |  |   |           |          
|Interest                              |                     |                        | 14,975    |           |  |      | 13,851    |           |  |   | 15,695    |          
|Equity income from investments        |                     |                        | (788      | )         |  |      | (283      | )         |  |   | (246      | )        
|Minority interests                    |                     |                        | 1,168     |           |  |      | 786       |           |  |   | 385       |          
|                                      |                     |                        |           |           |  |      |           |           |  |   |           |          
|Income before income taxes            |                     | $                      | 32,845    |           |  | $    | 24,143    |           |  | $ | 22,295    |          
|                                      |                     |                        |           |           |  |      |           |           |  |   |           |          
|Total identifiable assets  August 31 |                     | $                      | 857,523   |           |  | $    | 799,711   |           |  | $ | 679,053   |          
|                                      |                     |                        |           |           |  |      |           |           |  |   |           |          






GRAIN MARKETING


Overview




CHS is the nations largest cooperative
marketer of grain and oilseed based on grain storage capacity
and grain sales, handling about 1.1 billion bushels
annually. During fiscal year 2003, the Company purchased
approximately 67% of total grain volumes from individual and
member cooperatives and the Country Operations and Services
business segment, with the balance purchased from third parties.
CHS arranges for the transportation of the grains either
directly to customers or to Company owned or leased grain
terminals and elevators awaiting delivery to domestic and
foreign purchasers. The Company primarily conducts its Grain
Marketing operations directly, but does conduct some of its
business through two 50% owned joint ventures.




Operations

The Grain Marketing segment purchases grain
directly and indirectly from agricultural producers primarily in
the midwestern and western United States. The purchased grain is
typically contracted for sale for future delivery at a specified
location, with the Company responsible for handling the grain
and arranging for its transportation to that location. The sale
of grain is recorded after title to the commodity has
transferred and final weights, grades and settlement price have
been agreed upon. Amounts billed to the customer as part of a
sales transaction include the costs for shipping and handling.
The Companys ability to arrange efficient transportation,
including loading capabilities onto unit trains, ocean-going
vessels, and barges, is a significant part of the service it
offers to its customers. Rail, vessel, barge and truck
transportation is carried out by third parties, often under
long-term freight agreements with the Company. Grain intended
for export is usually shipped by rail or barge to an export
terminal, where it is loaded onto ocean-going vessels. Grain
intended for domestic use is usually shipped by rail or truck to
various locations throughout the country.

CHS owns export terminals, river terminals, and
elevators involved in the handling and transport of grain. River
terminals at St. Paul, Savage, and Winona, Minnesota, and
Davenport, Iowa are used to load

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grains onto barges for shipment to both domestic
and export customers via the Mississippi River System. The
Companys export terminal at Superior, Wisconsin provides
access to the Great Lakes and St. Lawrence Seaway, and an export
terminal at Myrtle Grove, Louisiana serves the Gulf market. In
the Pacific Northwest, the Company conducts its grain marketing
operations through United Harvest, LLC (a 50% joint venture with
United Grain Corporation) and TEMCO, LLC (a 50% joint venture
with Cargill, Incorporated). United Harvest, LLC operates grain
terminals in Vancouver and Kalama, Washington. TEMCO, LLC
operates a large export terminal in Tacoma, Washington. These
facilities serve the Pacific market, as well as domestic grain
customers in the western United States. Grain Suppliers, LLC, a
wholly-owned subsidiary (previously a 50% joint venture),
operates elevator facilities in Friona, Texas and Collins,
Mississippi. In 2003, the Company opened an office in Sao Paulo,
Brazil for the procurement of soybeans for the Grain Marketing
segments international customers.


Grain Marketing purchases most of its grain
during the summer and fall harvest period. Because of the
Companys geographic location and the fact that it is
further from its export facilities, grain tends to be sold later
than in other parts of the country. However, as many producers
have significant on-farm storage capacity and in light of the
Companys own storage capacity, the Grain Marketing
business segment buys and ships grain throughout the year. Due
to the amount of grain purchased and held in inventory, the
Grain Marketing business segment has significant working capital
needs at various times of the year. The amount of borrowings for
this purpose, and the interest rate charged on those borrowings,
directly affect the profitability of the Grain Marketing segment.

Products and Services

The primary grains purchased by the Grain
Marketing business segment for the year ended August 31,
2003 were corn (412 million bushels), wheat (329 million
bushels) and soybeans (245 million bushels). Of the total
grains purchased by the Grain Marketing business segment during
the year ended August 31, 2003, 508 million bushels were
purchased from the Companys individual and cooperative
association members, 204 million bushels were purchased
from the Country Operations and Services business segment and
the remainder were purchased from third parties.

Sales and Marketing; Customers

Purchasers include domestic and foreign millers,
maltsters, feeders, crushers, and other processors. To a much
lesser extent purchasers include intermediaries and
distributors. Grain Marketing operations are not dependent on
any one customer. The Grain Marketing segment has supply
relationships calling for delivery of grain at prevailing market
prices.

Industry; Competition

The Grain Marketing business segment competes for
both the purchase and sale of grain. Competition is intense and
margins are low. Some competitors are integrated food producers,
which may also be customers. A few major competitors have
substantially greater financial resources than the Company.

In the purchase of grain from producers, location
of the delivery facility is a prime consideration, but producers
are increasingly willing to truck grain longer distances for
sale. Price is affected by the capabilities of the facility; for
example, if it is cheaper to deliver to a customer by unit train
than by truck, a facility with unit train capability provides a
price advantage. The Company believes that its relationships
with individual members serviced by local Country Operations and
Services locations and with cooperative members gives it a broad
origination capability.

The Grain Marketing business segment competes for
grain sales based on price, services and ability to provide the
desired quantity and quality of grains. Location of facilities
is a major factor in the ability to compete. Grain marketing
operations compete with numerous grain merchandisers, including
major grain merchandising companies such as Archer Daniels
Midland (ADM), Cargill, Incorporated (Cargill), ConAgra, Bunge
and Louis Dreyfus, each of which handle grain volumes of more
than one billion bushels annually.

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The results of the grain marketing business may
be adversely affected by relative levels of supply and demand,
both domestic and international, commodity price levels
(including grain prices reported on national markets) and
transportation costs and conditions. Supply is affected by
weather conditions, disease, insect damage, acreage planted and
government regulations and policies. Demand may be affected by
foreign governments and their programs, relationships of foreign
countries with the United States, the affluence of foreign
countries, acts of war, currency exchange fluctuations and
substitution of commodities. Demand may also be affected by
changes in eating habits, by population growth, and by increased
or decreased per capita consumption of some products.

Summary Operating Results

Summary operating results and identifiable assets
for the Grain Marketing business segment for the fiscal years
ended August 31, 2003, 2002 and 2001 are shown below:

|                                          |                     |                        |           |           |  |      |           |           |  |   |           |           | 
|----------------------------------------- | ------------------- | ---------------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                          |                     | 2003                   |           | 2002      |  | 2001
|                                          |                     |                        |           |           |  |     
|                                          |                     |                       
|                                          |                     | (dollars in thousands)
|Revenues:                                 |                     |                        |           |           |  |      |           |           |  |   |           |          
|                                          | Net sales           |                        | $         | 4,139,226 |  |      | $         | 3,281,469 |  |   | $         | 3,416,239 | 
|                                          | Patronage dividends |                        |           | 218       |  |      |           | 497       |  |   |           | 840       | 
|                                          | Other revenues      |                        |           | 25,458    |  |      |           | 21,902    |  |   |           | 22,964    | 
|                                          |                     |                        |           |           |  |      |           |           |  |   |           |          
|                                          |                     |                        | 4,164,902 |           |  |      | 3,303,868 |           |  |   | 3,440,043 |          
|Cost of goods sold                        |                     |                        | 4,133,677 |           |  |      | 3,272,985 |           |  |   | 3,416,500 |          
|Marketing, general and administrative     |                     |                        | 21,072    |           |  |      | 22,213    |           |  |   | 22,396    |          
|                                          |                     |                        |           |           |  |      |           |           |  |   |           |          
|Operating earnings                        |                     |                        | 10,153    |           |  |      | 8,670     |           |  |   | 1,147     |          
|Interest                                  |                     |                        | 4,738     |           |  |      | 4,807     |           |  |   | 8,144     |          
|Equity loss (income) from investments     |                     |                        | 1,673     |           |  |      | (4,257    | )         |  |   | (4,519    | )        
|                                          |                     |                        |           |           |  |      |           |           |  |   |           |          
|Income (loss) before income taxes         |                     | $                      | 3,742     |           |  | $    | 8,120     |           |  | $ | (2,478    | )        
|                                          |                     |                        |           |           |  |      |           |           |  |   |           |          
|Total identifiable assets 
    August 31 |                     | $                      | 450,415   |           |  | $    | 481,232   |           |  | $ | 345,696   |          
|                                          |                     |                        |           |           |  |      |           |           |  |   |           |          






PROCESSED GRAINS AND FOODS


Overview

The Processed Grains and Foods business segment
converts raw agricultural commodities into ingredients for
finished food products or into finished consumer food products.
The Company has focused on areas that allow it to utilize the
products supplied by member producers. These areas are oilseed
processing, wheat milling and foods.

Oilseed Processing

The Companys oilseed processing operations
convert soybeans into soybean meal, soyflour, crude soyoil,
refined soybean oil and associated by-products. These operations
are conducted at a facility in Mankato, Minnesota that can crush
39 million bushels of soybeans on an annual basis,
producing approximately 940,000 short tons of soybean meal and
460 million pounds of crude soybean oil. The same facility
is able to produce approximately 1 billion pounds of
refined soybean oil annually. Another crushing facility in
Fairmont, Minnesota has a crushing capacity and crude soyoil
output similar to the Mankato facility. The facility in Fairmont
was essentially complete and became operational in the first
fiscal quarter of 2004. Total costs for this new facility are
estimated to be approximately $85.0 million, of which
$68.9 million has been spent through August 31, 2003.

The Companys oilseed processing operations
produce three primary products: refined oils, soybean meal and
soyflour. Refined oils are used in processed foods, such as
margarine, shortening, salad dressings

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and baked goods and, to a lesser extent for
certain industrial uses for plastics, inks and paints. Soybean
meal has a high protein content and is used for feeding
livestock. Soyflour is used in the baking industry, as a milk
replacement in animal feed and in industrial applications.


The Companys soy processing facilities are
located in areas with a strong production base of soybeans and
end-user market for the meal and soyflour. The Company purchases
virtually all of its soybeans from members. The oilseed crushing
operations currently produce approximately 45% of the crude oil
that the Company refines; it purchases the balance from outside
suppliers. Once the Fairmount, Minnesota crushing facility is
fully operational, the oilseed crushing operations will produce
approximately 85% of the crude oil the Company refines.




The Companys customers for refined oil are
principally large food product companies located throughout the
United States. However, over 50% of the customers are located in
the midwest due to lower freight costs and slightly higher
profitability. The largest customer for refined oil products is
Ventura Foods, LLC (Ventura Foods), in which the Company holds a
50% ownership interest and with which the Company has a
long-term supply agreement to supply minimum quantities of
edible soybean oils as long as the Company maintains a minimum
25.5% ownership interest and the Companys price is
comparative with other suppliers of the product. The
Companys sales to Ventura Foods were $78.5 million in
fiscal year 2003. The Company also sells soymeal to almost 400
customers, primarily feed lots and feed mills in southern
Minnesota; five of these customers accounted for approximately
58% of the soymeal sold. One customer accounted for 25% of
soymeal sold and another customer accounted for 12% of soymeal
sold. The Company sells soyflour to customers in the baking
industry both domestically and for export.




The refined soybean products industry is highly
competitive. Major industry competitors include ADM, Cargill, Ag
Processing, Inc., and Bunge. These and other competitors have
acquired other processors and have expanded existing plants, or
are proposing to construct new plants, both domestically and
internationally. Price, transportation costs, services and
product quality drive competition. The Company estimates that it
has a market share of approximately 4% to 5% of the domestic
refined soybean oil market and less than 3% of the domestic
soybean crushing capacity.

Soybeans are a commodity and their price can
fluctuate significantly depending on production levels, demand
for the refined products, and other supply and demand factors.

Wheat Milling




In January 2002, the Company and Cargill formed
Horizon Milling, LLC (Horizon Milling), in which the Company
owns 24% and Cargill owns the remaining 76%. Horizon Milling is
the largest U.S. wheat miller based on milling capacity. Sales
and purchases of wheat and durum by the Company to Horizon
Milling during fiscal year 2003 were $191.3 million and
$8.8 million, respectively. Horizon Millings advance
payments on grain to the Company were $7.5 million on
August 31, 2003, and are included in Customer advance
payments on the Companys Consolidated Balance Sheets.




The Company ceased operations at its Huron, Ohio
mill prior to the formation of Horizon Milling and the
Companys facility lease expired on September 30,
2002. The Company has dismantled the milling equipment and is
currently negotiating for the sale of the equipment that has not
yet been sold. The Processed Grains and Foods business segment
established an impairment of approximately $6.5 million on
the equipment during the fourth quarter of fiscal year 2002.

Foods

The Company has two primary areas of focus in the
foods area: Ventura Foods, which produces oilseed based products
such as margarine and salad dressing and which is 50% owned by
the Company, and the production of Mexican foods such as
tortillas, tortilla chips and entrees.

Ventura Foods.Ventura Foods manufactures, packages, distributes and markets
bulk margarine, salad dressings, mayonnaise, salad oils, syrups,
soup bases and sauces, many of which utilize soybean oil as a
primary ingredient. Approximately 30% of Ventura Foods
volume, based on sales revenues, comes from

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products for which Ventura Foods owns the brand,
and the remainder comes from products that it produces for third
parties. A variety of Ventura Foods product formulations
and processes are proprietary to it or its customers. Ventura
Foods is one of the largest manufacturers of margarine in the
U.S. based on sales and is a major producer of many other
products.








Ventura Foods has 13 manufacturing and
distribution locations across the United States. It sources its
raw materials, which consists primarily of soybean oil, canola
oil, cottonseed oil, peanut oil and various other ingredients
and supplies, from various national suppliers, including the
Companys oilseed processing operations. It sells the
products it manufactures to third parties as a contract
manufacturer, as well as directly to retailers, food
distribution companies and large institutional food service
companies. Ventura Foods sales are approximately 60% in
foodservice and the remainder split between retail and
industrial customers who use edible oil products as ingredients
in foods they manufacture for resale. One customer accounted for
23% of net sales during Ventura Foods 2003 fiscal year.




Ventura Foods competes with a variety of large
companies in the food manufacturing industry. Some of its major
competitors are ADM, Cargill, Bunge, Unilever, ConAgra, ACH,
Smuckers, Kraft, and CF Sauer.

Ventura Foods was created in 1996 and at the time
was owned 40% by the Company and 60% by Wilsey Foods, Inc., a
majority owned subsidiary of Mitsui & Co., Ltd. In
March 2000, the Company purchased an additional 10% interest
from Wilsey Foods, Inc. bringing the Companys total equity
investment in Ventura Foods to 50%. The Company accounts for the
Ventura Foods investment under the equity method of accounting.

Mexican Foods.Since
June 2000, the Company has acquired three regional producers of
Mexican foods. Through its Mexican foods operations, the Company
manufactures, packages, and distributes tortillas, tortilla
chips and prepared frozen Mexican food products such as burritos
and tamales. The Company sells these products under a variety of
local and regional brand names and also produces private label
products and co-packs for customers. The current operational
focus is on integrating these disparate operations into a single
business entity with consistent standards, systems and sales
practices.




The tortilla and tortilla chip industry in the
United States is comprised of a large number of small regional
manufacturers and a few dominant manufacturers. The Company
estimates that its Mexican foods operation has approximately a
1.5% share of the national tortilla market and less than a 1%
share of the national tortilla chip market. On a national basis,
the primary competitors are large chip and snack companies such
as Frito Lay. During the Companys fiscal year ended
August 31, 2003 one customer accounted for 13% of Mexican
foods net sales and another customer accounted for 12% of
net sales.




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Summary Operating Results

Summary operating results and identifiable assets
for the Processed Grains and Foods business segment for the
fiscal years ended August 31, 2003, 2002 and 2001 are shown
below:

|                                          |                     |                        |         |         |  |      |         |         |   |   |         |         |  
|----------------------------------------- | ------------------- | ---------------------- | ------- | ------- |  | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                          |                     | 2003                   |         | 2002    |  | 2001
|                                          |                     |                        |         |         |  |     
|                                          |                     |                       
|                                          |                     | (dollars in thousands)
|Revenues:                                 |                     |                        |         |         |  |      |         |         |   |   |         |        
|                                          | Net sales*          |                        | $       | 491,931 |  |      | $       | 496,084 |   |   | $       | 662,726 |  
|                                          | Patronage dividends |                        |         | 111     |  |      |         | 260     |   |   |         | 339     |  
|                                          | Other revenues      |                        |         | 2,300   |  |      |         | (1,469  | ) |   |         | (238    | )
|                                          |                     |                        |         |         |  |      |         |         |   |   |         |        
|                                          |                     |                        | 494,342 |         |  |      | 494,875 |         |   |   | 662,827 |        
|Cost of goods sold                        |                     |                        | 466,857 |         |  |      | 457,538 |         |   |   | 619,184 |        
|Marketing, general and administrative     |                     |                        | 36,540  |         |  |      | 36,930  |         |   |   | 44,870  |        
|                                          |                     |                        |         |         |  |      |         |         |   |   |         |        
|Operating (losses) earnings               |                     |                        | (9,055  | )       |  |      | 407     |         |   |   | (1,227  | )      
|Interest                                  |                     |                        | 12,845  |         |  |      | 9,514   |         |   |   | 13,026  |        
|Equity income from investments            |                     |                        | (26,056 | )       |  |      | (41,331 | )       |   |   | (35,505 | )      
|                                          |                     |                        |         |         |  |      |         |         |   |   |         |        
|Income before income taxes                |                     | $                      | 4,156   |         |  | $    | 32,224  |         |   | $ | 21,252  |        
|                                          |                     |                        |         |         |  |      |         |         |   |   |         |        
|Total identifiable assets 
    August 31 |                     | $                      | 498,872 |         |  | $    | 439,942 |         |   | $ | 430,871 |        
|                                          |                     |                        |         |         |  |      |         |         |   |   |         |        



---



|  |                                                                                                                                                                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The sales decline from 2001 is primarily due to
    the formation of Horizon Milling. Since January 2002 the Company
    has accounted for the operating results of its milling
    operations under the equity method of accounting. Earnings from
    the Companys interest in Horizon Milling are included as
    part of equity income from investments.






PRICE RISK AND HEDGING


Whenever the Company enters into a commodity
purchase commitment it incurs risks of carrying inventory,
including risks related to price changes and performance
(including delivery, quality, quantity and shipment period). The
Company is exposed to risk of loss in the market value of
positions held, consisting of inventory and purchase contracts
at a fixed or partially fixed price in the event market prices
decrease. The Company is also exposed to risk of loss on its
fixed price or partially fixed price sales contracts in the
event market prices increase.

To reduce the price change risks associated with
holding fixed price commitments, the Company generally takes
opposite and offsetting positions by entering into commodity
futures contracts (either a straight futures contract or an
options futures contract) on regulated commodity futures
exchanges for grain, and regulated mercantile exchanges for
refined products and crude oil. The crude oil and most of the
grain and oilseed volume handled by the Company can be hedged.
Some grains cannot be hedged because there are no futures for
certain commodities. For those commodities, risk is managed
through the use of forward sales and various pricing
arrangements and to some extent cross-commodity futures hedging.
While hedging activities reduce the risk of loss from changing
market values of inventory, such activities also limit the gain
potential which otherwise could result from changes in market
prices of inventory. The Companys policy is to generally
maintain hedged positions in grain. The Companys
profitability from operations is primarily derived from margins
on products sold and grain merchandised, not from hedging
transactions. Hedging arrangements do not protect against
nonperformance of a contract.

When a futures contract is entered into, an
initial margin deposit must be sent to the applicable exchange
or broker. The amount of the deposit is set by the exchange and
varies by commodity. If the market price of a short futures
contract increases, then an additional margin deposit
(maintenance margin) would be required. Similarly, if the price
of a long futures contract decreases, a maintenance margin

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deposit would be required and sent to the
applicable exchange. Subsequent price changes could require
additional maintenance margins or could result in the return of
maintenance margins.


At any one time, inventory and purchase contracts
for delivery to the Company may be substantial. The Company has
risk management policies and procedures that include net
position limits. These limits are defined for each commodity and
include both trader and management limits. This policy, and
computerized procedures in grain marketing operations, requires
a review by operations management when any trader is outside of
position limits and also a review by senior management of the
Company if operating areas are outside of position limits. A
similar process is used in energy operations. The position
limits are reviewed at least annually with the management of the
Company. The Company monitors current market conditions and may
expand or reduce its risk management policies or procedures in
response to changes in those conditions. In addition, all
purchase and sale contracts are subject to credit approvals and
appropriate terms and conditions.






EMPLOYEES





At August 31, 2003, CHS had approximately
6,820 full and part-time employees, which included approximately
560 employees of NCRA. Of that total, approximately 1,890 were
employed in the Energy segment, 2,440 in the Country Operations
and Services segment (not including an estimated 1,010 seasonal
and temporary employees), 440 in the Grain Marketing segment,
850 in the Processed Grains and Foods segment and 190 in
corporate and administrative functions. In addition to those
employed directly by the Company, many employees work for the
joint ventures in which the Company has an ownership interest.
All of the employees in the Agronomy segment and a portion of
the Grain Marketing and Processed Grains and Foods segments are
employed in this manner.




Employees in certain areas are represented by
collective bargaining agreements. Refinery workers in Laurel,
Montana (185 employees), are represented by agreements with
two unions (Paper, Allied-Industrial, Chemical and Energy
Workers International Union (PACE) and Oil Basin Pipeliners
Union (OBP)), for which agreements are in place through 2006 for
PACE, and through 2006 for OBP in regard to wages and benefits.
The contracts covering the NCRA McPherson, Kansas refinery
(254 employees in the PACE union) are also in place through
2006. There are approximately 170 employees in
transportation and lubricant plant operations that are covered
by collective bargaining agreements that expire at various
times. Production workers in grain marketing operations
(144 employees) are represented by agreements with four
unions which expire at various times from 2003 through 2005. In
particular, grain marketing employees in the Bakers,
Confectionary, Tobacco Workers and Grain Millers International
Union in Superior, Wisconsin (49 employees) have contracts
that have expired and are currently being negotiated, with the
Company anticipating a successful resolution. Finally, certain
production workers in oilseed processing operations are subject
to collective bargaining agreements with the American Federation
of Grain Millers (127 employees) and the Pipefitters
Union (2 employees) for which agreements are in place
through 2006.






MEMBERSHIP IN THE COMPANY AND AUTHORIZED
CAPITAL


Introduction

The Company is an agricultural membership
cooperative organized under Minnesota cooperative law to do
business with member and non-member patrons. Patrons, and not
the Company, are subject to income taxes on income from
patronage. The Company is subject to income taxes on
non-patronage-sourced income. See  Tax
Treatment below.




Distribution of Net Income; Patronage
Refunds




The Company is required by its organizational
documents annually to distribute net earnings derived from
patronage business with members, after payment of dividends on
equity capital, to members on the basis of patronage, except
that the Board of Directors may elect to retain and add to the
Companys

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unallocated capital reserve an amount not to
exceed 10% of the distributable net income from patronage
business. Net income from non-patronage business may be
distributed to members or added to the unallocated capital
reserve, in whatever proportions the Board of Directors deems
appropriate.





These distributions, referred to as
patronage refunds or patronage
dividends, may be distributed in cash, patrons
equities, revolving fund certificates, securities of the Company
or others or any combination designated by the Board of
Directors. Since 1998, the Board of Directors has distributed
patronage refunds the form of 30% cash and 70% patrons
equities (see  Patrons Equities
below). The Board of Directors may change the mix in the form of
the patronage refunds in the future. In making distributions,
the Board of Directors may use any method of allocation that, in
its judgment, is reasonable and equitable. Patronage refunds
distributed during the years ended August 31, 2003, 2002
and 2001 were $88.3 million ($26.5 million in cash),
$132.6 million ($40.1 million in cash) and
$86.4 million ($26.1 million in cash), respectively.




Patrons Equities




Patrons equities are in the form of a book
entry and represent a right to receive cash or other property,
including securities, when redeemed by the Company.
Patrons equities form part of the capital of the Company,
do not bear interest and are not subject to redemption upon
request of a member. Patrons equities are redeemable only
at the discretion of the Board of Directors and in accordance
with the terms of the redemption policy adopted by the Board of
Directors, which may be modified at any time without member
consent. The Companys bylaws grant the Board of Directors
the discretion to redeem patrons equities upon such terms
as the Board of Directors may, from time to time, determine. The
Companys current policy is to redeem the equities of those
members who were age 61 and older on June 1, 1998 when
they reach the age of 72 and upon death. The current policy also
provides for an annual pro-rata redemption of equities older
than 10 years held by active members in an amount
determined by the Board of Directors.




Redemptions of patrons and other equities,
including equity participation units (discussed in Note 9
to the Consolidated Financial Statements), during the years
ended August 31, 2003, 2002 and 2001 were
$31.1 million, $31.1 million and $33.0 million,
respectively.

Governance

The Company is managed by a Board of Directors of
at least 17 persons elected by the members at the Companys
annual meeting. Terms of Directors are staggered so that no more
than seven directors are elected in any year. The Board of
Directors is currently comprised of 17 directors. The articles
of incorporation and bylaws of the Company may be amended only
upon approval of a majority of the votes cast at an annual or
special meeting of the members, except for the higher vote
described under  Certain Antitakeover
Measures below.

Membership

Membership in the Company is restricted to
certain producers of agricultural products and to associations
of producers of agricultural products that are organized and
operating so as to adhere to the provisions of the Agricultural
Marketing Act and the Capper-Volstead Act, as amended. The Board
of Directors may establish other qualifications for membership
as it may from time to time deem advisable.

As a membership cooperative, the Company does not
have common stock. The Company may issue equity or debt
securities, on a patronage basis or otherwise, to its members.
The Company has two classes of outstanding membership.
Individual members are individuals actually engaged in the
production of agricultural products. Cooperative associations
are associations of agricultural producers, either cooperatives
or other associations organized and operated under the
provisions of the Agricultural Marketing Act and the
Capper-Volstead Act.

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Voting Rights

Voting rights arise by virtue of membership in
the Company, not because of ownership of any equity or debt
security. Members that are cooperative associations are entitled
to vote based upon a formula that takes into account the equity
held by the cooperative in the Company and the average amount of
business done with the Company over the previous three years.

Members who are individuals are entitled to one
vote. Individual members may exercise their voting power
directly or through a patrons association associated with
a grain elevator, feed mill, seed plant or any other Company
facility (with certain historical exceptions) recognized by the
Board of Directors. The number of votes of patrons
associations is determined under the same formula as cooperative
association members.

Most matters submitted to a vote of the members
require the approval of a majority of the votes cast at a
meeting of the members, although the approval of not less than
two-thirds of the votes cast at a meeting is required to approve
Change of Control transactions, which include a
merger, consolidation, liquidation, dissolution, or the sale of
all or substantially all of the Companys assets and, in
certain circumstances, a greater vote may be required. See
Certain Antitakeover Measures below.

Debt and Equity Instruments




The Company may issue debt and equity instruments
to its current members and patrons, on a patronage basis or
otherwise, and to persons who are neither members nor patrons.
Under our articles of incorporation, equity issued by the
Company is subject to a first lien in favor of the Company for
all indebtedness of the holder to the Company. As of
August 31, 2003, the Companys outstanding capital
included patrons equities (consisting of capital equity
certificates and non-patronage earnings certificates), 8%
Cumulative Redeemable Preferred Stock (dividends paid quarterly)
and certain capital reserves.




Distribution of Assets Upon Dissolution;
Merger and Consolidation

In the event of any dissolution, liquidation or
winding up of the Company, whether voluntary or involuntary, all
debts and liabilities would be paid first according to their
respective priorities. As more particularly provided in the
Companys bylaws, the remaining assets would be paid to the
holders of equity capital to the extent of their interests and
any excess would be paid to patrons on the basis of their past
patronage. The bylaws provide for the allocation among the
members and nonmember patrons of the consideration received in
any merger or consolidation to which the Company is a party.

Certain Antitakeover Measures

The Companys governing documents may be
amended upon the approval of a majority of the votes cast at an
annual or special meeting. However, if the Board of Directors,
in its sole discretion, declares that a proposed amendment to
the Companys governing documents involves or is related to
a hostile takeover, the amendment must be adopted by
80% of the total voting power of the members of the Company.
Further, if the Board of Directors determines that a proposed
change of control transaction involves a hostile takeover, the
80% approval requirement applies. The term hostile
takeover is not further defined in the Minnesota
cooperative law or the governing documents of the Company.

Tax Treatment

Subchapter T of the Internal Revenue Code sets
forth rules for the tax treatment of cooperatives and applies to
both cooperatives exempt from taxation under Section 521 of
the Internal Revenue Code and to nonexempt corporations
operating on a cooperative basis. The Company is a nonexempt
cooperative.

As a cooperative, the Company is not taxed on
patronage paid to its members either in the form of equities or
cash. Consequently, such amounts are taxed only at the patron
level. However, the amounts of any allocated but undistributed
patronage earnings (called non-qualified unit retains) are
taxable to the

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Company when allocated. Upon redemption of any
such non-qualified unit retains, the amount is deductible to the
Company and taxable to the member.


Income derived by the Company from non-patronage
sources is not entitled to the single tax benefit of
Subchapter T and is taxed to the Company at corporate
income tax rates.

NCRA is not consolidated for tax purposes.






Item
2.     Properties


The Company owns or leases energy, grain handling
and processing, food manufacturing and agronomy related
facilities throughout the United States. Below is a summary of
these locations.

Energy

Facilities in the Companys Energy business
segment include the following, all of which are owned except
where indicated as leased:

|                                                     |  |                                                                                                                              
|---------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Refinery                                             |  | Laurel, Montana                                                                                                              
|Propane terminals                                    |  | 3 locations in Minnesota, North Dakota and
    Wisconsin                                                                     
|Transportation terminals/repair facilities           |  | 10 locations in Iowa, Minnesota, Montana, North
    Dakota, South Dakota, Washington and Wisconsin, 2 of which are
    leased
|Petroleum & asphalt terminals/storage
    facilities |  | 9 locations in Montana, North Dakota and Wisconsin                                                                           
|Pump stations                                        |  | 10 locations in Montana and North Dakota                                                                                     
|Pipelines:                                           |  |                                                                                                                              
|Cenex Pipeline, LLC                                  |  | Laurel, Montana to Fargo, North Dakota                                                                                       
|Front Range Pipeline, LLC                            |  | Canadian Border to Laurel, Montana                                                                                           
|Convenience stores/gas stations                      |  | 33 locations in Iowa, Minnesota, Montana, South
    Dakota and Wyoming                                                       
|Lubricant plants/warehouses                          |  | 3 locations in Minnesota, Ohio and Texas                                                                                     

The Company has a 74.5% interest in NCRA, which
owns and operates the following facilities:

|                            |  |                                                           
|--------------------------- |  | ----------------------------------------------------------
|Refinery                    |  | McPherson, Kansas                                         
|Petroleum terminals/storage |  | 2 locations in Iowa and Kansas                            
|Pipeline                    |  | McPherson, Kansas to Council Bluffs, Iowa                 
|Jayhawk Pipeline            |  | Throughout Kansas, with branches in Oklahoma and
    Texas
|Jayhawk stations            |  | 40 locations located in Kansas and Oklahoma               

Grain Marketing

The Company owns or leases grain terminals used
in the Grain Marketing business segment at the following
locations:



| |                                             
| | --------------------------------------------
| | Davenport, Iowa (2 owned terminals)         
| | Kalama, Washington (leased)                 
| | Kansas City, Missouri (leased)              
| | Minneapolis, Minnesota (owned idle terminal)
| | Myrtle Grove, Louisiana (owned)             
| | St. Paul, Minnesota (leased)                
| | Savage, Minnesota (owned)                   
| | Spokane, Washington (owned)                 
| | Superior, Wisconsin (owned)                 
| | Winona, Minnesota (1 owned, 1 leased)       

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Country Operations and Services

In the Country Operations and Services business
segment the Company owns 282 agri operations locations (of
which some of the facilities are on leased land), 8 feed
manufacturing facilities and 2 sunflower plants located in
Minnesota, Nebraska, North Dakota, South Dakota, Montana,
Washington, Oregon and Idaho.

Processed Grains and Foods

Within the Processed Grains and Foods business
segment, the Company owns and leases the following facilities:



| |                   
| | ------------------
| | Oilseed Processing

The Company owns a campus in Mankato, Minnesota,
comprised of a crushing plant, an oilseed refinery, a soyflour
plant and a quality control laboratory. A crushing plant in
Fairmont, Minnesota previously under construction was
essentially complete and became operational during the fiscal
quarter ending November 30, 2003.



| |              
| | -------------
| | Wheat Milling

The Company owns five flour milling facilities at
the following locations that are leased to Horizon Milling, LLC:



| |                           
| | --------------------------
| | Rush City, Minnesota      
| | Kenosha, Wisconsin        
| | Houston, Texas            
| | Mount Pocono, Pennsylvania
| | Fairmount, North Dakota   



| |      
| | -----
| | Foods

The Company leases manufacturing facilities in
New Brighton, Minnesota, Ft. Worth, Texas and Phoenix, Arizona.
In addition, the Company owns two manufacturing facilities in
Ft. Worth, Texas. A new facility is currently under construction
near Newton, North Carolina, which the Company expects to
complete during its fiscal quarter ending November 30,
2003. The Company originally intended to use the facility for
manufacturing upon completion of construction, but at this time
the Company expects to sell or lease it. All facilities are
related to the Companys Mexican foods operations.

Corporate Headquarters

The Company is headquartered in Inver Grove
Heights, Minnesota. The Company owns a 33-acre campus consisting
of one main building with approximately 320,000 square feet of
office space and two smaller buildings with approximately 13,400
and 9,000 square feet of space.

The Companys internet address is
www.chsinc.com.






Item 3.     Legal
Proceedings


The Company is involved as a defendant in various
lawsuits, claims and disputes which are in the normal course of
the Companys business. The resolution of any such matters
may affect consolidated net income for any fiscal period;
however, management believes any resulting liabilities,
individually or in the aggregate, will not have a material
effect on the consolidated financial position, results of
operations or cash flows of the Company during any fiscal year.

In October 2003, the Company and NCRA reached
agreement with the Environmental Protection Agency (EPA) and the
State of Montanas Department of Environmental Quality and
the State of Kansas Department of Health and Environment,
respectively, regarding the terms of settlements with respect to

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reducing air emissions at the Companys
Laurel, Montana and NCRAs McPherson, Kansas refineries.
These settlements are part of a series of similar settlements
that the EPA has negotiated with major refiners under the
EPAs Petroleum Refinery Initiative. The settlements, which
resulted from nearly three years of discussions, take the form
of consent decrees filed with the U.S. District Court for the
District of Montana (Billings Division) and the U.S. District
Court for the District of Kansas, respectively. Each consent
decree details specific capital improvements, supplemental
environmental projects and operational changes that the Company
and NCRA have agreed to implement at the relevant refinery over
the next several years. The consent decrees also require the
Company and NCRA to pay approximately $0.5 million in
aggregate civil cash penalties. The Company and NCRA anticipate
that their aggregate capital expenditures related to these
settlements will total approximately $25.0 million to
$30.0 million over the next eight years. Approximately
50 percent of the expenditures will be made over the first
three years. The Company does not believe that the
settlements will have a material adverse affect on the Company.







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


The Company held a special meeting on
August 5, 2003 where results of a mail ballot were counted
to change the Companys legal name to CHS Inc.
Fifty percent of CHS members, consisting of cooperatives
and producers in 27 states, participated in the vote; of
these, eighty-seven percent of members voted in favor of the
legal name change, which needed a simple majority of the members
voting for passage.

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PART II.







Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters


The Company has approximately 51,100 members, of
which approximately 1,100 are cooperative association members
and approximately 50,000 are individual members. As a
cooperative, the Company does not have any common equity that is
traded.

On August 31, 2003 the Company had 3,748,099
shares of 8% Cumulative Redeemable Preferred Stock outstanding,
which is listed on the NASDAQ National Market under the symbol
CHSCP.

The Company sold no equity securities during the
three years ended August 31, 2003 that were not registered
under the Securities Act of 1933, as amended.

On April 25, 2003, the Company issued
298,099 shares of its 8% Cumulative Redeemable Preferred Stock
(the New Shares) on conversion of 7,452,439
then-outstanding shares of 8% Preferred Stock (the Old
Shares). The New Shares were exchanged by the Company with
its existing security holders (the holders of the Old Shares)
exclusively and no commission or other remuneration was paid or
given directly or indirectly for soliciting the exchange.
Accordingly, the Company relied on the exemption from
registration contained in Section 3(a)(9) of the Securities
Act of 1933, as amended, for the issuance of the New Shares and
did not file a registration statement with the Securities and
Exchanges Commission with respect to that issuance.






Item
6.     Selected Financial
Data


The selected financial information below has been
derived from the Companys consolidated financial
statements for the years ended August 31. The selected
consolidated financial information for August 31, 2003,
2002 and 2001 should be read in conjunction with the
Companys consolidated financial statements and notes
thereto included elsewhere in this filing.

Summary Consolidated Financial Data

|                       |                                       |                        |           |           |           |      |           |           |           |      |           |           |           |  |           |           |           |  |           |           |           | 
|---------------------- | ------------------------------------- | ---------------------- | --------- | --------- | --------- | ---- | --------- | --------- | --------- | ---- | --------- | --------- | --------- |  | --------- | --------- | --------- |  | --------- | --------- | --------- | 
|                       |                                       | 2003                   |           | 2002      |           | 2001 |           | 2000      |           | 1999
|                       |                                       |                        |           |           |           |      |           |           |           |     
|                       |                                       |                       
|                       |                                       | (dollars in thousands)
|Income Statement Data: |                                       |                        |           |           |           |      |           |           |           |      |           |           |           |  |           |           |           |  |           |          
|                       | Revenues:                             |                        |           |           |           |      |           |           |           |      |           |           |           |  |           |           |           |  |           |           |          
|                       |                                       | Net sales              |           | $         | 9,270,734 |      |           | $         | 7,156,454 |      |           | $         | 7,464,242 |  |           | $         | 8,248,413 |  |           | $         | 6,198,843 | 
|                       |                                       | Patronage dividends    |           |           | 3,257     |      |           |           | 3,885     |      |           |           | 5,977     |  |           |           | 5,494     |  |           |           | 5,876     | 
|                       |                                       | Other revenues         |           |           | 124,542   |      |           |           | 109,459   |      |           |           | 116,254   |  |           |           | 97,471    |  |           |           | 81,180    | 
|                       |                                       |                        |           |           |           |      |           |           |           |      |           |           |           |  |           |           |           |  |           |          
|                       |                                       |                        | 9,398,533 |           |           |      | 7,269,798 |           |           |      | 7,586,473 |           |           |  | 8,351,378 |           |           |  | 6,285,899 |          
|                       | Cost of goods sold                    |                        |           | 9,058,951 |           |      |           | 6,940,926 |           |      |           | 7,181,433 |           |  |           | 8,051,057 |           |  |           | 6,010,796 |          
|                       | Marketing, general and administrative |                        |           | 190,582   |           |      |           | 187,292   |           |      |           | 184,046   |           |  |           | 155,266   |           |  |           | 152,031   |          
|                       |                                       |                        |           |           |           |      |           |           |           |      |           |           |           |  |           |           |           |  |           |          
|                       | Operating earnings                    |                        |           | 149,000   |           |      |           | 141,580   |           |      |           | 220,994   |           |  |           | 145,055   |           |  |           | 123,072   |          
|                       | Gain on legal settlements             |                        |           | (10,867   | )         |      |           | (2,970    | )         |      |           |           |           |  |           |           |           |  |           |           |          
|                       | Interest                              |                        |           | 48,675    |           |      |           | 42,455    |           |      |           | 61,436    |           |  |           | 57,566    |           |  |           | 42,438    |          
|                       | Equity income from investments        |                        |           | (47,299   | )         |      |           | (58,133   | )         |      |           | (28,494   | )         |  |           | (28,325   | )         |  |           | (22,363   | )        
|                       | Minority interests                    |                        |           | 21,950    |           |      |           | 15,390    |           |      |           | 35,098    |           |  |           | 24,546    |           |  |           | 10,017    |          
|                       |                                       |                        |           |           |           |      |           |           |           |      |           |           |           |  |           |           |           |  |           |          
|                       | Income before income taxes            |                        |           | 136,541   |           |      |           | 144,838   |           |      |           | 152,954   |           |  |           | 91,268    |           |  |           | 92,980    |          
|                       | Income taxes                          |                        |           | 12,700    |           |      |           | 18,700    |           |      |           | (25,600   | )         |  |           | 3,880     |           |  |           | 6,980     |          
|                       |                                       |                        |           |           |           |      |           |           |           |      |           |           |           |  |           |           |           |  |           |          
|                       | Net income                            |                        | $         | 123,841   |           |      | $         | 126,138   |           |      | $         | 178,554   |           |  | $         | 87,388    |           |  | $         | 86,000    |          
|                       |                                       |                        |           |           |           |      |           |           |           |      |           |           |           |  |           |           |           |  |           |          

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|                                   |                                              |                        |   |           |  |      |   |           |  |      |   |           |  |  |   |           |  |  |   |           | 
|---------------------------------- | -------------------------------------------- | ---------------------- | - | --------- |  | ---- | - | --------- |  | ---- | - | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                   |                                              | 2003                   |   | 2002      |  | 2001 |   | 2000      |  | 1999
|                                   |                                              |                        |   |           |  |      |   |           |  |     
|                                   |                                              |                       
|                                   |                                              | (dollars in thousands)
|Balance Sheet Data (at August 31): |                                              |                        |   |           |  |      |   |           |  |      |   |           |  |  |   |           |  |  |   |          
|                                   | Working capital                              |                        | $ | 458,738   |  |      | $ | 249,115   |  |      | $ | 305,280   |  |  | $ | 214,223   |  |  | $ | 219,045   | 
|                                   | Net property, plant and equipment            |                        |   | 1,122,982 |  |      |   | 1,057,421 |  |      |   | 1,023,872 |  |  |   | 1,034,768 |  |  |   | 968,333   | 
|                                   | Total assets                                 |                        |   | 3,807,968 |  |      |   | 3,481,727 |  |      |   | 3,057,319 |  |  |   | 3,172,680 |  |  |   | 2,787,664 | 
|                                   | Long-term debt, including current maturities |                        |   | 663,173   |  |      |   | 572,124   |  |      |   | 559,997   |  |  |   | 510,500   |  |  |   | 482,666   | 
|                                   | Total equities                               |                        |   | 1,481,711 |  |      |   | 1,289,638 |  |      |   | 1,261,153 |  |  |   | 1,164,426 |  |  |   | 1,117,636 | 

The selected financial statement information
below has been derived from the Companys five business
segments, and Corporate and Other, for the fiscal years ended
August 31, 2003, 2002 and 2001. The intercompany sales
between segments were $894.3 million, $753.3 million
and $973.2 million for the fiscal years ended
August 31, 2003, 2002 and 2001, respectively.

Summary Financial Data By Business
Segment

|                                          |                     |                        |         |        |   |      |         |      |   |      |         |      |  |   |           |           |  |   |           |           |  |   |           |           | 
|----------------------------------------- | ------------------- | ---------------------- | ------- | ------ | - | ---- | ------- | ---- | - | ---- | ------- | ---- |  | - | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                          |                     |                        |         |       
|                                          |                     | Agronomy               |         | Energy
|                                          |                     |                        |         |       
|                                          |                     | 2003                   |         | 2002   |   | 2001 |         | 2003 |   | 2002 |         | 2001
|                                          |                     |                        |         |        |   |      |         |      |   |      |         |     
|                                          |                     |                       
|                                          |                     | (dollars in thousands)
|Revenues:                                 |                     |                        |         |        |   |      |         |      |   |      |         |      |  |   |           |           |  |   |           |           |  |   |           |          
|                                          | Net sales           |                        |         |        |   |      |         |      |   |      |         |      |  |   | $         | 3,648,093 |  |   | $         | 2,657,689 |  |   | $         | 2,781,243 | 
|                                          | Patronage dividends |                        | $       | (84    | ) |      | $       | (89  | ) |      | $       | 196  |  |   |           | 415       |  |   |           | 458       |  |   |           | 712       | 
|                                          | Other revenues      |                        |         |        |   |      |         |      |   |      |         |      |  |   |           | 10,461    |  |   |           | 6,392     |  |   |           | 4,036     | 
|                                          |                     |                        |         |        |   |      |         |      |   |      |         |      |  |   |           |           |  |   |           |           |  |   |           |          
|                                          |                     |                        | (84     | )      |   |      | (89     | )    |   |      | 196     |      |  |   | 3,658,969 |           |  |   | 2,664,539 |           |  |   | 2,785,991 |          
|Cost of goods sold                        |                     |                        |         |        |   |      |         |      |   |      |         |      |  |   | 3,475,947 |           |  |   | 2,489,352 |           |  |   | 2,549,099 |          
|Marketing, general and administrative     |                     |                        | 8,138   |        |   |      | 8,957   |      |   |      | 8,503   |      |  |   | 63,740    |           |  |   | 66,731    |           |  |   | 48,432    |          
|                                          |                     |                        |         |        |   |      |         |      |   |      |         |      |  |   |           |           |  |   |           |           |  |   |           |          
|Operating (losses) earnings               |                     |                        | (8,222  | )      |   |      | (9,046  | )    |   |      | (8,307  | )    |  |   | 119,282   |           |  |   | 108,456   |           |  |   | 188,460   |          
|Interest                                  |                     |                        | (974    | )      |   |      | (1,403  | )    |   |      | (4,529  | )    |  |   | 16,401    |           |  |   | 16,875    |           |  |   | 25,097    |          
|Equity (income) loss from investments     |                     |                        | (20,773 | )      |   |      | (13,425 | )    |   |      | (7,360  | )    |  |   | (1,353    | )         |  |   | 1,166     |           |  |   | 4,081     |          
|Minority interests                        |                     |                        |         |        |   |      |         |      |   |      |         |      |  |   | 20,782    |           |  |   | 14,604    |           |  |   | 34,713    |          
|                                          |                     |                        |         |        |   |      |         |      |   |      |         |      |  |   |           |           |  |   |           |           |  |   |           |          
|Income before income taxes                |                     | $                      | 13,525  |        |   | $    | 5,782   |      |   | $    | 3,582   |      |  | $ | 83,452    |           |  | $ | 75,811    |           |  | $ | 124,569   |          
|                                          |                     |                        |         |        |   |      |         |      |   |      |         |      |  |   |           |           |  |   |           |           |  |   |           |          
|Total identifiable assets 
    August 31 |                     | $                      | 285,906 |        |   | $    | 242,015 |      |   | $    | 230,051 |      |  | $ | 1,449,652 |           |  | $ | 1,305,828 |           |  | $ | 1,154,036 |          
|                                          |                     |                        |         |        |   |      |         |      |   |      |         |      |  |   |           |           |  |   |           |           |  |   |           |          

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|                                          |                     |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |           | 
|----------------------------------------- | ------------------- | ------------------------------- | --------- | --------------- |  | ---- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                          |                     |                                 |           |                
|                                          |                     | Country Operations and Services |           | Grain Marketing
|                                          |                     |                                 |           |                
|                                          |                     | 2003                            |           | 2002            |  | 2001 |           | 2003      |  | 2002 |           | 2001     
|                                          |                     |                                 |           |                 |  |      |           |           |  |      |           |          
|                                          |                     |                                
|                                          |                     | (dollars in thousands)         
|Revenues:                                 |                     |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                          | Net sales           |                                 | $         | 1,885,825       |  |      | $         | 1,474,553 |  |      | $         | 1,577,268 |  |   | $         | 4,139,226 |  |   | $         | 3,281,469 |  |   | $         | 3,416,239 | 
|                                          | Patronage dividends |                                 |           | 2,467           |  |      |           | 2,572     |  |      |           | 3,683     |  |   |           | 218       |  |   |           | 497       |  |   |           | 840       | 
|                                          | Other revenues      |                                 |           | 81,739          |  |      |           | 80,789    |  |      |           | 80,479    |  |   |           | 25,458    |  |   |           | 21,902    |  |   |           | 22,964    | 
|                                          |                     |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                          |                     |                                 | 1,970,031 |                 |  |      | 1,557,914 |           |  |      | 1,661,430 |           |  |   | 4,164,902 |           |  |   | 3,303,868 |           |  |   | 3,440,043 |          
|Cost of goods sold                        |                     |                                 | 1,876,811 |                 |  |      | 1,474,392 |           |  |      | 1,569,884 |           |  |   | 4,133,677 |           |  |   | 3,272,985 |           |  |   | 3,416,500 |          
|Marketing, general and administrative     |                     |                                 | 55,887    |                 |  |      | 47,995    |           |  |      | 53,417    |           |  |   | 21,072    |           |  |   | 22,213    |           |  |   | 22,396    |          
|                                          |                     |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Operating earnings                        |                     |                                 | 37,333    |                 |  |      | 35,527    |           |  |      | 38,129    |           |  |   | 10,153    |           |  |   | 8,670     |           |  |   | 1,147     |          
|Gain on legal settlements                 |                     |                                 | (10,867   | )               |  |      | (2,970    | )         |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Interest                                  |                     |                                 | 14,975    |                 |  |      | 13,851    |           |  |      | 15,695    |           |  |   | 4,738     |           |  |   | 4,807     |           |  |   | 8,144     |          
|Equity income (loss) from investments     |                     |                                 | (788      | )               |  |      | (283      | )         |  |      | (246      | )         |  |   | 1,673     |           |  |   | (4,257    | )         |  |   | (4,519    | )        
|Minority interests                        |                     |                                 | 1,168     |                 |  |      | 786       |           |  |      | 385       |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                          |                     |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Income (loss) before income taxes         |                     | $                               | 32,845    |                 |  | $    | 24,143    |           |  | $    | 22,295    |           |  | $ | 3,742     |           |  | $ | 8,120     |           |  | $ | (2,478    | )        
|                                          |                     |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Total identifiable assets 
    August 31 |                     | $                               | 857,523   |                 |  | $    | 799,711   |           |  | $    | 679,053   |           |  | $ | 450,415   |           |  | $ | 481,232   |           |  | $ | 345,696   |          
|                                          |                     |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          

|                                      |                     |                            |         |                     |  |      |         |         |   |      |         |         |   |   |         |       |  |   |         |       |  |   |         |       | 
|------------------------------------- | ------------------- | -------------------------- | ------- | ------------------- |  | ---- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ----- |  | - | ------- | ----- |  | - | ------- | ----- | 
|                                      |                     |                            |         |                    
|                                      |                     | Processed Grains and Foods |         | Corporate and Other
|                                      |                     |                            |         |                    
|                                      |                     | 2003                       |         | 2002                |  | 2001 |         | 2003    |   | 2002 |         | 2001   
|                                      |                     |                            |         |                     |  |      |         |         |   |      |         |        
|                                      |                     |                           
|                                      |                     | (dollars in thousands)    
|Revenues:                             |                     |                            |         |                     |  |      |         |         |   |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      
|                                      | Net sales           |                            | $       | 491,931             |  |      | $       | 496,084 |   |      | $       | 662,726 |   |   |         |       |  |   |         |       |  |   |         |       | 
|                                      | Patronage dividends |                            |         | 111                 |  |      |         | 260     |   |      |         | 339     |   |   | $       | 130   |  |   | $       | 187   |  |   | $       | 207   | 
|                                      | Other revenues      |                            |         | 2,300               |  |      |         | (1,469  | ) |      |         | (238    | ) |   |         | 4,584 |  |   |         | 1,845 |  |   |         | 9,013 | 
|                                      |                     |                            |         |                     |  |      |         |         |   |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      
|                                      |                     |                            | 494,342 |                     |  |      | 494,875 |         |   |      | 662,827 |         |   |   | 4,714   |       |  |   | 2,032   |       |  |   | 9,220   |      
|Cost of goods sold                    |                     |                            | 466,857 |                     |  |      | 457,538 |         |   |      | 619,184 |         |   |   |         |       |  |   |         |       |  |   |         |      
|Marketing, general and administrative |                     |                            | 36,540  |                     |  |      | 36,930  |         |   |      | 44,870  |         |   |   | 5,205   |       |  |   | 4,466   |       |  |   | 6,428   |      
|                                      |                     |                            |         |                     |  |      |         |         |   |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      
|Operating (losses) earnings           |                     |                            | (9,055  | )                   |  |      | 407     |         |   |      | (1,227  | )       |   |   | (491    | )     |  |   | (2,434  | )     |  |   | 2,792   |      
|Interest                              |                     |                            | 12,845  |                     |  |      | 9,514   |         |   |      | 13,026  |         |   |   | 690     |       |  |   | (1,189  | )     |  |   | 4,003   |      
|Equity (income) loss from investments |                     |                            | (26,056 | )                   |  |      | (41,331 | )       |   |      | (35,505 | )       |   |   | (2      | )     |  |   | (3      | )     |  |   | 15,055  |      
|                                      |                     |                            |         |                     |  |      |         |         |   |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      
|Income (loss) before income taxes     |                     | $                          | 4,156   |                     |  | $    | 32,224  |         |   | $    | 21,252  |         |   | $ | (1,179  | )     |  | $ | (1,242  | )     |  | $ | (16,266 | )    
|                                      |                     |                            |         |                     |  |      |         |         |   |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      
|Total identifiable assets  August 31 |                     | $                          | 498,872 |                     |  | $    | 439,942 |         |   | $    | 430,871 |         |   | $ | 265,600 |       |  | $ | 212,999 |       |  | $ | 217,612 |      
|                                      |                     |                            |         |                     |  |      |         |         |   |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

CHS Inc. (CHS or the Company) is one of the
nations leading integrated agricultural companies. As a
cooperative, the Company is owned by farmers, ranchers and their
local cooperatives from the Great Lakes to the Pacific Northwest
and from the Canadian border to Texas. CHS buys commodities
from, and provides products and services to members and other
customers. The Company provides a wide variety of products and
services, from initial agricultural inputs such as fuels, farm
supplies and crop nutrients, to agricultural outputs that
include grains and oilseeds, grain and oilseed processing, and
food products.

The Company has five distinct business
segments: Agronomy, Energy, Country Operations and Services,
Grain Marketing and Processed Grains and Foods. Summary data for
each of these segments for the fiscal years ended
August 31, 2003, 2002 and 2001 is shown on prior pages.

Many of the Companys business activities
are highly seasonal, and as a result, operating results will
vary throughout the year. Overall, the Companys income is
generally lowest during the second fiscal

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quarter and highest during the third fiscal
quarter. Certain business segments are subject to varying
seasonal fluctuations. For example, the Agronomy and Country
Operations and Services segments experience higher volumes and
income during the spring planting season and in the fall, which
corresponds to harvest. The Grain Marketing segment is subject
to fluctuations in volume and earnings based on producer
harvests, world grain prices and demand. The Companys
Energy segment generally experiences higher volumes and
profitability in certain operating areas, such as refined
products, in the summer when gasoline and diesel usage is
highest. Other energy products, such as propane, experience
higher volumes and profitability during the winter heating and
crop drying seasons.


The Companys revenue can be significantly
affected by global market prices for commodities such as
petroleum products, natural gas, grain, oilseeds and flour.
Changes in market prices for commodities that the Company
purchases without a corresponding change in the selling prices
of those products can affect revenues and operating earnings.
Commodity prices are affected by a wide range of factors beyond
the Companys control, including the weather, crop damage
due to disease or insects, drought, the availability and
adequacy of supply, government regulation and policies, world
events, and general political and economic conditions.

While the Companys sales and operating
results are derived from businesses and operations which are
wholly-owned and majority-owned, a portion of business
operations are conducted through companies in which the Company
holds ownership interests of 50% or less and does not control
the operations. The Company accounts for these investments
primarily using the equity method of accounting, wherein CHS
records as equity income from investments its proportionate
share of income or loss reported by the entity, without
consolidating the revenues and expenses of the entity in the
Companys consolidated statements of operations. These
investments principally include the Companys
25% ownership in Agriliance, LLC (Agriliance), the
50% ownership in TEMCO, LLC, the 50% ownership in
United Harvest, LLC, the 24% ownership in Horizon Milling,
LLC (Horizon) and the 50% ownership in Ventura Foods, LLC
(Ventura).

Agriliance is owned and governed by Land
OLakes, Inc. (50%) and United Country Brands, LLC (50%).
United Country Brands, LLC is owned and governed 50% by the
Company and 50% by Farmland Industries, Inc. (Farmland), and was
formed solely to hold a 50% interest in Agriliance. Prior
to the transaction described below, the Companys indirect
share of earnings (economic interest) in Agriliance was 25%,
which was the same as the Companys ownership or governance
interest. Subsequent to the transaction, the Companys
indirect economic interest in Agriliance is no longer the same
as the Companys ownership or governance interest.

In April 2003, the Company acquired an additional
economic interest in the Agriliance wholesale crop protection
business (the CPP Business), which constitutes only
a part of the Agriliance business operations. The Company
acquired 13.1% of the CPP Business for a cash payment of
$34.3 million. The economic interests in Agriliance are
owned 50% by Land OLakes, 25% plus an additional 13.1% of
the CPP Business by the Company and 25% less 13.1% of the CPP
Business by Farmland. The ownership or governance interests in
Agriliance did not change with the purchase of this additional
economic interest. Agriliances earnings are split among
the members based upon the respective economic interests of each
member.

Results of Operations



| |                                                           
| | ----------------------------------------------------------
| | Comparison of the years ended
    August 31, 2003 and 2002




General.The Company
recorded pretax earnings of $136.5 million in fiscal 2003
compared to pretax earnings of $144.8 million in fiscal
2002, with fiscal 2003 net income of $123.8 million,
slightly below fiscal 2002 net income of $126.1 million.
These results reflected increased pretax earnings in the
Agronomy, Energy and Country Operations and Services segments,
offset, however, by decreased pretax earnings in the Grain
Marketing and Processed Grains and Foods segments.




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The Agronomy segment generated pretax earnings of
$13.5 million for the year ended August 31, 2003
compared to $5.8 million in the prior year. This increase
in earnings is primarily attributable to the acquisition of an
additional economic interest in the Agriliance crop protection
business, as discussed earlier.







The Energy segment generated pretax earnings of
$83.5 million during the year ended August 31, 2003
compared with $75.8 million during the prior year. This
increase in earnings is primarily attributable to strong
refining margins. Because agricultural use of fuels is gradually
declining, the Company has introduced initiatives to market
greater volumes of refined fuels, propane and lubricants to
customers outside its traditional base in the agricultural
market. The Company established a record number of new
Cenex-branded retail sites during fiscal 2003, with nearly 160
dealerships added or converted to the Cenex brand, and has
introduced new lines of lubricant products for use in
snowmobiles, all terrain vehicles and marine equipment.







The Grain Marketing segment generated pretax
earnings of $3.7 million for the year ended August 31,
2003 compared to $8.1 million in the prior year. A major
contributing factor was a decrease in exports of grains and
oilseeds as the result of increased prices for U.S. grains and
oilseeds resulting from drought in parts of the U.S. crop
production area which, along with large crops in certain other
grain-exporting countries, put U.S. grains and oilseeds in a
non-competitive position in the world export market for most of
fiscal 2003. During fiscal 2003 the Company constructed 110-car
shuttle train receiving stations in Friona, Texas and Collins,
Mississippi, which are located near large-scale cattle and
poultry producers, with a goal of increasing the volume of
domestic grain sales, in part to reduce the Companys
exposure to volatile export markets.







The Country Operations and Services segment
generated pretax earnings of $32.8 million for the year
ended August 31, 2003 compared to $24.1 million for
the prior year. This increase resulted primarily from
$10.9 million received in cash from a class action lawsuit
alleging illegal price fixing against various feed vitamin
product suppliers, partially offset by impairments related to
facilities where the undiscounted projected income and related
cash flows were less than the carrying value of the facilities.







The Processed Grains and Foods segment generated
pretax earnings of $4.2 million for the year ended
August 31, 2003 compared to $32.2 million for the
prior year. This decrease was the result of several factors,
most significantly the decrease in CHSs equity income from
its investment in Ventura Foods discussed below under
 Equity Income from Investments,
depressed soybean meal prices and margins through much of the
year, the effects of the recent shifting of U.S. dietary
preferences from carbohydrates to high protein and the impact of
restructuring efforts in the Companys Mexican foods
operations. These factors were partially offset by the effect of
higher prices for refined soybean oil and improved results from
the Companys wheat milling operations, in part because of
impairment charges recognized in fiscal 2002. In late fiscal
2003, margins at both Ventura Foods and Horizon Milling began to
improve.







Net Income.Consolidated net income for the year ended August 31, 2003
was $123.8 million compared to $126.1 million for the
year ended August 31, 2002, which represents a
$2.3 million (2%) decrease. This decrease in profitability
is primarily attributable to decreased earnings in the
Companys Processed Grains and Foods and Grain Marketing
segments, which was partially offset by increased earnings
within the Energy, Country Operations and Services and Agronomy
segments compared to the year ended August 31, 2002.




Net Sales.Consolidated net sales of
$9.3 billion for the year ended August 31, 2003
increased $2.1 billion (30%) compared to the year ended
August 31, 2002.

Company-wide grain and oilseed net sales of
$4.5 billion increased $1.0 billion (30%) during the
year ended August 31, 2003 compared to the year ended
August 31, 2002. Sales for the year ended August 31,
2003 were $4,139.2 million and $1,140.0 million from
Grain Marketing and Country Operations and Services segments,
respectively. Sales for the year ended August 31, 2002 were
$3,281.5 million and $862.0 million from Grain
Marketing and Country Operations and Services segments,
respectively. The Company eliminated all intersegment sales
between Country Operations and Services and Grain

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Marketing, of $799.4 million and
$685.4 million, for the years ended August 31, 2003
and 2002, respectively. The net increase in sales was primarily
due to an increase of $0.93 (30%) per bushel in the average
sales price of all grain and oilseed marketed by the Company
while volumes remained essentially unchanged from the prior
year. The net increase in company-wide grain and oilseed of
$1.0 billion was primarily related to the price change due
to stronger commodity prices and increased international soybean
exports.


Energy net sales of $3.6 billion increased
$963.6 million (37%) during the year ended August 31,
2003 compared to the year ended August 31, 2002. Sales for
the year ended August 31, 2003 and 2002 were
$3,648.1 million and $2,657.7 million, respectively.
The Company eliminated all intersegment sales from Energy to
Country Operations and Services of $94.2 million and
$67.4 million for the years ended August 31, 2003 and
2002, respectively. Refined fuels net sales increased by
$783.2 million, of which $418.0 million was related to
a net average price change and $365.2 million was related
to a net volume change. The sales price of refined fuels
increased $0.18 per gallon and volume increased 17%
compared to the year ended August 31, 2002. Refined fuels
commodity prices increased due to global uncertainty in the
energy markets brought on by the ensuing war and the Venezuela
disruption. Propane net sales increased by $137.0 million,
of which $75.9 million was related to a net volume change
and $61.1 million was related to a net average price
change. The average sales price of propane increased by $0.09
per gallon and volume increased by 19% compared to the year
ended August 31, 2002. Domestic propane inventories were at
extremely low levels coming out of the heating season, which
supported a higher selling price. Refined fuels and propane
volume increases were primarily a result of acquisitions, with
the largest acquisition taking place in November 2001, when the
Company purchased for $32.6 million, the wholesale energy
business of Farmland Industries, Inc. (Farmland), as well as all
interest in Country Energy, LLC a joint venture formerly with
Farmland.

Country operations non-grain net sales of
$745.8 million increased by $133.3 million (22%)
during the year ended August 31, 2003 compared to the year
ended August 31, 2002. The net average price and net volume
increased on the majority of farm supply products, which
consists of seed; plant food; energy products; animal health
ingredients, supplements and products; animal health products;
and crop nutrient and crop protection products, compared to the
prior year. In addition, net sales increased $46.4 million
compared to the prior year due to the acquisition of a sunflower
processing plant.




Processed Grains and Foods segment net sales of
$491.2 million decreased $4.3 million (1%) during the
year ended August 31, 2003 compared to the year ended
August 31, 2002. Intersegment sales of $0.7 million
and $0.6 million for the years ended August 31, 2003
and 2002, respectively, have been eliminated. Oilseed processing
and refining net sales increased $81.4 million primarily
due to an average selling price increase of $0.07 per pound
in refined oilseed. In addition, Mexican Foods sales increased
$4.1 million compared to the prior year. These sales
increases were partially offset by an $89.6 million
decrease in sales due to the formation of Horizon Milling, a
wheat flour milling and processing joint venture that was formed
in January 2002. After that date, the Company accounted for
operating results of Horizon Milling under the equity method of
accounting.







Patronage Dividends.Patronage dividends received from other cooperatives of
$3.3 million decreased $0.6 million (16%) during the
year ended August 31, 2003 compared to the year ended
August 31, 2002 from cooperatives of which CHS is a member
and with which it does business. The amount of patronage
dividends received by CHS in each year depends on the volume of
business CHS conducted with the other cooperative (which, in
turn, depends on how the terms offered by that cooperative
compare to the terms offered by other entities), the
profitability generated by the other cooperative on the product
purchased by or from CHS, and the patronage distribution
resolution adopted by that other cooperative for that year. All
of these factors vary from year to year.







Other Revenues.Other revenues of $124.5 million increased
$15.1 million (14%) during the year ended August 31,
2003 compared to the year ended August 31, 2002. The
majority of other revenue was generated within the Country
Operations and Services and the Grain Marketing segments and
derived primarily from services performed through the Country
Operations and Services segments elevator and




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agri-service centers, including grain storage,
grain cleaning, fertilizer spreading, crop protection product
spraying and other services of this nature; the Country
Operations and Services segments financial services; and
the Grain Marketing segments service activities at its
export terminals for loading vessels.





Cost of Goods Sold.Cost of goods sold of $9.1 billion increased
$2.1 billion (31%) during the year ended August 31,
2003 compared to the year ended August 31, 2002. The cost
of all grains and oilseed procured by the Company through its
Grain Marketing and Country Operations and Services segments
increased 30% compared to the year ended August 31, 2002
primarily due to a $0.92 (30%) average cost per bushel increase
while volumes remained essentially unchanged from the prior
year. This increase in cost of goods sold was primarily the
result of higher commodity prices and increased international
exports. The Energy segment cost of goods sold increased by
$986.6 million (40%) during the year ended August 31,
2003 compared to the prior year, primarily due to refined fuels
average cost increase of $778.1 million (46%), which
consists of increased average cost of $0.18 per gallon and
volume increases of 17% compared to the year ended
August 31, 2002. In addition, the average cost of propane
increased by $138.1 million (43%), of which the average
cost increased by $0.10 per gallon and volumes increased by
19% compared to the prior year. Energy cost increases were
primarily related to the global effects of higher input costs
and increased volumes primarily as a result of acquisitions.
Country operations non-grain cost of goods sold increased by 12%
during the year ended August 31, 2003 compared to the prior
year primarily due to a sunflower processing plant acquisition
and increased average cost per unit on most farm supply
products. Processed Grains and Foods segment cost of goods sold
increased by $9.3 million (2%) compared to the year ended
August 31, 2002. Oilseed processing and refining cost of
goods sold increased $94.6 million, primarily due to the
increased cost of raw materials related to oilseed refining of
$0.07 per bushel. This increase was partially offset by
decreased cost of goods sold of $89.7 million related to
the formation of Horizon Milling, as previously discussed.

Marketing, General and
Administrative.Marketing, general and
administrative expenses of $190.6 million for the year
ended August 31, 2003 increased by $3.3 million (2%)
compared to the year ended August 31, 2002. The net
increase is primarily due to additional expenses within the
Country Operations and Services segment primarily due to a
sunflower plant acquisition.

Gain on Legal
Settlements.The Country Operations
and Services segment received cash of $10.9 million and
$3.0 million during the years ended August 31, 2003
and 2002, respectively, from a class action lawsuit alleging
illegal price fixing against various feed vitamin product
suppliers.

Interest.Interest
expense of $48.7 million for the year ended August 31,
2003 increased by $6.2 million (15%) compared to the year
ended August 31, 2002. The average level of short-term
borrowings increased $88.1 million primarily due to
financing working capital needs, which was partially offset by
an average short-term interest rate decrease of 0.4% during the
year ended August 31, 2003 compared to August 31,
2002. Long-term debt borrowings increased due to an additional
$175.0 million of private placement debt that was issued in
October 2002.




Equity Income from
Investments.Equity income from
investments of $47.3 million for the year ended
August 31, 2003 decreased by $10.8 million (19%)
compared to the year ended August 31, 2002. The Company
records equity income or loss from the investments it owns 50%
or less of for its proportionate share of income or loss
reported by the entity, without consolidating the revenues and
expenses of the entity in the Companys consolidated
statements of operations. The decrease in equity income from
investments was primarily attributable to decreased earnings in
Ventura Foods, which was partially offset by increased earnings
in Agriliance compared to the prior year. Equity earnings in
Ventura Foods decreased $16.2 million during fiscal 2003
when compared with earnings of the previous year. This decrease
was mostly attributable to higher priced refined soybean oil,
which is a primary ingredient in many of Ventura Foods products,
and also to the fact that the depressed U.S. economy reduced
business for many of Ventura Foods restaurant customers, in turn
decreasing demand for and margins on certain of Venturas
products. Equity earnings in Agriliance increased
$6.8 million during fiscal 2003 when compared with the
previous year. This increase was primarily attributable to the
Companys acquisition of an additional 13.1% of economic
interest in the wholesale CPP business of Agriliance, as
previously discussed.




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Minority Interests.Minority interests of $22.0 million for the year ended
August 31, 2003 increased by $6.6 million (43%)
compared to the year ended August 31, 2002. The net change
in minority interests during the year ended August 31, 2003
compared to the prior year was primarily a result of more
profitable operations within the Companys majority-owned
subsidiaries. Substantially all minority interests relate to
National Cooperative Refinery Association (NCRA) an
approximately 74.5% owned subsidiary.

Income Taxes.Income
tax expense of $12.7 million for the year ended
August 31, 2003 compares to $18.7 million for the year
ended August 31, 2002, resulting in effective tax rates of
9.3% and 12.9%, respectively. The federal and state statutory
rate applied to nonpatronage business activity was 38.9% for the
years ended August 31, 2003 and 2002. The income taxes and
effective tax rate vary each year based upon profitability and
nonpatronage business activity during each of the comparable
years.



| |                                                           
| | ----------------------------------------------------------
| | Comparison of the years ended
    August 31, 2002 and 2001

Net Income.Consolidated net income for the year ended August 31, 2002
was $126.1 million compared to $178.6 million for the
year ended August 31, 2001, which represents a
$52.5 million (29%) decrease. This decrease in
profitability is primarily attributable to a tax benefit of
$34.2 million in the prior year and decreased earnings in
the Companys Energy segment compared to the year ended
August 31, 2001.

Net Sales.Consolidated net sales of
$7.2 billion for the year ended August 31, 2002
decreased $307.8 million (4%) compared to the year ended
August 31, 2001.

Company-wide grain and oilseed net sales of
$3.5 billion increased $29.0 million (1%) during the
year ended August 31, 2002 compared to the year ended
August 31, 2001. Sales for the year ended August 31,
2002 were $3,281.4 million and $862.0 million from
Grain Marketing and Country Operations and Services segments,
respectively. Sales for the year ended August 31, 2001 were
$3,416.2 million and $913.4 million from Grain
Marketing and Country Operations and Services segments,
respectively. The Company eliminated all intersegment sales from
Country Operations and Services to Grain Marketing, of
$685.4 million and $900.6 million, for the years ended
August 31, 2002 and 2001, respectively. The net change in
sales was primarily due to an increase of $0.28 per bushel
(10%) in the average sales price of all grain and oilseed
marketed by the Company, which was partially offset by a
decrease in grain volume of 8% compared to the prior year. The
net increase in company-wide grain and oilseed of
$29.0 million was primarily related to an average price
increase of $335.8 million, which was partially offset by a
$306.8 million decrease related to volume.

Energy net sales of $2.6 billion decreased
$119.1 million (4%) during the year ended August 31,
2002 compared to the year ended August 31, 2001. Sales for
the year ended August 31, 2002 and 2001 were
$2,657.7 million and $2,781.2 million, respectively.
The Company eliminated all intersegment sales from the Energy
segment to Country Operations and Services segment of
$67.4 million and $71.8 million for the years ended
August 31, 2002 and 2001, respectively. Prior to
December 31, 2000 the company consolidated the business
activity of Cooperative Refining LLC (CRLLC), a refining joint
venture into the Energy segment. The Company held a 58% interest
in CRLLC, which was dissolved effective December 31, 2000.
Energy sales decreased by $371.6 million primarily due to
this dissolution. Refined fuels net sales that were not part of
CRLLC increased by $259.5 million due to a net volume
increase of $575.6 million, which was partially offset by a
$316.1 million decrease due to the price change compared to
the previous year. These refined fuels sales volumes increased
by 49%, which was partially offset by a decrease of $0.21 in the
average selling price compared to August 31, 2001. Propane
net sales decreased by $35.0 million; $109.7 million
due to the decrease in net price, which was partially offset by
a $74.8 million increase due to net volume change. The
average sales price of propane decreased by $0.21 per
gallon, which was partially offset by volume increases of 28%
compared to the year ended August 31, 2001. Refined fuels
and propane volume increases were primarily a result of
acquisitions, with the most substantial acquisition taking place
in November 2001, when the Company purchased for
$32.6 million, the wholesale energy business of Farmland
Industries, Inc. (Farmland), as well as all interest in Country
Energy, LLC a joint venture formerly with Farmland.

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Country operations non-grain sales of
$612.5 million decreased by $51.3 million (8%) during
the year ended August 31, 2002 compared to the year ended
August 31, 2001. The decrease is primarily due to a
reduction of $46.3 million (24%) in the average retail
sales price of energy products compared to the prior year.
Non-grain sales consist of seed; plant food; energy products;
animal health ingredients, supplements and products; animal
health products; and crop nutrient and crop protection products.

Processed Grains and Foods segment net sales of
$495.5 million decreased $166.4 million (25%) during
the year ended August 31, 2002 compared to the year ended
August 31, 2001. Intersegment sales of $0.6 million
and $0.8 million, for the years ended August 31, 2002
and 2001, respectively, have been eliminated. Sales decreased
$167.4 million primarily due to the formation of Horizon
Milling as previously discussed.

Patronage Dividends.Patronage dividends received of $3.9 million decreased
$2.1 million (35%) during the year ended August 31,
2002 compared to the year ended August 31, 2001, due to
reduced patronage dividends from cooperatives.




Other Revenues.Other revenues of $109.5 million decreased
$6.8 million (6%) during the year ended August 31,
2002 compared to the year ended August 31, 2001. The majority of
other revenue was generated within the Country Operations and
Services and the Grain Marketing segments and derived primarily
from services performed through the Country Operations and
Services segments elevator and agri-service centers,
including grain storage, grain cleaning, fertilizer spreading,
crop protection product spraying and other services of this
nature; the Country Operations and Services segments
financial services; and the Grain Marketing segments
service activities at its export terminals for loading vessels.







Cost of Goods Sold.Cost of goods sold of $6.9 billion decreased
$240.5 million (3%) during the year ended August 31,
2002 compared to the year ended August 31, 2001. The cost
of all grains and oilseed procured by the Company through its
Grain Marketing and Country Operations and Services segments
increased $28.0 million compared to the year ended
August 31, 2001 primarily due to a $0.27 (10%) average cost
per bushel increase, which was partially offset by an
8% decrease in volume. This increase was partially offset
by decreases in cost of goods sold in the Processed Grains and
Foods, Country Operations and Services and Energy segments.
Processed Grains and Foods segment cost of goods sold decreased
by 26% compared to the year ended August 31, 2001,
primarily due to the formation of Horizon Milling, as previously
described. Country operations non-grain cost of goods sold
decreased by 9% during the year ended August 31, 2002
compared to the prior year primarily due to the reduced cost of
energy products. The Energy segment cost of goods sold decreased
by 2% during the year ended August 31, 2002 compared to the
prior year, primarily due to the dissolution of CRLLC, as
previously discussed. However, the volumes of refined fuels that
were not associated with the dissolution of CRLLC increased by
49%, which was partially offset by an average cost decrease of
$0.18 per gallon compared to the year ended August 31,
2001. The average cost of propane decreased by $0.19 per
gallon, which was partially offset by a 28% volume increase
compared to the prior year. These volume increases were
primarily the result of acquisitions.




Marketing, General and
Administrative.Marketing, general and
administrative expenses of $187.3 million for the year
ended August 31, 2002 increased by $3.2 million (2%)
compared to the year ended August 31, 2001. The net
increase is primarily due to additional expenses resulting from
Energy segment acquisitions, which was partially offset by
reduced expenses within the Processed Grains and Foods segment
due to the formation of Horizon Milling described earlier.

Gain on Legal
Settlements.During the fiscal year
ended August 31, 2002, the Country Operations and Services
segment received $3.0 million in cash from a class action
lawsuit alleging illegal price fixing against various feed
vitamin product suppliers.

Interest.Interest
expense of $42.5 million for the year ended August 31,
2002 decreased by $19.0 million (31%) compared to the year
ended August 31, 2001. The average level of short-term
borrowings decreased $68.3 million (24%) and the average
short-term interest rate decreased 3.6% during the year ended
August 31, 2002 compared to the prior year. The net
decrease in interest expense from

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short-term borrowings was partially offset by an
increase due to an additional $80.0 million of long-term
debt from a private placement, of which $25.0 million and
$55.0 million were issued in January and March 2001,
respectively.


Equity Income from
Investments.Equity income from
investments of $58.1 million for the year ended
August 31, 2002 increased by $29.6 million (104%)
compared to the year ended August 31, 2001. The increase
was primarily attributable to decreased losses from Corporate
and Other segment technology investments of $15.1 million
which was dissolved. In addition, earnings from Agronomy, and
Processed Grains and Foods segments investments increased in
fiscal year 2002 by $6.1 million and $5.8 million,
respectively compared to the prior year.

Minority Interests.Minority interests of $15.4 million for the year ended
August 31, 2002 decreased by $19.7 million (56%)
compared to the year ended August 31, 2001. The change in
minority interests during the year ended August 31, 2002
compared to the prior year was primarily a result of less
profitable operations within the Companys majority-owned
subsidiaries and the dissolution of CRLLC. Substantially all
minority interests relate to National Cooperative Refinery
Association (NCRA) an approximately 74.5% owned subsidiary.

Income Taxes.Income
tax expense of $18.7 million for the year ended
August 31, 2002 compares to a tax benefit of
$25.6 million for the year ended August 31, 2001,
resulting in effective tax rates of a 12.9% expense and a 16.7%
benefit, respectively. The federal and state statutory rate
applied to nonpatronage business activity was 38.9% for the
years ended August 31, 2002 and 2001. An income tax benefit
of $34.2 million for the year ended August 31, 2001
resulted from a change in the tax rate applied to the
Companys cumulative temporary differences between income
for financial statement purposes and income used for tax
reporting purposes. The Companys calculation of its
patronage distribution using earnings for financial statement
purposes rather than tax basis earnings prompted the rate
change. The Company recorded income tax expense of
$18.7 million for the year ended August 31, 2002,
which compares to $8.6 million for the year ended
August 31, 2001, exclusive of the $34.2 million
benefit related to the change in patronage determination
described above. The income taxes and effective tax rate vary
each year based upon profitability and nonpatronage business
activity during each of the comparable years.

Liquidity and Capital Resources




On August 31, 2003 the Company had working
capital, defined as current assets less current liabilities, of
$458.7 million and a current ratio, defined as current
assets divided by current liabilities, of 1.3 to 1.0.
Included in this working capital was $168.2 million of cash
and cash equivalents. On August 31, 2002, the Company had
working capital of $249.1 million and a current ratio of
1.2 to 1.0 and on August 31, 2001, the Company had
working capital of $305.3 million and a current ratio of
1.3 to 1.0. During fiscal 2003, the Company borrowed
$175.0 million from a group of insurance companies on a
long-term basis and also received net proceeds of
$82.5 million from the sale of preferred stock to the
general public. These sources contributed significantly to the
increase in the amount of the Companys working capital
during fiscal 2003. The Company raised this additional capital
in part to fund capital expenditures that it made in fiscal 2003
and expects to make in fiscal years 2004 and 2005 to meet the
new low sulfur fuel regulations discussed below in
 Cash Flows from Investing Activities.
The Company has committed lines of revolving credit totaling
$730.0 million, of which $250.0 million was drawn on
August 31, 2003, primarily for the purpose of financing
receivables and inventories. These receivables and inventories
are highly liquid. The Company believes that its liquidity is
adequate to cover any increase in net operating assets and
liabilities.









| |                           
| | --------------------------
| | Cash Flows from Operations







Cash flows from operations are generally affected
by commodity prices. These commodity prices are affected by a
wide range of factors beyond our control, including weather,
crop conditions, drought, the availability and adequacy of
supply and transportation, government regulations and policies,
world events, and general political and economic conditions.
These factors, which are described in greater detail in this




34



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Form 10-K/A-1 under the heading
Business  Cautionary Statement Regarding
Forward-Looking Statements, may affect net operating
assets and liabilities and liquidity.








Cash flows provided by (used in) operating
activities were $216.5 million, ($35.9) million, and
$253.9 million for the years ended August 31, 2003,
2002 and 2001, respectively. Volatility in cash flows from
operations for the years ended August 31, 2003, 2002 and
2001 was caused primarily by fluctuations in the year-end price
of spring wheat, soybeans and corn, our highest volume
commodities. Although crude oil prices have experienced
volatility during the three-year period, values on
August 31, 2003, 2002, and 2001 were comparable, thus not
contributing significantly to changes in net operating assets
and liabilities on those dates.







Operating activities of the Company provided net
cash of $216.5 million during the year ended
August 31, 2003. Net income of $123.8 million and net
non-cash expenses of $98.0 million were partially offset by
a small increase in net operating assets and liabilities
requirements of $5.3 million. The primary components of net
non-cash expenses included depreciation and amortization of
$111.3 million which was partially offset by net income
from equity investments of $47.3 million. Grain and oilseed
prices on August 31, 2003 remained at the approximate level
prevailing at the end of the previous fiscal year, as market
conditions were similar to those at the end of the previous
fiscal year. Consequently, net operating assets and liabilities
at August 31, 2003 changed only slightly compared with
those at the prior year-end.







Operating activities of the Company used net cash
of $35.9 million during the year ended August 31,
2002. Net income of $126.1 million and net non-cash
expenses of $62.4 million were offset by an increase in net
operating assets and liabilities of $224.4 million. The
primary components of net non-cash expenses included
depreciation and amortization of $104.0 million which was
partially offset by net income from equity investments of
$58.1 million. The increase in net operating assets and
liabilities was primarily due to increased grain prices. Grain
and oilseed prices increased considerably at the end of fiscal
2002 in response to drought conditions in parts of the grain
production area, which reduced overall market supply and
resulted in an increase in grain and oilseed inventory values of
$155.6 million compared to that same inventory category of
the year before. The market price of spring wheat, soybeans and
corn was higher on August 31, 2002 by $2.15 per bushel (a
70% increase), $1.15 per bushel (a 24% increase) and $0.45 per
bushel (a 21% increase), respectively, than at the end of the
prior fiscal year. These increases in grain prices also had the
affect of increasing hedging margin deposits, which are carried
in other current assets, and receivables. These factors in
combination with related current liabilities caused net
operating assets and liabilities to increase, when comparing
August 31, 2002 with August 31, 2001, by
$224.4 million. A major part of the Companys
operating assets and liabilities are financed through short-term
notes payable. Since the changes in short-term notes payable are
shown in cash flows from financing activities, they do not
offset an increase in operating assets and liabilities in cash
flows from operations. This increase in net operating assets and
liabilities requirements at the end of fiscal 2002 was the
primary factor in the significant change in cash flows generated
by operations when comparing fiscal 2002 with fiscal 2001.







Operating activities of the Company provided net
cash of $253.9 million during the year ended
August 31, 2001. Net income of $178.6 million, net
non-cash expenses of $50.5 million and decreased net
operating assets and liabilities of $24.8 million provided
this net cash from operating activities. The primary components
of net non-cash expenses included depreciation and amortization
of $109.2 million which was partially offset by net income
from equity investments of $28.5 million and deferred tax
credits of $46.6 million. Stable prices for grain and
oilseeds as well as crude oil allowed us to reduce net operating
assets and liabilities slightly on August 31, 2001 when
compared to net operating assets and liabilities at the close of
the prior fiscal year.







The Company expects its net operating assets and
liabilities for the early part of fiscal 2004 to increase due to
a shortage of railcars available to transport grains and
oilseeds from our country elevators to sale destinations. This
is likely to cause inventories at the country elevators to
increase, and to require us to purchase grain at or near the
sale destination. Poor late summer growing conditions for
certain crops, especially soybeans, resulted in a decrease in
supply and an increase in prices, which we also expect to
contribute to an increase in net operating assets and
liabilities. The Company believes that it has adequate




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capacity within our existing committed lines of
credit to meet any likely increase in net operating assets and
liabilities.







| |                                         
| | ----------------------------------------
| | Cash Flows from Investing
    Activities

For the years ended August 31, 2003, 2002
and 2001, the net cash flows used in the Companys
investing activities totaled $173.3 million,
$147.6 million and $70.2 million, respectively.

The acquisition of property, plant and equipment
comprised the primary use of cash totaling $175.7 million,
$140.2 million and $97.6 million for the years ended
August 31, 2003, 2002 and 2001, respectively. These
acquisitions of property, plant and equipment included
$8.5 million, $6.6 million and $5.3 million
acquired as part of business acquisitions during the respective
fiscal years. Capital expenditures during the year ended
August 31, 2003 included $46.0 million for the
construction of an oilseed processing facility in Fairmont,
Minnesota, with total expenditures for the project at
$68.9 million through August 31, 2003. The Fairmont
facility was essentially complete and operational during the
first quarter of fiscal 2004, and total costs for the project
are estimated to be approximately $85.0 million. For the
year ended August 31, 2004 the Company expects to spend
approximately $252.7 million for the acquisition of
property, plant and equipment. Capital expenditures primarily
related to the U.S. Environmental Protection Agency
(EPA) low sulfur fuel regulations required by 2006, are
expected to be approximately $87.0 million for the
Companys Laurel, Montana refinery and $324.0 million
for NCRAs McPherson, Kansas refinery, of which
$8.7 million has been spent at the Laurel refinery and
$36.5 million has been spent by NCRA at the McPherson
refinery as of August 31, 2003. The Company expects all of
these compliance capital expenditures at the refineries to be
complete by December 31, 2005, and anticipates funding
these projects with a combination of cash flows from operations
and debt proceeds.

In October 2003, the Company and NCRA reached
agreement with the EPA and the State of Montanas
Department of Environmental Quality and the State of Kansas
Department of Health and Environment, respectively, regarding
the terms of settlements with respect to reducing air emissions
at the Companys Laurel, Montana and NCRAs McPherson,
Kansas refineries. These settlements are part of a series of
similar settlements that the EPA has negotiated with major
refiners under the EPAs Petroleum Refinery Initiative. The
settlements, which resulted from nearly three years of
discussions, take the form of consent decrees filed with the
U.S. District Court for the District of Montana (Billings
Division) and the U.S. District Court for the District of
Kansas, respectively. Each consent decree details specific
capital improvements, supplemental environmental projects and
operational changes that the Company and NCRA have agreed to
implement at the relevant refinery over the next several years.
The consent decrees also require the Company and NCRA to pay
approximately $0.5 million in aggregate civil cash
penalties. The Company and NCRA anticipate that their aggregate
capital expenditures related to these settlements will total
approximately $25.0 million to $30.0 million over the
next eight years. Approximately 50 percent of the
expenditures will be made over the first three years. The
Company does not believe that the settlements will have a
material adverse affect on the Company.

Investments made during the years ended
August 31, 2003, 2002 and 2001 totaled $43.5 million,
$6.2 million and $14.2 million, respectively.
Investments during the year ended August 31, 2003 included
the purchase of an additional economic interest in the wholesale
crop protection business of Agriliance, as previously explained.

Acquisitions of intangibles were
$0.8 million, $29.5 million and $7.3 million for
the years ended August 31, 2003, 2002 and 2001,
respectively. During the year ended August 31, 2002,
$26.4 million of the acquisitions of intangibles were
related to the purchase of Farmlands interest in its
wholesale energy business, as previously discussed, and
represented trademarks, tradenames and non-compete agreements.
During the year ended August 31, 2001, the intangibles
resulted primarily from the purchase of a Mexican foods business.

Net working capital acquired in business
acquisitions was $13.0 million, $5.8 million and
$1.1 million, respectively, during the years ended
August 31, 2003, 2002 and 2001.

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During the years ended August 31, 2003 and
2002 the changes in notes receivable resulted in decreases in
cash flows of $6.6 million and $22.0 million,
respectively, primarily from related party notes receivables at
NCRA from its minority owners, Growmark, Inc. and MFA Oil
Company. During the year ended August 31, 2001 the changes
in notes receivable resulted in an increase in cash flows of
$0.5 million.

Distributions to minority owners for the years
ended August 31, 2003, 2002 and 2001 were
$4.4 million, $7.4 million and $19.3 million,
respectively, and were primarily related to NCRA. For the year
ended August 31, 2001 NCRAs distributions also
included the distributions made by CRLLC. Cash distributions
NCRA has made to its members has decreased in 2003 and 2002, due
to the funding requirements for environmental capital
expenditures previously discussed.

Partially offsetting cash outlays in investing
activities were proceeds from the disposition of property, plant
and equipment of $26.9 million, $20.2 million and
$35.3 million for the years ended August 31, 2003,
2002 and 2001, respectively. During the year ended
August 31, 2003, the proceeds were primarily from disposals
of propane plants and non-strategic locations in the Energy
segment, sales of equipment and non-strategic agri-operations
locations in the Country Operations and Services segment, and
sales of wheat milling equipment. During the year ended
August 31, 2002, the proceeds were primarily from the
disposal of propane plants in the Energy segment and of
non-strategic agri-operations locations in the Country
Operations and Services segment. Also partially offsetting cash
usages were distributions received from joint ventures and
investments totaling $44.4 million, $44.0 million and
$31.8 million for the years ended August 31, 2003,
2002 and 2001, respectively.



| |                                         
| | ----------------------------------------
| | Cash Flows from Financing
    Activities

The Company finances its working capital needs
through short-term lines of credit with a syndication of banks.
In May 2003, the Company entered into a new 364-day credit
facility of $600.0 million committed. In addition to these
lines of credit, the Company has a 364-day credit facility
dedicated to NCRA, with a syndication of banks in the amount of
$30.0 million committed. On August 31, 2003 and 2002,
the Company had total short-term indebtedness outstanding on
these various facilities and other short-term notes payable
totaling $251.1 million and $332.5 million,
respectively. In October 2002, $175.0 million received from
private placement proceeds was used to pay down the
Companys 364-day credit facility. In January 2003,
$83.0 million of proceeds received from the issuance of the
Companys preferred stock (net of broker commissions of
$3.2 million) was also used to pay down the 364-day credit
facility.

In June 1998, the Company established a five-year
revolving credit facility with a syndication of banks, with
$200.0 million committed, which expired in May 2003. The
Company had a previous outstanding balance on this facility of
$75.0 million on August 31, 2002, of which repayments
of $75.0 million were made during the year ended
August 31, 2003.




In May 2003, the Company established a three-year
revolving credit facility with a syndication of banks, with
$100.0 million committed. The interest rate on any
borrowings under this facility will be set on the date of
borrowing pursuant to a formula; at August 31, 2003 this
rate would have been LIBOR plus 100 basis points. There was
no outstanding balance on this new credit facility on
August 31, 2003.







The Company finances its long-term capital needs,
primarily for the acquisition of property, plant and equipment,
with long-term agreements with various insurance companies and
banks. In June 1998, the Company established a long-term credit
agreement through the cooperative banks. This facility committed
$200.0 million of long-term borrowing capacity to the
Company, with repayments through fiscal year 2009. The amount
outstanding on this credit facility was $137.8 million and
$144.3 million on August 31, 2003 and 2002,
respectively. Repayments of $6.6 million were made on this
facility during each of the three years ended August 31,
2003, 2002 and 2001. Interest rates on August 31, 2003
ranged from 2.14% to 7.13%.




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Also in June 1998, the Company completed a
private placement offering with several insurance companies for
long-term debt in the amount of $225.0 million with an
interest rate of 6.81%. Repayments will be made in equal annual
installments of $37.5 million each in the years 2008
through 2013.







In January 2001, the Company entered into a note
purchase and private shelf agreement with Prudential Insurance
Company. The long-term note in the amount of $25.0 million
has an interest rate of 7.9% and will be repaid in equal annual
installments of approximately $3.6 million, in the years
2005 through 2011. A subsequent note for $55.0 million was
issued in March 2001, related to the private shelf facility. The
$55.0 million note has an interest rate of 7.43% and will
be repaid in equal annual installments of approximately
$7.9 million, in the years 2005 through 2011.




In October 2002, the Company completed a private
placement with several insurance companies for long-term debt in
the amount of $175.0 million which was layered into two
series. The first series of $115.0 million has an interest
rate of 4.96% and will be repaid in equal semi-annual
installments of approximately $8.8 million during the years
2007 through 2013. The second series of $60.0 million has
an interest rate of 5.60% and will be repaid in equal
semi-annual installments of approximately $4.6 million
during fiscal years 2012 through 2018.




The Company, through NCRA, had revolving term
loans outstanding of $15.0 million and $18.0 million
for the years ended August 31, 2003 and 2002, respectively.
Interest rates on August 31, 2003 ranged from 6.48% to
6.99%. Repayments of $3.0 million were made during each of
the three years ended August 31, 2003, 2002 and 2001.







On August 31, 2003, the Company had total
long-term debt outstanding of $663.2 million, of which
$168.0 million was bank financing, $480.0 million was
private placement proceeds and $15.2 million was industrial
development revenue bonds and other notes and contracts payable.
On August 31, 2002, the Company had long-term debt
outstanding of $572.1 million. The Companys long-term
debt is unsecured except for industrial revenue bonds in the
amount of $1.6 million and other notes and contracts in the
amount of $5.4 million, however, restrictive covenants
under various agreements have requirements for maintenance of
minimum working capital levels and other financial ratios. The
Company is in compliance with all debt covenants and
restrictions as of August 31, 2003. The aggregate amount of
long-term debt payable as of August 31, 2003 was as follows
(dollars in thousands):




|           |  |   |         | 
|---------- |  | - | ------- | 
|2004       |  | $ | 14,951  | 
|2005       |  |   | 34,716  | 
|2006       |  |   | 35,176  | 
|2007       |  |   | 59,671  | 
|2008       |  |   | 98,190  | 
|Thereafter |  |   | 420,469 | 
|           |  |   |         | 
|           |  | $ | 663,173 | 
|           |  |   |         | 

During the years ended August 31, 2003, 2002
and 2001, the Company borrowed on a long-term basis
$175.0 million, $30.0 million and $116.9 million,
respectively, and during the same periods repaid long-term debt
of $89.5 million, $18.0 million and
$67.4 million, respectively.

In accordance with the bylaws and by action of
the Board of Directors, annual net earnings from patronage
sources are distributed to consenting patrons following the
close of each fiscal year. Patronage refunds are calculated
based on amounts using financial statement earnings. The cash
portion of the patronage distribution is determined annually by
the Board of Directors, with the balance issued in the form of
capital equity certificates. The patronage earnings from the
fiscal year ended August 31, 2002 were primarily
distributed during the second quarter of the year ended
August 31, 2003. The cash portion of this distribution,
deemed by the Board of Directors to be 30% was
$26.5 million. During the years ended August 31, 2002
and 2001, the Company distributed cash patronage of
$40.1 million and $26.1 million, respectively.

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Cash patronage for the year ended August 31,
2003, deemed by the Board of Directors to be 30% and to be
distributed in fiscal year 2004, is expected to be approximately
$27.0 million and is classified as a current liability on
the August 31, 2003 consolidated balance sheet.

The current equity redemption policy, as
authorized by the Board of Directors, allows for the redemption
of capital equity certificates held by inactive direct members
and patrons and active direct members and patrons at age 72 or
death that were of age 61 or older on June 1, 1998. Such
redemptions are at the discretion of the Board of Directors. For
active direct members and patrons who were of age 60 or younger
on June 1, 1998, and member cooperatives, equities older
than 10 years may be redeemed annually based on a prorata
formula where the numerator is dollars available for such
purpose as determined by the Board of Directors, and the
denominator is the sum of the patronage certificates older than
10 years held by such eligible members and patrons. For the
years ended August 31, 2003, 2002 and 2001, the Company
redeemed patronage related equities in accordance with
authorization from the Board of Directors in the amounts of
$31.1 million, $31.1 million and $18.7 million,
respectively. Total cash redemptions related to the year ended
August 31, 2003, to be distributed in fiscal year 2004, are
expected to be approximately $10.8 million and are
classified as a current liability on the August 31, 2003
consolidated balance sheet. An additional $13 million of
capital equity certificates are expected to be redeemed in
fiscal year 2004 in exchange for shares of the Companys 8%
Cumulative Redeemable Preferred Stock.

During the year ended May 31, 1997, the
Company offered securities in the form of Equity Participation
Units (EPUs) in its Wheat Milling and Oilseed Processing and
Refining Defined Business Units. These EPUs gave the holder the
right and obligation to deliver to the Company a stated number
of bushels in return for a prorata share of the undiluted grain
based patronage earnings of these respective Defined Business
Units. The offering resulted in the issuance of such equity with
a stated value of $13,870,000 and generated additional capital
and cash of $10,837,000, after issuance cost and conversion
privileges. Conversion privileges allowed a member to elect to
use outstanding patrons equities for the payment of up to
one-sixth the purchase price of the EPUs. During 2001, the
Companys Board of Directors adopted a resolution to issue,
at no charge, to each Defined Member of the Oilseed Processing
and Refining Defined Business Unit an additional 1/4 Equity
Participation Unit (EPU) for each EPU held, due to
increased crush volume.

In August 2001, the CHS Board of Directors
approved and consummated a plan to end the Defined Investment
Program. The Company redeemed all of the EPUs and allocated the
assets of the Oilseed Processing and Refining and Wheat Milling
Defined Business Units to the Company as provided in the plan.
Due to loss carry-forwards incurred by the Wheat Milling Defined
Business Unit the plan also provided for the cancellation of all
outstanding Preferred Capital Certificates issued to the EPU
holders, totaling $0.2 million. The plan further provided
to the Oilseed Processing Defined Member EPU holders for the
redemption of all outstanding Preferred Capital Certificates
issued and a 100% cash distribution during 2002 for the
patronage refunds earned for the fiscal year ended
August 31, 2001.

In 2001 and 2002 the Company issued approximately
$9.5 million (9,454,874 shares) of 8% Preferred Stock (Old
Preferred). In late 2002, the Company suspended sales of the Old
Preferred, and on February 25, 2003 the Company filed a
post-effective amendment to terminate the offering of the Old
Preferred shares. In January 2003, the Board of Directors
authorized the sale and issuance of up to 3,500,000 shares of 8%
Cumulative Redeemable Preferred Stock (New Preferred) at a price
of $25.00 per share. The Company filed a registration statement
on Form S-2 with the Securities and Exchange Commission
registering 3,000,000 shares of the New Preferred (with an
additional over-allotment option of 450,000 shares granted to
the underwriters), which was declared effective on
January 27, 2003. The shares were subsequently sold for
proceeds of $86.3 million (3,450,000 shares), and are
listed on the NASDAQ National Market. The Board of Directors
intent is to pay quarterly dividends. Expenses related to the
issuance of the New Preferred were $3.8 million.

On March 5, 2003, the Companys Board
of Directors authorized the redemption and conversion of the Old
Preferred shares. A redemption notification and a conversion
election form were sent to holders of

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the Old Preferred shares on March 21, 2003
explaining that on April 25, 2003 all shares of the Old
Preferred would be redeemed by the Company for $1.00 per share
unless they were converted into shares of the Companys New
Preferred. The conversion did not change the base liquidation
amount or dividend amount of the Old Preferred, since 25 shares
of the Old Preferred converted to 1 share of the New Preferred.
The total Old Preferred converted to the New Preferred was $7.5
million (7,452,439 shares), and the balance of the Old Preferred
(2,002,435 shares) was redeemed in cash at $1.00 per share. As
of August 31, 2003 the Company had $93.7 million
(3,748,099 shares) of the New Preferred outstanding.


Off Balance Sheet Financing
Arrangements



| |                   
| | ------------------
| | Lease Commitments:

The Company has commitments under operating
leases for various refinery, manufacturing and transportation
equipment, rail cars, vehicles and office space. Some leases
include purchase options at not less than fair market value at
the end of the leases.

Total rental expense for all operating leases,
net of rail car mileage credits received from the railroad and
sublease income for the years ended August 31, 2003, 2002
and 2001 was $31.7 million, $30.7 million and $35.5
million, respectively.

Minimum future lease payments, required under
noncancellable operating leases as of August 31, 2003, were
as follows:

|                                    |  |                       |       | 
|----------------------------------- |  | --------------------- | ----- | 
|                                    |  | Total                
|                                    |  |                      
|                                    |  | (dollars in millions)
|2004                                |  | $                     | 33.4  | 
|2005                                |  |                       | 24.4  | 
|2006                                |  |                       | 19.2  | 
|2007                                |  |                       | 12.6  | 
|2008                                |  |                       | 7.2   | 
|Thereafter                          |  |                       | 10.6  | 
|                                    |  |                       |       | 
|Total minimum future lease payments |  | $                     | 107.4 | 
|                                    |  |                       |       | 



| |            
| | -----------
| | Guarantees:

The Company is a guarantor for lines of credit
for related companies of which $52.3 million was
outstanding on August 31, 2003. The Companys bank
covenants allow maximum guarantees of $150.0 million. In
addition, the Companys bank covenants allow for guarantees
dedicated solely for NCRA in the amount of $125.0 million.
All outstanding loans with respective creditors are current as
of August 31, 2003.



| |      
| | -----
| | Debt:

There is no material off balance sheet debt.

Critical Accounting Policies

The consolidated financial statements of the
Company are prepared in conformity with accounting principles
generally accepted in the United States of America. The
preparation of these consolidated financial statements requires
the use of estimates as well as managements judgments and
assumptions regarding matters that are subjective, uncertain or
involve a high degree of complexity, all of which affect the
results of operations and financial condition for the periods
presented. The Company believes that of its significant
accounting policies, the following may involve a higher degree
of estimates, judgments, and complexity.

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| |                                     
| | ------------------------------------
| | Allowances for Doubtful
    Accounts

The allowances for doubtful accounts are
maintained at a level considered appropriate by management based
on analyses of credit quality for specific accounts, historical
trends of charge-offs and recoveries, and current and projected
economic and market conditions. Different assumptions, changes
in economic circumstances or the deterioration of the financial
condition of the Companys customers could result in
additional provisions to the allowances for doubtful accounts
and increased bad debt expense.



| |                                     
| | ------------------------------------
| | Inventory Valuation and
    Reserves

Grain, processed grains, oilseed and processed
oilseeds are stated at net realizable values, which approximates
market values. All other inventories are stated at the lower of
cost or market. The cost of certain energy inventories
(wholesale refined products, crude oil and asphalt) are
determined on the last-in, first-out (LIFO) method; all
other energy inventories are valued on the first-in, first-out
(FIFO) and average cost methods. Estimates are used in
determining the net realizable value of grain and oilseed and
processed grains and oilseeds inventories. These estimates
include the measurement of grain in bins and other storage
facilities, which use formulas in addition to actual
measurements taken to arrive at appropriate quantity. Other
determinations made by management include quality of the
inventory and estimates for freight. Grain shrink reserves and
other reserves that account for spoilage also affect inventory
valuations. If estimates regarding the valuation of inventories
or the adequacy of reserves are less favorable than
managements assumptions, then additional reserves or
write-downs of inventories may be required.



| |                                     
| | ------------------------------------
| | Derivative Financial
    Instruments

The Company enters into exchange-traded commodity
futures and options contracts to hedge its exposure to price
fluctuations on energy, grain and oilseed transactions to the
extent considered practicable for minimizing risk. The Company
does not use derivatives for speculative purposes. Futures and
options contracts used for hedging are purchased and sold
through regulated commodity exchanges. Fluctuations in inventory
valuations, however, may not be completely hedged, due in part
to the absence of satisfactory hedging facilities for certain
commodities and geographical areas and in part to the
Companys assessment of its exposure from expected price
fluctuations. The Company also manages its risks by entering
into fixed price purchase contracts with pre-approved producers
and establishing appropriate limits for individual suppliers.
Fixed price sales contracts are entered into with customers of
acceptable creditworthiness, as internally evaluated. The
Company is exposed to loss in the event of nonperformance by the
counterparties to the contracts; however, the Company does not
anticipate nonperformance by counterparties. The fair value of
futures and options contracts are determined primarily from
quotes listed on regulated commodity exchanges. Fixed price
purchase and sales contracts are with various counterparties,
and the fair values of such contracts are determined from the
market price of the underlying product.



| |                                              
| | ---------------------------------------------
| | Pension and Other Postretirement
    Benefits

Pension and other postretirement benefits costs
and obligations are dependent on assumptions used in calculating
such amounts. These assumptions include discount rates, health
care cost trend rates, benefits earned, interest costs, expected
return on plan assets, mortality rates, and other factors. In
accordance with accounting principles generally accepted in the
United States of America, actual results that differ from the
assumptions are accumulated and amortized over future periods
and, therefore, generally affect recognized expenses and the
recorded obligations in future periods. While management
believes that the assumptions used are appropriate, differences
in actual experience or changes in assumptions may affect the
Companys pension and other postretirement obligations and
future expenses.



| |                    
| | -------------------
| | Deferred Tax Assets

The Company assesses whether a valuation
allowance is necessary to reduce its deferred tax assets to the
amount that it believes is more likely than not to be realized.
While the Company has considered

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future taxable income as well as other factors in
assessing the need for the valuation allowance, in the event
that the Company were to determine that it would not be able to
realize all or part of its net deferred tax assets in the
future, an adjustment to the deferred tax assets would be
charged to income in the period such determination was made.




| |                  
| | -----------------
| | Long-Lived Assets

Depreciation and amortization of the
Companys property, plant and equipment is provided on the
straight-line method by charges to operations at rates based
upon the expected useful lives of individual or groups of
assets. Economic circumstances or other factors may cause
managements estimates of expected useful lives to differ
from actual.

All long-lived assets, including property plant
and equipment, goodwill, investments in unconsolidated
affiliates and other identifiable intangibles, are evaluated for
impairment on the basis of undiscounted cash flows at least
annually for goodwill, and whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. An impaired asset is written down to its
estimated fair market value based on the best information
available. Estimated fair market value is generally measured by
discounting estimated future cash flows. Considerable management
judgment is necessary to estimate discounted future cash flows
and may differ from actual.



| |                          
| | -------------------------
| | Environmental Liabilities

Liabilities, including legal costs, related to
remediation of contaminated properties are recognized when the
related costs are considered probable and can be reasonably
estimated. Estimates of these costs are based on current
available facts, existing technology, undiscounted site-specific
costs and currently enacted laws and regulations. Recoveries, if
any, are recorded in the period in which recovery is considered
probable. It is often difficult to estimate the cost of
environmental compliance, remediation and potential claims given
the uncertainties regarding the interpretation and enforcement
of applicable environmental laws and regulations, the extent of
environmental contamination and the existence of alternate
cleanup methods. All liabilities are monitored and adjusted as
new facts or changes in law or technology occur and management
believes adequate provisions have been made for environmental
liabilities. Changes in facts or circumstances may have an
adverse impact on the Companys financial results.

Effect of Inflation and Foreign Currency
Transactions

The Company believes that inflation and foreign
currency fluctuations have not had a significant effect on its
operations.

Recent Accounting Pronouncements

During 2003, the Company adopted SFAS
No. 143, Accounting for Asset Retirement
Obligations, issued by the Financial Accounting Standards
Board (FASB) which addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The
Companys Energy segment operates oil refineries and
related pipelines for which the Company would be subject to
Asset Retirement Obligations (ARO) if such assets were to
be dismantled. The Company, however, expects to operate its
refineries and related pipelines indefinitely. Since the time
period to dismantle these assets is indeterminate, a
corresponding ARO is not estimable and therefore has not been
recorded.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities. The interpretation addresses
consolidation of certain entities in which equity investors do
not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties. It also requires consolidation by
primary beneficiary. The interpretation applies immediately to
variable interest entities created after January 31, 2003,
and to variable interest entities in which an enterprise obtains
an

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interest after that date. It applies in the first
fiscal year or interim period beginning after December 15,
2003, to variable interest entities in which an enterprise holds
a variable interest that it acquired before February 1,
2003. The Company believes that the effects of adopting this
standard will not have a material effect on the Company.


On April 30, 2003, the FASB issued SFAS
No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149 amends
and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. The new guidance
amends SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group process that effectively
required amendments to SFAS No. 133, and decisions made in
connection with other FASB projects dealing with financial
instruments and in connection with implementation issues raised
in relation to the application of the definition of a derivative
and characteristics of a derivative that contains financing
components. In addition, it clarifies when a derivative contains
a financing component that warrants special reporting in the
statements of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and
for hedging relationships designated after June 30, 2003.
The Company believes that the effects of adopting this standard
do not have a material effect on the Company.




In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or
an asset in certain circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 is effective
for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of
nonpublic entities which are subject to the provisions for the
fiscal period beginning after December 15, 2003. The
Statement is to be implemented by reporting the cumulative
effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement
and still existing at the beginning of the interim period of
adoption. The Company believes that the effects of adopting this
standard will not have a material effect on the Company.









Item
7A.     Quantitative and Qualitative
Disclosures About Market Risk




| |                     
| | --------------------
| | Commodity Price Risk

The Company utilizes futures and options
contracts offered through regulated commodity exchanges to
reduce price risk. The Company is exposed to risk of loss in the
market value of inventories and fixed or partially fixed
purchase and sales contracts. In order to reduce that risk, the
Company generally takes opposite and offsetting positions using
futures contracts or options.

Certain commodities cannot be hedged with futures
or options contracts because such contracts are not offered for
these commodities by regulated commodity exchanges. Inventories
and purchase contracts for those commodities are hedged with
forward sales contracts, to the extent practical, in order to
arrive at a net commodity position within the formal position
limits set by the Company and deemed prudent for each of those
commodities. Commodities for which futures contracts and options
are available are also typically hedged first with forward
contracts, with futures and options used to hedge within
position limits the remaining portion. These futures and options
contracts and forward purchase and sales cash contracts used to
hedge against commodity price changes are effective economic
hedges of price risk, but they are not designated as, or
accounted for as, hedging instruments for accounting purposes.

Unrealized gains and losses on futures contracts
and options used as economic hedges of grain and oilseed
inventories and fixed price contracts are recognized in cost of
goods sold for financial reporting on a monthly basis using
market based prices. Inventories and fixed price contracts are
marked to fair value using market based prices so that gains or
losses on the derivative contracts are offset by gains or losses
on inventories and fixed priced contracts during the same
accounting period.

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Unrealized gains and losses on futures contracts
and options used as economic hedges of energy inventories and
fixed price contracts are recognized in cost of goods sold for
financial reporting on a monthly basis using market based
prices. The inventories hedged with these derivatives are valued
at the lower of cost or fair value, and the fixed price
contracts are marked to fair value using market based prices.
Certain fixed price contracts related to propane in the Energy
segment meet the normal purchase and sales exemption, and thus
are not required to be marked to fair value.

A 10% adverse change in market prices would not
materially affect the Companys results of operations,
financial position or liquidity, since the Companys
operations have effective economic hedging requirements as a
general business practice.



| |                   
| | ------------------
| | Interest Rate Risk

The Company manages interest expense using a mix
of fixed and floating rate debt. These debt instruments are
carried at amounts approximating estimated fair value.
Short-term debt used to finance inventories and receivables is
represented by notes payable within thirty days or less so that
the blended interest rate to the Company for all such notes
approximates current market rates. Long-term debt used to
finance non-current assets carries various fixed interest rates
and is payable at various dates as to minimize the effect of
market interest rate changes. The effective interest rate to the
Company on fixed rate debt outstanding on August 31, 2003,
was approximately 6.5%; a 10% adverse change in market rates
would not materially affect the Companys results of
operations, financial position or liquidity.

In August 2002, the Company entered into interest
rate treasury lock instruments to secure the interest rate
related to a portion of its private placement debt issued on
October 18, 2002. These instruments were designated and
effective as cash flow hedges for accounting purposes, and
accordingly, the loss on settlement was recorded as a component
of other comprehensive income. Interest expense for the year
ended August 31, 2003, includes $0.7 million related
to the interest rate derivatives. The additional interest
expense is an offset to the lower actual interest paid on the
outstanding debt instruments.



| |                      
| | ---------------------
| | Foreign Currency Risk

The Company conducts essentially all of its
business in U.S. dollars except for grain marketing operations
in Brazil and some purchases of products from Canada, and had
minimal risk regarding foreign currency fluctuations during
2003. Foreign currency fluctuations do, however, impact the
ability of foreign buyers to purchase U.S. agricultural products
and the competitiveness of U.S. agricultural products compared
to the same products offered by alternative sources of world
supply.






Item
8.     Financial Statements and
Supplementary Data


The financial statements listed in 15(a)(1) are
set forth beginning on page F-1. Supplementary financial
information required by Item 302 of Regulation S-K for
the years ended August 31, 2003 and 2002 is presented
below. Financial statement schedules are omitted because they
are not applicable or the required information is shown in the
financial statements or notes thereto.

|                  |  |                        |           |             |  |        |           |           |  |   |           |  |  |   |           | 
|----------------- |  | ---------------------- | --------- | ----------- |  | ------ | --------- | --------- |  | - | --------- |  |  | - | --------- | 
|                  |  |                       
|                  |  | 2003                  
|                  |  |                       
|                  |  | November 30, 2002      |           | February 28 |  | May 31 |           | August 31
|                  |  |                        |           |             |  |        |           |          
|                  |  |                       
|                  |  | (Unaudited)           
|                  |  | (dollars in thousands)
|Net sales         |  | $                      | 2,400,596 |             |  | $      | 2,328,154 |           |  | $ | 2,220,455 |  |  | $ | 2,321,529 | 
|Total revenues    |  |                        | 2,435,851 |             |  |        | 2,356,737 |           |  |   | 2,251,928 |  |  |   | 2,354,017 | 
|Gross profit      |  |                        | 99,089    |             |  |        | 61,301    |           |  |   | 98,588    |  |  |   | 80,604    | 
|Net income (loss) |  |                        | 40,356    |             |  |        | (4,100    | )         |  |   | 52,173    |  |  |   | 35,412    | 

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|               |  |                        |           |             |  |        |           |           |  |   |           |  |  |   |           | 
|-------------- |  | ---------------------- | --------- | ----------- |  | ------ | --------- | --------- |  | - | --------- |  |  | - | --------- | 
|               |  |                       
|               |  | 2002                  
|               |  |                       
|               |  | November 30, 2001      |           | February 28 |  | May 31 |           | August 31
|               |  |                        |           |             |  |        |           |          
|               |  |                       
|               |  | (Unaudited)           
|               |  | (dollars in thousands)
|Net sales      |  | $                      | 1,729,453 |             |  | $      | 1,704,249 |           |  | $ | 1,763,266 |  |  | $ | 1,959,486 | 
|Total revenues |  |                        | 1,762,250 |             |  |        | 1,729,085 |           |  |   | 1,792,696 |  |  |   | 1,985,767 | 
|Gross profit   |  |                        | 100,385   |             |  |        | 62,245    |           |  |   | 90,983    |  |  |   | 75,259    | 
|Net income     |  |                        | 41,355    |             |  |        | 2,371     |           |  |   | 46,641    |  |  |   | 35,771    | 






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


None.






Item
9A.     Controls and
Procedures


Under the supervision and with the participation
of our management, including our Chief Executive Officer and
Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934 (the Exchange Act)) as of
August 31, 2003. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as
of that date except as noted below with respect to the
identification and elimination of certain sales and transfers
within our Grain Marketing business segment, our disclosure
controls and procedures were adequately designed to ensure that
information required to be disclosed by us in reports we file or
submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the applicable
Securities and Exchange Commission rules and forms.

During our fourth fiscal quarter, there was no
change in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.




Following the end of our fourth fiscal quarter,
we determined that certain sales and transfers within our Grain
Marketing business segment and also between the Grain Marketing
segment and the Processed Grains and Foods segment had not been
properly identified and eliminated in our consolidated financial
statements for certain periods prior to that fiscal quarter.
Following this determination, we restated our consolidated
statements of operations for the fiscal years ended
August 31, 2002, 2001 and 2000 and for the first three
fiscal quarters of the fiscal year ended August 31, 2003.
These changes had no effect on our financial condition, or
changes in cash flows, and no effect on reported gross profit or
net income for the periods stated above. In response, we changed
our internal control over financial reporting to include
additional processes that are intended to ensure the proper
identification and reporting of intra-company transactions and
enable us to eliminate those transactions in the preparation of
our consolidated financial statements.




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PART III.







|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant






BOARD OF DIRECTORS


The table below lists the directors of the
Company as of August 31, 2003.

|                            |  |     |    |          |  |       |   |  |  |  |      | 
|--------------------------- |  | --- | -- | -------- |  | ----- | - |  |  |  | ---- | 
|                            |  |     |    | Director |  |      
|Name and Address            |  | Age |    | District |  | Since
|                            |  |     |    |          |  |      
|Bruce Anderson              |  |     | 51 |          |  |       | 3 |  |  |  | 1995 | 
|13500  42nd St NE          |  |     |    |          |  |       |   |  |  |  |      | 
|Glenburn, ND 58740-9564     |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|Robert Bass                 |  |     | 49 |          |  |       | 5 |  |  |  | 1994 | 
|E 6391 Bass Road            |  |     |    |          |  |       |   |  |  |  |      | 
|Reedsburg, WI 53959         |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|David Bielenberg            |  |     | 54 |          |  |       | 6 |  |  |  | 2002 | 
|16425 Herigstad Road NE     |  |     |    |          |  |       |   |  |  |  |      | 
|Silverton, Oregon 97381     |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|Dennis Carlson              |  |     | 42 |          |  |       | 3 |  |  |  | 2001 | 
|3255  50th Street          |  |     |    |          |  |       |   |  |  |  |      | 
|Mandan, ND 58554            |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|Curt Eischens               |  |     | 51 |          |  |       | 1 |  |  |  | 1990 | 
|2153  330th St North       |  |     |    |          |  |       |   |  |  |  |      | 
|Minnesota, MN 56264-1880    |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|Robert Elliott              |  |     | 53 |          |  |       | 8 |  |  |  | 1996 | 
|324 Hillcrest               |  |     |    |          |  |       |   |  |  |  |      | 
|Alliance, NE 69301          |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|Robert Grabarski            |  |     | 54 |          |  |       | 5 |  |  |  | 1999 | 
|1770 Highway 21             |  |     |    |          |  |       |   |  |  |  |      | 
|Arkdale, WI 54613           |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|Jerry Hasnedl               |  |     | 57 |          |  |       | 1 |  |  |  | 1995 | 
|12276  150th Avenue SE     |  |     |    |          |  |       |   |  |  |  |      | 
|St. Hilaire, MN 56754 -9776 |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|Glen Keppy                  |  |     | 56 |          |  |       | 7 |  |  |  | 1999 | 
|21316  155th Avenue        |  |     |    |          |  |       |   |  |  |  |      | 
|Davenport, IA 52804         |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|James Kile                  |  |     | 55 |          |  |       | 6 |  |  |  | 1992 | 
|508 W. Bell Lane            |  |     |    |          |  |       |   |  |  |  |      | 
|St. John, WA 99171          |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|Randy Knecht                |  |     | 53 |          |  |       | 4 |  |  |  | 2001 | 
|40193  112th Street        |  |     |    |          |  |       |   |  |  |  |      | 
|Houghton, SD 57449          |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|Leonard Larsen              |  |     | 67 |          |  |       | 3 |  |  |  | 1993 | 
|5128  11th Ave. N.         |  |     |    |          |  |       |   |  |  |  |      | 
|Granville, ND 58741-9595    |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|Richard Owen                |  |     | 49 |          |  |       | 2 |  |  |  | 1999 | 
|PO Box 129                  |  |     |    |          |  |       |   |  |  |  |      | 
|Geraldine, MT 59446         |  |     |    |          |  |       |   |  |  |  |      | 
|                           
|Duane Stenzel               |  |     | 57 |          |  |       | 1 |  |  |  | 1993 | 
|62904  295th Street        |  |     |    |          |  |       |   |  |  |  |      | 
|Wells, MN 56097             |  |     |    |          |  |       |   |  |  |  |      | 

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|                        |  |     |    |          |  |       |   |  |  |  |      | 
|----------------------- |  | --- | -- | -------- |  | ----- | - |  |  |  | ---- | 
|                        |  |     |    | Director |  |      
|Name and Address        |  | Age |    | District |  | Since
|                        |  |     |    |          |  |      
|Michael Toelle          |  |     | 41 |          |  |       | 1 |  |  |  | 1992 | 
|RR 1, Box 190           |  |     |    |          |  |       |   |  |  |  |      | 
|Browns Valley, MN 56219 |  |     |    |          |  |       |   |  |  |  |      | 
|                       
|Merlin Van Walleghen    |  |     | 67 |          |  |       | 4 |  |  |  | 1993 | 
|24106  408th Avenue    |  |     |    |          |  |       |   |  |  |  |      | 
|Letcher, SD 57359-6021  |  |     |    |          |  |       |   |  |  |  |      | 
|                       
|Elroy Webster           |  |     | 70 |          |  |       | 1 |  |  |  | 1982 | 
|47947  370th Street    |  |     |    |          |  |       |   |  |  |  |      | 
|Nicollet, MN 56074      |  |     |    |          |  |       |   |  |  |  |      | 




Bruce Anderson(1995): Served four years in the North
Dakota House of Representatives. Held positions with North
Dakota Farmers Union and Farmers Union Mutual Insurance Company.
Vice chairman of the North Dakota Agricultural Products
Utilization Commission. Raises 1,000 acres of small grains
near Glenburn, N.D. Mr. Andersons principal
occupation has been farming for the last five years or longer.







Robert Bass(1994):
Chairman of board audit committee. Also director of Wisconsin
Federation of Cooperatives, as well as Co-op Country Partners,
Baraboo, Wis., for 15 years, seven as president. Graduate
of the Madison Area Technical College Farm Training Program and
holds a B.S. degree in agricultural and extension education from
the University of Wisconsin  Madison. Operates a
500-acre dairy and feed grain farm near Reedsburg, Wis.
Mr. Basss principal occupation has been farming for
the last five years or longer.







David Bielenberg(2002): Director of Wilco Farmers
Cooperative of Mt. Angel, Ore., beginning in 1989,
including five years as chairman. Chair of the East Valley Water
District. Holds a B.S. degree in Agricultural Engineering from
Oregon State University and is a graduate of the Texas A&M
University executive program for agricultural producers.
Operates a diversified vegetable, fruit and horticultural farm
near Silverton, Ore. Mr. Bielenbergs principal
occupation has been farming for the last five years or longer.







Dennis Carlson(2001): Chairman, Farmers Union Oil
Co. of Bismarck/ Mandan, N.D., serving since 1989. Operates a
diversified wheat, sunflower and cow-calf operation near Mandan.
Mr. Carlsons principal occupation has been farming
for the last five years or longer.







Curt Eischens(1990): Has served as director of
Farmers Co-op Association, Canby, Minn. for nine years, eight as
board chairman. Chair of the Minnesota Association of
Cooperatives. Operates a corn and soybean farm near Canby.
Graduate of the Canby Area Technical College Farm Management
Program. Mr. Eischens principal occupation has been
farming for the last five years or longer.







Robert Elliott(1996): Served on the boards of
Western Cooperative Alliance and New Alliance Bean and Grain
Company. Past president of Nebraska Wheat Growers Association
and president of Hemingford Scholarship Foundation. Raises
5,000 acres of wheat, corn, dry beans, sugar beets and
millet. Holds B.S. and M.S. degrees in agriculture from
California Polytechnic University. Mr. Elliotts
principal occupation has been farming for the last five years or
longer.







Robert Grabarski(1999): Chairman of Wisconsin River
Cooperative, Adams and Mauston, Wis., and first vice chairman of
Alto Cooperative Creamery, Waupun, Wis. Graduate of the
University of Wisconsin agriculture industry shortcourse.
Operates a 1,500-acre dairy and crop farm, milking 90 registered
Holsteins, near Arkdale, Wis. Mr. Grabarskis
principal occupation has been farming for the last five years or
longer.




Jerry Hasnedl(1995): Serves on boards for the
Minnesota Association of Cooperatives and Minnesota Barley
Growers. Chair of the former Wheat Milling Defined Member Board
and former director for Northwest Grain. Member of the CHS
Foundation Finance and Investment Committee.

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Raises wheat, barley, corn, soybeans, canola,
sunflowers and alfalfa near St. Hilaire, Minn.
Mr. Hasnedls principal occupation has been farming
for the last five years or longer.








Glen Keppy(1999):
Serves on advisory committee for Clean Water Foundation and
executive committee of the U.S. Meat Export Federation. Has
been director of the Iowa Pork Producers Association, National
Pork Producers Association and Federal Reserve Bank Ag
Committee. Graduate of University of Wisconsin 
Platteville with a degree in technical agriculture. Operates a
farrow-to-finish hog farm and raises 1,000 acres of corn,
soybeans, oats and alfalfa near Davenport, Iowa.
Mr. Keppys principal occupation has been farming for
the last five years or longer.







James Kile(1992):
Served 18 years, including 10 as chairman, on the board of
St. John (Wash.) Grange Supply. Represents CHS on the
Washington State Council of Farmer Cooperatives and Idaho
Cooperative Council. Holds a degree in agricultural economics
from Washington State University and worked in banking before
returning to St. John to operate a dryland wheat and barley
farm. Mr. Kiles principal occupation has been farming
for the last five years or longer.







Randy Knecht(2001):
Served on board of Four Seasons Cooperative, Britton, S.D., for
seven years, chairman of Northern Electric Cooperative
board and director for Dakota Value Capture Cooperative, Pierre,
S.D. Holds a B.S. degree in agriculture from South Dakota State
University. Maintains a 450-head cow-calf operation and raises
4,000 acres of corn, soybeans, wheat and alfalfa near
Houghton, S.D. Mr. Knechts principal occupation has
been farming for the last five years or longer.







Leonard Larsen(1993): Member of Farmers Union Oil
Companies, Minot and Velva, N.D.; SunPrairie Grain; and Dakota
Growers Pasta Co. Former board member of Minot Farmers Union
Elevator, including six years as chairman. Member of the North
Dakota Farmers Union. Served on Hendrickson Township board and
the Granville Economic Development Corporation. Raises grain,
sunflower, canola and flax near Granville, N.D.
Mr. Larsens principal occupation has been farming for
the last five years or longer.







Richard Owen(1999):
Serves on boards of Montana Council of Cooperatives, Mountain
View, LLC, and Cooperative Development Center, and on the CHS
Foundation Finance and Investment Committee. Former secretary
and president of Equity Co-op Association of Geraldine, Mont.,
and past secretary of Central Montana Cooperative of Geraldine
and Denton. Holds bachelors degree in agriculture from
Montana State University. Operates a grain farm near Geraldine.
Mr. Owens principal occupation has been farming for
the last five years or longer.







Duane Stenzel(1993): Member of WFS, St. James,
Minn., and Wells (Minn.) Farmers Elevator, where he served as
board president and secretary. Previously chair of former CHS
Oilseed Processing and Refining Defined Member Board. Raises
710 acres of soybeans, sweet corn and corn near Wells.
Mr. Stenzels principal occupation has been farming
for the last five years or longer.







Michael Toelle(elected in 1992; chairman since
2002): Chaired corporate responsibility committee and served on
audit committee and on the CHS Foundation Finance and Investment
Committee. Served 15 years as director of Country Partners
Cooperative, Browns Valley, Minn., including 10 years as
chairman. Holds a B.S. degree in industrial technology from
Moorhead State University. Operates a grain and hog farm near
Browns Valley. Mr. Toelles principal occupation has
been farming for the last five years or longer.







Merlin Van Walleghen(1993): Previously director of Farmers
Co-op Elevator Association of Mitchell, Letcher and Alexandria,
S.D., including 10 years as president. Served
nine years on the South Dakota Association of Cooperatives
board, seven as president. Member of Heartland Consumer Power
District board, former Butler Township supervisor and past board
member of Farmers Home Administration. Operates a corn and
soybean operation near Letcher. Mr. Van Walleghens
principal occupation has been farming for the last five years or
longer.




Elroy Webster(1982): Co-chairman of CHS board
1998-99; chairman of Cenex, Inc., board 1988-98. Previously
director for Minnesota Association of Cooperatives, Western
Co-op Transport Association and

48



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Agland Cooperative. Past chair of Agricultural
Council of America and Board of Trustees for CHS Foundation.
Mr. Websters principal occupation has been farming
for the last five years or longer.





Elections are for three-year terms and are open
to any eligible candidate. To be eligible, a candidate must meet
the following qualifications:



| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | At the time of the election, the individual must
    be less than the age of 68.                                                                                                                                                                                   
|
| |  | The individual must be a member of this
    cooperative or a member of a Cooperative Association Member.                                                                                                                                                           
|
| |  | The individual must reside in the region from
    which he or she is to be elected.                                                                                                                                                                                
|
| |  | The individual must be an active farmer or
    rancher. Active farmer or rancher means an
    individual whose primary occupation is that of a farmer or
    rancher, excluding any full-time employee of the Company or of a
    Cooperative Association Member.
|
| |  | The individual must currently be serving or shall
    have served at least one full term as a director of a
    Cooperative Association Member of this cooperative.                                                                                                

The following positions on the Board of Directors
will be elected at the 2003 Annual Meeting of Members:

|                                                                            |  |                                                          
|--------------------------------------------------------------------------- |  | ---------------------------------------------------------
|Region                                                                      |  | Current Incumbent                                        
|                                                                            |  |                                                          
|Region 1 (Minnesota)                                                        |  | Elroy Webster (not seeking re-election)
    Duane Stenzel
|Region 3 (North Dakota)                                                     |  | Leonard Larsen                                           
|Region 4 (South Dakota)                                                     |  | Merlin Van Walleghen                                     
|Region 6 (Alaska, Arizona, California, Idaho,
    Oregon, Washington, Utah) |  | James Kile                                               
|Region 8 (Nebraska, Kansas, Oklahoma, Texas,
    Colorado, New Mexico)      |  | Robert Elliott                                           






EXECUTIVE OFFICERS


The table below lists the executive officers of
the Company as of August 31, 2003. Officers are appointed
annually by the Board of Directors.

|                  |  |     |    |          |  |                                                                               
|----------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|John D. Johnson   |  |     | 55 |          |  | President and Chief Executive Officer                                         
|Patrick Kluempke  |  |     | 55 |          |  | Executive Vice President  Corporate
    Planning                             
|Tom Larson        |  |     | 55 |          |  | Executive Vice President  Public
    Affairs                                 
|Mark Palmquist    |  |     | 46 |          |  | Executive Vice President/ Chief Operating
    Officer  Grains and Foods      
|John Schmitz      |  |     | 53 |          |  | Executive Vice President and Chief Financial
    Officer                      
|Leon E. Westbrock |  |     | 56 |          |  | Executive Vice President/ Chief Operating
    Officer  Energy and Crop Inputs

John D. Johnson,President and Chief Executive Officer,
was born in Rhame, North Dakota, and grew up in Spearfish, South
Dakota. He earned a degree in business administration and a
minor in economics from Black Hills State University. In 1976,
he joined Harvest States Cooperatives as a feed consultant in
the GTA Feeds Division, later becoming regional sales manager,
Director of Sales and Marketing and then General Manager of GTA
Feeds. In 1992, he was elected Group Vice President of Farm
Marketing and Supply for Harvest States Cooperatives and was
selected President and CEO in January 1995. Mr. Johnson
became President and General Manager of CHS Inc. upon its
creation June 1, 1998 and was named President and Chief
Executive Officer on June 1, 2000. Mr. Johnson serves
on

49



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Ventura Foods, LLC, CF Industries, Inc. and
National Cooperative Refinery Association boards of directors.


Patrick Kluempke,Executive Vice President of Corporate
Planning, was raised on a family dairy farm in central
Minnesota, and received a Bachelor of Science degree in Finance
and Accounting from St. Cloud University and the University
of Minnesota. Mr. Kluempke served in the United States Army
in South Vietnam and South Korea, as Aide to General J.
Guthrie. He began his agribusiness career in grain procurement
and merchandising at General Mills and later with Louis Dreyfus
Corporation in export marketing. Mr. Kluempke joined the
predecessor to CHS when G.T.A. was being merged with North
Pacific Grain Growers, in 1983, to form Harvest States
Cooperatives and has held various positions in the commodity
marketing division and at the corporate level. He was named to
the position of Senior Vice President of Corporate Planning and
Business Development in 1993 and held that position until 2000
when he was named to his current position. Mr. Kluempke
serves on the board of Ventura Foods, LLC.




Tom Larsonis
Executive Vice President, Public Affairs at CHS. After growing
up on a 480-acre crop and hog farm near Slayton, Minnesota, he
earned a Bachelors degree in Agriculture Education from
South Dakota State University. After working as a vo-ag teacher,
he took an agronomy sales position with Cenex, Inc. and later
managed the local cooperative at Hoffman, Minnesota, for
two years. Mr. Larson returned to the regional
cooperative in 1978 and held positions in marketing and
planning. He moved to Agronomy in 1987 and became director of
Agronomy Services for Cenex/ Land OLakes Agronomy Company
in 1988. He was later named Vice President of Agronomy Services
until 1996 when he became Vice President of Cenex Supply and
Marketing which included overseeing the operation of more than
two dozen Cenex-owned agricultural supply outlets.
Mr. Larson was named Vice-President of Public Affairs in
January 1999 and in 2000 he was appointed to his current
position. He oversees the public affairs area of the Company,
which includes communications, corporate giving, meetings and
travel and governmental affairs, including the
Washington, D.C. office. He is active in the FFA
organization and is a recipient of its Honorary American Degree.




Mark Palmquistis
the Executive Vice President and Chief Operating Officer of
Grains and Foods. He is responsible for all related areas of
grains including country operations, terminal operations,
exports, logistics, transportation and grain marketing joint
ventures. He is also responsible for the operations of wheat
milling, oilseed processing and refining, and food manufacturing
and packaging. Mr. Palmquist has worked for CHS for
22 years. Starting as a grain buyer and moving into
merchandising, he has traded many different commodities
including corn, soybeans and spring wheat. In 1990, he assumed
the role of Vice President and director of Grain Marketing and
then in 1993, was promoted to Senior Vice President, which he
held until 2000 when he was named to his current position.
Mr. Palmquist attended Gustavus Adolphus College in
St. Peter, Minnesota, graduating in 1979. He also attended
the Master of Business Administration program at the University
of Minnesota. Mr. Palmquist serves on Ventura Foods, LLC
board of directors.




John Schmitzis the
Executive Vice President and Chief Financial Officer of the
Company. Mr. Schmitz joined Harvest States Cooperatives in
1974 as Corporate Accountant and has held a number of accounting
and finance positions within the Company, including divisional
controller positions in Country Services, Farm
Marketing & Supply and Grain Marketing. In 1986, he was
named Vice President and Controller of Harvest States
Cooperatives, and had served in that position up to the time of
the merger with Cenex when he became Vice President, Finance, of
CHS. In May 1999, Mr. Schmitz became Senior Vice President
and Chief Financial Officer, and in 2000 he was appointed to his
current position. Mr. Schmitz earned a Bachelor of Science
Degree in Accounting from St. Cloud State University, and
is a member of the American Institute of Certified Public
Accountants, the Minnesota Society of CPAs and the
National Society of Accountants for Cooperatives.
Mr. Schmitz serves on National Cooperative Refinery
Association, Ventura Foods, LLC, Fin-Ag, Inc. and United
Harvest, LLC boards of directors.




Leon E. Westbrockis
the Executive Vice President and Chief Operating Officer of
Energy and Crop Inputs for the Company. He joined the
cooperative system in 1976 and managed three local
cooperatives before joining the regional system. At the regional
level, Mr. Westbrock served in the Merchandising

50



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Department at Cenex, Inc. and then later as
Manager of the Lubricants Department and as Director of
Retailing. Since January 1, 1987, he served as Vice
President and Executive Vice President in the Energy Division of
the Company. On March 1, 2000 Mr. Westbrock was
appointed to his current position. He serves as chairman for
both National Cooperative Refinery Association and Universal
Cooperatives, Inc. boards of directors and also serves as a
member of the Agriliance, LLC board of directors.
Mr. Westbrock received a Bachelors Degree from
St. Cloud State University and served a tour in the
U.S. Army.







Section 16(a) Beneficial Ownership
Reporting Compliance


Based solely upon a review of copies of reports
on Forms 3 and 4 and amendments thereto furnished to the
Company during, and reports on Form 5 and amendments
thereto furnished to the Company with respect to, the fiscal
year ended August 31, 2003, and based further upon written
representations received by the Company with respect to the need
to file reports on Form 5, the following persons filed late
reports required by Section 16(a) of the Exchange Act.
Mr. Stenzel was late in filing a report on Form 4
relating to one transaction in July 2003. Dennis Wendland,
Anwer Hussain, John McEnroe and Tim Cauley, all officers of the
Company, were late in filing reports on Form 3, and
Mr. Hussain also reported one transaction that was not
reported on a timely basis.






Code of Ethics


The Company has adopted a code of ethics within
the meaning of Item 406(b) of Regulation S-K of the
Securities and Exchange Commission. This code of ethics applies
to all officers and employees of the Company. The Company will
provide to any person, without charge, upon request, a copy of
such code of ethics. A person may request a copy by writing or
telephoning the Company at the following address:

CHS Inc.

Attention: Dave Kastelic


5500 Cenex Drive


Inver Grove Heights, Minnesota 55077


(651) 355-6000







Audit Committee Matters


The Companys Board of Directors has a
separately designated standing Audit Committee for the purpose
of overseeing the accounting and financial reporting processes
of the Company and audits of the Companys financial
statements. The Audit Committee is comprised solely of directors
Mr. Bass, Mr. Bielenberg, Mr. Carlson and
Mr. Webster, each of whom is an independent director. The
Audit Committee has oversight responsibility to the
Companys owners relating to the Companys financial
statements and the financial reporting process, preparation of
the financial reports and other financial information provided
by the Company to any governmental or regulatory body, the
systems of internal accounting and financial controls, the
internal audit function and the annual independent audit of the
Companys financial statements. The Audit Committee assures
that the corporate information gathering and reporting systems
developed by management represent a good faith attempt to
provide senior management and the Board of Directors with
information regarding material acts, events and conditions
within the Company. In addition, the Audit Committee is directly
responsible for the appointment, compensation and oversight of
the independent auditors.

The Company does not believe that any member of
the Audit Committee of the Board of Directors is an audit
committee financial expert as defined in the
Sarbanes-Oxley Act of 2002 and rules and regulations thereunder.
As a cooperative, the 17-member Board of Directors is nominated
and elected by the Companys members. To ensure geographic
representation of the Companys members, the Board of
Directors represent eight (8) regions in which the
Companys members are located. The members in each region
nominate and elect the number of directors for that region as
set forth in the Companys bylaws. To be eligible for
service as a director, a nominee must (i) be a member of
the Company and (ii) reside in the geographic region from
which he or she is nominated. Neither management nor the
incumbent

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directors have any control over the nominating
process for directors. Because of the eligibility requirements
and the election process, the Company cannot ensure that an
elected director will be an audit committee financial
expert.


However, many of the Companys directors,
including all of the Audit Committee members, are financially
sophisticated and have experience or background in which they
have had significant financial oversight responsibilities. The
current Audit Committee includes directors who have served as
presidents or chairmen of local cooperative association boards.
Members of the Board of Directors, including the Audit
Committee, also operate large commercial enterprises requiring
expertise in all areas of management, including financial
oversight.






Item 11.     Executive
Compensation


Summary
Compensation.The following table sets
forth the cash and noncash compensation earned by the Chief
Executive Officer and each of the executive officers of the
Company whose total salary and bonus or similar incentive
payment earned during the year ended August 31, 2003,
exceeded $100,000 (the Named Executive Officers):

Summary Compensation Table

|                            |                               |                     |         |              |  |           |         |                 |  |                 |         |            |  |   |        |        |  |   |       |        |  |   |         |  | 
|--------------------------- | ----------------------------- | ------------------- | ------- | ------------ |  | --------- | ------- | --------------- |  | --------------- | ------- | ---------- |  | - | ------ | ------ |  | - | ----- | ------ |  | - | ------- |  | 
|                            |                               |                     |         | Long-Term-  
|                            |                               | Annual Compensation |         | Compensation
|                            |                               |                     |         |             
|                            |                               |                     |         | Other Annual |  | All Other |         | LTIP           
|Name and Principal Position |                               | Year Ended          |         | Salary(1)    |  | Bonus(1)  |         | Compensation(2) |  | Compensation(3) |         | Payouts(1)
|                            |                               |                     |         |              |  |           |         |                 |  |                 |         |           
|John. D. Johnson            |                               |                     | 8/31/03 |              |  | $         | 850,000 |                 |  | $               | 710,940 |            |  | $ | 25,800 |        |  | $ | 7,931 |        |  | $ | 820,802 | 
|                            | President and Chief Executive |                     |         | 8/31/02      |  |           |         | 820,000         |  |                 |         | 811,750    |  |   |        | 30,376 |  |   |       | 10,216 |  |   |         |  | 
|                            | Officer                       |                     |         | 8/31/01      |  |           |         | 787,500         |  |                 |         | 747,338    |  |   |        | 8,600  |  |   |       | 9,606  |  |   |         |  | 
|Patrick Kluempke            |                               |                     | 8/31/03 |              |  |           | 230,880 |                 |  |                 | 145,842 |            |  |   | 15,120 |        |  |   | 7,549 |        |  |   | 166,949 | 
|                            | Executive Vice President     |                     |         | 8/31/02      |  |           |         | 223,000         |  |                 |         | 166,875    |  |   |        | 15,120 |  |   |       | 10,873 |  |   |         |  | 
|                            | Corporate Planning            |                     |         | 8/31/01      |  |           |         | 200,000         |  |                 |         | 162,675    |  |   |        | 3,780  |  |   |       | 6,010  |  |   |         |  | 
|Tom Larson                  |                               |                     | 8/31/03 |              |  |           | 240,000 |                 |  |                 | 156,966 |            |  |   | 15,120 |        |  |   | 6,104 |        |  |   | 174,763 | 
|                            | Executive Vice President     |                     |         | 8/31/02      |  |           |         | 229,100         |  |                 |         | 172,200    |  |   |        | 18,878 |  |   |       | 10,214 |  |   |         |  | 
|                            | Public Affairs                |                     |         | 8/31/01      |  |           |         | 200,000         |  |                 |         | 167,850    |  |   |        | 16,130 |  |   |       | 8,189  |  |   |         |  | 
|Mark Palmquist              |                               |                     | 8/31/03 |              |  |           | 482,400 |                 |  |                 | 145,323 |            |  |   | 15,120 |        |  |   | 6,938 |        |  |   | 348,215 | 
|                            | Executive Vice President and  |                     |         | 8/31/02      |  |           |         | 453,400         |  |                 |         | 342,000    |  |   |        | 15,120 |  |   |       | 11,081 |  |   |         |  | 
|                            | Chief Operating Officer      |                     |         | 8/31/01      |  |           |         | 375,000         |  |                 |         | 232,680    |  |   |        | 14,111 |  |   |       | 5,863  |  |   |         |  | 
|                            | Grains and Foods              |                     |         |              |  |           |         |                 |  |                 |         |            |  |   |        |        |  |   |       |        |  |   |         |  | 
|John Schmitz                |                               |                     | 8/31/03 |              |  |           | 410,700 |                 |  |                 | 268,146 |            |  |   | 15,120 |        |  |   | 7,932 |        |  |   | 285,155 | 
|                            | Executive Vice President and  |                     |         | 8/31/02      |  |           |         | 317,300         |  |                 |         | 244,500    |  |   |        | 21,856 |  |   |       | 12,255 |  |   |         |  | 
|                            | Chief Financial Officer       |                     |         | 8/31/01      |  |           |         | 275,000         |  |                 |         | 232,500    |  |   |        | 2,520  |  |   |       | 7,080  |  |   |         |  | 
|Leon E. Westbrock           |                               |                     | 8/31/03 |              |  |           | 482,400 |                 |  |                 | 344,148 |            |  |   | 15,120 |        |  |   | 6,725 |        |  |   | 348,215 | 
|                            | Executive Vice President and  |                     |         | 8/31/02      |  |           |         | 453,400         |  |                 |         | 342,000    |  |   |        | 15,120 |  |   |       | 12,057 |  |   |         |  | 
|                            | Chief Operating Officer      |                     |         | 8/31/01      |  |           |         | 375,000         |  |                 |         | 332,400    |  |   |        | 7,320  |  |   |       | 5,116  |  |   |         |  | 
|                            | Energy and Crop Inputs        |                     |         |              |  |           |         |                 |  |                 |         |            |  |   |        |        |  |   |       |        |  |   |         |  | 



---



|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts shown include amounts deferred at the
    employees election under the Companys Deferred
    Compensation Program and amounts waived in exchange for options
    under the Companys Share Option Plan.
|   
|(2) | Amounts shown include personal use of a Company
    vehicle and/or vehicle allowance.                                                                                                                            
|   
|(3) | Other compensation includes the Companys
    matching contributions under the Companys 401(k) Plan
    and the portion of group term life insurance premiums paid by
    the Company.                          

On November 6, 2003, the Company entered
into an employment agreement with John D. Johnson, the
President and CEO. The employment agreement provides for a
rolling three-year period of employment effective
September 1, 2003 at an initial base salary of at least
$850,000, subject to annual review. Either party, subject to the
rights and obligations set forth in the employment agreement,
may terminate Mr. Johnsons employment at any time.
The Company is obligated to pay Mr. Johnson a

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severance allowance of 2.99 times his base
salary and target bonus in the event Mr. Johnsons
employment is terminated for any reason other than for cause (as
such term is defined in the employment agreement), death,
disability or voluntary termination, and in the event of the
consolidation of the Companys business with the business
of any other entity, if Mr. Johnson is not offered the
position of Chief Executive Officer of the combined entity. The
contract provides for a gross-up for any possible excise tax.
Mr. Johnson has also agreed to a non-compete clause of
two years, in the event of his termination.


Report on Executive Compensation

The Corporate Responsibility Committee of the
Board of Directors, subject to the approval of the Board of
Directors, determines the compensation of CHS Inc. chief
executive officer and oversees the administration of the
executive compensation programs.



| |                                                 
| | ------------------------------------------------
| | Executive Compensation Policies and
    Programs

CHS Inc. executive compensation programs are
designed to attract and retain highly qualified executives and
to motivate them to optimize member owner returns by achieving
aggressive goals. The compensation program links executive
compensation directly to the Companys performance. A
significant portion of each executives compensation is
dependent upon value-added operations and meeting financial
goals and other individual performance objectives.

Each year, the Committee reviews the executive
compensation policies with respect to the correlation between
executive compensation and the creation of member owner value,
as well as the competitiveness of the programs. The Committee
determines what, if any, changes are appropriate to executive
compensation programs of CHS Inc. The Committee recommends to
the total Board of Directors, salary actions relative to the
chief executive officer and determines the amount of annual
variable pay and the amount of long-term awards.

The Company intends to the extent possible, to
preserve the deductibility under the Internal Revenue Code of
compensation paid to its executive officers while maintaining
compensation programs to attract and retain highly qualified
executives in a competitive environment. Accordingly,
compensation paid under CHS Inc. share option plan and incentive
compensation plan is generally deductible.



| |                           
| | --------------------------
| | Components of Compensation

There are three basic components to the CHS Inc.
executive compensation plan: base pay; annual variable pay; and
long-term variable pay (grants in the share option plan). Each
component is designed to be competitive within the executive
compensation market. In determining competitive compensation
levels, the Company analyzes information from several
independent compensation surveys, which include information
regarding a comparable all-industrial market and other companies
that compete for executive talent.

Base Pay:Base pay
is designed to be competitive at the 50th percentile of other
large companies for equivalent positions. The executives
actual salary relative to this competitive benchmark varies
based on individual performance and the individuals
skills, experience and background.

Annual Variable Pay:Award levels, like the base pay
levels, are set with reference to competitive conditions and are
intended to motivate the executives by providing substantial
incentive payments for the achievement of aggressive goals. The
actual amounts paid for 2003 were determined based on two
factors: first, profitability and financial performance of the
Company and the executives business unit; and second, the
individual executives performance against other specific
management objectives such as revenue volume growth, value added
performance, talent development. Financial objectives are given
greater weight than individual performance objectives in
determining individual awards. The types and relative importance
of specific financial and other business objectives varied among
executives depending upon their positions and the particular
business unit for which they were responsible.

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Long-Term Variable Pay:The main purpose of the long-term
variable pay program is to encourage the CHS Inc. executives to
increase the value of doing business with the Company by
increasing and improving value added business opportunities and
therefore the value of member owners doing business with CHS
Inc. The long-term variable pay component of the compensation
program (through extended vesting) is also designed to create an
incentive for the individual to remain with the Company.

The long-term variable pay program consists of
grants of shares in the restricted investment corporations
sponsored by CHS Inc. These options vest over a multi-year
period. The Company periodically grants new awards to provide
continuing incentives for future performance. Like the annual
variable pay, award levels are set with regard to competitive
considerations and each individuals actual award is based
on financial performance of the Company, collectively.



| |                                                
| | -----------------------------------------------
| | Compensation of the Chief Executive
    Officer

In determining the compensation of the chief
executive officer, the Committee considers three factors: the
absolute and relative performance of the business particularly
as it relates to variable pay; the market for such positions;
and CHS Inc. compensation strategy in determining the mix of
base, annual, and long-term variable pay.

In general, the Companys strategy is to
distribute pay for the chief executive officer among the three
basic components so that it effectively reflects the competitive
market with major consideration for achievement of individual
performance objectives.

Mr. Johnsons actual base salary for
fiscal year 2003 was $850,000. Based on CHS Inc. financial
performance in terms of profitability and other individual goals
related to achieving communications objectives, business partner
accountability and other strategic objectives, Mr. Johnson
received an annual variable pay award of $710,940 and a
long-term variable pay award of $820,802 for fiscal year 2003.
These incentive payments were consistent with his achievement of
performance standards set by the Board of Directors.

The following summarizes certain benefits in
effect as of August 31, 2003 to the Named Executive
Officers.



| |                                              
| | ---------------------------------------------
| | Management Compensation Incentive
    Program

Each Named Executive Officer is eligible to
participate in the Management Compensation Incentive Program
(the Incentive Program) for the year ending
August 31, 2003. The Incentive Program is based on Company,
group or division performance and individual performance. These
amounts will be paid after August 31, 2003. The target
incentive is 50% of base compensation except for the President
and Chief Executive Officer, where target incentive is 67% of
base compensation.



| |                         
| | ------------------------
| | Long-Term Incentive Plan

Each Named Executive Officer is eligible to
participate in the Long-Term Incentive Plan. The plan consists
of a three-year performance period. Award opportunities are
expressed as a percentage of a participating employees
position average mid-point. Company performance must meet a
minimum level of pre-tax earnings per unit of sales volume and
net income levels before any grants are made from this plan. The
Board of Directors has discretion to increase or decrease an
award up to 20%. Awards from the plan are grants to the
Companys Share Option Plan at the end of each plan period.

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Long-Term Incentive Plans  Awards
in Last Fiscal Year

|                            |                                                                                       |           |         |               |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|--------------------------- | ------------------------------------------------------------------------------------- | --------- | ------- | ------------- |  | --------- | --------- | --------- |  | --------- | ------ |  |  | - | ------- |  |  | - | ------- |  | 
|                            |                                                                                       | Award     |         | Maturation of |  | Threshold |           | Target    |  | Maximum  
|Name and Principal Position |                                                                                       | 2001-2003 |         | Award         |  | each year |           | each year |  | each year
|                            |                                                                                       |           |         |               |  |           |           |           |  |          
|John D. Johnson             |                                                                                       | $         | 820,802 |               |  |           | 2001-2003 |           |  | $         | 81,417 |  |  | $ | 545,492 |  |  | $ | 814,167 | 
|                            | President and Chief Executive Officer                                                 |           |         |               |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|Patrick Kluempke            |                                                                                       |           | 166,949 |               |  |           | 2001-2003 |           |  |           | 16,560 |  |  |   | 110,952 |  |  |   | 165,600 | 
|                            | Executive Vice President  Corporate
    Planning                                     |           |         |               |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|Tom Larson                  |                                                                                       |           | 174,763 |               |  |           | 2001-2003 |           |  |           | 17,335 |  |  |   | 116,145 |  |  |   | 173,350 | 
|                            | Executive Vice President 
    Public Affairs                                         |           |         |               |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|Mark Palmquist              |                                                                                       |           | 348,215 |               |  |           | 2001-2003 |           |  |           | 34,540 |  |  |   | 231,418 |  |  |   | 345,400 | 
|                            | Executive Vice President and Chief Operating
    Officer 
    Grain and Foods        |           |         |               |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|John Schmitz                |                                                                                       |           | 285,155 |               |  |           | 2001-2003 |           |  |           | 28,285 |  |  |   | 189,510 |  |  |   | 282,850 | 
|                            | Executive Vice President and Chief Financial
    Officer                              |           |         |               |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|Leon E. Westbrock           |                                                                                       |           | 348,215 |               |  |           | 2001-2003 |           |  |           | 34,540 |  |  |   | 231,418 |  |  |   | 345,400 | 
|                            | Executive Vice President and Chief Operating
    Officer 
    Energy and Crop Inputs |           |         |               |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 



| |                
| | ---------------
| | Retirement Plan

Each of the Named Executive Officers is entitled
to receive benefits under the Companys Cash Balance
Retirement Plan (the Retirement Plan). An
employees benefit under the Retirement Plan depends on
credits to the employees account, which are based on the
employees total salary each year the employee works for
the Company, the length of service with the Company and the rate
of interest credited to the employees account balance each
year. Credits are made to the employees account from Pay
Credits, Special Career Credits and Investment Credits.

The amount of Pay Credits added to an
employees account each year is a percentage of the
employees gross salary, including overtime pay,
commissions, severance pay, bonuses, any compensation reduction
pursuant to the 401(k) Plan and any pretax contribution to any
of the Companys welfare benefit plans, paid vacations,
paid leaves of absence and pay received if away from work due to
a sickness or injury. The Pay Credits percentage received is
determined on a yearly basis, based on the years of Benefit
Service completed as of January 1 of each year. An employee
receives one year of Benefit Service for every calendar year of
employment in which the employee completed at least 1,000 hours
of service.

Effective January 1, 2003, Pay Credits are
earned according to the following schedule:

|                         |  |                           |    |                           |  |  |     | 
|------------------------ |  | ------------------------- | -- | ------------------------- |  |  | --- | 
|                         |  | Pay Below Social Security |    | Pay Above Social Security
|Years of Benefit Service |  | Taxable Wage Base         |    | Taxable Wage Base        
|                         |  |                           |    |                          
|1 to 3 years             |  |                           | 3% |                           |  |  | 6%  | 
|4 to 7 years             |  |                           | 4% |                           |  |  | 8%  | 
|8 to 11 years            |  |                           | 5% |                           |  |  | 10% | 
|12 to 15 years           |  |                           | 6% |                           |  |  | 12% | 
|16 years and more        |  |                           | 7% |                           |  |  | 14% | 

The Company credits an employees account at
the end of the year with an Investment Credit based on the
balance at the beginning of the year. The Investment Credit is
based on the average return for one-year U.S. Treasury Bills for
the preceding 12-month period. The maximum Investment Credit
will not exceed 12% for any year.

55



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##### Table of Contents



As of December 31, 2002, the dollar value of
the account and years of service for each of the Named Executive
Officers was:

|                  |  |              |           |                  |  |  |    | 
|----------------- |  | ------------ | --------- | ---------------- |  |  | -- | 
|                  |  | Dollar Value |           | Years of Service
|                  |  |              |           |                 
|John D. Johnson   |  | $            | 990,480   |                  |  |  | 27 | 
|Patrick Kluempke  |  |              | 484,691   |                  |  |  | 20 | 
|Tom Larson        |  |              | 441,526   |                  |  |  | 26 | 
|Mark Palmquist    |  |              | 540,524   |                  |  |  | 23 | 
|John Schmitz      |  |              | 466,773   |                  |  |  | 28 | 
|Leon E. Westbrock |  |              | 1,051,770 |                  |  |  | 22 | 



| |                  
| | -----------------
| | Share Option Plan

In October 1997, the Company adopted a Share
Option Plan. Participants in the plan, which include all Named
Executive Officers, are select management of the Company who
have been designated as eligible by the President of the Company
to participate in such plan. The Share Option Plan allows
participants to waive bonuses and up to 30 percent of
salary in exchange for options to purchase, at a discount,
shares of selected mutual funds. The Company has filed a
Form S-8, dated December 12, 1997 on this program.
This plan allows officers to buy investments at a specific
price. Some options have vesting schedules.

The following is a share option grants table
showing each Named Executive Officer option activity for the
fiscal year ended August 31, 2003. The dollars in the
Realizable Value columns of the table are computed
as of the expiration date. All grants are salary exchanges, and
not additional income to the employee.

|                  |  |            |             |            |  |            |        |            |  |            |       |            |  |            |            |  |  |   |           |  |  |   |           |  |  |   |         | 
|----------------- |  | ---------- | ----------- | ---------- |  | ---------- | ------ | ---------- |  | ---------- | ----- | ---------- |  | ---------- | ---------- |  |  | - | --------- |  |  | - | --------- |  |  | - | ------- | 
|                  |  | Number of  |             | % of Total |  | $ Exercise |        | Expiration |  | Realizable |       | Realizable |  | Realizable
|Name              |  | Securities |             | Options    |  | Price      |        | Date       |  | Value 5%   |       | Value 10%  |  | Value 0%  
|                  |  |            |             |            |  |            |        |            |  |            |       |            |  |           
|John D. Johnson   |  |            | 9.578.554   |            |  |            | 43.96% |            |  | $          | 7.83  |            |  |            | 9/30/2022  |  |  | $ | 198,997   |  |  | $ | 504,563   |  |  | $ | 56,250  | 
|John D. Johnson   |  |            | 131,033.091 |            |  |            | 26.46% |            |  |            | 8.26  |            |  |            | 11/07/2022 |  |  |   | 2,871,753 |  |  |   | 7,281,397 |  |  |   | 811,750 | 
|John D. Johnson   |  |            | 9,168.704   |            |  |            | 43.96% |            |  |            | 8.18  |            |  |            | 12/31/2022 |  |  |   | 198,997   |  |  |   | 504,563   |  |  |   | 56,250  | 
|John D. Johnson   |  |            | 12,531.328  |            |  |            | 13.48% |            |  |            | 7.98  |            |  |            | 3/31/2023  |  |  |   | 265,330   |  |  |   | 672,750   |  |  |   | 75,000  | 
|John D. Johnson   |  |            | 11,123.471  |            |  |            | 52.41% |            |  |            | 8.99  |            |  |            | 6/30/2023  |  |  |   | 265,330   |  |  |   | 672,750   |  |  |   | 75,000  | 
|Patrick Kluempke  |  |            | 28,933.680  |            |  |            | 5.44%  |            |  |            | 7.69  |            |  |            | 11/07/2022 |  |  |   | 590,359   |  |  |   | 1,496,869 |  |  |   | 166,875 | 
|Mark Palmquist    |  |            | 944.510     |            |  |            | 4.69%  |            |  |            | 8.47  |            |  |            | 9/30/2022  |  |  |   | 21,226    |  |  |   | 53,850    |  |  |   | 6,000   | 
|Mark Palmquist    |  |            | 25,997.719  |            |  |            | 5.57%  |            |  |            | 8.77  |            |  |            | 11/07/2022 |  |  |   | 604,952   |  |  |   | 1,533,870 |  |  |   | 171,000 | 
|Mark Palmquist    |  |            | 912.201     |            |  |            | 4.69%  |            |  |            | 8.77  |            |  |            | 12/31/2022 |  |  |   | 21,226    |  |  |   | 53,820    |  |  |   | 6,000   | 
|John Schmitz      |  |            | 7,434.436   |            |  |            | 1.59%  |            |  |            | 8.77  |            |  |            | 11/07/2022 |  |  |   | 172,995   |  |  |   | 438,633   |  |  |   | 48,900  | 
|Leon E. Westbrock |  |            | 42,978.322  |            |  |            | 11.15% |            |  |            | 10.61 |            |  |            | 11/07/2022 |  |  |   | 1,209,904 |  |  |   | 3,067,740 |  |  |   | 342,000 | 

56



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##### Table of Contents



The following is a share option grants table
showing each Named Executive Officer, along with the number and
value of shares exercised for the fiscal year ended
August 31, 2003, and the number of underlying unexercised
options and the value of unexercised in-the-money options, as of
the most recent statement period ended June 30, 2003.

|                  |  |           |            |           |  |             |         |               |  |              |             |               |  |  |            |  |  |   |           |  |  |   |         | 
|----------------- |  | --------- | ---------- | --------- |  | ----------- | ------- | ------------- |  | ------------ | ----------- | ------------- |  |  | ---------- |  |  | - | --------- |  |  | - | ------- | 
|                  |  |           |            |           |  | Number of   |         | Number of     |  | Value of     |             | Value of     
|                  |  |           |            |           |  | Securities  |         | Securities    |  | Unexercised  |             | Unexercised  
|                  |  | Number of |            | Value of  |  | Underlying  |         | Underlying    |  | In-the-Money |             | In-the-Money 
|                  |  | Shares    |            | Shares    |  | Options     |         | Options       |  | Options      |             | Options      
|Name              |  | Exercised |            | Exercised |  | Exercisable |         | Unexercisable |  | Exercisable  |             | Unexercisable
|                  |  |           |            |           |  |             |         |               |  |              |             |              
|John. D. Johnson  |  |           |            |           |  |             |         |               |  |              | 470,532.389 |               |  |  | 23,654.799 |  |  | $ | 4,390,067 |  |  | $ | 220,699 | 
|Patrick Kluempke  |  |           | 81,521.058 |           |  | $           | 600,810 |               |  |              | 50,596.492  |               |  |  |            |  |  |   | 444,237   |  |  |   |         | 
|Thomas Larson     |  |           |            |           |  |             |         |               |  |              | 56,364.534  |               |  |  |            |  |  |   | 494,881   |  |  |   |         | 
|Mark Palmquist    |  |           | 58,291.716 |           |  |             | 524,611 |               |  |              | 3,549.270   |               |  |  |            |  |  |   | 34,641    |  |  |   |         | 
|John Schmitz      |  |           |            |           |  |             |         |               |  |              | 41,731.660  |               |  |  |            |  |  |   | 407,301   |  |  |   |         | 
|Leon E. Westbrock |  |           | 73,260.073 |           |  |             | 600,000 |               |  |              | 449,277.209 |               |  |  |            |  |  |   | 4,052,959 |  |  |   |         | 



| |            
| | -----------
| | 401(k) Plan

Each Named Executive Officer is eligible to
participate in the CHS Inc. Savings Plan (the 401(k) Plan). All
benefit-eligible employees of the Company are eligible to
participate in the 401(k) Plan. Effective January 1, 2002,
participants may contribute between 1% and 50% (not to exceed
the IRS limits on benefits in the case of highly
compensated employees) of their pay on a pre-tax basis.
Each of the Named Executive Officers is a highly
compensated employee. The Company matches 50% of the first
6% of pay contributed each year. The Companys Board of
Directors may elect to reduce or eliminate matching
contributions for any year or any portion thereof. Participants
are 100% vested in their own contributions and are fully vested
after three years of service in any Company matching
contribution made on the participants behalf.



| |                                                       
| | ------------------------------------------------------
| | Deferred Compensation Supplemental
    Retirement Plan

Each of the Named Executive Officers may
participate in the Companys Deferred Compensation
Supplemental Retirement Plan (the Supplemental Plan).
Participants in the Supplemental Plan are select management or
highly compensated employees of the Company who have been
designated as eligible by the President of the Company to
participate in such plan. Compensation waived under the Share
Option Plan is not eligible for Pay Credits under the Cash
Balance Retirement Plan or matching contributions under the
401(k) Plan. The Supplemental Plan is intended to replace the
benefits lost under those plans due to Section 415 of the
Internal Revenue Code of 1986, as amended (the Code) which
cannot be considered for purposes of benefits due to
Section 401(a)(17) of the Code under the qualified plans
that the Company offers. The Supplemental Plan is not funded or
qualified for special tax treatment under the Code.

In addition, the Chief Executive Officer of the
Company is eligible to participate in the Companys Special
Supplemental Executive Retirement Plan (the Special Supplemental
Plan). The special supplemental retirement benefit will be
credited at the end of each plan year for which the participant
completes a year of service. The amount credited shall be an
amount equal to that set forth in a schedule of benefits stated
in the Special Supplemental Plan. The Special Supplemental Plan
is not funded or qualified for special tax treatment under the
Code.

57



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##### Table of Contents



As of December 31, 2002, the dollar value of
the account of each of the Named Executive Officers was
approximately:

|                  |  |                   |           |                   |  |  |     | 
|----------------- |  | ----------------- | --------- | ----------------- |  |  | --- | 
|                  |  |                   |           | Special          
|                  |  | Supplemental Plan |           | Supplemental Plan
|                  |  |                   |           |                  
|John D. Johnson   |  | $                 | 1,904,914 |                   |  |  | $0  | 
|Patrick Kluempke  |  |                   | 91,160    |                   |  |  | N/A | 
|Tom Larson        |  |                   | 396,566   |                   |  |  | N/A | 
|Mark Palmquist    |  |                   | 253,641   |                   |  |  | N/A | 
|John Schmitz      |  |                   | 199,830   |                   |  |  | N/A | 
|Leon E. Westbrock |  |                   | 1,274,612 |                   |  |  | N/A | 



| |                        
| | -----------------------
| | Directors Compensation

The Board of Directors met monthly during the
year ended August 31, 2003. Through August 31, 2003,
the Company provided each director with compensation of $42,000,
paid in twelve monthly payments, with; the Chairman of the Board
receiving an additional annual compensation of $12,000, the
First Vice Chairman receiving an additional annual compensation
of $3,600, and the Secretary-Treasurer receiving an additional
annual compensation of $1,800. Each director receives a per diem
of $300 plus actual expenses and travel allowance for each day
spent on Company meetings (other than regular Board meetings and
the Annual Meeting), life insurance and health and dental
insurance. Each director has a retirement benefit of $175 per
month per year of service, with a maximum benefit of $2,625 per
month, for life with a guarantee of 120 months (paid to
beneficiary in the event of death). This benefit commences at
age 60 or retirement, whichever is later. This retirement
benefit may be converted to a lump sum. The retired directors
may also continue health benefits until eligible for Medicare
and thereafter pay at their own expense for a Medicare
supplemental policy.



| |                                         
| | ----------------------------------------
| | Committees of the Board of
    Directors

The Board of Directors appoints ad hoc committees
from time to time to review certain matters and make reports and
recommendations to the full Board of Directors for action. The
entire Board of Directors determines the salaries and incentive
compensation for the President and Chief Executive Officer using
industry and compensation studies. The Board of Directors has a
standing Audit Committee to review the results and scope of the
annual audit and other services provided by the Companys
independent auditors, and another standing committee to review
equity redemption policy and its application to situations
believed by the equity holder or patrons equity department
to be unusual.



| |                                                                
| | ---------------------------------------------------------------
| | Compensation Committee Interlocks and
    Insider Participation

As noted above, the Companys Board of
Directors does not have a Compensation Committee. The entire
Board of Directors determined the compensation of the President
and Chief Executive Officer and the terms of the employment
agreement with the President and Chief Executive Officer. The
President and Chief Executive Officer determined the
compensation for all other executive officers.

58



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##### Table of Contents








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Beneficial ownership of equity securities as of
August 31, 2003 is shown below:

|                                         |  |                                             |                      |            |               |              |  |  |   |   | 
|---------------------------------------- |  | ------------------------------------------- | -------------------- | ---------- | ------------- | ------------ |  |  | - | - | 
|                                         |  |                                             |                      | Amount and |               |             
|                                         |  |                                             |                      | Nature of  |               |             
|                                         |  |                                             |                      | Beneficial |               |             
|Title of Class                           |  | Name of Beneficial Owner(1)                 |                      | Ownership  |               | % of Class  
|                                         |  |                                             |                      |            |               |             
|8% Cumulative Redeemable Preferred Stock |  | Directors:                                  |                      |            |               |              |  |  |   |  
|                                         |  |                                             | Michael Toelle       |            |               | 420 shares   |  |  |   | * | 
|                                         |  |                                             | Bruce Anderson       |            |               | 40 shares    |  |  |   | * | 
|                                         |  |                                             | Robert Bass          |            |               | 120 shares   |  |  |   | * | 
|                                         |  |                                             | David Bielenberg     |            |               | 1,200 shares |  |  |   | * | 
|                                         |  |                                             | Dennis Carlson       |            |               | 460 shares   |  |  |   | * | 
|                                         |  |                                             | Curt Eischens        |            |               | 120 shares   |  |  |   | * | 
|                                         |  |                                             | Robert Elliott       |            |               | 640 shares   |  |  |   | * | 
|                                         |  |                                             | Robert Grabarski     |            |               | 2,280 shares |  |  |   | * | 
|                                         |  |                                             | Jerry Hasnedl        |            |               | 200 shares   |  |  |   | * | 
|                                         |  |                                             | Glen Keppy           |            |               | 200 shares   |  |  |   | * | 
|                                         |  |                                             | James Kile           |            |               | 120 shares   |  |  |   | * | 
|                                         |  |                                             | Randy Knecht         |            |               | 240 shares   |  |  |   | * | 
|                                         |  |                                             | Leonard Larsen       |            |               | 200 shares   |  |  |   | * | 
|                                         |  |                                             | Richard Owen         |            |               | 240 shares   |  |  |   | * | 
|                                         |  |                                             | Duane Stenzel        |            |               | 600 shares   |  |  |   | * | 
|                                         |  |                                             | Merlin Van Walleghen |            |               | 1,600 shares |  |  |   | * | 
|                                         |  |                                             | Elroy Webster        |            |               | 400 shares   |  |  |   | * | 
|                                         |  | Named Executive Officers:                   |                      |            |               |              |  |  |   |  
|                                         |  |                                             | John D. Johnson      |            |               | 2,800 shares |  |  |   | * | 
|                                         |  |                                             | Patrick Kluempke     |            |               | 1,000 shares |  |  |   | * | 
|                                         |  |                                             | Tom Larson           |            |               | 400 shares   |  |  |   | * | 
|                                         |  |                                             | Mark Palmquist       |            |               | 1,200 shares |  |  |   | * | 
|                                         |  |                                             | John Schmitz         |            |               | 1,400 shares |  |  |   | * | 
|                                         |  |                                             | Leon E. Westbrock    |            |               | 800 shares   |  |  |   | * | 
|                                         |  |                                             |                      |            |               |              |  |  |   |  
|                                         |  | Directors and executive officers as a group |                      |            | 16,680 shares |              |  |  | * |  



---



|    |                                             
|--- | --------------------------------------------
|(1) | Includes shares held by spouse and children.

*     Less than 1%.

The Company has no compensation plans under which
equity securities of the Company are authorized for issuance.









|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions







Because directors must be active patrons of the
Company or an affiliated association, transactions between the
Company and directors are customary and expected. Transactions
with directors, which include the sale of commodities (primarily
grain) to the Company and the purchase of products and services
from the Company, are entered into on the same terms, as they
are with other patrons of the Company. During the fiscal year
ended August 31, 2003 the value of those transactions
between each director (and members of such directors
immediate family, which includes such directors spouse,
parents,




59



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##### Table of Contents






children, siblings, mothers and fathers-in-law,
sons and daughters-in-law, and brothers and sisters-in-law) and
the Company in which the amount involved exceeded $60,000 are
shown below.








|                     |  |            |         |              |  |              |         |  |  |   |         | 
|-------------------- |  | ---------- | ------- | ------------ |  | ------------ | ------- |  |  | - | ------- | 
|                     |  |            |         | Purchases of |  |             
|                     |  |            |         | Products and |  |             
|                     |  | Grain Sold |         | Services     |  |             
|                     |  | to the     |         | from the     |  | Total       
|                     |  | Company    |         | Company      |  | Transactions
|                     |  |            |         |              |  |             
|Bruce Anderson       |  | $          | 65,846  |              |  | $            | 6,044   |  |  | $ | 71,890  | 
|Curt Eischens        |  |            | 188,879 |              |  |              | 63      |  |  |   | 188,942 | 
|Jerry Hasnedl        |  |            | 358,638 |              |  |              | 216,684 |  |  |   | 575,322 | 
|Leonard Larsen       |  |            | 251,616 |              |  |              | 18,104  |  |  |   | 269,720 | 
|Merlin Van Walleghen |  |            | 148,492 |              |  |              | 1,284   |  |  |   | 149,776 | 









PART IV.










Item
14.     Principal Accountant Fees
and Services








The following table shows the aggregate fees
billed to the Company by PricewaterhouseCoopers for services
rendered during the fiscal years ended August 31, 2003 and
2002:







|                    |       |      |         |           |  |   |         |         | 
|------------------- | ----- | ---- | ------- | --------- |  | - | ------- | ------- | 
|Description of Fees |       | 2003 |         | 2002     
|                    |       |      |         |          
|Audit Fees(1)       |       | $    | 905,461 |           |  | $ | 656,798 |        
|Tax Fees(2)         |       |      | 138,109 |           |  |   | 168,671 |        
|                    |       |      |         |           |  |   |         |        
|                    | Total |      | $       | 1,043,570 |  |   | $       | 825,469 | 
|                    |       |      |         |           |  |   |         |        






---



|    |                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Includes fees for audit of annual financial
    statements and reviews of the related quarterly financial
    statements, certain statutory audits, employee benefit plan
    audits, work related to S-2 filings and assistance with
    preparation and review of documents filed with the Securities
    and Exchange Commission.
|   
|   
|   
|(2) | Includes fees related to tax compliance, tax
    advice and tax planning.                                                                                                                                                                                                                                                           
|   




The Company adopted a policy that the Audit
Committee must approve in advance all audit and non-audit
services provided by PricewaterhouseCoopers. The Audit Committee
approved all of the services.




60



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##### Table of Contents






Item
15.     Exhibits, Financial
Statements and Reports Filed on Form 8-K

(a)(1)     Financial
Statements




The following financial statements and the
Reports of Independent Accountants are filed as part of this
Form 10-K/A-1.







|                                                                       |                                                                                                                                                                                 |          |  |      | 
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------- |  | ---- | 
|                                                                       |                                                                                                                                                                                 | Page No.
|                                                                       |                                                                                                                                                                                 |         
|CHS Inc.                                                               |                                                                                                                                                                                 |          |  |     
|                                                                       | Consolidated Balance Sheets as of August 31,
    2003 and 2002                                                                                                                  |          |  | F-1  | 
|                                                                       | Consolidated Statements of Operations for the
    years ended August 31, 2003, 2002 and 2001                                                                                    |          |  | F-2  | 
|                                                                       | Consolidated Statements of Equities and
    Comprehensive Income for the years ended August 31, 2003,
    2002 and 2001                                                         |          |  | F-3  | 
|                                                                       | Consolidated Statements of Cash Flows for the
    years ended August 31, 2003, 2002 and 2001                                                                                    |          |  | F-4  | 
|                                                                       | Notes to Consolidated Financial Statements                                                                                                                                      |          |  | F-5  | 
|                                                                       | Report of Independent Accountants                                                                                                                                               |          |  | F-30 | 
|VENTURA FOODS, LLC, a non-consolidated 50%
    owned equity investment |                                                                                                                                                                                 |          |  |     
|                                                                       | Independent Auditors Report                                                                                                                                                    |          |  | F-31 | 
|                                                                       | Consolidated Balance Sheets as of March 31,
    2003 and 2002                                                                                                                   |          |  | F-32 | 
|                                                                       | Consolidated Statements of Income for the years
    ended March 31, 2003 and 2002, the three months ended
    March 31, 2001 and the year ended December 31, 2000               |          |  | F-33 | 
|                                                                       | Consolidated Statements of Members Capital
    for the years ended March 31, 2003 and 2002, the three
    months ended March 31, 2001 and the year ended
    December 31, 2000 |          |  | F-34 | 
|                                                                       | Consolidated Statements of Cash Flows for the
    years ended March 31, 2003 and 2002, the three months ended
    March 31, 2001 and the year ended December 31, 2000           |          |  | F-35 | 
|                                                                       | Notes to Consolidated Financial Statements for
    the years ended March 31, 2003 and 2002, the three months
    ended March 31, 2001 and the year ended December 31,
    2000  |          |  | F-36 | 






---



|  |                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Audited financial statements for Ventura Foods,
    LLC, as of and for the year ended March 31, 2004 will be
    filed by an amendment to this Form 10-K.

(a)(2)     Financial
Statement Schedules

Financial statement schedules are omitted because
they are not applicable or the required information is shown in
the financial statements or notes thereto.

(a)(3)     Exhibits

| |      |  |  |                                                                                                                                                                                                                                                                      
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1  |  |  | Articles of Incorporation of the Company, as
    amended.(13)                                                                                                                                                                                                        
| | 3.2  |  |  | Articles of Amendment to the Articles of
    Incorporation.(18)                                                                                                                                                                                                      
| | 3.3  |  |  | Bylaws of the Company, as amended.(13)                                                                                                                                                                                                                               
| | 4.1  |  |  | Resolution Creating a Series of Preferred Equity
    to be Designated 8% Cumulative Redeemable Preferred Stock.(14)                                                                                                                                                  
| | 4.2  |  |  | Unanimous Written Consent Resolution of the Board
    of Directors of Cenex Harvest States Cooperatives Amending the
    Amended and Restated Resolution Creating a Series of Preferred
    Equity to be Designated 8% Cumulative Redeemable Preferred
    Stock.(15)
| | 4.3  |  |  | Resolution amending a previous Preferred Stock
    Resolution with respect to the record date for payment of
    dividends for the Companys 8% Cumulative Redeemable
    Preferred Stock.(17)                                                                       
| | 4.4  |  |  | Form of Certificate Representing 8% Cumulative
    Redeemable Preferred Stock.(15)                                                                                                                                                                                   
| | 10.1 |  |  | Lease between the Port of Kalama and North
    Pacific Grain Growers, Inc., dated November 22, 1960.(1)                                                                                                                                                              
| | 10.2 |  |  | Limited Liability Company Agreement for the
    Wilsey-Holsum Foods, LLC dated July 24, 1996.(1)                                                                                                                                                                     

61



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##### Table of Contents






| |        |  |  |                                                                                                                                                                                                                                                   
| | ------ |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.3   |  |  | Long Term Supply Agreement between Wilsey-Holsum
    Foods, LLC and Harvest States Cooperatives dated August 30,
    1996.(*)(1)                                                                                                                  
| | 10.4   |  |  | TEMCO, LLC Limited Liability Company Agreement
    between Cargill, Incorporated and Cenex Harvest States
    Cooperatives dated as of August 26, 2002.(12)                                                                                       
| | 10.5   |  |  | Cenex Harvest States Cooperatives Supplemental
    Savings Plan.(7)                                                                                                                                                                               
| | 10.6   |  |  | Cenex Harvest States Cooperatives Supplemental
    Executive Retirement Plan.(7)                                                                                                                                                                  
| | 10.7   |  |  | Cenex Harvest States Cooperatives Senior
    Management Compensation Plan.(7)                                                                                                                                                                     
| | 10.8   |  |  | Cenex Harvest States Cooperatives Executive
    Long-Term Variable Compensation Plan.(7)                                                                                                                                                          
| | 10.9   |  |  | Cenex Harvest States Cooperatives Share Option
    Plan.(7)                                                                                                                                                                                       
| | 10.9A  |  |  | Amendment to Cenex Harvest States Share Option
    Plan, dated June 28, 2001.(10)                                                                                                                                                                 
| | 10.10  |  |  | $225,000,000 Note Agreement (Private Placement
    Agreement) dated as of June 19, 1998 among Cenex Harvest
    States Cooperatives and each of the Purchasers of the Notes.(2)                                                                   
| | 10.10A |  |  | First Amendment to Note Agreement ($225,000,000
    Private Placement), effective September 10, 2003, among CHS
    Inc. and each of the Purchasers of the notes.(19)                                                                             
| | 10.11  |  |  | Credit Agreement (Revolving Loan) dated as of
    May 21, 2003 among Cenex Harvest States Cooperatives,
    CoBank, ACB, SunTrust Bank, Cooperatieve Centrale
    Raiffeisen-Boerenleenbank B.A., BNP Paribas and the Syndication
    Parties.(17)
| | 10.12  |  |  | $200 Million Term Loan Credit Agreement dated as
    of June 1, 1998 among Cenex Harvest States Cooperatives,
    CoBank, ACB, and St. Paul Bank for Cooperatives, including
    Exhibit 2.4 (form of $200 Million Promissory Note).(2)           
| | 10.12A |  |  | First Amendment to Credit Agreement (Term Loan),
    effective as of May 31, 1999 among Cenex Harvest States
    Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives.(4)                                                                
| | 10.12B |  |  | Second Amendment to Credit Agreement (Term Loan)
    dated May 23, 2000 by and among Cenex Harvest States
    Cooperatives, CoBank, ACB, St. Paul Bank for Cooperatives
    and the Syndication Parties.(6)                                       
| | 10.12C |  |  | Third Amendment to Credit Agreement (Term Loan)
    dated May 23, 2001 among Cenex Harvest States Cooperatives,
    CoBank, ACB, and the Syndication Parties.(9)                                                                                  
| | 10.12D |  |  | Fourth Amendment to Credit Agreement (Term Loan)
    dated May 22, 2002 among Cenex Harvest States Cooperatives,
    CoBank, ACB and the Syndication Parties.(11)                                                                                 
| | 10.13  |  |  | Limited Liability Agreement of United Harvest,
    LLC dated November 9, 1998 between United Grain Corporation
    and Cenex Harvest States Cooperatives.(3)                                                                                      
| | 10.14  |  |  | Joint Venture Agreement for Agriliance LLC, dated
    as of January 1, 2000 among Farmland Industries, Inc.,
    Cenex Harvest States Cooperatives, United Country Brands, LLC
    and Land O Lakes, Inc.(5)                                     
| | 10.15  |  |  | Employment Agreement dated November 6, 2003
    by and between John D. Johnson and CHS Inc.(19)                                                                                                                                                   
| | 10.16  |  |  | CHS Inc. Special Supplemental Executive
    Retirement Plan.(19)                                                                                                                                                                                  
| | 10.17  |  |  | Note purchase and Private Shelf Agreement dated
    as of January 10, 2001 between Cenex Harvest States
    Cooperatives and The Prudential Insurance Company of America.(8)                                                                      
| | 10.17A |  |  | Amendment No. 1 to Note Purchase and Private
    Shelf Agreement, dated as of March 2, 2001.(8)                                                                                                                                                   
| | 10.18  |  |  | Note Purchase Agreement and Series D & E
    Senior Notes dated October 18, 2002.(12)                                                                                                                                                             
| | 10.19  |  |  | 2002 Amended and Restated Credit Agreement
    (364-Day Revolving Loan) dated December 17, 2002 by and
    among National Cooperative Refinery Association, CoBank, ACB and
    Farm Credit Bank of Wichita, D/B/A U.S. AgBank, FCB.(16)          
| | 21.1   |  |  | Subsidiaries of the Registrant.(19)                                                                                                                                                                                                               
| | 23.1   |  |  | Consent of Independent Accountants.(20)                                                                                                                                                                                                           
| | 23.2   |  |  | Independent Auditors Consent.(20)                                                                                                                                                                                                                
| | 24.1   |  |  | Power of Attorney.(19)                                                                                                                                                                                                                            
| | 31.1   |  |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.(20)                                                                                                                                                                  




62



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##### Table of Contents






| |      |  |  |                                                                                                                                    
| | ---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------
| | 31.2 |  |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.(20)                                                   
| | 32.1 |  |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.(20)
| | 32.2 |  |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.(20)






---



|    |                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(*) | Pursuant to Rule 406 of the Securities Act
    of 1933, as amended, confidential portions of Exhibit 10.3
    have been deleted and filed separately with the Securities and
    Exchange Commission pursuant to a request for confidential
    treatment.
|   
|(1) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (File
    No. 333-17865), filed February 7, 1997.                                                                                                                       
|   
|(2) | Incorporated by reference to the Companys
    Form 10-Q Transition Report for the period June 1,
    1998 to August 31, 1998, filed October 14, 1998.                                                                                                    
|   
|(3) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended November 30,
    1998, filed January 13, 1999.                                                                                                                    
|   
|(4) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended May 31, 1999,
    filed July 13, 1999.                                                                                                                            
|   
|(5) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended February 29,
    2000 filed April 11, 2000.                                                                                                                       
|   
|(6) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended May 31, 2000,
    filed July 10, 2000.                                                                                                                            
|   
|(7) | Incorporated by reference to the Companys
    Form 10-K for the year ended August 31, 2000, filed
    November 22, 2000.                                                                                                                                 
|   
|(8) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended February 28,
    2001, filed April 10, 2001.                                                                                                                      
|   
|(9) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended May 31, 2001,
    filed July 3, 2001.                                                                                                                             



|     |                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Companys
    Registration Statement on Form S-2 (File
    No. 333-65364), filed October 26, 2001.                    
|    
|(11) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended May 31, 2002,
    filed July 3, 2002.                          
|    
|(12) | Incorporated by reference to the Companys
    Form 10-K for the year ended August 31, 2002, filed
    November 25, 2002.                              
|    
|(13) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended November 30,
    2002, filed January 9, 2003.                  
|    
|(14) | Incorporated by reference to Amendment No. 1
    to the Companys Registration Statement on Form S-2
    (File No. 333-101916), dated January 13, 2003.
|    
|(15) | Incorporated by reference to Amendment No. 2
    to the Companys Registration Statement on Form S-2
    (File No. 333-101916), dated January 23, 2003.
|    
|(16) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended February 28,
    2003, filed April 4, 2003.                    
|    
|(17) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended May 31, 2003,
    filed July 2, 2003.                          
|    
|(18) | Incorporated by reference to the Companys
    Form 8-K, filed August 5, 2003.                                                                         
|    
|    
|(19) | Incorporated by reference to the Companys
    Form 10-K for the year ended August 31, 2003 filed on
    November 21, 2003.                            
|    
|    
|    
|(20) | Filed herewith.                                                                                                                                        
|    

63



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##### Table of Contents



(b)     Reports on
Form 8-K

On August 5, 2003 the Company filed a report
on Form 8-K announcing the Companys name change from
Cenex Harvest States Cooperatives to CHS Inc. This was the only
report on Form 8-K filed during the fourth quarter.

(c)     Exhibits

The exhibits shown in Item 15(a)(3) above
are being filed herewith.

(d)     Schedules

None.




Supplemental Information

As a cooperative, the Company does not utilize
proxy statements.

64



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##### Table of Contents








SIGNATURES





Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on
January 20, 2004.






| |         
| | --------
| | CHS INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ JOHN D. JOHNSON

| |                                          
| | -----------------------------------------
| |                                          
| | John D. Johnson                          
| | President and Chief Executive
    Officer




Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities indicated on January 20, 2004:







|                                   |  |                                                                                            |  | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------ |  | 
|                                   |  |                                                                                           
|Signature                          |  | Title                                                                                     
|                                   |  |                                                                                           
|                                  
|/s/ JOHN D. JOHNSONJohn D. Johnson |  | President and Chief Executive Officer
    (principal executive officer)                   
|                                  
|/s/ JOHN SCHMITZJohn Schmitz       |  | Executive Vice President and Chief Financial
    Officer
    (principal financial officer)
|                                  
|/s/ JODELL HELLERJodell Heller     |  | Vice President and Controller
    (principal accounting officer)                          
|                                  
|Michael Toelle*                    |  | Chairman of the Board of Directors                                                        
|                                  
|Bruce Anderson*                    |  | Director                                                                                  
|                                  
|Robert Bass*                       |  | Director                                                                                  
|                                  
|David Bielenberg*                  |  | Director                                                                                  
|                                  
|Dennis Carlson*                    |  | Director                                                                                  
|                                  
|Curt Eischens*                     |  | Director                                                                                  
|                                  
|Robert Elliott*                    |  | Director                                                                                  
|                                  
|Robert Grabarski*                  |  | Director                                                                                  
|                                  
|Jerry Hasnedl*                     |  | Director                                                                                  
|                                  
|Glen Keppy*                        |  | Director                                                                                  
|                                  
|James Kile*                        |  | Director                                                                                  
|                                  
|Randy Knecht*                      |  | Director                                                                                  
|                                  
|Richard Owen*                      |  | Director                                                                                  
|                                  
|Duane Stenzel*                     |  | Director                                                                                  
|                                  
|Merlin Van Walleghen*              |  | Director                                                                                  
|                                  
|Michael Mulcahey                   |  | Director                                                                                  
|                                  
|Steve Fritel                       |  | Director                                                                                  
|*By:                               |  | /s/ JOHN D. JOHNSONJohn D. Johnson
    Attorney-in-fact                                    |  | 




65



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CHS INC.

CONSOLIDATED BALANCE SHEETS

|                                   |                                   |                           |           |         |           |   |           |         |           | 
|---------------------------------- | --------------------------------- | ------------------------- | --------- | ------- | --------- | - | --------- | ------- | --------- | 
|                                   |                                   |                          
|                                   |                                   | August 31                
|                                   |                                   |                          
|                                   |                                   | 2003                      |           | 2002   
|                                   |                                   |                           |           |        
|                                   |                                   |                          
|                                   |                                   | (dollars in thousands)   
|ASSETS                            
|Current assets:                    |                                   |                           |           |         |           |   |           |        
|                                   | Cash and cash equivalents         |                           | $         | 168,249 |           |   | $         | 108,192 |          
|                                   | Receivables                       |                           |           | 763,780 |           |   |           | 741,578 |          
|                                   | Inventories                       |                           |           | 801,883 |           |   |           | 759,663 |          
|                                   | Other current assets              |                           |           | 178,661 |           |   |           | 140,944 |          
|                                   |                                   |                           |           |         |           |   |           |        
|                                   |                                   | Total current assets      |           |         | 1,912,573 |   |           |         | 1,750,377 | 
|Investments                        |                                   |                           | 532,893   |         |           |   | 496,607   |        
|Property, plant and equipment      |                                   |                           | 1,122,982 |         |           |   | 1,057,421 |        
|Other assets                       |                                   |                           | 239,520   |         |           |   | 177,322   |        
|                                   |                                   |                           |           |         |           |   |           |        
|Total assets                       |                                   | $                         | 3,807,968 |         |           | $ | 3,481,727 |        
|                                   |                                   |                           |           |         |           |   |           |        
|LIABILITIES AND EQUITIES          
|Current liabilities:               |                                   |                           |           |         |           |   |           |        
|                                   | Notes payable                     |                           | $         | 251,131 |           |   | $         | 332,514 |          
|                                   | Current portion of long-term debt |                           |           | 14,951  |           |   |           | 89,032  |          
|                                   | Customer credit balances          |                           |           | 58,417  |           |   |           | 26,461  |          
|                                   | Customer advance payments         |                           |           | 123,383 |           |   |           | 169,123 |          
|                                   | Checks and drafts outstanding     |                           |           | 85,239  |           |   |           | 84,251  |          
|                                   | Accounts payable                  |                           |           | 627,250 |           |   |           | 517,667 |          
|                                   | Accrued expenses                  |                           |           | 254,415 |           |   |           | 225,704 |          
|                                   | Dividends and equities payable    |                           |           | 39,049  |           |   |           | 56,510  |          
|                                   |                                   |                           |           |         |           |   |           |        
|                                   |                                   | Total current liabilities |           |         | 1,453,835 |   |           |         | 1,501,262 | 
|Long-term debt                     |                                   |                           | 648,222   |         |           |   | 483,092   |        
|Other liabilities                  |                                   |                           | 111,555   |         |           |   | 118,280   |        
|Minority interests in subsidiaries |                                   |                           | 112,645   |         |           |   | 89,455    |        
|Commitments and contingencies      |                                   |                           |           |         |           |   |           |        
|Equities                           |                                   |                           | 1,481,711 |         |           |   | 1,289,638 |        
|                                   |                                   |                           |           |         |           |   |           |        
|Total liabilities and equities     |                                   | $                         | 3,807,968 |         |           | $ | 3,481,727 |        
|                                   |                                   |                           |           |         |           |   |           |        

The accompanying notes are an integral part of
the consolidated financial statements.

F-1



---



##### Table of Contents



CHS INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                      |                             |                               |           |           |  |      |           |           |  |   |           |           | 
|------------------------------------- | --------------------------- | ----------------------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                      |                             |                              
|                                      |                             | For the years ended August 31
|                                      |                             |                              
|                                      |                             | 2003                          |           | 2002      |  | 2001
|                                      |                             |                               |           |           |  |     
|                                      |                             |                              
|                                      |                             | (dollars in thousands)       
|Revenues:                             |                             |                               |           |           |  |      |           |           |  |   |           |          
|                                      | Net sales                   |                               | $         | 9,270,734 |  |      | $         | 7,156,454 |  |   | $         | 7,464,242 | 
|                                      | Patronage dividends         |                               |           | 3,257     |  |      |           | 3,885     |  |   |           | 5,977     | 
|                                      | Other revenues              |                               |           | 124,542   |  |      |           | 109,459   |  |   |           | 116,254   | 
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|                                      |                             |                               | 9,398,533 |           |  |      | 7,269,798 |           |  |   | 7,586,473 |          
|Cost of goods sold                    |                             |                               | 9,058,951 |           |  |      | 6,940,926 |           |  |   | 7,181,433 |          
|Marketing, general and administrative |                             |                               | 190,582   |           |  |      | 187,292   |           |  |   | 184,046   |          
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|Operating earnings                    |                             |                               | 149,000   |           |  |      | 141,580   |           |  |   | 220,994   |          
|Gain on legal settlements             |                             |                               | (10,867   | )         |  |      | (2,970    | )         |  |   |           |          
|Interest                              |                             |                               | 48,675    |           |  |      | 42,455    |           |  |   | 61,436    |          
|Equity income from investments        |                             |                               | (47,299   | )         |  |      | (58,133   | )         |  |   | (28,494   | )        
|Minority interests                    |                             |                               | 21,950    |           |  |      | 15,390    |           |  |   | 35,098    |          
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|Income before income taxes            |                             |                               | 136,541   |           |  |      | 144,838   |           |  |   | 152,954   |          
|Income taxes                          |                             |                               | 12,700    |           |  |      | 18,700    |           |  |   | (25,600   | )        
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|Net income                            |                             | $                             | 123,841   |           |  | $    | 126,138   |           |  | $ | 178,554   |          
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|Distribution of net income:           |                             |                               |           |           |  |      |           |           |  |   |           |          
|                                      | Patronage refunds           |                               | $         | 90,000    |  |      | $         | 92,900    |  |   | $         | 128,900   | 
|                                      | Unallocated capital reserve |                               |           | 33,841    |  |      |           | 33,238    |  |   |           | 49,654    | 
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|Net income                            |                             | $                             | 123,841   |           |  | $    | 126,138   |           |  | $ | 178,554   |          
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          

The accompanying notes are an integral part of
the consolidated financial statements.

F-2



---



##### Table of Contents



CHS INC.

CONSOLIDATED STATEMENTS OF EQUITIES

AND COMPREHENSIVE INCOME


|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |         |  
|------------------------------------------------------ | -------------------------- | ---------------------- | --------- | ------------ |  | --------- | ------ | ------- |  | ---------- | ------ | --------- |  | ----------- | ------ | ------------- |  | --------- | ------ | -------- |  | - | -------- | ------- |  | - | ------- | ------ |  | - | ------- | ------- | - | - | ----- | - |  | - | --------- | ------- | -
|                                                       |                            |                        |           |              |  |           |        |         |  | Oilseed    |        |           |  |             |        | Accumulated   |  |           |        |         
|                                                       |                            | Capital                |           | Nonpatronage |  |           |        | Wheat   |  | Processing |        |           |  | Unallocated |        | Other         |  | Allocated |        |         
|                                                       |                            | Equity                 |           | Equity       |  | Preferred |        | Milling |  | & Refining |        | Patronage |  | Capital     |        | Comprehensive |  | Capital   |        | Total   
|                                                       |                            | Certificates           |           | Certificates |  | Stock     |        | EPUs    |  | EPUs       |        | Refunds   |  | Reserve     |        | Income (Loss) |  | Reserve   |        | Equities
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |         
|                                                       |                            |                       
|                                                       |                            | (dollars in thousands)
|For the years ended August 31, 2003, 2002 and
    2001 |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Balances, September 1, 2000                            |                            | $                      | 940,880   |              |  | $         | 28,509 |         |  |            |        |           |  | $           | 9,246  |               |  | $         | 4,182  |          |  | $ | 61,180   |         |  | $ | 114,736 |        |  | $ | (2,427  | )       |   | $ | 8,120 |   |  | $ | 1,164,426 |        
|Patronage and equity retirement determination          |                            |                        | 17,474    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | 26,220   |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 43,694    |        
|Patronage distribution                                 |                            |                        | 60,304    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (87,400  | )       |  |   | 967     |        |  |   |         |         |   |   |       |   |  |   | (26,129   | )      
|Equities retired                                       |                            |                        | (18,662   | )            |  |           | (74    | )       |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (18,736   | )      
|Equities issued                                        |                            |                        | 5,481     |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 5,481     |        
|Equity Participation Units issued                      |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           | 1,045  |          |  |   |          |         |  |   | (1,045  | )      |  |   |         |         |   |   |       |   |  |   |          |        
|Equity Participation Units redeemed                    |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             | (9,066 | )             |  |           | (5,227 | )        |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (14,293   | )      
|Other, net                                             |                            |                        | (120      | )            |  |           | (277   | )       |  |            |        |           |  |             | (180   | )             |  |           |        |          |  |   |          |         |  |   | 445     |        |  |   |         |         |   |   | (70   | ) |  |   | (202      | )      
|Comprehensive income:                                  |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|                                                       | Net income                 |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          | 128,900 |  |   |         | 49,654 |  |   |         |         |   |   |       |   |  |   |           | 178,554 |  
|                                                       | Other comprehensive income |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         | 512     |   |   |       |   |  |   |           | 512     |  
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Total comprehensive income                             |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 179,066   |        
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Dividends and equities payable                         |                            |                        | (33,484   | )            |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (38,670  | )       |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (72,154   | )      
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Balances, August 31, 2001                              |                            |                        | 971,873   |              |  |           | 28,158 |         |  |            |        |           |  |             |       |               |  |           |       |          |  |   | 90,230   |         |  |   | 164,757 |        |  |   | (1,915  | )       |   |   | 8,050 |   |  |   | 1,261,153 |        
|Patronage and equity retirement determination          |                            |                        | 33,484    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | 38,670   |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 72,154    |        
|Patronage distribution                                 |                            |                        | 92,484    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (128,900 | )       |  |   | (3,666  | )      |  |   |         |         |   |   |       |   |  |   | (40,082   | )      
|Equities retired                                       |                            |                        | (31,099   | )            |  |           | (46    | )       |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (31,145   | )      
|Equities issued                                        |                            |                        | 2,600     |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 2,600     |        
|Preferred stock issued, net                            |                            |                        |           |              |  |           |        |         |  | $          | 9,325  |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | (3,428  | )      |  |   |         |         |   |   |       |   |  |   | 5,897     |        
|Preferred stock dividends                              |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | (240    | )      |  |   |         |         |   |   |       |   |  |   | (240      | )      
|Other, net                                             |                            |                        | (106      | )            |  |           | (339   | )       |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | 100     |        |  |   |         |         |   |   |       |   |  |   | (345      | )      
|Comprehensive income:                                  |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|                                                       | Net income                 |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          | 92,900  |  |   |         | 33,238 |  |   |         |         |   |   |       |   |  |   |           | 126,138 |  
|                                                       | Other comprehensive loss   |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         | (49,982 | ) |   |       |   |  |   |           | (49,982 | )
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Total comprehensive income                             |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 76,156    |        
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Dividends and equities payable                         |                            |                        | (28,640   | )            |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (27,870  | )       |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (56,510   | )      
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Balances, August 31, 2002                              |                            |                        | 1,040,596 |              |  |           | 27,773 |         |  |            | 9,325  |           |  |             |       |               |  |           |       |          |  |   | 65,030   |         |  |   | 190,761 |        |  |   | (51,897 | )       |   |   | 8,050 |   |  |   | 1,289,638 |        
|Patronage and equity retirement determination          |                            |                        | 28,639    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | 27,870   |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 56,509    |        
|Patronage distribution                                 |                            |                        | 61,784    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (92,900  | )       |  |   | 4,638   |        |  |   |         |         |   |   |       |   |  |   | (26,478   | )      
|Equities retired                                       |                            |                        | (31,092   | )            |  |           | (52    | )       |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (31,144   | )      
|Equities issued                                        |                            |                        | 350       |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 350       |        
|Preferred stock issued, net                            |                            |                        |           |              |  |           |        |         |  |            | 86,379 |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | (3,895  | )      |  |   |         |         |   |   |       |   |  |   | 82,484    |        
|Preferred stock redeemed                               |                            |                        |           |              |  |           |        |         |  |            | (2,002 | )         |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (2,002    | )      
|Preferred stock dividends                              |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | (3,575  | )      |  |   |         |         |   |   |       |   |  |   | (3,575    | )      
|Other, net                                             |                            |                        | (2,440    | )            |  |           | (3     | )       |  |            |       |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | (4      | )      |  |   |         |         |   |   |       |   |  |   | (2,447    | )      
|Comprehensive income:                                  |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|                                                       | Net income                 |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          | 90,000  |  |   |         | 33,841 |  |   |         |         |   |   |       |   |  |   |           | 123,841 |  
|                                                       | Other comprehensive income |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         | 33,584  |   |   |       |   |  |   |           | 33,584  |  
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Total comprehensive income                             |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 157,425   |        
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Dividends and equities payable                         |                            |                        | (10,800   | )            |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (27,000  | )       |  |   | (1,249  | )      |  |   |         |         |   |   |       |   |  |   | (39,049   | )      
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Balances, August 31, 2003                              |                            | $                      | 1,087,037 |              |  | $         | 27,718 |         |  | $          | 93,702 |           |  | $           |       |               |  | $         |       |          |  | $ | 63,000   |         |  | $ | 220,517 |        |  | $ | (18,313 | )       |   | $ | 8,050 |   |  | $ | 1,481,711 |        
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        

The accompanying notes are an integral part of
the consolidated financial statements.

F-3



---



##### Table of Contents



CHS INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |          |         |          |  
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------- | -------- | ------- | ------- | -------- | -------- | ------- | -------- | -------- | -------- | ------- | -------- | -
|                                                         |                                                                                                 |                                                         
|                                                         |                                                                                                 | For the years ended August 31                           
|                                                         |                                                                                                 |                                                         
|                                                         |                                                                                                 | 2003                                                     |                                       | 2002     |         | 2001   
|                                                         |                                                                                                 |                                                          |                                       |          |         |        
|                                                         |                                                                                                 |                                                         
|                                                         |                                                                                                 | (dollars in thousands)                                  
|Cash flows from operating activities:                    |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|                                                         | Net income                                                                                      |                                                          | $                                     | 123,841  |         |         | $        | 126,138  |         |          | $        | 178,554  |        
|                                                         | Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                                          |                                       |          |         |         |          |          |         |          |          |          |        
|                                                         |                                                                                                 | Depreciation and amortization                            |                                       |          | 111,347 |         |          |          | 103,986 |          |          |          | 109,180 |         
|                                                         |                                                                                                 | Noncash net income from equity investments               |                                       |          | (47,299 | )       |          |          | (58,133 | )        |          |          | (28,494 | )       
|                                                         |                                                                                                 | Minority interests                                       |                                       |          | 21,950  |         |          |          | 15,390  |          |          |          | 35,098  |         
|                                                         |                                                                                                 | Noncash portion of patronage dividends received          |                                       |          | (1,795  | )       |          |          | (2,327  | )        |          |          | (3,896  | )       
|                                                         |                                                                                                 | Loss (gain) on sale of property, plant and
    equipment |                                       |          | 741     |         |          |          | (6,418  | )        |          |          | (13,941 | )       
|                                                         |                                                                                                 | Deferred tax expense (benefit)                           |                                       |          | 9,000   |         |          |          | 4,400   |          |          |          | (46,625 | )       
|                                                         |                                                                                                 | Other, net                                               |                                       |          | 4,052   |         |          |          | 5,467   |          |          |          | (801    | )       
|                                                         |                                                                                                 | Changes in operating assets and liabilities:             |                                       |          |         |         |          |          |         |          |          |          |         |         
|                                                         |                                                                                                 |                                                          | Receivables                           |          |         | (18,669 | )        |          |         | (32,517  | )        |          |         | 147,922  |  
|                                                         |                                                                                                 |                                                          | Inventories                           |          |         | (25,692 | )        |          |         | (255,107 | )        |          |         | 39,248   |  
|                                                         |                                                                                                 |                                                          | Other current assets and other assets |          |         | (83,347 | )        |          |         | (86,636  | )        |          |         | (24,128  | )
|                                                         |                                                                                                 |                                                          | Customer credit balances              |          |         | 30,238  |          |          |         | (12,025  | )        |          |         | 1,707    |  
|                                                         |                                                                                                 |                                                          | Customer advance payments             |          |         | (45,740 | )        |          |         | 59,988   |          |          |         | (22,800  | )
|                                                         |                                                                                                 |                                                          | Accounts payable and accrued expenses |          |         | 135,310 |          |          |         | 92,781   |          |          |         | (130,142 | )
|                                                         |                                                                                                 |                                                          | Other liabilities                     |          |         | 2,569   |          |          |         | 9,079    |          |          |         | 13,050   |  
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Net cash provided by (used in) operating
    activities  |                                                                                                 |                                                          | 216,506                               |          |         |         | (35,934  | )        |         |          | 253,932  |         
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Cash flows from investing activities:                    |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|                                                         | Acquisition of property, plant and equipment                                                    |                                                          |                                       | (175,689 | )       |         |          | (140,169 | )       |          |          | (97,610  | )      
|                                                         | Proceeds from disposition of property, plant and
    equipment                                  |                                                          |                                       | 26,886   |         |         |          | 20,205   |         |          |          | 35,263   |        
|                                                         | Investments                                                                                     |                                                          |                                       | (43,478  | )       |         |          | (6,211   | )       |          |          | (14,247  | )      
|                                                         | Equity investments redeemed                                                                     |                                                          |                                       | 35,939   |         |         |          | 37,689   |         |          |          | 30,104   |        
|                                                         | Investments redeemed                                                                            |                                                          |                                       | 8,467    |         |         |          | 6,310    |         |          |          | 1,672    |        
|                                                         | Changes in notes receivable                                                                     |                                                          |                                       | (6,630   | )       |         |          | (22,031  | )       |          |          | 533      |        
|                                                         | Acquisitions of intangibles                                                                     |                                                          |                                       | (767     | )       |         |          | (29,501  | )       |          |          | (7,328   | )      
|                                                         | Acquisitions of working capital, net                                                            |                                                          |                                       | (13,030  | )       |         |          | (5,750   | )       |          |          | (1,103   | )      
|                                                         | Distribution to minority owners                                                                 |                                                          |                                       | (4,444   | )       |         |          | (7,413   | )       |          |          | (19,256  | )      
|                                                         | Other investing activities, net                                                                 |                                                          |                                       | (507     | )       |         |          | (685     | )       |          |          | 1,775    |        
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Net cash used in investing activities                    |                                                                                                 |                                                          | (173,253                              | )        |         |         | (147,556 | )        |         |          | (70,197  | )       
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Cash flows from financing activities:                    |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|                                                         | Changes in notes payable                                                                        |                                                          |                                       | (81,383  | )       |         |          | 235,319  |         |          |          | (120,731 | )      
|                                                         | Long-term debt borrowings                                                                       |                                                          |                                       | 175,000  |         |         |          | 30,000   |         |          |          | 116,861  |        
|                                                         | Principal payments on long-term debt                                                            |                                                          |                                       | (89,512  | )       |         |          | (17,968  | )       |          |          | (67,364  | )      
|                                                         | Payments on derivative instruments                                                              |                                                          |                                       | (7,574   | )       |         |          |          |         |          |          |          |        
|                                                         | Changes in checks and drafts outstanding                                                        |                                                          |                                       | 988      |         |         |          | (3,557   | )       |          |          | 3,722    |        
|                                                         | Proceeds from sale of preferred stock, net of
    expenses                                      |                                                          |                                       | 82,484   |         |         |          | 5,897    |         |          |          |          |        
|                                                         | Redemptions of preferred stock                                                                  |                                                          |                                       | (2,002   | )       |         |          |          |         |          |          |          |        
|                                                         | Preferred stock dividends paid                                                                  |                                                          |                                       | (3,575   | )       |         |          | (240     | )       |          |          |          |        
|                                                         | Retirements of equity                                                                           |                                                          |                                       | (31,144  | )       |         |          | (31,145  | )       |          |          | (18,736  | )      
|                                                         | Equity Participation Units redeemed                                                             |                                                          |                                       |          |         |         |          |          |         |          |          | (14,293  | )      
|                                                         | Cash patronage dividends paid                                                                   |                                                          |                                       | (26,478  | )       |         |          | (40,082  | )       |          |          | (26,129  | )      
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Net cash provided by (used in) financing
    activities  |                                                                                                 |                                                          | 16,804                                |          |         |         | 178,224  |          |         |          | (126,670 | )       
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Net increase (decrease) in cash and cash
    equivalents |                                                                                                 |                                                          | 60,057                                |          |         |         | (5,266   | )        |         |          | 57,065   |         
|Cash and cash equivalents at beginning of period         |                                                                                                 |                                                          | 108,192                               |          |         |         | 113,458  |          |         |          | 56,393   |         
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Cash and cash equivalents at end of period               |                                                                                                 | $                                                        | 168,249                               |          |         | $       | 108,192  |          |         | $        | 113,458  |         
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         

The accompanying notes are an integral part of
the consolidated financial statements.

F-4



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##### Table of Contents



CHS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




|   |                                                
|-- | -----------------------------------------------
|1. | Summary of Significant Accounting
    Policies:



| |              
| | -------------
| | Organization:

Effective August 5, 2003, Cenex Harvest
States Cooperatives changed its name to CHS Inc. (CHS or the
Company). CHS is an agricultural cooperative organized for the
mutual benefit of its members. Members of the cooperative are
located throughout the United States. In addition to grain
marketing, oilseed processing and refining, foods and wheat
milling, the Company provides its patrons with energy and
agronomy products as well as other farm supplies. Sales are both
domestic and international.

Effective September 1, 2000, the
Companys Board of Directors approved a resolution
providing for the computation of patronage distributions based
on earnings for financial statement purposes rather than federal
income tax basis earnings. On December 1, 2000, this
resolution was ratified by the Companys members, the
by-laws were amended and beginning with fiscal year 2001
patronage distributions have been calculated based on financial
statement earnings. The by-laws further provide that an amount
of up to 10% of the distributable annual net savings from
patronage sources be added to the unallocated capital reserve as
determined by the Board of Directors.



| |               
| | --------------
| | Consolidation:

The consolidated financial statements include the
accounts of CHS and all of its wholly-owned and majority-owned
subsidiaries, including National Cooperative Refinery
Association (NCRA). The effects of all significant intercompany
transactions have been eliminated.

On September 1, 1999, NCRA and Farmland
Industries, Inc. (Farmland) formed Cooperative Refining, LLC
(CRLLC), which was established to operate and manage the
refineries and related pipelines and terminals of NCRA and
Farmland. On December 31, 2000, NCRA and Farmland signed an
Agreement of Dissolution and dissolved CRLLC.

During 2000, the Company entered into a series of
transactions, the result of which was the exchange of its
agronomy operations, consisting primarily of its interests in
and ownership of the Cenex/ Land OLakes Agronomy Company
and Agro Distribution, LLC and related entities for a 25% equity
ownership interest in Agriliance, LLC (Agriliance). Agriliance
is a distributor of crop nutrients, crop protection products and
other agronomy inputs and services formerly owned by the
Company, Land OLakes, Inc. (Land OLakes) and
Farmland. The company accounts for the Agriliance investment
under the equity method.

During 2003 and 2002, the Company had various
other acquisitions, which have been accounted for using the
purchase method of accounting. Operating results of the
acquisitions are included in the consolidated financial
statements since the respective acquisition dates. The
respective purchase prices were allocated to the assets and
liabilities acquired based upon the estimated fair values. The
excess purchase price over the estimated fair values of the net
assets acquired has been reported as identifiable intangible
assets and goodwill.



| |                  
| | -----------------
| | Cash Equivalents:

Cash equivalents include short-term highly liquid
investments with original maturities of three months or less at
date of acquisition.



| |             
| | ------------
| | Inventories:

Grain, processed grain, oilseed and processed
oilseed are stated at net realizable values which approximates
market values. All other inventories are stated at the lower of
cost or market. Costs for inventories produced or modified by
the Company through a manufacturing process include fixed and

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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


variable production costs and raw material costs,
and in-bound freight costs for raw materials over the amount
charged to cost of goods sold. Costs for inventories purchased
for resale include the cost of products and any freight incurred
to place the products at the Companys point of sales. The
cost of certain energy inventories (wholesale refined products,
crude oil and asphalt) is determined on the last-in, first-out
(LIFO) method; all other inventories of non-grain products
purchased for resale are valued on the first-in, first-out
(FIFO) and average cost methods.



| |                                      
| | -------------------------------------
| | Derivative Financial
    Instruments:

The Company enters into exchange-traded commodity
futures and options contracts to hedge its exposure to price
fluctuations on energy, grain and oilseed transactions to the
extent considered practicable for minimizing risk. Futures and
options contracts used for hedging are purchased and sold
through regulated commodity exchanges. Fluctuations in inventory
valuations, however, may not be completely hedged, due in part
to the absence of satisfactory hedging facilities for certain
commodities and geographical areas and in part to the
Companys assessment of its exposure from expected price
fluctuations. The Company also manages its risks by entering
into fixed price purchase contracts with pre-approved producers
and establishing appropriate limits for individual suppliers.
Fixed price sales contracts are entered into with customers of
acceptable creditworthiness, as internally evaluated. The
Company is exposed to loss in the event of nonperformance by the
counterparties to the contracts; however, the Company does not
anticipate nonperformance by counterparties.

Commodity trading in futures and options
contracts is a natural extension of cash market trading. The
commodity futures and options markets have underlying principles
of increased liquidity and longer trading periods than the cash
market, and hedging is one method of reducing exposure to price
fluctuations. The Companys use of the derivative
instruments described above reduces the effects of price
volatility, thereby protecting against adverse short-term price
movements while somewhat limiting the benefits of short-term
price movements. Changes in market value of derivative
instruments described above are recognized in the consolidated
statements of operations in the period such changes occur. The
fair value of futures and options contracts are determined
primarily from quotes listed on regulated commodity exchanges.
Fixed price purchase and sales contracts are with various
counterparties, and the fair values of such contracts are
determined from the market price of the underlying product. At
August 31, 2003, the Companys derivative assets and
liabilities were $54.5 million and $46.5 million,
respectively. At August 31, 2002, the Companys
derivative assets and liabilities were $53.8 million and
$67.9 million, respectively.



| |                     
| | --------------------
| | Commodity Price Risk

The Company utilizes futures and options
contracts offered through regulated commodity exchanges to
reduce price risk. The Company is exposed to risk of loss in the
market value of inventories and fixed or partially fixed
purchase and sale contracts. In order to reduce that risk, the
Company generally takes opposite and offsetting positions using
futures contracts or options. Certain commodities cannot be
hedged with futures or options contracts because such contracts
are not offered for these commodities by regulated commodity
exchanges. Inventories and purchase contracts for those
commodities are hedged with forward sales contracts, to the
extent practical, in order to arrive at a net commodity position
within the formal position limits set by the Company and deemed
prudent for each of those commodities. Commodities for which
future contracts and options are available are also typically
hedged with forward contracts, with futures and options used to
hedge within position limits the remaining portion. These
futures and options contracts and forward purchase and sales
contracts used to hedge against commodity price changes are
effective economic hedges of price risk, but they are not
designated as, and accounted for as, hedging instruments for
accounting purposes.

Unrealized gains and losses on futures contracts
and options used as economic hedges of grain and oilseed
inventories and fixed price contracts are recognized in cost of
goods sold for financial reporting on a

F-6



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


monthly basis using market based prices.
Inventories and fixed price contracts are marked to fair value
using market based prices so that gains or losses on the
derivative contracts are offset by gains or losses on
inventories and fixed price contracts during the same accounting
period.

Unrealized gains and losses on futures contracts
and options used as economic hedges of energy inventories and
fixed price contracts are recognized in cost of goods sold for
financial reporting on a monthly basis using market based
prices. The inventories hedged with these derivatives are valued
at the lower of cost or market, and fixed price contracts are
marked to fair value using market based prices. Certain fixed
price contracts related to propane in the Energy segment meet
the normal purchase and sales exemption, and thus are not
required to be marked to fair value.



| |                   
| | ------------------
| | Interest Rate Risk

The Company manages interest expense using fixed
and floating rate debt. These debt instruments are carried at
amounts approximating estimated fair value. Short-term debt used
to finance inventories and receivables is represented by notes
payable within thirty days or less so that the blended interest
rate to the Company for all such notes approximates current
market rates. Long-term debt used to finance non-current assets
has various fixed interest rates and is payable at various dates
as to minimize the effect of market interest rate changes. The
effective interest rate to the Company on fixed rate debt
outstanding on August 31, 2003, was approximately 6.5%.

In August 2002, the Company entered into interest
rate treasury lock instruments to secure the interest rate
related to a portion of its private placement debt issued on
October 18, 2002. These instruments were designated and are
effective as cash flow hedges for accounting purposes, and
accordingly, the loss on settlement was recorded as a component
of other comprehensive income. Interest expense for the year
ended August 31, 2003, includes $0.7 million related
to the interest rate derivatives. The additional interest
expense is an offset to the lower actual interest paid on the
outstanding debt instruments.



| |                      
| | ---------------------
| | Foreign Currency Risk

The Company conducts essentially all of its
business in U.S. dollars except for grain marketing operations
in Brazil, and had minimal risk regarding foreign currency
fluctuations during 2003. Foreign currency fluctuations do,
however, impact the ability of foreign buyers to purchase U.S.
agricultural products and the competitiveness of U.S.
agricultural products compared to the same products offered by
alternative sources of world supply.



| |             
| | ------------
| | Investments:

Investments in other cooperatives are stated at
cost, plus patronage dividends received in the form of capital
stock and other equities. Patronage dividends are recorded at
the time qualified written notices of allocation are received.
Joint ventures and other investments, in which the Company has
significant ownership and influence, but not control, are
accounted for in the consolidated financial statements under the
equity method of accounting. Investments in other debt and
equity securities are considered available for sale financial
instruments and are stated at market value, with unrealized
amounts included as a component of accumulated other
comprehensive income (loss).



| |                                   
| | ----------------------------------
| | Property, Plant and
    Equipment:

Property, plant and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and
amortization are provided on the straight-line method by charges
to operations at rates based upon the expected useful lives of
individual or groups of assets (primarily 15 to 40 years
for land improvements and buildings and 3 to 20 years for
machinery, equipment, office and other). The cost and

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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


related accumulated depreciation and amortization
of assets sold or otherwise disposed of are removed from the
related accounts and resulting gains or losses are reflected in
operations. Expenditures for maintenance and repairs and minor
renewals are expensed, while costs of major renewals and
betterments are capitalized.

The Company periodically reviews property, plant
and equipment and other long-lived assets in order to assess
recoverability based on projected income and related cash flows
on an undiscounted basis. Should the sum of the expected future
net cash flows be less than the carrying value, an impairment
loss would be recognized. An impairment loss would be measured
by the amount by which the carrying value of the asset exceeds
the fair value of the asset.



| |                                          
| | -----------------------------------------
| | Goodwill and Other Intangible
    Assets:

Effective September 1, 2001, the Company
adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. This statement discontinued the
amortization of goodwill and indefinite-lived intangible assets,
subject to periodic impairment testing. At August 31, 2001,
goodwill (net of accumulated amortization) prior to the adoption
of SFAS No. 142, was $29.2 million and was included as
a component of other assets. The effect of adopting the new
standard will reduce goodwill amortization expense by
approximately $2.0 million annually. No changes to the
carrying value of goodwill and other intangible assets were
required as a result of the adoption of SFAS No. 142.
Subsequent impairment testing is performed annually as well as
when a triggering event indicating impairment may have occurred.
During 2003, as a result of the impairment testing, the Company
believes that no impairments are required.

In 2001, the Company recorded goodwill
amortization expense of $2.6 million. Had SFAS No. 142
been in effect during the year ended August 31, 2001, net
income would have been $181.1 million.



| |                     
| | --------------------
| | Revenue Recognition:

The Company provides a wide variety of products
and services, from agricultural inputs such as fuels, farm
supplies and crop nutrients, to agricultural outputs that
include grain and oilseed, processed grains and oilseeds and
food products. Grain and oilseed sales are recorded after the
commodity has been delivered to its destination and final
weights, grades and settlement price have been agreed upon. All
other sales are recognized upon transfer of title, which could
occur upon either shipment or receipt by the customer, depending
upon the contract. Amounts billed to a customer as part of a
sales transaction related to shipping and handling are included
in net sales. Service revenues are recorded only after such
services have been rendered, and are included in other revenues.



| |                            
| | ---------------------------
| | Environmental Expenditures:




Liabilities related to remediation of
contaminated properties are recognized when the related costs
are considered probable and can be reasonably estimated.
Estimates of environmental costs are based on current available
facts, existing technology, undiscounted site-specific costs and
currently enacted laws and regulations. Recoveries, if any, are
recorded in the period in which recovery is considered probable.
Liabilities are monitored and adjusted as new facts or changes
in law or technology occur. Environmental expenditures are
capitalized when such costs provide future economic benefits.
The Company accrues legal costs expected to be incurred in
connection with loss contingencies when those legal costs are
probably and can be reasonably estimated.






| |              
| | -------------
| | Income Taxes:

The Company is a nonexempt agricultural
cooperative and files a consolidated federal income tax return
with its 80% or more owned subsidiaries. The Company is subject
to tax on income from

F-8



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


nonpatronage sources and undistributed
patronage-sourced income. Deferred income taxes reflect the
impact of temporary differences between the amounts of assets
and liabilities recognized for financial reporting purposes and
such amounts recognized for federal and state income tax
purposes, at each year end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized.



| |                      
| | ---------------------
| | Comprehensive Income:

Comprehensive income (defined as the change in
equity of a business enterprise during a period from sources
other than those resulting from investments by owners and
distribution to owners), primarily includes net income and the
effects of minimum pension liability adjustments. Total
comprehensive income is reflected in the consolidated statements
of equities and comprehensive income.



| |                  
| | -----------------
| | Use of Estimates:

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.



| |                                      
| | -------------------------------------
| | Recent Accounting
    Pronouncements:

During 2003, the Company adopted SFAS
No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The
Companys Energy segment operates oil refineries and
related pipelines for which the Company would be subject to
Asset Retirement Obligations (ARO) if such assets were to be
dismantled. The Company, however, expects to operate its
refineries and related pipelines indefinitely. Since the time
period to dismantle these assets is indeterminate, a
corresponding ARO is not estimable and therefore has not been
recorded.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities. The interpretation addresses
consolidation of certain entities in which equity investors do
not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties. It also requires consolidation by
primary beneficiary. The interpretation applies immediately to
variable interest entities created after January 31, 2003,
and to variable interest entities in which an enterprise obtains
an interest after that date. It applies in the first fiscal year
or interim period beginning after December 15, 2003, to
variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003.
The Company believes that the effects of adopting this standard
will not have a material effect on the Company.

On April 30, 2003, the FASB issued SFAS
No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS
No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under SFAS
No. 133. The new guidance amends SFAS No. 133 for
decisions made as part of the Derivatives Implementation Group
process that effectively required amendments to SFAS
No. 133, and decisions made in connection with other FASB
projects dealing with financial instruments and in connection
with implementation issues raised in relation to the application
of the definition of a derivative and characteristics of a
derivative that contains financing components. In addition, it
clarifies when a

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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


derivative contains a financing component that
warrants special reporting in the statements of cash flows. SFAS
No. 149 is effective for contracts entered into or modified
and for hedging relationships designated after June 30,
2003. The Company believes that the effects of adopting this
standard do not have a material effect on the Company.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or
an asset in certain circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities which are subject to the
provisions for the first fiscal period beginning after
December 15, 2003. The Statement is to be implemented by
reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance
date of the Statement and still existing at the beginning of the
interim period of adoption. The Company believes that the
effects of adopting this standard will not have a material
effect on the Company.



| |                   
| | ------------------
| | Reclassifications:

Certain reclassifications have been made to prior
years amounts to conform to current year classifications.
In addition, the Company has made changes to net sales and cost
of goods sold for years ended August 31, 2002 and 2001, to
eliminate certain intercompany sales identified subsequent to
the issuance of the 2002 Annual Report. These reclassifications
and changes had no effect on previously reported net income,
equities and comprehensive income, or cash flows.

2.     Receivables:

Receivables as of August 31, 2003 and 2002
are as follows:

|                                      |  |                        |         |      |  |   |         | 
|------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                                      |  | 2003                   |         | 2002
|                                      |  |                        |         |     
|                                      |  |                       
|                                      |  | (dollars in thousands)
|Trade                                 |  | $                      | 748,398 |      |  | $ | 717,888 | 
|Other                                 |  |                        | 47,000  |      |  |   | 49,846  | 
|                                      |  |                        |         |      |  |   |         | 
|                                      |  |                        | 795,398 |      |  |   | 767,734 | 
|Less allowances for doubtful accounts |  |                        | 31,618  |      |  |   | 26,156  | 
|                                      |  |                        |         |      |  |   |         | 
|                                      |  | $                      | 763,780 |      |  | $ | 741,578 | 
|                                      |  |                        |         |      |  |   |         | 

All international sales are denominated in U.S.
dollars. International sales for the years ended August 31,
2003, 2002 and 2001 are as follows:

|                              |  |                       |       |      |  |      |       |  |  |   |       | 
|----------------------------- |  | --------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                              |  | 2003                  |       | 2002 |  | 2001
|                              |  |                       |       |      |  |     
|                              |  |                      
|                              |  | (dollars in millions)
|Africa                        |  | $                     | 99    |      |  | $    | 135   |  |  | $ | 138   | 
|Asia                          |  |                       | 815   |      |  |      | 407   |  |  |   | 403   | 
|Europe                        |  |                       | 156   |      |  |      | 282   |  |  |   | 255   | 
|North America, excluding U.S. |  |                       | 367   |      |  |      | 298   |  |  |   | 317   | 
|South America                 |  |                       | 166   |      |  |      | 100   |  |  |   | 101   | 
|                              |  |                       |       |      |  |      |       |  |  |   |       | 
|                              |  | $                     | 1,603 |      |  | $    | 1,222 |  |  | $ | 1,214 | 
|                              |  |                       |       |      |  |      |       |  |  |   |       | 

F-10



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


3.     Inventories:

Inventories as of August 31, 2003 and 2002
are as follows:

|                            |  |                        |         |      |  |   |         | 
|--------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                            |  | 2003                   |         | 2002
|                            |  |                        |         |     
|                            |  |                       
|                            |  | (dollars in thousands)
|Grain and oilseed           |  | $                      | 370,381 |      |  | $ | 393,095 | 
|Energy                      |  |                        | 292,095 |      |  |   | 229,981 | 
|Feed and farm supplies      |  |                        | 95,589  |      |  |   | 91,138  | 
|Processed grain and oilseed |  |                        | 42,688  |      |  |   | 36,264  | 
|Other                       |  |                        | 1,130   |      |  |   | 9,185   | 
|                            |  |                        |         |      |  |   |         | 
|                            |  | $                      | 801,883 |      |  | $ | 759,663 | 
|                            |  |                        |         |      |  |   |         | 

As of August 31, 2003, the Company valued
approximately 24% of inventories, primarily related to energy,
using the lower of cost, determined on the LIFO method, or
market (26% as of August 31, 2002). If the FIFO method of
accounting for these inventories had been used, inventories
would have been higher than the reported amount by
$86.3 million and $40.5 million at August 31,
2003 and 2002, respectively.

4.     Investments:

Investments as of August 31, 2003 and 2002
are as follows:

|                |                            |                        |         |         |  |   |         |         | 
|--------------- | -------------------------- | ---------------------- | ------- | ------- |  | - | ------- | ------- | 
|                |                            | 2003                   |         | 2002   
|                |                            |                        |         |        
|                |                            |                       
|                |                            | (dollars in thousands)
|Cooperatives:   |                            |                        |         |         |  |   |         |        
|                | CF Industries, Inc.        |                        | $       | 152,996 |  |   | $       | 152,996 | 
|                | CoBank ACB (CoBank)        |                        |         | 22,505  |  |   |         | 30,069  | 
|                | Ag Processing, Inc.        |                        |         | 24,481  |  |   |         | 25,797  | 
|                | Land OLakes, Inc.         |                        |         | 27,105  |  |   |         | 26,232  | 
|Joint ventures: |                            |                        |         |         |  |   |         |        
|                | Ventura Foods, LLC         |                        |         | 107,464 |  |   |         | 108,981 | 
|                | United Country Brands, LLC |                        |         | 129,286 |  |   |         | 86,175  | 
|                | TEMCO, LLC                 |                        |         | 9,087   |  |   |         | 8,414   | 
|Other           |                            |                        | 59,969  |         |  |   | 57,943  |        
|                |                            |                        |         |         |  |   |         |        
|                |                            | $                      | 532,893 |         |  | $ | 496,607 |        
|                |                            |                        |         |         |  |   |         |        

CHSs investment in CF Industries, Inc. (CF)
is carried at cost, including allocated patronage refunds. Since
CF is a cooperative, CHS recognizes income from this investment
only when patronage refunds are received. Over the past
five years CF has generated operating losses, none of which
were allocated to its owners. CHS management has performed the
appropriate impairment tests of this investment, and based upon
those tests, believes that fair market value exceeds its
carrying value. CHS will continue to perform impairment tests
annually, including reviewing operating results, or as
circumstances dictate, which could result in an impairment to
its CF investment.

F-11



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


In March 2000, the Company purchased an
additional 10% interest in Ventura Foods, LLC, its consumer
products and packaging joint venture, for $25.6 million, of
which $13.8 million was goodwill. The Company has a 50%
interest in this joint venture. The following provides
summarized unaudited financial information for Ventura Foods,
LLC balance sheets as of August 31, 2003 and 2002, and
statements of operations for the twelve months ended
August 31, 2003, 2002 and 2001:

|                        |  |                        |         |      |  |   |         | 
|----------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                        |  | 2003                   |         | 2002
|                        |  |                        |         |     
|                        |  |                       
|                        |  | (dollars in thousands)
|Current assets          |  | $                      | 193,632 |      |  | $ | 171,084 | 
|Non-current assets      |  |                        | 231,649 |      |  |   | 231,045 | 
|Current liabilities     |  |                        | 227,400 |      |  |   | 133,230 | 
|Non-current liabilities |  |                        | 21,738  |      |  |   | 90,819  | 

|             |  |                        |           |      |  |      |           |  |  |   |         | 
|------------ |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | ------- | 
|             |  | 2003                   |           | 2002 |  | 2001
|             |  |                        |           |      |  |     
|             |  |                       
|             |  | (dollars in thousands)
|Net sales    |  | $                      | 1,165,823 |      |  | $    | 1,013,475 |  |  | $ | 925,962 | 
|Gross profit |  |                        | 155,274   |      |  |      | 181,217   |  |  |   | 161,405 | 
|Net income   |  |                        | 42,837    |      |  |      | 75,368    |  |  |   | 71,148  | 

Effective January 1, 2000, CHS, Farmland and
Land OLakes created Agriliance, a distributor of crop
nutrients, crop protection products and other agronomy inputs
and services. At formation, Agriliance managed the agronomy
marketing and distribution operations of CHS (which included
principally its wholesale agronomy, Cenex/Land OLakes
Agronomy Company and Agro Distribution, LLC business
operations), Farmland and Land OLakes, with the Company
exchanging the right to use its agronomy operations for 26.455%
of the results of the jointly managed operations.

In March 2000, the Company sold 1.455% of its
economic interest in the operations collectively managed by
Agriliance to Land OLakes, resulting in a gain of
$7.4 million. This left the Company with a 25% economic
interest in such operations. In July 2000, Agriliance secured
its own financing, which is without recourse to the Company.
Agriliance also purchased the net working capital related to
agronomy operations from each of its member owners, consisting
primarily of trade accounts receivable and inventories, net of
accounts payable. On July 31, 2000, the Company contributed
outright its ownership interest in the Cenex/ Land OLakes
Agronomy Company and in Agro Distribution, LLC, with a total
investment of $64.7 million, along with the rest of its
wholesale agronomy business, to Agriliance. The Company retained
a 25% interest in Agriliance after the outright contribution of
its ownership interests in those two ventures and its wholesale
agronomy business. Agriliance ownership also includes Farmland
(25%) and Land OLakes (50%). The interests of the Company
and Farmland are held through equal ownership in United Country
Brands, LLC, a joint venture holding company whose sole
operations consist of the ownership of a 50% interest in
Agriliance. The Companys equity in the joint venture was
recorded at the historical carrying value of its ownership in
Cenex/ Land OLakes Agronomy Company and Agro Distribution,
LLC and no gain or loss was recorded on the exchange.

In April 2003, the Company acquired an additional
economic interest in the Agriliance wholesale crop protection
business (the CPP Business), which constitutes only
a part of the Agriliance business operations. The Company
acquired 13.1% of the CPP Business for a cash payment of
$34.3 million. The economic interests in Agriliance are
owned 50% by Land OLakes, 25% plus an additional 13.1% of
the CPP Business by the Company and 25% less 13.1% of the CPP
Business by Farmland. The ownership or governance interests in
Agriliance did not change. Agriliances earnings or losses
are split among the members based upon the respective economic
interest of each member.

F-12



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following provides summarized financial
information for Agriliance balance sheets as of August 31,
2003 and 2002, and statements of operations for the years ended
August 31, 2003, 2002 and 2001:

|                        |  |                        |           |      |  |   |         | 
|----------------------- |  | ---------------------- | --------- | ---- |  | - | ------- | 
|                        |  | 2003                   |           | 2002
|                        |  |                        |           |     
|                        |  |                       
|                        |  | (dollars in thousands)
|Current assets          |  | $                      | 1,249,941 |      |  | $ | 922,958 | 
|Non-current assets      |  |                        | 119,615   |      |  |   | 134,247 | 
|Current liabilities     |  |                        | 1,083,743 |      |  |   | 700,903 | 
|Non-current liabilities |  |                        | 27,061    |      |  |   | 107,960 | 

|                         |  |                        |           |      |  |      |           |  |  |   |           | 
|------------------------ |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                         |  | 2003                   |           | 2002 |  | 2001
|                         |  |                        |           |      |  |     
|                         |  |                       
|                         |  | (dollars in thousands)
|Net sales                |  | $                      | 3,485,623 |      |  | $    | 3,625,849 |  |  | $ | 4,072,248 | 
|Earnings from operations |  |                        | 67,239    |      |  |      | 57,604    |  |  |   | 50,423    | 
|Net income               |  |                        | 60,741    |      |  |      | 47,044    |  |  |   | 25,053    | 

Disclosure of the fair value of financial
instruments to which the Company is a party includes estimates
and assumptions which may be subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Financial instruments are
carried at amounts that approximate estimated fair values.
Investments in cooperatives and joint ventures have no quoted
market prices.

Various agreements with other owners of investee
companies and a majority-owned subsidiary set out parameters
whereby CHS may buy and sell additional interests in those
companies, upon the occurrence of certain events, at fair values
determinable as set forth in the specific agreements.

5.     Property,
Plant and Equipment:

A summary of property, plant and equipment as of
August 31, 2003 and 2002 is as follows:

|                                               |  |                        |           |      |  |   |           | 
|---------------------------------------------- |  | ---------------------- | --------- | ---- |  | - | --------- | 
|                                               |  | 2003                   |           | 2002
|                                               |  |                        |           |     
|                                               |  |                       
|                                               |  | (dollars in thousands)
|Land and land improvements                     |  | $                      | 60,453    |      |  | $ | 63,045    | 
|Buildings                                      |  |                        | 380,940   |      |  |   | 371,107   | 
|Machinery and equipment                        |  |                        | 1,508,963 |      |  |   | 1,470,475 | 
|Office and other                               |  |                        | 68,369    |      |  |   | 62,144    | 
|Construction in progress                       |  |                        | 159,555   |      |  |   | 71,540    | 
|                                               |  |                        |           |      |  |   |           | 
|                                               |  |                        | 2,178,280 |      |  |   | 2,038,311 | 
|Less accumulated depreciation and amortization |  |                        | 1,055,298 |      |  |   | 980,890   | 
|                                               |  |                        |           |      |  |   |           | 
|                                               |  | $                      | 1,122,982 |      |  | $ | 1,057,421 | 
|                                               |  |                        |           |      |  |   |           | 

In January 2002, the Company formed a limited
liability company with Cargill, Incorporated to engage in wheat
flour milling and processing. The Company holds a 24% interest
in the entity, which is known as Horizon Milling, LLC. The
Company is leasing certain of its wheat milling facilities and
related equipment to Horizon Milling under an operating lease
agreement. The book value of the leased milling assets at
August 31, 2003, was $99.4 million, net of accumulated
depreciation of $31.3 million.

For the years ended August 31, 2003, 2002
and 2001, the Company capitalized interest of $3.9 million,
$2.1 million and $1.2 million, respectively, related
to capitalized construction projects.

F-13



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


6.     Other
Assets:

Other assets as of August 31, 2003 and 2002
are as follows:

|                                                                                              |  |                        |         |      |  |   |         | 
|--------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                                                                                              |  | 2003                   |         | 2002
|                                                                                              |  |                        |         |     
|                                                                                              |  |                       
|                                                                                              |  | (dollars in thousands)
|Goodwill                                                                                      |  | $                      | 27,052  |      |  | $ | 27,926  | 
|Customer lists, less accumulated amortization of
    $5,112 and $3,511, respectively          |  |                        | 9,414   |      |  |   | 8,447   | 
|Non-compete covenants, less accumulated
    amortization of $11,774 and $2,896, respectively  |  |                        | 1,766   |      |  |   | 11,204  | 
|Other intangible assets, less accumulated
    amortization of $1,986 and $2,462, respectively |  |                        | 14,607  |      |  |   | 15,795  | 
|Prepaid pension and other benefit assets                                                      |  |                        | 151,389 |      |  |   | 54,230  | 
|Deferred tax asset                                                                            |  |                        | 28,689  |      |  |   | 50,544  | 
|Notes receivable                                                                              |  |                        | 1,991   |      |  |   | 4,822   | 
|Other                                                                                         |  |                        | 4,612   |      |  |   | 4,354   | 
|                                                                                              |  |                        |         |      |  |   |         | 
|                                                                                              |  | $                      | 239,520 |      |  | $ | 177,322 | 
|                                                                                              |  |                        |         |      |  |   |         | 

Intangible assets subject to amortization are
provided on a straight-line basis over the number of years that
approximate their respective useful lives (ranging from 2 to
15 years). The straight-line method of amortization
reflects an appropriate allocation of the cost of intangible
assets to earnings in proportion to the amount of economic
benefit obtained by the Company in each reporting period.
Amortization expenses for the years ended August 31, 2003
and 2002, were $12.2 million and $4.2 million,
respectively. The estimated amortization expense related to
intangible assets subject to amortization for the next five
years will approximate $2.7 million annually.

Through Country Energy, LLC, formerly a joint
venture with Farmland, the Company marketed refined petroleum
products including gasoline, diesel fuel, propane and lubricants
under the Cenex brand. On November 30, 2001, the Company
purchased the wholesale energy business of Farmland, as well as
all interest in Country Energy, LLC. Based on estimated fair
values, $26.4 million of the purchase price was allocated
to intangible assets, primarily trademarks, tradenames and
non-compete agreements. The intangible assets had a
weighted-average life of approximately 12 years. During the
year ended August 31, 2003, the Company accelerated the
amortization of the non-compete agreement due to Farmlands
July 31, 2003 notification that it intends to liquidate its
assets in bankruptcy. The Company had additional amortization
expense of $7.5 million during 2003 related to the
acceleration, and the asset has a zero book value as of
August 31, 2003. The Company also entered into an exclusive
two-year supply agreement to purchase, at prevailing market
prices, all of the refined fuels production from Farmlands
Coffeyville, Kansas facility. On May 22, 2003, the Company
gave notice to Farmland that it will not renew the supply
agreement, and the non-renewal is effective November 30,
2003. The Companys management is confident that
alternative sources of supply will be available and that the
non-renewal will not have a material affect on the Company.

F-14



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


7.     Notes Payable
and Long-Term Debt:

Notes payable and long-term debt as of
August 31, 2003 and 2002 consisted of the following:

|                     |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |         | 
|-------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | -------------- | --------------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                     |                                                                                                                                        |                             
|                     |                                                                                                                                        | Interest rates at August 31,
|                     |                                                                                                                                        |                             
|                     |                                                                                                                                        | 2003                         |                | 2003            |  | 2002
|                     |                                                                                                                                        |                              |                |                 |  |     
|                     |                                                                                                                                        |                             
|                     |                                                                                                                                        | (dollars in thousands)      
|Notes payable (a)(i) |                                                                                                                                        |                              | 1.63% to 1.96% |                 |  | $    | 251,131 |         |  | $ | 332,514 |        
|                     |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |        
|Long-term debt:      |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |        
|                     | Revolving term loans from cooperative and other
    banks, payable in installments through 2009, when the balance is
    due (b)(c)(i) |                              |                | 2.14% to 13.00% |  |      | $       | 168,032 |  |   | $       | 254,962 | 
|                     | Private placement, payable in equal installments
    beginning in 2008 through 2013 (d)(i)                                             |                              |                | 6.81%           |  |      |         | 225,000 |  |   |         | 225,000 | 
|                     | Private placement, payable in installments
    beginning in 2007 through 2018 (e)(i)                                                   |                              |                | 4.96% to 5.60%  |  |      |         | 175,000 |  |   |         |        | 
|                     | Private placement, payable in equal installments
    beginning in 2005 through 2011 (f)(i)                                             |                              |                | 7.43% to 7.90%  |  |      |         | 80,000  |  |   |         | 80,000  | 
|                     | Industrial Revenue Bonds, payable in installments
    through 2011 (g)                                                                 |                              |                | 5.23% to 12.97% |  |      |         | 5,831   |  |   |         | 7,444   | 
|                     | Other notes and contracts (h)                                                                                                          |                              |                | 5.70% to 12.17% |  |      |         | 9,310   |  |   |         | 4,718   | 
|                     |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |        
|Total long-term debt |                                                                                                                                        |                              |                |                 |  |      | 663,173 |         |  |   | 572,124 |        
|Less current portion |                                                                                                                                        |                              |                |                 |  |      | 14,951  |         |  |   | 89,032  |        
|                     |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |        
|Long-term portion    |                                                                                                                                        |                              |                |                 |  | $    | 648,222 |         |  | $ | 483,092 |        
|                     |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |        

|                                              |                 |      |  |       |  |  |  |       | 
|--------------------------------------------- | --------------- | ---- |  | ----- |  |  |  | ----- | 
|                                              |                 | 2003 |  | 2002 
|                                              |                 |      |  |      
|Weighted average interest rates at August 31: |                 |      |  |       |  |  |  |      
|                                              | Short-term debt |      |  | 1.83% |  |  |  | 2.58% | 
|                                              | Long-term debt  |      |  | 6.52% |  |  |  | 6.38% | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The Company finances its working capital needs
    through short-term lines of credit with a syndication of banks.
    The Company has a 364-day credit facility of
    $600.0 million, all of which is committed, and of which
    $250.0 million was outstanding on August 31, 2003. In
    addition to this short-term line of credit, the Company has a
    364-day credit facility dedicated to NCRA with a syndication of
    banks in the amount of $30.0 million, all of which is
    committed, with no amounts outstanding on August 31, 2003.
    Other miscellaneous notes payable totaled $1.1 million at
    August 31, 2003.
|   
|(b) | The Company established a $100.0 million
    three-year revolving credit facility with a syndication of
    banks. On August 31, 2003, the Company had no outstanding
    balance on this facility.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(c) | The Company established a long-term credit
    agreement which committed $200.0 million of long-term
    borrowing capacity to the Company through May 31, 1999, of which
    $164.0 million was drawn before the expiration date of that
    commitment. On August 31, 2003, $137.8 million was
    outstanding. NCRA term loans of $15.0 million are
    collateralized by NCRAs investment in CoBank.                                                                                                                                                                                                                                  
|   
|(d) | The Company entered into a private placement with
    several insurance companies for long-term debt in the amount of
    $225.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(e) | In October 2002, the Company entered into a
    private placement with several insurance companies for long-term
    debt in the amount of $175.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-15



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(f) | In January 2001, the Company entered into a note
    purchase and private shelf agreement with Prudential Insurance
    Company. A long-term note was issued for $25.0 million and
    a subsequent note for $55.0 million was issued in March
    2001.                                           
|   
|(g) | Industrial Revenue Bonds in the amount of
    $1.6 million are collateralized by property, plant and
    equipment, primarily energy refinery equipment, with a cost of
    approximately $152.0 million, less accumulated depreciation
    of approximately $120.4 million as of August 31, 2003. 
|   
|(h) | Grain Suppliers, LLC, a wholly-owned subsidiary
    of the Company, has other notes payable of $5.4 million
    collateralized by property, plant and equipment, with a cost of
    approximately $8.3 million, less accumulated depreciation of
    approximately $0.2 million on August 31, 2003.
|   
|(i) | The debt is unsecured, however restrictive
    covenants under various agreements have requirements for
    maintenance of minimum working capital levels and other
    financial ratios.                                                                                                          

The fair value of long-term debt approximates
book value as of August 31, 2003 and 2002.

The aggregate amount of long-term debt payable as
of August 31, 2003 is as follows:

|           |  |                        |         | 
|---------- |  | ---------------------- | ------- | 
|           |  | (dollars in thousands)
|2004       |  | $                      | 14,951  | 
|2005       |  |                        | 34,716  | 
|2006       |  |                        | 35,176  | 
|2007       |  |                        | 59,671  | 
|2008       |  |                        | 98,190  | 
|Thereafter |  |                        | 420,469 | 
|           |  |                        |         | 
|           |  | $                      | 663,173 | 
|           |  |                        |         | 

The Company is in compliance with all debt
covenants and restrictions as of August 31, 2003.

8.     Income
Taxes:

As a result of the Companys by-law changes
during 2001, and the by-law changes of its majority-owned
subsidiary (NCRA) in 2002, to distribute patronage based on
financial statement earnings, the statutory rate applied to the
cumulative differences between financial statement earnings and
tax basis earnings, has been changed. In connection with this
change the Company recorded a deferred tax benefit of
$10.9 million as of August 31, 2002, and
$34.2 million as of August 31, 2001. The
$10.9 million deferred tax benefit recorded as a result of
the change in patronage distribution by NCRA as of
August 31, 2002, has been offset by a $10.9 million
NCRA valuation allowance. Additional valuation allowances of
$1.7 million, $6.2 million and $2.4 million were
provided to offset deferred tax benefits generated by NCRA as of
August 31, 2003, 2002 and 2001, respectively.

The provision for income taxes for the years
ended August 31, 2003, 2002 and 2001 is as follows:

|                    |  |                        |        |      |  |      |         |   |  |   |         |  
|------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                    |  | 2003                   |        | 2002 |  | 2001
|                    |  |                        |        |      |  |     
|                    |  |                       
|                    |  | (dollars in thousands)
|Current             |  | $                      | 3,700  |      |  | $    | 14,300  |   |  | $ | 21,025  |  
|Deferred            |  |                        | 7,300  |      |  |      | (12,700 | ) |  |   | (49,025 | )
|Valuation allowance |  |                        | 1,700  |      |  |      | 17,100  |   |  |   | 2,400   |  
|                    |  |                        |        |      |  |      |         |   |  |   |         |  
|Income taxes        |  | $                      | 12,700 |      |  | $    | 18,700  |   |  | $ | (25,600 | )
|                    |  |                        |        |      |  |      |         |   |  |   |         |  

F-16



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The tax effect of temporary differences of
deferred tax assets and liabilities as of August 31, 2003
and 2002 is as follows:

|                                      |                                                                    |                        |         |        |  |   |         |        | 
|------------------------------------- | ------------------------------------------------------------------ | ---------------------- | ------- | ------ |  | - | ------- | ------ | 
|                                      |                                                                    | 2003                   |         | 2002  
|                                      |                                                                    |                        |         |       
|                                      |                                                                    |                       
|                                      |                                                                    | (dollars in thousands)
|Deferred tax assets:                  |                                                                    |                        |         |        |  |   |         |       
|                                      | Accrued expenses and valuation reserves                            |                        | $       | 53,521 |  |   | $       | 49,236 | 
|                                      | Postretirement health care and deferred
    compensation           |                        |         | 29,153 |  |   |         | 32,671 | 
|                                      | Property, plant and equipment                                      |                        |         | 9,369  |  |   |         | 11,532 | 
|                                      | Alternative minimum tax credit and patronage loss
    carryforward |                        |         | 8,948  |  |   |         | 6,993  | 
|                                      | Other                                                              |                        |         | 19,316 |  |   |         | 12,439 | 
|                                      |                                                                    |                        |         |        |  |   |         |       
|Total deferred tax assets             |                                                                    |                        | 120,307 |        |  |   | 112,871 |       
|                                      |                                                                    |                        |         |        |  |   |         |       
|Deferred tax liabilities:             |                                                                    |                        |         |        |  |   |         |       
|                                      | Pension, including minimum liability                               |                        |         | 34,531 |  |   |         | 2,635  | 
|                                      | Equity method investments                                          |                        |         | 23,310 |  |   |         | 20,482 | 
|                                      | Other                                                              |                        |         |        |  |   |         | 730    | 
|                                      |                                                                    |                        |         |        |  |   |         |       
|Total deferred tax liabilities        |                                                                    |                        | 57,841  |        |  |   | 23,847  |       
|                                      |                                                                    |                        |         |        |  |   |         |       
|Deferred tax assets valuation reserve |                                                                    |                        | (11,765 | )      |  |   | (19,466 | )     
|                                      |                                                                    |                        |         |        |  |   |         |       
|Net deferred tax assets               |                                                                    | $                      | 50,701  |        |  | $ | 69,558  |       
|                                      |                                                                    |                        |         |        |  |   |         |       

As of August 31, 2003, net deferred tax
assets of $22.0 million and $28.7 million are included
in current assets and other assets, respectively
($19.0 million and $50.6 million, respectively, as of
August 31, 2002). At August 31, 2003, NCRA recognized
a valuation allowance for the entire tax benefit associated with
its net deferred tax asset, as it is considered more likely than
not, based on the weight of available information, that the
future tax benefits related to these items will not be realized.
At August 31, 2003, NCRAs net deferred tax assets of
$11.8 million were comprised of deferred tax assets of
$21.4 million and deferred tax liabilities of
$9.6 million. Deferred tax assets are comprised of basis
differences related to inventories, investments, lease
obligations, accrued liabilities and certain federal and state
tax credits. NCRA files a separate tax return and, as such,
these items must be assessed independently of the Companys
deferred tax assets when determining recoverability.

The reconciliation of the statutory federal
income tax rates to the effective tax rates for the years ended
August 31, 2003, 2002 and 2001 is as follows:

|                                                                    |  |      |       |      |  |      |       |   |  |  |       |   
|------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | --
|                                                                    |  | 2003 |       | 2002 |  | 2001
|                                                                    |  |      |       |      |  |     
|Statutory federal income tax rate                                   |  |      | 35.0  | %    |  |      | 35.0  | % |  |  | 35.0  | % 
|State and local income taxes, net of federal
    income tax benefit |  |      | 3.9   |      |  |      | 3.9   |   |  |  | 3.9   |   
|Patronage earnings                                                  |  |      | (25.7 | )    |  |      | (25.0 | ) |  |  | (32.8 | ) 
|Change in patronage determination                                   |  |      |       |      |  |      | (7.5  | ) |  |  | (22.4 | ) 
|Export activities at rates other than the U.S.
    statutory rate   |  |      | (3.2  | )    |  |      | (1.9  | ) |  |  |       |   
|Deferred tax asset valuation allowance                              |  |      | 1.3   |      |  |      | 11.8  |   |  |  | 1.6   |   
|Other                                                               |  |      | (2.0  | )    |  |      | (3.4  | ) |  |  | (2.0  | ) 
|                                                                    |  |      |       |      |  |      |       |   |  |  |       |   
|Effective tax rate                                                  |  |      | 9.3   | %    |  |      | 12.9  | % |  |  | (16.7 | )%
|                                                                    |  |      |       |      |  |      |       |   |  |  |       |   

F-17



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The principal differences between financial
statement income and taxable (loss) income for the years ended
August 31, 2003, 2002 and 2001 are as follows:

|                                     |                                  |                        |         |         |   |      |         |         |   |   |         |          |  
|------------------------------------ | -------------------------------- | ---------------------- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | -------- | -
|                                     |                                  | 2003                   |         | 2002    |   | 2001
|                                     |                                  |                        |         |         |   |     
|                                     |                                  |                       
|                                     |                                  | (dollars in thousands)
|Income before income taxes           |                                  | $                      | 136,541 |         |   | $    | 144,838 |         |   | $ | 152,954 |         
|Financial reporting/tax differences: |                                  |                        |         |         |   |      |         |         |   |   |         |         
|                                     | Environmental reserves           |                        |         | 2,208   |   |      |         | 1,939   |   |   |         | 4,453    |  
|                                     | Oil and gas activities, net      |                        |         | (21,989 | ) |      |         | 1,540   |   |   |         | (22,230  | )
|                                     | Energy inventory market reserves |                        |         | 1,210   |   |      |         | (933    | ) |   |         | (2,441   | )
|                                     | Pension and compensation         |                        |         | (21,966 | ) |      |         | (21,491 | ) |   |         | 8,981    |  
|                                     | Investments in other entities    |                        |         | 117     |   |      |         | 1,898   |   |   |         | 26,495   |  
|                                     | Export activities                |                        |         | (11,253 | ) |      |         | (7,141  | ) |   |         |          |  
|                                     | Other, net                       |                        |         | 1,716   |   |      |         | (2,291  | ) |   |         | 10,038   |  
|                                     | Patronage refund provisions      |                        |         | (90,000 | ) |      |         | (92,900 | ) |   |         | (128,900 | )
|                                     |                                  |                        |         |         |   |      |         |         |   |   |         |         
|Taxable (loss) income                |                                  | $                      | (3,416  | )       |   | $    | 25,459  |         |   | $ | 49,350  |         
|                                     |                                  |                        |         |         |   |      |         |         |   |   |         |         

No tax benefit has been recognized for
NCRAs $13.1 million operating loss that was included in
the Companys August 31, 2003 taxable loss as shown
above.

9.     Equities:

In accordance with the by-laws and by action of
the Board of Directors, annual net savings from patronage
sources are distributed to consenting patrons following the
close of each year, and are based on amounts using financial
statement earnings. The cash portion of the patronage
distribution is determined annually by the Board of Directors,
with the balance issued in the form of capital equity
certificates.

Annual net savings from sources other than
patronage may be added to the unallocated capital reserve or,
upon action by the Board of Directors, allocated to members in
the form of nonpatronage equity certificates. Redemptions are at
the discretion of the Board of Directors.

Inactive direct members and patrons and active
direct members and patrons age 61 and older on June 1,
1998, are eligible for redemption of their capital equity
certificates at age 72 or death. For other active direct
members and patrons and member cooperatives, equities will be
redeemed annually as determined by the Board of Directors.

On May 31, 1997, the Company completed an
offering for the sale of Equity Participation Units (EPUs) in
its Wheat Milling Defined Business Unit and its Oilseed
Processing and Refining Defined Business Unit to qualified
subscribers. Qualified subscribers were identified as Defined
Members or representatives of Defined Members who were persons
or associations of producers actually engaged in the production
of agricultural products. Subscribers were allowed to purchase a
portion of their EPUs by exchanging existing patronage
certificates. The purchasers of EPUs had the right and
obligation to deliver annually the number of bushels of wheat or
soybeans equal to the number of units held. Unit holders
participated in the net patronage-sourced income from operations
of the applicable Defined Business Unit as patronage refunds.
Retirements of patrons equities attributable to EPUs, were
at the discretion of the Board of Directors, and it was the
Boards goal to retire such equity on a revolving basis
seven years after declaration.

F-18



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


During 2001, the Companys Board of
Directors adopted a resolution to issue, at no charge, to each
Defined Member of the Oilseed Processing and Refining Defined
Business Unit an additional 1/4 EPU, for each EPU held, due
to increased crush volume.

In August 2001, the CHS Board of Directors
approved and consummated a plan to end the Defined Investment
Program. The Company redeemed all of the EPUs and allocated the
assets of the Oilseed Processing and Refining and Wheat Milling
Defined Business Units to the Company as provided in the plan.
The amounts redeemed to the Oilseed Processing and Refining and
Wheat Milling Defined Member EPU holders were $5.2 million
and $9.1 million, respectively. Due to loss carry-forwards
incurred by the Wheat Milling Defined Business Unit, the plan
also provided for the cancellation of all outstanding Preferred
Capital Certificates issued to the Wheat Milling EPU holders,
totaling $0.2 million. The plan further provided to the
Oilseed Processing and Refining Defined Member EPU holders for
the redemption of all outstanding Preferred Capital Certificates
issued of $0.2 million and a 100% cash distribution during
2002 for the patronage refunds earned for the fiscal year ended
August 31, 2001.

In January 2003, the Board of Directors
authorized the sale and issuance of up to 3,500,000 shares of 8%
Cumulative Redeemable Preferred Stock (New Preferred) at a price
of $25.00 per share. The Company filed a registration statement
on Form S-2 with the Securities and Exchange Commission
registering 3,000,000 shares of the New Preferred (with an
additional over-allotment option of 450,000 shares granted to
the underwriters), which was declared effective on
January 27, 2003. The shares were subsequently sold for
proceeds of $86.3 million (3,450,000 shares), and are listed on
the NASDAQ National Market. Expenses related to the issuance of
the New Preferred were $3.8 million.

The Company had previously suspended sales of its
8% Preferred Stock (Old Preferred) after raising
$9.5 million (9,454,874 shares), and on February 25,
2003, the Company filed a post-effective amendment to terminate
the offering of the Old Preferred shares. On March 5, 2003,
the Companys Board of Directors authorized the redemption
and conversion of the Old Preferred shares. A redemption
notification and a conversion election form were sent to holders
of the Old Preferred shares on March 21, 2003 explaining
that on April 25, 2003 all shares of the Old Preferred
would be redeemed by the Company for $1.00 per share unless
they were converted into shares of the Companys New
Preferred. The conversion did not change the base liquidation
amount or dividend amount of the Old Preferred, since 25 shares
of the Old Preferred converted to 1 share of the New
Preferred. The total Old Preferred converted to the New
Preferred was $7.5 million (7,452,439 shares) and the
balance of the Old Preferred (2,002,435 shares) was redeemed in
cash at $1.00 per share. As of August 31, 2003, the
Company had $93.7 million (3,748,099 shares) of the New
Preferred outstanding.

F-19



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                        
|--- | -----------------------
|10. | Employee Benefit Plans:

The Company has various pension and other defined
benefit and defined contribution plans, in which substantially
all employees may participate.

Financial information on changes in benefit
obligation and plan assets funded and balance sheet status as of
August 31, 2003 and 2002 is as follows:

|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |        |  
|--------------------------------------------- | ------------------------------------------------ | ---------------------- | ------- | ---------------- | - | -------------- | ------- | ------- | - | ---- | ------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                              |                                                  |                        |         |                  |   |                |         |        
|                                              |                                                  | Qualified              |         | Non-Qualified    |   |               
|                                              |                                                  | Pension Benefits       |         | Pension Benefits |   | Other Benefits
|                                              |                                                  |                        |         |                  |   |               
|                                              |                                                  | 2003                   |         | 2002             |   | 2003           |         | 2002    |   | 2003 |         | 2002  
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |       
|                                              |                                                  |                       
|                                              |                                                  | (dollars in thousands)
|Change in benefit obligation:                 |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|                                              | Benefit obligation at beginning of period        |                        | $       | 253,868          |   |                | $       | 241,728 |   |      | $       | 14,543 |   |   | $       | 11,836 |   |   | $       | 24,915 |   |   | $       | 22,667 |  
|                                              | Service cost                                     |                        |         | 10,840           |   |                |         | 9,275   |   |      |         | 800    |   |   |         | 1,168  |   |   |         | 648    |   |   |         | 557    |  
|                                              | Interest cost                                    |                        |         | 17,503           |   |                |         | 17,673  |   |      |         | 1,033  |   |   |         | 886    |   |   |         | 1,722  |   |   |         | 1,586  |  
|                                              | Plan participants contributions                  |                        |         | 1,771            |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         | 215    |   |   |         | 189    |  
|                                              | Plan amendments                                  |                        |         |                  |   |                |         | 2,383   |   |      |         |        |   |   |         |        |   |   |         | 88     |   |   |         |        |  
|                                              | Transfers                                        |                        |         |                  |   |                |         | 3,677   |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |        |  
|                                              | Actuarial loss (gain)                            |                        |         | 22,049           |   |                |         | 1,157   |   |      |         | (766   | ) |   |         | 1,607  |   |   |         | 2,527  |   |   |         | 1,716  |  
|                                              | Assumption change                                |                        |         | 4,659            |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         | 1,469  |   |   |         | 638    |  
|                                              | Benefits paid                                    |                        |         | (20,784          | ) |                |         | (22,025 | ) |      |         | (1,776 | ) |   |         | (954   | ) |   |         | (2,329 | ) |   |         | (2,438 | )
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|Benefit obligation at end of period           |                                                  | $                      | 289,906 |                  |   | $              | 253,868 |         |   | $    | 13,834  |        |   | $ | 14,543  |        |   | $ | 29,255  |        |   | $ | 24,915  |       
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|Change in plan assets:                        |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|                                              | Fair value of plan assets at beginning of period |                        | $       | 201,563          |   |                | $       | 230,121 |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |        |  
|                                              | Actual income (loss) on plan assets              |                        |         | 14,915           |   |                |         | (14,810 | ) |      |         |        |   |   |         |        |   |   |         |        |   |   |         |        |  
|                                              | Company contributions                            |                        |         | 84,523           |   |                |         | 4,600   |   |      | $       | 1,776  |   |   | $       | 954    |   |   | $       | 2,114  |   |   | $       | 2,249  |  
|                                              | Participants contributions                       |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         | 215    |   |   |         | 189    |  
|                                              | Net transfers                                    |                        |         |                  |   |                |         | 3,677   |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |        |  
|                                              | Benefits paid                                    |                        |         | (20,784          | ) |                |         | (22,025 | ) |      |         | (1,776 | ) |   |         | (954   | ) |   |         | (2,329 | ) |   |         | (2,438 | )
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|Fair value of plan assets at end of period    |                                                  | $                      | 280,217 |                  |   | $              | 201,563 |         |   | $    |        |        |   | $ |        |        |   | $ |        |        |   | $ |        |       
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|Funded status                                 |                                                  | $                      | (9,689  | )                |   | $              | (52,305 | )       |   | $    | (13,834 | )      |   | $ | (14,543 | )      |   | $ | (29,255 | )      |   | $ | (24,915 | )     
|Employer contributions after measurement date |                                                  |                        |         |                  |   |                | 31,362  |         |   |      | 84      |        |   |   | 32      |        |   |   | 247     |        |   |   | 269     |       
|Unrecognized actuarial loss (gain)            |                                                  |                        | 118,025 |                  |   |                | 85,066  |         |   |      | (899    | )      |   |   | 16      |        |   |   | 707     |        |   |   | (3,505  | )     
|Unrecognized transition obligation            |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   | 9,261   |        |   |   | 10,197  |       
|Unrecognized prior service cost               |                                                  |                        | 7,467   |                  |   |                | 6,502   |         |   |      | 3,503   |        |   |   | 4,067   |        |   |   | (1,076  | )      |   |   | (1,336  | )     
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|Prepaid benefit cost (accrued)                |                                                  | $                      | 115,803 |                  |   | $              | 70,625  |         |   | $    | (11,146 | )      |   | $ | (10,428 | )      |   | $ | (20,116 | )      |   | $ | (19,290 | )     
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       

F-20



---



##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                 |                                      |                        |         |                  |  |                |        |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |         |  
|------------------------------------------------ | ------------------------------------ | ---------------------- | ------- | ---------------- |  | -------------- | ------ | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                 |                                      |                        |         |                  |  |                |        |        
|                                                 |                                      | Qualified              |         | Non-Qualified    |  |               
|                                                 |                                      | Pension Benefits       |         | Pension Benefits |  | Other Benefits
|                                                 |                                      |                        |         |                  |  |               
|                                                 |                                      | 2003                   |         | 2002             |  | 2003           |        | 2002    |   | 2003 |         | 2002   
|                                                 |                                      |                        |         |                  |  |                |        |         |   |      |         |        
|                                                 |                                      |                       
|                                                 |                                      | (dollars in thousands)
|Amounts recognized on balance sheets consist of: |                                      |                        |         |                  |  |                |        |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        
|                                                 | Accrued benefit liability            |                        | $       | 95,917           |  |                | $      | (11,028 | ) |      | $       | (12,125 | ) |   | $       | (12,809 | ) |   | $       | (20,116 | ) |   | $       | (19,290 | )
|                                                 | Intangible asset                     |                        |         | 2,425            |  |                |        | 6,510   |   |      |         | 253     |   |   |         | 1,485   |   |   |         |         |   |   |         |         |  
|                                                 | Minority interests                   |                        |         |                  |  |                |        | 6,195   |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |         |  
|                                                 | Accumulated other comprehensive loss |                        |         | 17,461           |  |                |        | 68,948  |   |      |         | 726     |   |   |         | 896     |   |   |         |         |   |   |         |         |  
|                                                 |                                      |                        |         |                  |  |                |        |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        
|Net amounts recognized                           |                                      | $                      | 115,803 |                  |  | $              | 70,625 |         |   | $    | (11,146 | )       |   | $ | (10,428 | )       |   | $ | (20,116 | )       |   | $ | (19,290 | )      
|                                                 |                                      |                        |         |                  |  |                |        |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        

For measurement purposes, a 9% annual rate of
increase in the per capita cost of covered health care benefits
was assumed for the year ended August 31, 2003. The rate
was assumed to decrease gradually to 6.0% for 2006 and remain at
that level thereafter. Components of net periodic benefit costs
for the years ended August 31, 2003, 2002 and 2001 are as
follows:

|                                         |                                    |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       |       |  
|---------------------------------------- | ---------------------------------- | ---------------------- | ----- | ---------------- | - | -------------- | ----- | ------- | - | ---- | ----- | ------- | - | ---- | ----- | ----- | - | ---- | ----- | ----- | - | - | ----- | ---- | - | - | ----- | ----- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                                         |                                    |                        |       |                  |   |                |       |         |   |     
|                                         |                                    | Qualified              |       | Non-Qualified    |   |               
|                                         |                                    | Pension Benefits       |       | Pension Benefits |   | Other Benefits
|                                         |                                    |                        |       |                  |   |               
|                                         |                                    | 2003                   |       | 2002             |   | 2001           |       | 2003    |   | 2002 |       | 2001    |   | 2003 |       | 2002  |   | 2001
|                                         |                                    |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |     
|                                         |                                    |                       
|                                         |                                    | (dollars in thousands)
|Components of net periodic benefit cost:
|                                         | Service cost                       |                        | $     | 10,840           |   |                | $     | 9,275   |   |      | $     | 7,875   |   |      | $     | 800   |   |      | $     | 1,168 |   |   | $     | 631  |   |   | $     | 648   |   |   | $     | 557   |   |   | $     | 566   |  
|                                         | Interest cost                      |                        |       | 17,503           |   |                |       | 17,673  |   |      |       | 17,580  |   |      |       | 1,033 |   |      |       | 886   |   |   |       | 907  |   |   |       | 1,722 |   |   |       | 1,586 |   |   |       | 1,569 |  
|                                         | Expected return on assets          |                        |       | (23,788          | ) |                |       | (21,386 | ) |      |       | (22,855 | ) |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       |       |  
|                                         | Prior service cost amortization    |                        |       | 806              |   |                |       | 740     |   |      |       | 619     |   |      |       | 564   |   |      |       | 574   |   |   |       | 574  |   |   |       | (172  | ) |   |       | (197  | ) |   |       | (131  | )
|                                         | Actuarial loss (gain) amortization |                        |       | 2,623            |   |                |       | 1,369   |   |      |       | 231     |   |      |       | 159   |   |      |       | 18    |   |   |       | 144  |   |   |       | (215  | ) |   |       | (505  | ) |   |       | (538  | )
|                                         | Transition amount amortization     |                        |       |                  |   |                |       | (708    | ) |      |       | (874    | ) |      |       |       |   |      |       |       |   |   |       | 13   |   |   |       | 936   |   |   |       | 936   |   |   |       | 936   |  
|                                         | Other                              |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       | (22   | )
|                                         |                                    |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       |      
|Net periodic benefit cost                |                                    | $                      | 7,984 |                  |   | $              | 6,963 |         |   | $    | 2,576 |         |   | $    | 2,556 |       |   | $    | 2,646 |       |   | $ | 2,269 |      |   | $ | 2,919 |       |   | $ | 2,377 |       |   | $ | 2,380 |      
|                                         |                                    |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       |      
|Weighted-average assumptions:            |                                    |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       |      
|                                         | Discount rate                      |                        |       | 6.30             | % |                |       | 7.10    | % |      |       | 7.30    | % |      |       | 6.00  | % |      |       | 7.25  | % |   |       | 7.50 | % |   |       | 6.30  | % |   |       | 7.10  | % |   |       | 7.30  | %
|                                         | Expected return on plan assets     |                        |       | 9.00             | % |                |       | 9.00    | % |      |       | 9.00    | % |      |       | N/A   |   |      |       | N/A   |   |   |       | N/A  |   |   |       | N/A   |   |   |       | N/A   |   |   |       | N/A   |  
|                                         | Rate of compensation increase      |                        |       | 5.00             | % |                |       | 5.00    | % |      |       | 5.00    | % |      |       | 5.00  | % |      |       | 5.00  | % |   |       | 5.00 | % |   |       | 5.00  | % |   |       | 5.00  | % |   |       | 5.00  | %

F-21



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The aggregate projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for
pension plans with accumulated benefit obligations in excess of
plan assets were as follows as of August 31, 2003 and 2002:

|                               |  |                        |         |                  |  |      |         |      |  |   |        |  |  |   |        | 
|------------------------------ |  | ---------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------ |  |  | - | ------ | 
|                               |  |                        |         |                 
|                               |  | Qualified              |         | Non-Qualified   
|                               |  | Pension Benefits       |         | Pension Benefits
|                               |  |                        |         |                 
|                               |  | 2003                   |         | 2002             |  | 2003 |         | 2002
|                               |  |                        |         |                  |  |      |         |     
|                               |  |                       
|                               |  | (dollars in thousands)
|Projected benefit obligation   |  | $                      | 120,068 |                  |  | $    | 253,868 |      |  | $ | 13,834 |  |  | $ | 14,543 | 
|Accumulated benefit obligation |  |                        | 107,760 |                  |  |      | 243,953 |      |  |   | 12,209 |  |  |   | 12,842 | 
|Fair value of plan assets      |  |                        | 104,560 |                  |  |      | 201,563 |      |  |   |        |  |  |   |        | 

Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care
plans. A one-percentage point change in the assumed health care
cost trend rates would have the following effects:

|                                                            |  |                        |       |             |  |   |        |  
|----------------------------------------------------------- |  | ---------------------- | ----- | ----------- |  | - | ------ | -
|                                                            |  | 1% Increase            |       | 1% Decrease
|                                                            |  |                        |       |            
|                                                            |  |                       
|                                                            |  | (dollars in thousands)
|Effect on total of service and interest cost
    components |  | $                      | 275   |             |  | $ | (250   | )
|Effect on postretirement benefit obligation                 |  |                        | 2,618 |             |  |   | (2,399 | )

The Company provides defined life insurance and
health care benefits for certain retired employees. The plan is
contributory based on years of service and family status, with
retiree contributions adjusted annually.

The Company has other contributory defined
contribution plans covering substantially all employees. Total
contributions by the Company to these plans were
$8.5 million, $11.0 million and $6.1 million, for
the years ended August 31, 2003, 2002 and 2001,
respectively.



|    |                   
|--- | ------------------
|11. | Segment Reporting:

The Company manages five business segments, which
are based on products and services, and are Agronomy, Energy,
Country Operations and Services, Grain Marketing, and Processed
Grains and Foods. The Agronomy segment consists of joint
ventures and other investments, from which the Company derives
investment income based upon the profitability of these
investments. The Energy segment derives its revenues through
refining, wholesaling and retailing of petroleum products. The
Country Operations and Services segment derives its revenues
through the origination and marketing of grain, through the
retail sales of petroleum and agronomy products, and processed
sunflowers, feed and farm supplies. The Country Operations
segment also derives revenues from service activities related to
crop production. The Grain Marketing segment derives its
revenues from the sale of grains and oilseeds and from service
activities conducted at its export terminals. Processed Grains
and Foods segment derives its revenues from the sales of soybean
meal and soybean refined oil, from equity income in two wheat
milling joint ventures, from equity income in an oilseed food
manufacturing joint venture, and from the sale of Mexican food
products.

Reconciling Amounts represent the elimination of
sales between segments. Such transactions are conducted at
market prices to more accurately evaluate the profitability of
the individual business segments.

The Company assigns certain corporate general and
administrative expenses to its business segments based on use of
such services and allocates other services based on factors or
considerations relevant to the costs incurred.

Expenses that are incurred at the corporate level
for the purpose of the general operation of the Company are
allocated to the segments based upon factors which management
considers to be non-

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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


asymmetrical. Nevertheless, due to efficiencies
in scale, cost allocations, and intersegment activity,
management does not represent that these segments, if operated
independently, would report the income before income taxes and
other financial information as presented.

Segment information for the years ended
August 31, 2003, 2002 and 2001 is as follows:

|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|-------------------------------------------- |  | ---------------------- | ------- | ------ |  | ---------- | --------- | --------- |  | ---------- | --------- | --------- |  | ----------- | --------- | ----- |  | - | ------- | - |  | - | ------- | - |  | - | -------- | - |  | - | --------- | -
|                                             |  |                        |         |        |  | Country    |           |           |  |            |           |           |  |             |           |      
|                                             |  |                        |         |        |  | Operations |           |           |  | Processed  |           |           |  |             |           |      
|                                             |  |                        |         |        |  | and        |           | Grain     |  | Grains and |           | Corporate |  | Reconciling |           |      
|                                             |  | Agronomy               |         | Energy |  | Services   |           | Marketing |  | Foods      |           | and Other |  | Amounts     |           | Total
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |      
|                                             |  |                       
|                                             |  | (dollars in thousands)
|For the year ended August 31,
    2003:      |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |  
|Net sales                                    |  |                        |         |        |  | $          | 3,648,093 |           |  | $          | 1,885,825 |           |  | $           | 4,139,226 |       |  | $ | 491,931 |   |  |   |         |   |  | $ | (894,341 | ) |  | $ | 9,270,734 |  
|Patronage dividends                          |  | $                      | (84     | )      |  |            | 415       |           |  |            | 2,467     |           |  |             | 218       |       |  |   | 111     |   |  | $ | 130     |   |  |   |          |   |  |   | 3,257     |  
|Other revenues                               |  |                        |         |        |  |            | 10,461    |           |  |            | 81,739    |           |  |             | 25,458    |       |  |   | 2,300   |   |  |   | 4,584   |   |  |   |          |   |  |   | 124,542   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|                                             |  |                        | (84     | )      |  |            | 3,658,969 |           |  |            | 1,970,031 |           |  |             | 4,164,902 |       |  |   | 494,342 |   |  |   | 4,714   |   |  |   | (894,341 | ) |  |   | 9,398,533 |  
|Cost of goods sold                           |  |                        |         |        |  |            | 3,475,947 |           |  |            | 1,876,811 |           |  |             | 4,133,677 |       |  |   | 466,857 |   |  |   |         |   |  |   | (894,341 | ) |  |   | 9,058,951 |  
|Marketing, general and administrative        |  |                        | 8,138   |        |  |            | 63,740    |           |  |            | 55,887    |           |  |             | 21,072    |       |  |   | 36,540  |   |  |   | 5,205   |   |  |   |          |   |  |   | 190,582   |  
|Gain on legal settlements                    |  |                        |         |        |  |            |           |           |  |            | (10,867   | )         |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | (10,867   | )
|Interest                                     |  |                        | (974    | )      |  |            | 16,401    |           |  |            | 14,975    |           |  |             | 4,738     |       |  |   | 12,845  |   |  |   | 690     |   |  |   |          |   |  |   | 48,675    |  
|Equity (income) loss from investments        |  |                        | (20,773 | )      |  |            | (1,353    | )         |  |            | (788      | )         |  |             | 1,673     |       |  |   | (26,056 | ) |  |   | (2      | ) |  |   |          |   |  |   | (47,299   | )
|Minority interests                           |  |                        |         |        |  |            | 20,782    |           |  |            | 1,168     |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | 21,950    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Income (loss) before income taxes            |  | $                      | 13,525  |        |  | $          | 83,452    |           |  | $          | 32,845    |           |  | $           | 3,742     |       |  | $ | 4,156   |   |  | $ | (1,179  | ) |  | $ |         |   |  | $ | 136,541   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Intersegment sales                           |  |                        |         |        |  | $          | (94,209   | )         |  | $          | (796,999  | )         |  | $           | (2,435    | )     |  | $ | (698    | ) |  |   |         |   |  | $ | 894,341  |   |  | $ |          |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Goodwill                                     |  |                        |         |        |  | $          | 3,185     |           |  | $          | 262       |           |  |             |           |       |  | $ | 23,605  |   |  |   |         |   |  |   |          |   |  | $ | 27,052    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Capital expenditures                         |  |                        |         |        |  | $          | 80,837    |           |  | $          | 26,738    |           |  | $           | 5,298     |       |  | $ | 60,576  |   |  | $ | 2,240   |   |  |   |          |   |  | $ | 175,689   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Depreciation and amortization                |  | $                      | 1,247   |        |  | $          | 65,868    |           |  | $          | 21,039    |           |  | $           | 6,718     |       |  | $ | 13,321  |   |  | $ | 3,154   |   |  |   |          |   |  | $ | 111,347   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Total identifiable assets at August 31, 2003 |  | $                      | 285,906 |        |  | $          | 1,449,652 |           |  | $          | 857,523   |           |  | $           | 450,415   |       |  | $ | 498,872 |   |  | $ | 265,600 |   |  |   |          |   |  | $ | 3,807,968 |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  

F-23



---



##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|-------------------------------------------- |  | ---------------------- | ------- | ------ |  | ---------- | --------- | --------- |  | ---------- | --------- | --------- |  | ----------- | --------- | ----- |  | - | ------- | - |  | - | ------- | - |  | - | -------- | - |  | - | --------- | -
|                                             |  |                        |         |        |  | Country    |           |           |  |            |           |           |  |             |           |      
|                                             |  |                        |         |        |  | Operations |           |           |  | Processed  |           |           |  |             |           |      
|                                             |  |                        |         |        |  | and        |           | Grain     |  | Grains and |           | Corporate |  | Reconciling |           |      
|                                             |  | Agronomy               |         | Energy |  | Services   |           | Marketing |  | Foods      |           | and Other |  | Amounts     |           | Total
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |      
|                                             |  |                       
|                                             |  | (dollars in thousands)
|For the year ended August 31,
    2002:      |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |  
|Net sales                                    |  |                        |         |        |  | $          | 2,657,689 |           |  | $          | 1,474,553 |           |  | $           | 3,281,469 |       |  | $ | 496,084 |   |  |   |         |   |  | $ | (753,341 | ) |  | $ | 7,156,454 |  
|Patronage dividends                          |  | $                      | (89     | )      |  |            | 458       |           |  |            | 2,572     |           |  |             | 497       |       |  |   | 260     |   |  | $ | 187     |   |  |   |          |   |  |   | 3,885     |  
|Other revenues                               |  |                        |         |        |  |            | 6,392     |           |  |            | 80,789    |           |  |             | 21,902    |       |  |   | (1,469  | ) |  |   | 1,845   |   |  |   |          |   |  |   | 109,459   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|                                             |  |                        | (89     | )      |  |            | 2,664,539 |           |  |            | 1,557,914 |           |  |             | 3,303,868 |       |  |   | 494,875 |   |  |   | 2,032   |   |  |   | (753,341 | ) |  |   | 7,269,798 |  
|Cost of goods sold                           |  |                        |         |        |  |            | 2,489,352 |           |  |            | 1,474,392 |           |  |             | 3,272,985 |       |  |   | 457,538 |   |  |   |         |   |  |   | (753,341 | ) |  |   | 6,940,926 |  
|Marketing, general and administrative        |  |                        | 8,957   |        |  |            | 66,731    |           |  |            | 47,995    |           |  |             | 22,213    |       |  |   | 36,930  |   |  |   | 4,466   |   |  |   |          |   |  |   | 187,292   |  
|Gain on legal settlements                    |  |                        |         |        |  |            |           |           |  |            | (2,970    | )         |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | (2,970    | )
|Interest                                     |  |                        | (1,403  | )      |  |            | 16,875    |           |  |            | 13,851    |           |  |             | 4,807     |       |  |   | 9,514   |   |  |   | (1,189  | ) |  |   |          |   |  |   | 42,455    |  
|Equity (income) loss from investments        |  |                        | (13,425 | )      |  |            | 1,166     |           |  |            | (283      | )         |  |             | (4,257    | )     |  |   | (41,331 | ) |  |   | (3      | ) |  |   |          |   |  |   | (58,133   | )
|Minority interests                           |  |                        |         |        |  |            | 14,604    |           |  |            | 786       |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | 15,390    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Income (loss) before income taxes            |  | $                      | 5,782   |        |  | $          | 75,811    |           |  | $          | 24,143    |           |  | $           | 8,120     |       |  | $ | 32,224  |   |  | $ | (1,242  | ) |  | $ |         |   |  | $ | 144,838   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Intersegment sales                           |  |                        |         |        |  | $          | (67,367   | )         |  | $          | (615,853  | )         |  | $           | (69,561   | )     |  | $ | (560    | ) |  |   |         |   |  | $ | 753,341  |   |  | $ |          |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Goodwill                                     |  |                        |         |        |  | $          | 4,059     |           |  | $          | 262       |           |  |             |           |       |  | $ | 23,605  |   |  |   |         |   |  |   |          |   |  | $ | 27,926    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Capital expenditures                         |  |                        |         |        |  | $          | 54,576    |           |  | $          | 34,305    |           |  | $           | 14,851    |       |  | $ | 35,144  |   |  | $ | 1,293   |   |  |   |          |   |  | $ | 140,169   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Depreciation and amortization                |  | $                      | 1,247   |        |  | $          | 58,701    |           |  | $          | 21,214    |           |  | $           | 6,235     |       |  | $ | 13,436  |   |  | $ | 3,153   |   |  |   |          |   |  | $ | 103,986   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Total identifiable assets at August 31, 2002 |  | $                      | 242,015 |        |  | $          | 1,305,828 |           |  | $          | 799,711   |           |  | $           | 481,232   |       |  | $ | 439,942 |   |  | $ | 212,999 |   |  |   |          |   |  | $ | 3,481,727 |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|For the year ended August 31,
    2001:      |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |  
|Net sales                                    |  |                        |         |        |  | $          | 2,781,243 |           |  | $          | 1,577,268 |           |  | $           | 3,416,239 |       |  | $ | 662,726 |   |  |   |         |   |  | $ | (973,234 | ) |  | $ | 7,464,242 |  
|Patronage dividends                          |  | $                      | 196     |        |  |            | 712       |           |  |            | 3,683     |           |  |             | 840       |       |  |   | 339     |   |  | $ | 207     |   |  |   |          |   |  |   | 5,977     |  
|Other revenues                               |  |                        |         |        |  |            | 4,036     |           |  |            | 80,479    |           |  |             | 22,964    |       |  |   | (238    | ) |  |   | 9,013   |   |  |   |          |   |  |   | 116,254   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|                                             |  |                        | 196     |        |  |            | 2,785,991 |           |  |            | 1,661,430 |           |  |             | 3,440,043 |       |  |   | 662,827 |   |  |   | 9,220   |   |  |   | (973,234 | ) |  |   | 7,586,473 |  
|Cost of goods sold                           |  |                        |         |        |  |            | 2,549,099 |           |  |            | 1,569,884 |           |  |             | 3,416,500 |       |  |   | 619,184 |   |  |   |         |   |  |   | (973,234 | ) |  |   | 7,181,433 |  
|Marketing, general and administrative        |  |                        | 8,503   |        |  |            | 48,432    |           |  |            | 53,417    |           |  |             | 22,396    |       |  |   | 44,870  |   |  |   | 6,428   |   |  |   |          |   |  |   | 184,046   |  
|Interest                                     |  |                        | (4,529  | )      |  |            | 25,097    |           |  |            | 15,695    |           |  |             | 8,144     |       |  |   | 13,026  |   |  |   | 4,003   |   |  |   |          |   |  |   | 61,436    |  
|Equity (income) loss from investments        |  |                        | (7,360  | )      |  |            | 4,081     |           |  |            | (246      | )         |  |             | (4,519    | )     |  |   | (35,505 | ) |  |   | 15,055  |   |  |   |          |   |  |   | (28,494   | )
|Minority interests                           |  |                        |         |        |  |            | 34,713    |           |  |            | 385       |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | 35,098    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Income (loss) before income taxes            |  | $                      | 3,582   |        |  | $          | 124,569   |           |  | $          | 22,295    |           |  | $           | (2,478    | )     |  | $ | 21,252  |   |  | $ | (16,266 | ) |  | $ |         |   |  | $ | 152,954   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Intersegment sales                           |  |                        |         |        |  | $          | (71,846   | )         |  | $          | (709,910  | )         |  | $           | (190,695  | )     |  | $ | (783    | ) |  |   |         |   |  | $ | 973,234  |   |  | $ |          |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Capital expenditures                         |  |                        |         |        |  | $          | 38,984    |           |  | $          | 32,448    |           |  | $           | 3,715     |       |  | $ | 20,485  |   |  | $ | 1,978   |   |  |   |          |   |  | $ | 97,610    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Depreciation and amortization                |  | $                      | 1,250   |        |  | $          | 55,343    |           |  | $          | 21,738    |           |  | $           | 4,917     |       |  | $ | 22,304  |   |  | $ | 3,628   |   |  |   |          |   |  | $ | 109,180   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  

F-24



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


12. Commitments and
Contingencies:






| |               
| | --------------
| | Environmental:







The Company is required to comply with various
environmental laws and regulations incidental to its normal
business operations. In order to meet its compliance
requirements, the Company establishes reserves for the probable
future costs of remediation of identified issues, which are
included in cost of goods sold or in marketing, general and
administrative expenses in the consolidated statements of
operations. Remediation costs with respect to an asset are
reported in costs of goods sold if the asset is owned and
operated by the Company and the Company reports sales related to
it. Remediation costs are reported in marketing, general and
administrative expenses if the Company does not own or operate
the asset and the Company does not report sales related to it.
Management does not believe that the resolution of any such
matters, individually or in the aggregate, are reasonably likely
to have a material effect on the consolidated financial position
of the Company or the results of operations or cash flows during
any reporting period.







In connection with certain refinery upgrades and
enhancements that are necessary in order to comply with existing
environmental regulations, the Company expects to incur
additional capital expenditures of approximately
$87.0 million for the Companys Laurel, Montana
refinery and $324.0 million for NCRAs McPherson,
Kansas refinery, of which $8.7 million has been spent at
the Laurel refinery and $36.5 million has been spent by
NCRA at the McPherson refinery as of August 31, 2003. The
Company expects all of these compliance capital expenditures at
the refineries to be complete by December 31, 2005, and
anticipates funding these projects with a combination of cash
flows from operations and debt proceeds.









| |                             
| | ----------------------------
| | Other Litigation and Claims:







The Company is involved as a defendant in various
lawsuits, claims and disputes which are in the normal course of
the Companys business. Management does not believe that
the resolution of any such matters, individually or in the
aggregate, are reasonably likely to have a material effect on
the consolidated financial position of the Company or the
results of operations or cash flows during any reporting period.






| |               
| | --------------
| | Grain Storage:

As of August 31, 2003 and 2002, the Company
stored grain and processed grain products for third parties
totaling $155.2 million and $148.0 million,
respectively. Such stored commodities and products are not the
property of the Company and therefore are not included in the
Companys inventories.



| |            
| | -----------
| | Guarantees:

The Company is a guarantor for lines of credit
for related companies of which $52.3 million was
outstanding as of August 31, 2003. The Companys bank
covenants allow maximum guarantees of $150.0 million. In
addition, the Companys bank covenants allow for guarantees
dedicated solely for NCRA in the amount of $125.0 million.
All outstanding loans with respective creditors are current as
of August 31, 2003.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The initial
recognition and measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the
guarantors fiscal year-end. The disclosure requirements
are effective for financial statements of interim or annual
periods ending after December 15, 2002. The interpretation
addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees. The interpretation also clarifies the

F-25



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


requirements related to the recognition of a
liability by a guarantor at the inception of the guarantee for
obligations the guarantor has undertaken in issuing the
guarantee.

The Company makes seasonal and term loans to
member cooperatives, and its wholly-owned subsidiary, Fin-Ag,
Inc., makes loans for agricultural purposes to individual
producers. Some of these loans are sold to CoBank, and the
Company guarantees a portion of the loans sold. In addition, the
Company also guarantees certain debt and obligations under
contracts for its subsidiaries and members.

F-26



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The Companys obligations pursuant to its
guarantees as of August 31, 2003 are as follows:

|                                                                      |  |                        |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                          |  |                                                 |  |                                                                                                                      
|--------------------------------------------------------------------- |  | ---------------------- | ----- | ----------- |  | --------- | ------ | --------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ |  | ----------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------
|                                                                      |  | Guarantee/             |       | Exposure on |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                         
|                                                                      |  | Maximum                |       | August 31,  |  | Nature of |        |                 |  | Triggering                                                                                                                                                            |  | Recourse                                                                                                                                                                                   |  | Assets Held             
|Entities                                                              |  | Exposure               |       | 2003        |  | Guarantee |        | Expiration Date |  | Event                                                                                                                                                                 |  | Provisions                                                                                                                                                                                 |  | as Collateral           
|                                                                      |  |                        |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                         
|                                                                      |  |                        |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                           
|                                                                      |  | (dollars in thousands) |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                           
|The Companys Financial Services cooperative
    loans sold to CoBank |  |                        | *     |             |  | $         | 6,667  |                 |  | 10% of the obligations of borrowers (agri-
    cultural cooperatives) under credit agreements for loans sold                                                          |  | None stated, but may be terminated by either
    party upon 60 days prior notice in regard to future
    obligations                                                                       |  | Credit agreement default |  | Subrogation against borrower                    |  | Some or all assets of borrower are held as
    collateral and should be sufficient to cover guarantee exposure       
|                                                                     
|Fin-Ag, Inc. agricultural loans sold to CoBank                        |  |                        | *     |             |  |           | 43,016 |                 |  | 15% of the obligations of borrowers under credit
    agreements for some of the loans sold, and 100% of the
    obligations of borrowers for the remaining loans sold |  | None stated, but may be terminated by either
    party upon 90 days prior notice in regard to future
    obligations                                                                       |  | Credit agreement default |  | Subrogation against borrower                    |  | Some or all assets of borrower are held as
    collateral and should be sufficient to cover guarantee exposure       
|                                                                     
|TEMCO, LLC                                                            |  | $                      | 7,500 |             |  |           |        |                 |  | Obligations by TEMCO, LLC under credit agreement                                                                                                                      |  | None stated                                                                                                                                                                                |  | Credit agreement default |  | Subrogation against TEMCO, LLC                  |  | None                                                                                                                 
|                                                                     
|North Valley Petroleum, LLC                                           |  | $                      | 194   |             |  |           | 179    |                 |  | Obligations by North Valley Petroleum, LLC under
    credit agreement                                                                                                 |  | None stated                                                                                                                                                                                |  | Credit agreement default |  | Subrogation against North Valley Petroleum, LLC |  | None                                                                                                                 
|                                                                     
|Third parties                                                         |  |                        | *     |             |  |           | 2,413  |                 |  | Surety for, or indemnification of surety for
    sales contracts between affiliates and sellers of grain under
    deferred payment contracts                         |  | Annual renewal on December 1st in regard to
    surety for one third party, otherwise none stated and may be
    terminated by the Company at any time in regard to future
    obligations |  | Nonpayment               |  | Subrogation against affiliates                  |  | Some or all assets of borrower are held as
    collateral but might not be sufficient to cover guarantee
    exposure
|                                                                      |  |                        |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                          |  |                                                 |  |                                                                                                                      
|                                                                      |  |                        |       |             |  | $         | 52,275 |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                          |  |                                                 |  |                                                                                                                      
|                                                                      |  |                        |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                          |  |                                                 |  |                                                                                                                      



---



|  |                                                                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The Companys bank covenants allow for
    guarantees of up to $150.0 million, but the Company is under no
    obligation to extend these guarantees. The maximum exposure on
    any given date is equal to the actual guarantees extended as of
    that date.

F-27



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                   
| | ------------------
| | Lease Commitments:

The Company leases approximately 1,900 rail cars
with remaining lease terms of one to ten years. In addition, the
Company has commitments under other operating leases for various
refinery, manufacturing and transportation equipment, vehicles
and office space. Some leases include purchase options at not
less than fair market value at the end of the leases.

Total rental expense for all operating leases,
net of rail car mileage credits received from the railroad and
sublease income was $31.7 million, $30.7 million and
$35.5 million for the years ended August 31, 2003,
2002 and 2001, respectively. Mileage credits and sublease income
were $7.1 million, $9.5 million and $11.0 million for
the years ended August 31, 2003, 2002 and 2001,
respectively.

Minimum future lease payments, required under
noncancellable operating leases as of August 31, 2003 are
as follows:

|                                    |  |                        |        |          |  |           |        |       |  |   |        |  |  |   |         | 
|----------------------------------- |  | ---------------------- | ------ | -------- |  | --------- | ------ | ----- |  | - | ------ |  |  | - | ------- | 
|                                    |  | Rail                   |        |          |  | Equipment |        |      
|                                    |  | Cars                   |        | Vehicles |  | and Other |        | Total
|                                    |  |                        |        |          |  |           |        |      
|                                    |  |                       
|                                    |  | (dollars in thousands)
|2004                                |  | $                      | 9,407  |          |  | $         | 12,141 |       |  | $ | 11,856 |  |  | $ | 33,404  | 
|2005                                |  |                        | 7,447  |          |  |           | 10,158 |       |  |   | 6,842  |  |  |   | 24,447  | 
|2006                                |  |                        | 5,027  |          |  |           | 9,273  |       |  |   | 4,881  |  |  |   | 19,181  | 
|2007                                |  |                        | 4,073  |          |  |           | 4,825  |       |  |   | 3,668  |  |  |   | 12,566  | 
|2008                                |  |                        | 2,914  |          |  |           | 2,240  |       |  |   | 2,061  |  |  |   | 7,215   | 
|Thereafter                          |  |                        | 4,246  |          |  |           | 1,643  |       |  |   | 4,693  |  |  |   | 10,582  | 
|                                    |  |                        |        |          |  |           |        |       |  |   |        |  |  |   |         | 
|Total minimum future lease payments |  | $                      | 33,114 |          |  | $         | 40,280 |       |  | $ | 34,001 |  |  | $ | 107,395 | 
|                                    |  |                        |        |          |  |           |        |       |  |   |        |  |  |   |         | 

13.     Supplemental
Cash Flow and Other Information:

Additional information concerning supplemental
disclosures of cash flow activities for the years ended
August 31, 2003, 2002 and 2001 is as follows:

|                                        |                                                                            |                        |   |         |   |      |   |         |   |  |   |         |  
|--------------------------------------- | -------------------------------------------------------------------------- | ---------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                        |                                                                            | 2003                   |   | 2002    |   | 2001
|                                        |                                                                            |                        |   |         |   |     
|                                        |                                                                            |                       
|                                        |                                                                            | (dollars in thousands)
|Net cash paid during the period for:    |                                                                            |                        |   |         |   |      |   |         |   |  |   |        
|                                        | Interest                                                                   |                        | $ | 45,239  |   |      | $ | 44,231  |   |  | $ | 63,034  |  
|                                        | Income taxes                                                               |                        |   | 956     |   |      |   | 27,965  |   |  |   | 11,709  |  
|Other significant noncash transactions: |                                                                            |                        |   |         |   |      |   |         |   |  |   |        
|                                        | Distributions of inventories of minority interests                         |                        |   |         |   |      |   |         |   |  |   | (54,399 | )
|                                        | Capital equity certificates issued in exchange
    for elevator properties |                        |   | 350     |   |      |   | 1,842   |   |  |   | 5,481   |  
|                                        | Equity Participation Units issued                                          |                        |   |         |   |      |   |         |   |  |   | 1,045   |  
|                                        | Exchange of preferred stock                                                |                        |   | 7,452   |   |      |   |         |   |  |   |         |  
|                                        | Accrual of dividends and equities payable                                  |                        |   | (39,049 | ) |      |   | (56,510 | ) |  |   | (72,154 | )
|                                        | Other comprehensive income (loss)                                          |                        |   | 33,583  |   |      |   | (49,982 | ) |  |   | 512     |  

F-28



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


14.     Related Party
Transactions:

Related party transactions with equity investees
as of August 31, 2003 and 2002 are as follows:

|            |  |                        |         |      |  |   |         | 
|----------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|            |  | 2003                   |         | 2002
|            |  |                        |         |     
|            |  |                       
|            |  | (dollars in thousands)
|Sales       |  | $                      | 779,857 |      |  | $ | 549,978 | 
|Purchases   |  |                        | 637,357 |      |  |   | 502,450 | 
|Receivables |  |                        | 13,393  |      |  |   | 21,232  | 
|Payables    |  |                        | 29,113  |      |  |   | 18,296  | 

These related party transactions were primarily
with Agriliance, CF Industries, Inc., Horizon Milling, TEMCO,
LLC and Ventura Foods, LLC.

15.     Comprehensive
Income:

The components of comprehensive income, net of
taxes, for the years ended August 31, 2003, 2002 and 2001
are as follows:

|                                        |  |                        |         |      |  |      |         |   |  |   |         |  
|--------------------------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                        |  | 2003                   |         | 2002 |  | 2001
|                                        |  |                        |         |      |  |     
|                                        |  |                       
|                                        |  | (dollars in thousands)
|Net income                              |  | $                      | 123,841 |      |  | $    | 126,138 |   |  | $ | 178,554 |  
|Additional minimum pension liability    |  |                        | 36,105  |      |  |      | (48,797 | ) |  |   | (15     | )
|Financial instruments                   |  |                        | 1,045   |      |  |      | (548    | ) |  |   | 527     |  
|Cash flow hedges                        |  |                        | (3,548  | )    |  |      | (637    | ) |  |   |         |  
|Foreign currency translation adjustment |  |                        | (18     | )    |  |      |         |   |  |   |         |  
|                                        |  |                        |         |      |  |      |         |   |  |   |         |  
|Comprehensive income                    |  | $                      | 157,425 |      |  | $    | 76,156  |   |  | $ | 179,066 |  
|                                        |  |                        |         |      |  |      |         |   |  |   |         |  

The components of accumulated other comprehensive
loss, net of taxes, as of August 31, 2003 and 2002 are as
follows:

|                                        |  |                        |        |      |  |   |        | 
|--------------------------------------- |  | ---------------------- | ------ | ---- |  | - | ------ | 
|                                        |  | 2003                   |        | 2002
|                                        |  |                        |        |     
|                                        |  |                       
|                                        |  | (dollars in thousands)
|Additional minimum pension liability    |  | $                      | 13,946 |      |  | $ | 50,051 | 
|Financial instruments                   |  |                        | 164    |      |  |   | 1,209  | 
|Cash flow hedges                        |  |                        | 4,185  |      |  |   | 637    | 
|Foreign currency translation adjustment |  |                        | 18     |      |  |   |        | 
|                                        |  |                        |        |      |  |   |        | 
|Accumulated other comprehensive loss    |  | $                      | 18,313 |      |  | $ | 51,897 | 
|                                        |  |                        |        |      |  |   |        | 

F-29



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Members and Patrons
of

CHS Inc.:


In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations, of equities and comprehensive income and of cash
flows present fairly, in all material respects, the financial
position of CHS Inc. and subsidiaries as of August 31, 2003
and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended
August 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

-s- PriceWaterhouse Coopers LLP

November 5, 2003

Minneapolis, Minnesota


F-30



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

Members Committee

Ventura Foods, LLC


We have audited the accompanying consolidated
balance sheets of Ventura Foods, LLC and subsidiary (the
Company) as of March 31, 2003 and 2002 and the
related consolidated statements of income, members capital
and cash flows for the years ended March 31, 2003 and 2002,
the three months ended March 31, 2001 and the year ended
December 31, 2000. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these 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, such consolidated financial
statements present fairly, in all material respects, the
financial position of Ventura Foods, LLC and subsidiary as of
March 31, 2003 and 2002 and the results of their operations
and their cash flows for the years ended March 31, 2003 and
2002, the three months ended March 31, 2001 and the year
ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated
financial statements, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective April 1, 2002.



| |                          
| | -------------------------
| | /s/ DELOITTE & TOUCHE LLP
| |                          
| | Deloitte & Touche LLP    

Los Angeles, California

June 16, 2003


F-31



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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2003 AND 2002


|                                                                                                         |                                                                                                                                                   |                           |             |             |             |   |             |             |             | 
|-------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ----------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | 
|                                                                                                         |                                                                                                                                                   | 2003                      |             | 2002       
|                                                                                                         |                                                                                                                                                   |                           |             |            
|ASSETS (Note 4)                                                                                         
|CURRENT ASSETS:                                                                                          |                                                                                                                                                   |                           |             |             |             |   |             |            
|                                                                                                         | Cash and cash equivalents (Note 2)                                                                                                                |                           | $           | 2,800,000   |             |   | $           | 9,300,000   |            
|                                                                                                         | Trade receivables  net of allowance
    for doubtful accounts of $1,909,000 and $1,543,000 at 2003 and
    2002, respectively (Notes 2, 4 and 5) |                           |             | 64,313,000  |             |   |             | 57,139,000  |            
|                                                                                                         | Inventories (Notes 2, 4 and 5)                                                                                                                    |                           |             | 92,366,000  |             |   |             | 62,799,000  |            
|                                                                                                         | Prepaid expenses and other current assets                                                                                                         |                           |             | 5,922,000   |             |   |             | 2,283,000   |            
|                                                                                                         | Due from Wilsey Foods, Inc. (Note 5)                                                                                                              |                           |             | 309,000     |             |   |             |             |            
|                                                                                                         | Derivative contract asset (Notes 2
    and 5)                                                                                                     |                           |             | 18,703,000  |             |   |             | 13,298,000  |            
|                                                                                                         |                                                                                                                                                   |                           |             |             |             |   |             |            
|                                                                                                         |                                                                                                                                                   | Total current assets      |             |             | 184,413,000 |   |             |             | 144,819,000 | 
|                                                                                                         |                                                                                                                                                   |                           |             |             |             |   |             |            
|PROPERTY (Notes 2 and 4):                                                                                |                                                                                                                                                   |                           |             |             |             |   |             |            
|                                                                                                         | Land, buildings and improvements                                                                                                                  |                           |             | 102,768,000 |             |   |             | 98,840,000  |            
|                                                                                                         | Machinery and equipment                                                                                                                           |                           |             | 139,264,000 |             |   |             | 129,133,000 |            
|                                                                                                         | Construction-in-progress                                                                                                                          |                           |             | 6,905,000   |             |   |             | 6,489,000   |            
|                                                                                                         | Other property                                                                                                                                    |                           |             | 10,798,000  |             |   |             | 10,494,000  |            
|                                                                                                         |                                                                                                                                                   |                           |             |             |             |   |             |            
|                                                                                                         |                                                                                                                                                   | Total                     |             |             | 259,735,000 |   |             |             | 244,956,000 | 
|Less accumulated depreciation and amortization                                                           |                                                                                                                                                   |                           | 106,914,000 |             |             |   | 95,052,000  |            
|                                                                                                         |                                                                                                                                                   |                           |             |             |             |   |             |            
|                                                                                                         | Property  net                                                                                                                                    |                           |             | 152,821,000 |             |   |             | 149,904,000 |            
|GOODWILL  Net of amortization of
    $18,087,000 at 2003 and 2002                                       |                                                                                                                                                   |                           |             |             |             |   |             |            
|                                                                                                         | (Notes 2, 3 and 8)                                                                                                                                |                           |             | 43,156,000  |             |   |             | 43,156,000  |            
|TRADEMARKS  Net of amortization of
    $8,526,000 and $8,685,000 at 2003 and 2002 (Notes 2
    and 8)   |                                                                                                                                                   |                           | 19,318,000  |             |             |   | 19,577,000  |            
|DEFERRED COMPENSATION PLAN TRUST (Note 6)                                                                |                                                                                                                                                   |                           | 13,574,000  |             |             |   | 14,240,000  |            
|OTHER ASSETS  Net of amortization of
    $3,520,000 and $4,310,000 at 2003 and 2002 (Notes 2
    and 8) |                                                                                                                                                   |                           | 4,673,000   |             |             |   | 5,293,000   |            
|                                                                                                         |                                                                                                                                                   |                           |             |             |             |   |             |            
|TOTAL                                                                                                    |                                                                                                                                                   | $                         | 417,955,000 |             |             | $ | 376,989,000 |            
|                                                                                                         |                                                                                                                                                   |                           |             |             |             |   |             |            
|                                                                                                        
|LIABILITIES AND MEMBERS
    CAPITAL                                                                    
|CURRENT LIABILITIES:                                                                                     |                                                                                                                                                   |                           |             |             |             |   |             |            
|                                                                                                         | Accounts payable (Note 5)                                                                                                                         |                           | $           | 58,395,000  |             |   | $           | 52,045,000  |            
|                                                                                                         | Accrued liabilities (Note 5)                                                                                                                      |                           |             | 36,984,000  |             |   |             | 25,784,000  |            
|                                                                                                         | Dividends payable                                                                                                                                 |                           |             | 5,748,000   |             |   |             | 9,550,000   |            
|                                                                                                         | Bank lines of credit (Note 4)                                                                                                                     |                           |             | 20,500,000  |             |   |             | 8,000,000   |            
|                                                                                                         | Current portion of long-term debt (Note 4)                                                                                                        |                           |             | 74,228,000  |             |   |             | 12,758,000  |            
|                                                                                                         | Current portion of long-term
    liability  Wilsey Foods, Inc. (Note 1)                                                                          |                           |             |             |             |   |             | 491,000     |            
|                                                                                                         | Derivative contract liability (Notes 2
    and 5)                                                                                                 |                           |             | 12,162,000  |             |   |             | 4,120,000   |            
|                                                                                                         |                                                                                                                                                   |                           |             |             |             |   |             |            
|                                                                                                         |                                                                                                                                                   | Total current liabilities |             |             | 208,017,000 |   |             |             | 112,748,000 | 
|LONG-TERM DEBT (Note 4)                                                                                  |                                                                                                                                                   |                           | 22,950,000  |             |             |   | 97,178,000  |            
|DEFERRED COMPENSATION OBLIGATIONS (Note 6)                                                               |                                                                                                                                                   |                           | 20,496,000  |             |             |   | 16,347,000  |            
|                                                                                                         |                                                                                                                                                   |                           |             |             |             |   |             |            
|                                                                                                         |                                                                                                                                                   | Total liabilities         |             |             | 251,463,000 |   |             |             | 226,273,000 | 
|COMMITMENTS AND CONTINGENCIES (Notes 6
    and 7) MEMBERS CAPITAL                                       |                                                                                                                                                   |                           | 166,492,000 |             |             |   | 150,716,000 |            
|                                                                                                         |                                                                                                                                                   |                           |             |             |             |   |             |            
|TOTAL                                                                                                    |                                                                                                                                                   | $                         | 417,955,000 |             |             | $ | 376,989,000 |            
|                                                                                                         |                                                                                                                                                   |                           |             |             |             |   |             |            

See notes to consolidated financial statements.

F-32



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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED MARCH 31, 2003 AND 2002, THE
THREE MONTHS ENDED MARCH 31, 2001 AND THE YEAR ENDED
DECEMBER 31, 2000


|                                   |                                                         |                          |               |                |             |                |             |              |            |   |             |            |            |   |             |            |            | 
|---------------------------------- | ------------------------------------------------------- | ------------------------ | ------------- | -------------- | ----------- | -------------- | ----------- | ------------ | ---------- | - | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                   |                                                         |                          |               |                |             | Three Months   |             | Year Ended  
|                                   |                                                         | Year Ended               |               | Year Ended     |             | Ended          |             | December 31,
|                                   |                                                         | March 31, 2003           |               | March 31, 2002 |             | March 31, 2001 |             | 2000        
|                                   |                                                         |                          |               |                |             |                |             |             
|NET SALES (Notes 2 and 5)          |                                                         | $                        | 1,096,425,000 |                |             | $              | 965,521,000 |              |            | $ | 215,158,000 |            |            | $ | 889,775,000 |           
|COST OF GOODS SOLD (Notes 2 and 5) |                                                         |                          | 912,702,000   |                |             |                | 791,061,000 |              |            |   | 177,492,000 |            |            |   | 743,291,000 |           
|                                   |                                                         |                          |               |                |             |                |             |              |            |   |             |            |            |   |             |           
|GROSS PROFIT                       |                                                         |                          | 183,723,000   |                |             |                | 174,460,000 |              |            |   | 37,666,000  |            |            |   | 146,484,000 |           
|                                   |                                                         |                          |               |                |             |                |             |              |            |   |             |            |            |   |             |           
|OPERATING EXPENSES:                |                                                         |                          |               |                |             |                |             |              |            |   |             |            |            |   |             |           
|                                   | Selling, general and administrative (Notes 2
    and 5) |                          |               | 105,424,000    |             |                |             | 91,827,000   |            |   |             | 20,092,000 |            |   |             | 77,878,000 |           
|                                   | Amortization of intangibles (Notes 2
    and 8)         |                          |               | 223,000        |             |                |             | 6,227,000    |            |   |             | 1,581,000  |            |   |             | 6,431,000  |           
|                                   |                                                         |                          |               |                |             |                |             |              |            |   |             |            |            |   |             |           
|                                   |                                                         | Total operating expenses |               |                | 105,647,000 |                |             |              | 98,054,000 |   |             |            | 21,673,000 |   |             |            | 84,309,000 | 
|                                   |                                                         |                          |               |                |             |                |             |              |            |   |             |            |            |   |             |           
|OPERATING INCOME                   |                                                         |                          | 78,076,000    |                |             |                | 76,406,000  |              |            |   | 15,993,000  |            |            |   | 62,175,000  |           
|INTEREST EXPENSE  Net (Note 4)    |                                                         |                          | 6,785,000     |                |             |                | 7,474,000   |              |            |   | 2,071,000   |            |            |   | 9,585,000   |           
|OTHER EXPENSE (INCOME) (Note 7)    |                                                         |                          | 733,000       |                |             |                | (1,554,000  | )            |            |   | (446,000    | )          |            |   | (4,916,000  | )         
|                                   |                                                         |                          |               |                |             |                |             |              |            |   |             |            |            |   |             |           
|NET INCOME                         |                                                         | $                        | 70,558,000    |                |             | $              | 70,486,000  |              |            | $ | 14,368,000  |            |            | $ | 57,506,000  |           
|                                   |                                                         |                          |               |                |             |                |             |              |            |   |             |            |            |   |             |           

See notes to consolidated financial statements.

F-33



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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF MEMBERS
CAPITAL

YEARS ENDED MARCH 31, 2003 AND 2002, THE
THREE MONTHS ENDED MARCH 31, 2001 AND THE YEAR ENDED
DECEMBER 31, 2000


|                           |                               |             |            |               |   |       |            |             |   |   |             |             |  
|-------------------------- | ----------------------------- | ----------- | ---------- | ------------- | - | ----- | ---------- | ----------- | - | - | ----------- | ----------- | -
|                           |                               |             |            | Cenex Harvest |   |      
|                           |                               | Wilsey      |            | States        |   |      
|                           |                               | Foods, Inc. |            | Cooperatives  |   | Total
|                           |                               |             |            |               |   |      
|BALANCE, JANUARY 1, 2000   |                               | $           | 67,315,000 |               |   | $     | 44,877,000 |             |   | $ | 112,192,000 |            
|                           | Net income                    |             |            | 30,593,000    |   |       |            | 26,913,000  |   |   |             | 57,506,000  |  
|                           | Transfer of interest (Note 1) |             |            | (11,775,000   | ) |       |            | 11,775,000  |   |   |             |             |  
|                           | Dividends                     |             |            | (23,288,000   | ) |       |            | (20,720,000 | ) |   |             | (44,008,000 | )
|                           |                               |             |            |               |   |       |            |             |   |   |             |            
|BALANCE, DECEMBER 31, 2000 |                               |             | 62,845,000 |               |   |       | 62,845,000 |             |   |   | 125,690,000 |            
|                           | Net income                    |             |            | 7,184,000     |   |       |            | 7,184,000   |   |   |             | 14,368,000  |  
|                           | Dividends                     |             |            | (4,157,000    | ) |       |            | (4,157,000  | ) |   |             | (8,314,000  | )
|                           |                               |             |            |               |   |       |            |             |   |   |             |            
|BALANCE, MARCH 31, 2001    |                               |             | 65,872,000 |               |   |       | 65,872,000 |             |   |   | 131,744,000 |            
|                           | Net income                    |             |            | 35,243,000    |   |       |            | 35,243,000  |   |   |             | 70,486,000  |  
|                           | Dividends                     |             |            | (25,757,000   | ) |       |            | (25,757,000 | ) |   |             | (51,514,000 | )
|                           |                               |             |            |               |   |       |            |             |   |   |             |            
|BALANCE, MARCH 31, 2002    |                               |             | 75,358,000 |               |   |       | 75,358,000 |             |   |   | 150,716,000 |            
|                           | Net income                    |             |            | 35,279,000    |   |       |            | 35,279,000  |   |   |             | 70,558,000  |  
|                           | Dividends                     |             |            | (27,391,000   | ) |       |            | (27,391,000 | ) |   |             | (54,782,000 | )
|                           |                               |             |            |               |   |       |            |             |   |   |             |            
|BALANCE, MARCH 31, 2003    |                               | $           | 83,246,000 |               |   | $     | 83,246,000 |             |   | $ | 166,492,000 |            
|                           |                               |             |            |               |   |       |            |             |   |   |             |            

See notes to consolidated financial statements.

F-34



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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH
FLOWS

YEARS ENDED MARCH 31, 2003 AND 2002, THE
THREE MONTHS ENDED MARCH 31, 2001 AND THE YEAR ENDED
DECEMBER 31, 2000


|                                               |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |             |            |            |            |             |  
|---------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------- | -------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ------------ | ----------- | ------------ | ---------- | ---------- | ---------- | ----------- | --------- | ---------- | ---------- | ----------- | ---------- | ---------- | ---------- | ----------- | -
|                                               |                                                                                       |                  |                                              |                                           |                                                         | Three Months |             |             
|                                               |                                                                                       | Year Ended       |                                              | Year Ended                                |                                                         | Ended        |             | Year Ended  
|                                               |                                                                                       | March 31,        |                                              | March 31,                                 |                                                         | March 31,    |             | December 31,
|                                               |                                                                                       | 2003             |                                              | 2002                                      |                                                         | 2001         |             | 2000        
|                                               |                                                                                       |                  |                                              |                                           |                                                         |              |             |             
|CASH FLOWS FROM OPERATING ACTIVITIES:          |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|                                               | Net income                                                                            |                  | $                                            | 70,558,000                                |                                                         |              | $           | 70,486,000   |            |            | $          | 14,368,000  |           |            | $          | 57,506,000  |           
|                                               | Adjustments to reconcile net income to net cash
    provided by operating activities: |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |             |           
|                                               |                                                                                       |                  | Depreciation and amortization                |                                           |                                                         | 12,416,000   |             |              |            | 12,186,000 |            |             |           | 2,833,000  |            |             |            | 10,829,000 |           
|                                               |                                                                                       |                  | Amortization of intangibles                  |                                           |                                                         | 223,000      |             |              |            | 6,227,000  |            |             |           | 1,581,000  |            |             |            | 6,431,000  |           
|                                               |                                                                                       |                  | Deferred rent                                |                                           |                                                         | 515,000      |             |              |            |            |            |             |           |            |            |             |            |            |           
|                                               |                                                                                       |                  | Loss (gain) on disposal of assets            |                                           |                                                         | 872,000      |             |              |            | 324,000    |            |             |           | 128,000    |            |             |            | (139,000   | )         
|                                               |                                                                                       |                  | Derivative contract asset                    |                                           |                                                         | 2,637,000    |             |              |            | (1,803,000 | )          |             |           | (7,375,000 | )          |             |            |            |           
|                                               |                                                                                       |                  | Changes in operating assets and liabilities: |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |             |            |            |           
|                                               |                                                                                       |                  |                                              | Trade receivables                         |                                                         |              | (7,174,000  | )            |            |            | (771,000   | )           |           |            | 980,000    |             |            |            | (359,000   | )          
|                                               |                                                                                       |                  |                                              | Inventories                               |                                                         |              | (29,567,000 | )            |            |            | 3,881,000  |             |           |            | 5,089,000  |             |            |            | (3,246,000 | )          
|                                               |                                                                                       |                  |                                              | Prepaid expenses and other current assets |                                                         |              | (3,639,000  | )            |            |            | (793,000   | )           |           |            | 330,000    |             |            |            | 234,000    |            
|                                               |                                                                                       |                  |                                              | Accounts payable                          |                                                         |              | 6,350,000   |              |            |            | (4,491,000 | )           |           |            | (2,943,000 | )           |            |            | (4,654,000 | )          
|                                               |                                                                                       |                  |                                              | Accrued liabilities                       |                                                         |              | 10,685,000  |              |            |            | 2,893,000  |             |           |            | (2,540,000 | )           |            |            | 2,499,000  |            
|                                               |                                                                                       |                  |                                              | Deferred compensation obligations         |                                                         |              | 4,815,000   |              |            |            | 4,866,000  |             |           |            | (1,767,000 | )           |            |            | 6,747,000  |            
|                                               |                                                                                       |                  |                                              | Due from/to affiliates                    |                                                         |              | (309,000    | )            |            |            | 47,000     |             |           |            | 1,000      |             |            |            | 293,000    |            
|                                               |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|                                               |                                                                                       |                  |                                              |                                           | Net cash provided by operating activities               |              |             | 68,382,000   |            |            |            | 93,052,000  |           |            |            | 10,685,000  |            |            |            | 76,141,000  |  
|                                               |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|CASH FLOWS FROM INVESTING ACTIVITIES:          |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|                                               | Acquisition of property                                                               |                  |                                              | (16,062,000                               | )                                                       |              |             | (13,268,000  | )          |            |            | (4,869,000  | )         |            |            | (13,037,000 | )         
|                                               | Proceeds from sale of assets                                                          |                  |                                              | 1,845,000                                 |                                                         |              |             | 69,000       |            |            |            | 23,000      |           |            |            | 1,021,000   |           
|                                               | Acquisitions  net of cash acquired
    (Note 3)                                      |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            | (5,312,000  | )         
|                                               | Acquisition of trademarks                                                             |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            | (47,000     | )         
|                                               | Investment in rabbi trust                                                             |                  |                                              |                                           |                                                         |              |             | (13,976,000  | )          |            |            |             |           |            |            |             |           
|                                               | Other assets                                                                          |                  |                                              | (1,332,000                                | )                                                       |              |             | (48,000      | )          |            |            | 67,000      |           |            |            | (201,000    | )         
|                                               |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|                                               |                                                                                       |                  |                                              |                                           | Net cash used in investing activities                   |              |             | (15,549,000  | )          |            |            | (27,223,000 | )         |            |            | (4,779,000  | )          |            |            | (17,576,000 | )
|                                               |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|CASH FLOWS FROM FINANCING ACTIVITIES:          |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|                                               | Repayment of long-term debt                                                           |                  |                                              | (12,758,000                               | )                                                       |              |             | (12,603,000  | )          |            |            | (554,000    | )         |            |            | (12,417,000 | )         
|                                               | Net borrowings from (payments on) line of credit                                      |                  |                                              | 12,500,000                                |                                                         |              |             | 3,000,000    |            |            |            | 5,000,000   |           |            |            | (15,000,000 | )         
|                                               | Payment to Wilsey Foods, Inc. (Note 1)                                                |                  |                                              | (491,000                                  | )                                                       |              |             | (487,000     | )          |            |            | (487,000    | )         |            |            |             |           
|                                               | Dividends paid                                                                        |                  |                                              | (58,584,000                               | )                                                       |              |             | (60,589,000  | )          |            |            |             |           |            |            | (38,539,000 | )         
|                                               |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|                                               |                                                                                       |                  |                                              |                                           | Net cash (used in) provided by financing
    activities |              |             | (59,333,000  | )          |            |            | (70,679,000 | )         |            |            | 3,959,000   |            |            |            | (65,956,000 | )
|                                               |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|NET (DECREASE) INCREASE IN CASH AND            |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|                                               |                                                                                       | CASH EQUIVALENTS |                                              |                                           | (6,500,000                                              | )            |             |              | (4,850,000 | )          |            |             | 9,865,000 |            |            |             | (7,391,000 | )         
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |                                                                                       |                  | 9,300,000                                    |                                           |                                                         |              | 14,150,000  |              |            |            | 4,285,000  |             |           |            | 11,676,000 |            
|                                               |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|CASH AND CASH EQUIVALENTS, END OF PERIOD       |                                                                                       | $                | 2,800,000                                    |                                           |                                                         | $            | 9,300,000   |              |            | $          | 14,150,000 |             |           | $          | 4,285,000  |            
|                                               |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW           |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            
|                                               | INFORMATION  Cash paid during the
    period for interest                            |                  | $                                            | 7,183,000                                 |                                                         |              | $           | 8,129,000    |            |            | $          | 653,054     |           |            | $          | 10,181,000  |           
|                                               |                                                                                       |                  |                                              |                                           |                                                         |              |             |              |            |            |            |             |           |            |            |            

See notes to consolidated financial statements

F-35



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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

YEARS ENDED MARCH 31, 2003 AND 2002, THE
THREE MONTHS ENDED MARCH 31, 2001 AND THE YEAR ENDED
DECEMBER 31, 2000




|   |                
|-- | ---------------
|1. | General Matters

Ventura Foods, LLC and its subsidiary (the
Company) is a processor and distributor of edible
oils used in food preparation and a packager of food products.
The Company sells its products to national and regional
restaurant chains, food wholesalers and retail chains.

The Company was formed pursuant to a Joint
Venture Agreement (the Agreement) dated
August 30, 1996 between Wilsey Foods, Inc.
(Wilsey) and Cenex Harvest States Cooperatives
(CHS) whereby substantially all the assets and
liabilities of Wilsey and Holsum Foods (a division of CHS) were
transferred and assigned, with certain exclusions, to the
Company. Wilsey is a majority-owned subsidiary of
Mitsui & Co., Ltd. From the period of inception through
March 31, 2000, Wilsey and CHS owned 60% and 40%,
respectively, of the Company. On March 31, 2000, Wilsey
sold a 10% interest in the Company to CHS. Accordingly, Wilsey
and CHS each own 50% of the Company.

At the formation date, a liability equal to the
net deferred income tax liability of Wilsey at August 30,
1996 was assumed by the Company and was included in long-term
liability  Wilsey Foods, Inc. The amount was payable
in five equal annual installments of $487,000 plus a final
installment of $491,000. The final installment of $491,000 was
paid during fiscal 2003.



|   |                    
|-- | -------------------
|2. | Accounting Policies

Basis of Presentation and Principles of
Consolidation The
consolidated financial statements include the accounts of
Ventura Foods, LLC and its 100%-owned subsidiary, Ventura Jets,
Inc. All material intercompany transactions have been eliminated.

Fiscal Year
End During 2001, the
Company changed its fiscal year end to March 31. Prior to
such change, the Companys fiscal year end had been
December 31.

Cash and Cash
Equivalents The Company
considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.

Inventories
Inventories consist of the following at March 31:

|                         |  |      |            |      |  |   |            | 
|------------------------ |  | ---- | ---------- | ---- |  | - | ---------- | 
|                         |  | 2003 |            | 2002
|                         |  |      |            |     
|Bulk oil                 |  | $    | 38,751,000 |      |  | $ | 17,654,000 | 
|Finished goods           |  |      | 34,119,000 |      |  |   | 27,696,000 | 
|Ingredients and supplies |  |      | 19,496,000 |      |  |   | 17,449,000 | 
|                         |  |      |            |      |  |   |            | 
|Total                    |  | $    | 92,366,000 |      |  | $ | 62,799,000 | 
|                         |  |      |            |      |  |   |            | 

Inventories are accounted for at the lower of
cost or market, using the first-in, first-out method. Cost for
inventories produced or modified by the Company through a
manufacturing process includes fixed and variable production
costs and raw materials costs, and in-bound freight costs. Cost
for inventories purchased for resale includes the cost of the
product and freight and handling costs incurred to place the
product at the Companys point of sale.

Derivative Financial
Instruments The
Companys use of derivative financial instruments is
limited to forwards, futures and certain other delivery
contracts as discussed below. The Company enters into these
contracts to limit its exposure to price volatility of various
food oils that are critical to its processing and distribution
activities. It is the Companys policy to remain
substantially hedged with respect to edible oil product price
risk; derivative contracts are used to maintain this hedged
position. Forward purchase and sales contracts with established
market participants as well as exchange traded futures contracts
are

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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

entered into in amounts necessary to protect
against price changes on raw materials needed for the
Companys food oil processing and distribution activities.
The Company also enters into purchase and sales commitments with
major suppliers and customers at a specified premium or discount
from a future market price (Basis Contracts).
Additionally, the Companys policies do not permit
speculative trading of such contracts. All of these qualify as
derivatives under Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, and are stated at market
value. Changes in market value are recognized in the
consolidated statements of income, through cost of sales, in the
periods such changes occur. The adoption of
SFAS No. 133 on January 1, 2001 did not have a
significant impact on the Companys results of operations,
as the Company historically recorded its financial instruments
at market value. Prior to the adoption of
SFAS No. 133, the market value of futures contracts,
Basis Contracts, and forward purchase and sales contracts were
recorded as a component of inventory. Beginning with the
adoption of SFAS No. 133, the market value of these
contracts is now recorded separately on the consolidated balance
sheets as derivative contract assets or liabilities. These
contracts have maturities of less than one year.

The following summarizes the Companys
various derivative contracts outstanding at March 31, 2003
and 2002 (pounds and dollars in thousands)

|                                  |  |        |           |             |  |   |        |  
|--------------------------------- |  | ------ | --------- | ----------- |  | - | ------ | -
|                                  |  |        |           | Net        
|                                  |  |        |           | Unrealized 
|Forward Contracts and Commitments |  | Pounds |           | Gain (Loss)
|                                  |  |        |           |            
|March 31, 2003                    |  |        |           |             |  |   |        |  
|Forward purchases                 |  |        | 334,100   |             |  | $ | 11,060 |  
|Forward sales                     |  |        | 433,300   |             |  |   | (6,208 | )
|Basis purchase                    |  |        | 259,800   |             |  |   | 857    |  
|Basis sales                       |  |        | 17,500    |             |  |   | (126   | )
|Futures contracts                 |  |        | 146,000   |             |  |   | 958    |  
|                                  |  |        |           |             |  |   |        |  
|                                  |  |        | 1,190,700 |             |  | $ | 6,541  |  
|                                  |  |        |           |             |  |   |        |  
|March 31, 2002                    |  |        |           |             |  |   |        |  
|Forward purchases                 |  |        | 490,500   |             |  | $ | 7,873  |  
|Forward sales                     |  |        | 454,100   |             |  |   | (1,117 | )
|Basis purchase                    |  |        | 390,300   |             |  |   | 2,304  |  
|Basis sales                       |  |        | 62,600    |             |  |   | (303   | )
|Futures contracts                 |  |        | 96,100    |             |  |   | 421    |  
|                                  |  |        |           |             |  |   |        |  
|                                  |  |        | 1,493,600 |             |  | $ | 9,178  |  
|                                  |  |        |           |             |  |   |        |  

The fair value of futures contracts is determined
from quotes listed on the Chicago Board of Trade or other market
makers. Forward purchase and sales contracts are with various
counterparties, and the fair values of such contracts, are
determined from the market price of the underlying product.

The Company is exposed to loss in the event of
nonperformance by the other parties to the contracts. However,
the Company does not anticipate nonperformance by counterparties.

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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Property and
Depreciation Property is
stated at cost. Depreciation and amortization are provided for
using the straight-line method over the estimated useful lives
of the assets, as follows:

|                        |  |  |             | 
|----------------------- |  |  | ----------- | 
|Buildings               |  |  | 40 years    | 
|Leasehold improvements  |  |  | 3-19 years  | 
|Machinery and equipment |  |  | 10-25 years | 
|Other property          |  |  | 3-20 years  | 

Fair Value of Financial
Instruments The Company
estimates the fair value of financial instruments using the
following methods and assumptions:



| |                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Accounts Receivable and Accounts
    Payable The carrying
    amounts approximate fair value due to the short maturities of
    these instruments.                                                                                                                                     
|
| | Lines of
    Credit The carrying
    amounts approximate fair value, as the interest rates are based
    upon variable reference rates.                                                                                                                                                
|
| | Long-Term
    Debt The fair value of
    long-term fixed rate debt is estimated based upon prevailing
    market interest rates available to the Company. The Company
    estimates the fair value on the $25,573,000 6.55% fixed rate
    debt as of March 31, 2003 to be $27,804,000.

Futures
Contracts The fair value
of futures contracts (used for hedging purposes) is determined
from quotes listed principally on the Chicago Board of Trade.

Concentration of Credit
Risk During the years
ended March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000,
net sales to one customer were 23%, 22%, 22% and 21% of total
net sales, respectively. This customer represents approximately
23% and 19% of trade receivables at March 31, 2003 and
2002, respectively. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for
potential credit losses.

The Company maintains cash deposits with various
financial institutions. The Company periodically evaluates the
credit standing of these financial institutions and has not
sustained any credit losses relating to such balances.

Marketable
Securities The
Companys marketable securities comprise equity securities
that have been classified as trading securities. The equity
securities are carried at fair market value based upon quoted
market prices. Unrealized gains and losses on equity securities
are recognized in net income and totaled $666,000 and $(264,000)
for the years ended March 31, 2003 and 2002, respectively
(see Note 6).

Goodwill and
Trademarks The Company
adopted SFAS No. 142, Goodwill and Other Intangible
Assets, effective April 1, 2002, the first day of its
2003 fiscal year. As a result, goodwill and indefinite life
intangible assets (trademarks) are no longer
amortized, but reviewed for impairment annually, or more
frequently if certain impairment indicators arise. See
Note 8 for the effect of adopting SFAS No. 142.

Other identifiable intangible assets consist of
patents, deferred financing costs and other assets, which are
amortized using the straight-line method over 5 to 15 years.

Impairment of Long-Lived Assets Long-lived assets, including
identifiable intangibles, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In performing the
review for recoverability, future cash flows expected to result
from the use of the asset and its eventual disposition are
estimated. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recorded
under the discounted future cash flow method.

F-38



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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Advertising Costs The Company expenses advertising costs
in the period incurred. For the years ended March 31, 2003
and 2002, the three months ended March 31, 2001 and the
year ended December 31, 2000, the Company incurred
advertising expenses of approximately $9,039,000, $7,100,000,
$1,300,000 and $6,100,000, respectively.

Income Taxes The Company is a limited liability
company and has no liability for federal and state income taxes.
Income is taxed to the members based on their allocated share of
taxable income or loss. However, certain states tax the income
of limited liability companies. The Companys liability for
such state income taxes is not significant.

Revenue Recognition The Company is a processor and
distributor of edible oils used in food preparation and a
packager of food products. Revenue is recognized upon transfer
of title to the customer, which occurs generally upon shipment.
In certain instances, title is transferred upon receipt by the
customer, at which time the Company records revenue. Amounts
billed to the customer as part of a sales transaction related to
shipping and handling are included in sales. Revenue is recorded
net of discounts, rebates and certain sales incentives.

Use of Estimates The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Reclassifications Certain reclassifications have been
made to the prior periods financial statements to conform
to the 2003 presentation.

Recent Accounting Pronouncements In June 2001, the Financial Accounting
Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. As required, the Company will apply the provisions of
SFAS No. 143 prospectively to retirements of tangible
long-lived assets, if any, initiated for fiscal years beginning
after June 15, 2002.

In July 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, and the accounting and
reporting provisions of Accounting Principles Board Opinion
No. 30, Reporting The Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. This statement retains the requirements of
SFAS No. 121 to (a) recognize an impairment loss
only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and
(b) measure an impairment loss as the difference between
the carrying amount and fair value of the asset, and establishes
a single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of
by sale. The adoption of SFAS No. 144 did not have a
material impact on the Companys consolidated financial
statements.

In November 2001, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer
or Reseller of the Vendors Products, which addresses
the accounting for consideration given by a vendor or a reseller
of the vendors products. This new guidance requires
companies to report certain consideration given by a vendor to a
customer as a reduction in revenues rather than as marketing
expense. This consensus was required to be adopted no later than
the first quarter of 2002, and upon adoption, companies were
required to retroactively reclassify such amounts in previously
issued financial statements to comply with the income statement
classification

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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

requirements of the consensus. The Company
adopted the provisions of EITF Issue No. 01-09 during
fiscal 2003. The effect of the adoption of EITF Issue
No. 01-09 was a reduction in both revenues and selling,
general and administrative expenses of $690,000, $207,000,
$29,000 and $267,000 for the years ended March 31, 2003 and
2002, the three months ended March 31, 2001 and the year
ended December 31, 2000, respectively.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated With
Exit or Disposal Activities. SFAS No. 146
addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF
Issue No. 94-03, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in
Restructuring). This statement requires that the fair value
of an initial liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred
as opposed to when the entity commits to an exit plan, thereby
eliminating the definition and requirements for recognition of
exit costs. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated
after December 31, 2002. As required, the Company will
apply the provisions of SFAS No. 146 prospectively to
exit or disposal activities, if any, initiated after
December 31, 2002.

In September 2002, the EITF issued EITF Issue
No. 02-16, Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor,
which addresses the accounting for consideration received by the
reseller of the vendors products. This new guidance
provides that the consideration represents a reimbursement of
costs incurred by the customer to sell the vendors
products and is generally presumed to be a reduction of the cost
of the vendors products and, therefore, should be
characterized as a reduction of cost of sales in the
customers income statement. The Company adopted EITF Issue
No. 02-16 during fiscal 2003. The effect of the adoption of
EITF Issue No. 02-16 was a reduction in cost of goods sold
and other income of $2,987,000, $1,628,000, $256,000 and
$991,000 for the years ended March 31, 2003 and 2002, the
three months ended March 31, 2001 and the year ended
December 31, 2000, respectively.

In November 2002, the FASB issued FASB
Interpretation No. (FIN) 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 elaborates on the disclosures to be made
by a guarantor about its obligations under certain guarantees.
FIN 45 also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the
guarantee. FIN 45 specifically identifies certain
obligations that are excluded from the provisions related to
recognizing a liability at inception; however, these guarantees
are subject to the disclosure requirements of FIN 45. The
initial recognition and measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure
requirements are effective for all annual periods ending after
December 15, 2002. The adoption of FIN 45 did not have
a material impact on the Companys consolidated financial
statements.

On April 30, 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under
SFAS No. 133. The new guidance amends
SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group (DIG) process that
effectively required amendments to SFAS No. 133, and
decisions made in connection with other FASB projects dealing
with financial instruments and in connection with implementation
issues raised in relation to the application of the definition
of a derivative and characteristics of a derivative that
contains financing components. In addition, it clarifies when a
derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149
is effective for contracts entered into or modified after
June 30,

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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2003 and for hedging relationships designated
after June 30, 2003. The Company is currently assessing,
but has not yet determined, the impact this statement will have
on its consolidated financial statements.



|   |             
|-- | ------------
|3. | Acquisitions

During the year ended December 31, 2000, the
Company acquired substantially all the assets and liabilities of
Sona and Hollen for $5,740,000. Sona and Hollen was a portion
packing company located in Los Alamitos, California. The
acquisition has been accounted for as a purchase, and
accordingly, the purchase price has been allocated based on the
estimated fair values of the assets acquired. The excess of the
purchase price over the fair value of the assets acquired,
approximately $4,276,000, was recorded as goodwill. Prior to the
adoption of SFAS No. 142 on April 1, 2002,
goodwill had been amortized using a 15-year life (see
Note 8).

The following is a summary of the assets acquired
at estimated fair market value:

|                                  |  |   |           | 
|--------------------------------- |  | - | --------- | 
|Inventories                       |  | $ | 637,000   | 
|Prepaid expenses and other assets |  |   | 208,000   | 
|Property and equipment            |  |   | 600,000   | 
|Trademark                         |  |   | 19,000    | 
|Goodwill                          |  |   | 4,276,000 | 
|                                  |  |   |           | 
|Net assets of business acquired   |  | $ | 5,740,000 | 
|                                  |  |   |           | 



|   |                                   
|-- | ----------------------------------
|4. | Lines of Credit and Long-Term Debt

Lines of Credit At March 31, 2003, the Company
had a revolving line-of-credit agreement with a banking group to
provide for borrowings of up to an aggregate of $72,000,000.
Outstanding borrowings at March 31, 2003 and 2002 were
$20,500,000 and $8,000,000, respectively. The applicable
interest rates are based, at the option of the Company, at a
London Interbank Offered Rate (LIBOR) or a term
federal funds rate (TFFR) option. The
weighted-average interest rate at March 31, 2003 and 2002
was 1.72% and 2.24%, respectively. The lines of credit mature at
varying dates between November 2003 and February 2004.

Long-Term Debt At March 31, 2003 and 2002,
balances outstanding on term loans with a banking group were
$71,605,000 and $81,905,000, respectively. The interest rate
applicable to these term loans is based, at the option of the
Company, at a TFFR-based, LIBOR-based or a fixed rate option.
The weighted-average interest rate on such borrowings at
March 31, 2003 and 2002 was 6.53% and 6.59%, respectively.
The term loans with the banking group mature on
December 23, 2003.

At March 31, 2003 and 2002, balances
outstanding on a term loan with a bank were $25,573,000 and
$28,031,000, respectively. The agreement requires quarterly
principal and interest payments of $1,058,000. The interest rate
on this term loan is fixed at 6.55%. The term loan with the bank
matures in October 2011.

The term loans are collateralized by
substantially all property, equipment and intellectual property
rights, and the lines of credit are collateralized by
substantially all trade receivables and inventories of the
Company. The lines of credit and term loan agreements contain
various covenants, including compliance with tangible net worth
(as defined) and other financial ratios, restrictions on the
payment of dividends, and restrictions on the incurrence of
additional debt.

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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Annual maturities of long-term debt at
March 31, 2003 are as follows:

|                     |  |   |            | 
|-------------------- |  | - | ---------- | 
|2004                 |  | $ | 74,228,000 | 
|2005                 |  |   | 2,799,000  | 
|2006                 |  |   | 2,987,000  | 
|2007                 |  |   | 3,187,000  | 
|2008                 |  |   | 3,401,000  | 
|Thereafter           |  |   | 10,576,000 | 
|                     |  |   |            | 
|Total                |  |   | 97,178,000 | 
|Less current portion |  |   | 74,228,000 | 
|                     |  |   |            | 
|Long-term debt       |  | $ | 22,950,000 | 
|                     |  |   |            | 



|   |                             
|-- | ----------------------------
|5. | Transactions with Affiliates

At March 31, 2003, the Company had a
receivable balance of $309,000 due from Wilsey for reimbursement
of expenses paid by the Company on behalf of Wilsey.

Included in accounts payable at March 31,
2003 and 2002 were $8,035,000 and $5,976,000, respectively,
payable to CHS for purchases of oil. Purchases from CHS for the
years ended March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000
were $66,682,000, $47,745,000, $8,575,000 and $48,916,000,
respectively. Sales to CHS for the years ended March 31,
2003 and 2002, the three months ended March 31, 2001 and
the year ended December 31, 2000 totaled $1,056,000,
$883,000, $109,000 and $950,000, respectively.

Included in accounts payable at March 31,
2003 and 2002 were $790,000 and $817,000, respectively, payable
to Mitsui USA for the Companys participation in Mitsui
USAs insurance plans. During the years ended
March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000,
the Company recorded expenses of $9,402,000, $8,487,000,
$1,380,000 and $5,049,000, respectively, in connection with its
participation in such plans.

Included in trade receivables at March 31,
2003 and 2002 were $123,000 and $69,000, respectively, of
receivables from Mitsui USA for product sales. Sales to Mitsui
USA for the years ended March 31, 2003 and 2002, the three
months ended March 31, 2001 and the year ended
December 31, 2000 totaled $1,423,000, $1,406,000, $341,000
and $1,569,000, respectively.

Forward purchase contracts as of March 31,
2003 included commitments for purchases of 86,964,000 pounds of
oil from CHS. The Company recognized gains (losses) of
$1,081,000, $934,000, $1,788,000 and $(363,000) on such related
party commitments for the years ended March 31, 2003 and
2002, the three months ended March 31, 2001 and the year
ended December 31, 2000, respectively.



|   |                       
|-- | ----------------------
|6. | Employee Benefit Plans

The Company has long-term incentive arrangements
for certain key executives. Benefits under the initial plan were
based on earnings over a three-to-five year period (as defined)
from January 1, 1997 through December 31, 2001. An
amount equal to the obligation incurred under the plan was
contributed to a rabbi trust that would be available to general
creditors in the event of bankruptcy. The trust holds
investments primarily in marketable securities that are recorded
at market value (classified as trading securities). The assets
in the trust are to be distributed to the employees upon
retirement. The liability under the arrangements was $13,574,000
and $14,240,000 as of March 31, 2003 and 2002,
respectively, and is included in deferred compensation
obligation in the accompanying consolidated balance sheets.

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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On January 1, 2002, the Company established
new long-term incentive arrangements with certain key
executives. Under these arrangements, the amount of additional
compensation is based on the attainment of cumulative
income-based or equity-based targets over a two- to three-year
period. At the end of the defined periods, amounts earned by
individual executives will be contributed to a rabbi trust,
unless representatives of Wilsey and CHS elect to pay such
amounts directly to the respective key executives. At
March 31, 2003 and 2002, a liability for the plan of
$4,702,000 and $439,000, respectively, is classified as
long-term deferred compensation obligation in the accompanying
consolidated balance sheets.

For the years ended March 31, 2003 and 2002,
the three months ended March 31, 2001 and the year ended
December 31, 2000, the Company recognized compensation
expense under the long-term incentive arrangements of
$4,264,000, $5,658,000, $750,000 and $5,889,000, respectively.

The Company has a combined 401(k) and defined
contribution profit-sharing plan (the Plan) covering
substantially all employees not covered by collective bargaining
agreements. Under the Plan, employees can make annual voluntary
contributions not to exceed the lesser of an amount equal to 15%
of their compensation or limits established by the Internal
Revenue Code. The Company is required, by the Plan, to make
certain matching contributions of up to 4% of each
participants salary and may make discretionary
profit-sharing contributions. The Company also established a
401(k) defined contribution plan covering employees under
certain collective bargaining agreements. Under this plan,
employees can make annual voluntary contributions of up to 15%
of their compensation. Expense for the years ended
March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000
was $6,484,000, $5,855,000, $1,343,000 and $5,139,000,
respectively. Certain of the Companys union employees are
participants in multi-employer plans. Payments to multi-employer
pension plans are negotiated in various collective bargaining
agreements and aggregated $2,367,000, $1,162,000, $416,000 and
$1,641,000 for the years ended March 31, 2003 and 2002, the
three months ended March 31, 2001 and the year ended
December 31, 2000, respectively. The actuarial present
value of accumulated plan benefits and net assets available for
benefits to union employees under these multi-employer pension
plans is not available, as the Company does not administer these
plans.

Effective January 1, 1999, the Company
established a Supplemental Executive Retirement Plan for certain
of its employees. The projected benefit obligation as of
March 31, 2003 and 2002 was $2,955,000 and $2,049,000,
respectively. A liability of $2,220,000 and $1,668,000 as of
March 31, 2003 and 2002, respectively, is included in
long-term deferred compensation obligation in the accompanying
consolidated balance sheets. The plan is unfunded. During the
years ended March 31, 2003 and 2002, the three months ended
March 31, 2001 and the year ended December 31, 2000,
the Company recorded an expense related to the plan of $552,000,
$111,000, $420,000 and $379,000, respectively.

The assumptions used in the measurement of the
Companys benefit obligation are as follows:

|                              |  |          |      |             |  |      |      |      |  |  |      |  |  |  |      | 
|----------------------------- |  | -------- | ---- | ----------- |  | ---- | ---- | ---- |  |  | ---- |  |  |  | ---- | 
|                              |  |          |      |            
|                              |  | March 31 |      | December 31
|                              |  |          |      |            
|                              |  | 2003     |      | 2002        |  | 2001 |      | 2000
|                              |  |          |      |             |  |      |      |     
|Discount rate                 |  |          | 6.0% |             |  |      | 7.0% |      |  |  | 7.0% |  |  |  | 7.0% | 
|Rate of compensation increase |  |          | 3.0% |             |  |      | 3.0% |      |  |  | 3.0% |  |  |  | 3.0% | 

The Company accrues the actuarially determined
amount necessary to fund the participants benefits in
accordance with the requirements of the Employee Retirement
Income Security Act of 1974.

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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                              
|-- | -----------------------------
|7. | Commitments and Contingencies

Future minimum annual payments under
noncancelable operating leases with lease terms in excess of one
year at March 31, 2003 are as follows:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2004       |  | $ | 7,263,000  | 
|2005       |  |   | 7,431,000  | 
|2006       |  |   | 5,792,000  | 
|2007       |  |   | 4,217,000  | 
|2008       |  |   | 3,659,000  | 
|Thereafter |  |   | 16,217,000 | 
|           |  |   |            | 
|Total      |  | $ | 44,579,000 | 
|           |  |   |            | 

Under the lease agreements, the Company is
obligated to pay certain property taxes, insurance and
maintenance costs. Certain leases contain renewal and purchase
options. Rental expense for the years ended March 31, 2003
and 2002, the three months ended March 31, 2001 and the
year ended December 31, 2000 under operating leases totaled
$7,138,000, $5,671,000, $1,476,000 and $5,205,000, respectively.

During the year ended December 31, 2000, the
Company received a payment of approximately $2,400,000 in
connection with the settlement of a class action lawsuit. This
amount has been recorded as a component of other income in the
accompanying consolidated statement of income.

The Company is involved from time to time in
routine legal matters incidental to its business. The Company
believes that the resolution of such matters will not have a
material adverse effect on the Companys business,
financial condition or results of operations.



|   |         
|-- | --------
|8. | Goodwill

In June 2001, the FASB issued
SFAS No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets. These
statements, among other things, eliminate the
pooling-of-interests method of accounting for business
combinations as of June 30, 2001, eliminate the
amortization of goodwill and indefinite life intangible assets
for all fiscal years beginning after December 15, 2001, and
require that goodwill and indefinite life intangible assets be
reviewed annually for impairment, or more frequently if
impairment indicators arise. The Company adopted
SFAS Nos. 141 and 142 with respect to new goodwill as
of July 1, 2001 and adopted SFAS No. 142 with
respect to existing goodwill and indefinite life intangible
assets as of April 1, 2002, the first day of its 2003
fiscal year. The adoption of SFAS No. 141 did not
impact the Companys financial condition or results of
operations. Upon the adoption of SFAS No. 142, the
Company ceased amortizing existing goodwill and trademarks.

The Company completed the transitional test of
goodwill and trademarks during 2003. Based on the result of the
test, the Company determined that there was no impairment of
goodwill and trademarks as of April 1, 2002. Pursuant to
SFAS No. 142, goodwill and trademarks will be tested
for impairment at least annually and more frequently if an event
occurs which indicates that goodwill or trademarks may be
impaired. During 2003, the Company abandoned the use of certain
trademarks with a net book value of $100,000.

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##### Table of Contents



VENTURA FOODS, LLC AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation of net income to the amount
adjusted for the exclusion of goodwill and trademarks
amortization follows for the years ended March 31, 2003 and
2002, the three months ended March 31, 2001 and the year
ended December 31, 2000:

|                       |  |          |            |             |  |      |            |      |  |   |            |  |  |   |            | 
|---------------------- |  | -------- | ---------- | ----------- |  | ---- | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                       |  |          |            |            
|                       |  | March 31 |            | December 31
|                       |  |          |            |            
|                       |  | 2003     |            | 2002        |  | 2001 |            | 2000
|                       |  |          |            |             |  |      |            |     
|Reported net income    |  | $        | 70,558,000 |             |  | $    | 70,486,000 |      |  | $ | 14,368,000 |  |  | $ | 57,506,000 | 
|Add:                   |  |          |            |             |  |      |            |      |  |   |            |  |  |   |            | 
|Goodwill amortization  |  |          |           |             |  |      | 3,972,000  |      |  |   | 1,036,000  |  |  |   | 4,001,000  | 
|Trademark amortization |  |          |           |             |  |      | 1,853,000  |      |  |   | 421,000    |  |  |   | 1,684,000  | 
|                       |  |          |            |             |  |      |            |      |  |   |            |  |  |   |            | 
|Adjusted net income    |  | $        | 70,558,000 |             |  | $    | 76,311,000 |      |  | $ | 15,825,000 |  |  | $ | 63,191,000 | 
|                       |  |          |            |             |  |      |            |      |  |   |            |  |  |   |            | 

Amortization expense for other intangible assets
subject to amortization was $223,000, $402,000, $124,000 and
$746,000 for the years ended March 31, 2003 and 2002, the
three months ended March 31, 2001 and the year ended
December 31, 2000, respectively. Estimated annual
amortization for each of the years in the five-year period
ending March 31, 2008 is $180,000.



|   |                                  
|-- | ---------------------------------
|9. | Quarterly Information (Unaudited)

As discussed in Note 2, the Company changed
its fiscal year end to March 31. Audited financial
information for the three months ended March 31, 2001 has
been included herein. For comparison purposes, selected
unaudited financial information for the three months ended
March 31, 2000 is as follows:

|                  |  |   |             | 
|----------------- |  | - | ----------- | 
|Sales             |  | $ | 211,815,000 | 
|Cost of goods     |  |   | 172,818,000 | 
|Net               |  |   | 17,123,000  | 
|Total             |  |   | 362,382,000 | 
|Total liabilities |  |   | 231,789,000 | 
|Members          |  |   | 130,593,000 | 

F-45