##### Table of Contents



UNITED
 STATESSECURITIES AND EXCHANGE COMMISSION


Washington,
 D.C. 20549




---

FORM 10-K


(Mark One)

|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------
|  |                                                                                
|  | For the fiscal
 year ended: September 29, 2002                                 

OR



|o | TRANSITION REPORT PURSUANT TO SECTION
 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------

For the transition from ____
 to ____



Commission file number
 001-13222


STATER BROS. HOLDINGS INC.


(Exact name of registrant as specified in
 its charter)




|Delaware                                          | 33-0350671                        
|------------------------------------------------- | ----------------------------------
|                                                  |                                   
|(State or
 other jurisdiction of incorporation or | (IRS Employer
 Identification No.)
|organization)                                     |                                   



|21700 Barton
 Road                                  |               
|--------------------------------------------------- | --------------
|Colton, California                                  | 92324         
|                                                    |               
|(Address of
 principal executive offices)           | (Zip Code)    
|                                                    |               
|Registrants
 telephone number, including area code | (909) 783-5000

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

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

Indicate
 by check mark 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 x
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 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.
 Yes x
No o.

No voting
 stock of the registrant is held by non-affiliates of the registrant.

Number of
 shares of the registrants Common Stock, $.01 par value, outstanding as of
 December 2, 2002  Class A Common Stock - 38,301 shares.

DOCUMENTS INCORPORATED
 BY REFERENCE

None

1



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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5. Market for the 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 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                  
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|              | Item 14. Controls and Procedures                                                             
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules                                             
|SIGNATURES   
|CERTIFICATION
|EXHIBIT 10.30
|EXHIBIT 10.31
|EXHIBIT 10.32
|EXHIBIT 12   
|EXHIBIT 99.3 



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##### Table of Contents



STATER BROS. HOLDINGS INC.

FORM 10-K

TABLE OF CONTENTS



|         |                                                                                        |  | Page Number
|-------- | -------------------------------------------------------------------------------------- |  | -----------
|         |                                                                                        |  |            
|PART I  
|Item 1   | Business                                                                               |  |            
|Item 2   | Properties                                                                             |  |            
|Item 3   | Legal Proceedings                                                                      |  |            
|Item 4   | Submission of Matters to a Vote of Security Holders                                    |  |            
|PART II 
|Item 5   | Market for the 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 8   | Financial Statements and Supplementary Data                                            |  |            
|Item 9   | Changes in and Disagreements with Accountants on Accounting and
 Financial Disclosure  |  |            
|PART III
|Item 10  | Directors and Executive Officers of the Registrant                                     |  |            
|Item 11  | Executive Compensation                                                                 |  |            
|Item 12  | Security Ownership of Certain Beneficial Owners and Management                         |  |            
|Item 13  | Certain Relationships and Related Transactions                                         |  |            
|Item 14  | Controls and Procedures                                                                |  |            
|PART IV 
|Item 15  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                        |  |            
|         | Signatures                                                                             |  |            
|         | Certifications                                                                         |  |            

2



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##### Table of Contents






PART I






|Item 1. |  | Business
|------- |  | --------

General
Stater Bros. Holdings Inc. was incorporated
 in Delaware in 1989 and together with its wholly-owned subsidiaries, Stater Bros.
 Markets and Stater Bros. Development, Inc., (collectively Stater Bros. or the
 Company) were founded in 1936 when the first Stater Bros. Market opened in Yucaipa,
 California. The Company is a leading supermarket chain in Southern California and
 operates 156 supermarkets under the Stater Bros. Markets name.

The Company has grown, primarily by constructing
 supermarkets in its primary trading areas, through the enlargement of existing supermarkets
 and through a strategic acquisition in August 1999 of 43 supermarkets in Southern
 California. Stater Bros. supermarkets consist of approximately 5.2 million
 total square feet including approximately 3.7 million selling square feet. The
 Companys supermarkets offer its customers a high level of customer service,
 broad selections of grocery, meat, produce, liquor and general merchandise. All
 of the Companys supermarkets have expanded selections of produce and full-service
 meat departments. Nearly all of the supermarkets have hot service delicatessens
 and hot service bakery departments.

The Company utilizes a centralized warehouse
 and distribution facilities that provide the Companys supermarkets with approximately
 77% of the volume of the merchandise they offer for sale. The Companys warehouse
 and distribution facilities encompass approximately 1,467,000 square feet and include
 facilities for grocery, deli, produce, meat, meat deli, frozen, bakery, health and
 beauty care, and general merchandise products.

Ownership of the Company
La Cadena Investments (La Cadena) is the
 sole shareholder of the Company and holds all of the shares of the Companys
 Class A Common Stock. La Cadena is a California General Partnership whose partners
 include Jack H. Brown, Chairman of the Board, President and Chief Executive Officer
 of the Company and a former member of the senior management of the Company. Jack
 H. Brown has a majority interest in La Cadena and is the managing general partner
 with the power to vote the shares of the Company held by La Cadena.

Stock Redemption
During fiscal 2002, the Company obtained
 consent of the holders of its 10.75% Senior Notes due 2006 (the 10.75% Notes)
 to make a distribution and payment to stockholders consisting of $25.0 million in
 cash and a subordinated note in the principal amount of $20.0 million. On January
 22, 2002, the Company redeemed 11,699 shares of the Companys stock previously
 held by La Cadena and made a cash payment of $20.0 million and executed a $20.0
 million subordinated note due March 31, 2007 to a former partner of La Cadena.
 The subordinated note bears interest at a rate of 5.0% per annum, payable semi-annually.
 On February 1, 2002, the Company paid a $4.5 million dividend to La Cadena. Fees
 for consent of the holders of its 10.75% Senior Notes and fees and expenses of the
 transaction, including a $500,000 financial advisory service fee to La Cadena, amounted
 to approximately $5.0 million.

Acquisition
On May 7, 1999, Stater Bros. entered into
 an agreement with Albertsons, Inc. (Albertsons) to purchase
 43 supermarkets and one future store site (the Acquisition) in Stater
 Bros. existing and contiguous market areas. The stores were formerly operated
 by Albertsons or Lucky Stores and were divested in connection with the merger
 of Albertsons and American Store Company, the parent of Lucky Stores. The
 purchase price was $94.4 million for land, buildings and equipment, $39.6 million
 for inventories on hand at closing, and the assumption of $13.3 million of capitalized
 lease obligations and approximately $2.2 million of capitalized cost related to
 the transfer of ownership of the supermarkets. The supermarkets were acquired sequentially
 over a twenty-four day period, which began on August 9, 1999. Each acquired store
 was reopened under the Stater Bros. name within two days of its acquisition and
 was fully integrated into the Stater Bros. operating systems.

3



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##### Table of Contents





|Item 1. |  | Business (contd.)
|------- |  | -----------------

Acquisition (contd.)
The Acquisition was funded through an issue,
 in August 1999, of $450 million of the 10.75% Notes under Rule 144A of the Securities
 Act of 1933. Proceeds from the issuance were used to (a) retire all of the 9%
 Notes ($100.0 million), (b) retire substantially all of the 11% Notes ($159,952,000),
 (c) fund early redemption premiums of $18.7 million for both the 9% Notes and the
 11% Notes, (d) acquire the assets of 43 supermarkets and one future store site for
 $134.0 million, (e) pay a fee to La Cadena for financial advisory services of $4.5
 million, and (f) pay fees and expenses of the transaction. The remaining proceeds
 from the issue were used for general corporate purposes, including capital expenditures.
 Of the 10.75% Notes, $449,750,000 were registered securities and $250,000 were
 restricted and unregistered.

Business Strategy

Store Profile and Locations
The Companys supermarkets have well-established
 locations and low overhead expenses, including fixed rent payments in most supermarkets.
 In addition, the Company believes that its existing supermarkets are well maintained
 and generally require capital expenditures only for customary maintenance. An average
 supermarket is approximately 33,100 square feet, while newly constructed supermarkets
 range from approximately 35,000 square feet to 44,000 square feet. Stater Bros.
 supermarkets typically utilize approximately 72% of total square feet for retail
 selling space. The Company operates its supermarkets with minimal back-room storage
 space because of the close proximity of its distribution facility to its store locations.
 Generally, all Stater Bros. supermarkets are similarly designed and stocked thereby
 allowing Stater Bros. customers to find items easily in any of the Companys
 supermarkets.

Substantially all of the Companys
 156 supermarkets are located in neighborhood shopping centers in well-populated
 residential areas. The Company endeavors to locate its supermarkets in growing
 areas that will be convenient to potential customers and will accommodate future
 supermarket expansion.

Management actively pursues the acquisition
 of sites for new supermarkets. In an effort to determine sales potential, new supermarket
 sites are carefully researched and analyzed by management for population shifts,
 zoning changes, traffic patterns, nearby new construction and competitive locations.
 Stater Bros. works with developers to attain the Companys criteria for potential
 supermarket sites, and to insure adequate parking and a complementary co-tenant
 mix.

Store Expansion and Remodeling
The Company has historically focused its
 expansion in the San Bernardino, Riverside, Orange, Los Angeles, San Diego and Kern
 counties of Southern California. Such expansion has been accomplished through improving
 and remodeling existing stores, constructing new supermarkets, and the acquisition
 of other supermarket operations. The number of supermarkets operated by the Company
 is 156 as of September 29, 2002. The Company intends to continue to expand its
 existing supermarket operations by enlarging and remodeling existing supermarkets
 and constructing new supermarkets. The Company may also make strategic acquisitions
 of existing supermarkets, if such opportunities arise.

4



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##### Table of Contents





|Item 1. |  | Business (contd.)
|------- |  | -----------------

Store Expansion and Remodeling (contd.)
The Company monitors sales and profitability
 of its operations on a store-by-store basis and enlarges, remodels or replaces stores
 in light of their performance and managements assessment of their future potential.
 Approximately 68% of the Companys supermarkets have been either newly constructed
 or remodeled within the last five years. Minor remodels cost between $100,000 and
 $500,000 and typically include new fixtures and may include a change in decor.
 Major remodels cost in excess of $500,000 and typically involve more extensive refurbishment
 of the stores interior and may include the addition of one or more specialty
 service departments such as a hot service delicatessen or hot service bakery. Expansions
 entail enlargement of the store building and typically includes breaking through
 an exterior wall. The primary objectives of remodelings and expansions are to improve
 the attractiveness of supermarkets, increase sales of higher margin product categories
 and, where feasible, to increase selling area. The Company conducts all of its
 new construction and most of its remodeling through its wholly owned subsidiary,
 Stater Bros. Development, Inc., which serves as the general contractor for all Company
 construction projects.

The following table sets forth certain statistical
 information with respect to the Companys supermarket expansion and remodeling
 for the periods indicated.



|                        | Fiscal Year Ended
|----------------------- | -----------------
|                        |                  
|                        | Sept. 27,1998    
|                        |                  
|Number of supermarkets: |                  
|Opened                  | 2                
|Acquired                |                 
|Replaced                |                 
|Total at end of year    | 112              
|Minor Remodel           | 5                
|Major Remodel           | 6                
|Expansion               |                 

Beyond 2002, the Company plans to open approximately
 one to five new stores per year, based upon a number of factors, including customer
 demand, market conditions, profitability, costs of opening, and availability of
 financing for such new stores. The Companys plans with respect to major and
 minor remodels, expansion and new construction are reviewed continually and are
 revised, if appropriate, to take advantage of marketing opportunities. The Company
 finances its new store construction primarily from cash provided by operating activities
 and short-term borrowings under its credit facilities. Long-term financing of new
 stores generally will be obtained through either sale and leaseback transactions
 or secured long-term financings. However, no assurances can be made as to the availability
 of such financings.

Warehouse and Distribution Facilities
The Companys warehouse and distribution
 facilities and administrative offices are located in Colton, California, and encompass
 approximately 1,467,000 square feet. The facilities include warehouses for grocery,
 deli, produce, meat, meat deli, frozen, bakery, health and beauty care, and general
 merchandise products. Management believes that its existing warehouse and distribution
 facilities are adequate to meet its current volume. Approximately 77% of the volume
 of the products offered for sale in the Companys supermarkets are processed
 through the Companys warehouse and distribution facilities.

The Companys warehouse and distribution
 facilities are centrally located and are an average distance of approximately 41
 miles from its supermarkets. Most supermarkets can be reached without using the
 most congested portions of the Southern California freeway system.

5



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##### Table of Contents





|Item 1. |  | Business (contd.)
|------- |  | -----------------

Warehouse and Distribution Facilities
 (contd.)The Companys transportation fleet
 consists of modern well-maintained vehicles. As of September 29, 2002, the Company
 operated approximately 139 tractors and 406 trailers, all of which were owned by
 the Company. The Company also operates a repair terminal at the Colton distribution
 facility.

Purchasing and Marketing
The Company uses an Aggressive Everyday
 Low Price (AEDLP) format supported heavily by radio, TV, newspaper and direct
 mail advertising programs as an integral part of its purchasing and marketing strategy
 to provide its customers with the best overall supermarket value in its primary
 market areas. The Company supplements its everyday low price structure with chain-wide
 temporary price reductions (Stater Savers) on selected food and non-food
 merchandise. The geographic location of the Companys supermarkets allows
 it to reach its target consumers through a variety of media and the Company aggressively
 advertises its everyday low prices through local and regional newspapers, direct
 mail and printed circulars as well as extensive advertisements on radio and television.

A key factor in the Companys business
 strategy is to provide its customers with a variety of quality brand-name merchandise
 as well as alternative selections of high-quality private label merchandise. To
 meet the needs of customers, most supermarkets are stocked with approximately 35,000
 items. The Company places particular emphasis on the freshness and quality of its
 meat and produce merchandise and maintains high standards for these perishables
 by distributing the merchandise through its perishable warehouses and distribution
 facilities.

Retail Operations
The Companys supermarkets are well
 maintained, have sufficient off-street parking and generally are open from 6:00
 a.m. or 7:00 a.m. until 10:00 p.m. or 11:00 p.m., seven days a week, including all
 holidays with the exception of Christmas Day. Because Stater Bros. operates its
 supermarkets under similar formats, management believes it is able to achieve certain
 operating economies.

Store Management.     Each supermarket
 is managed by a store manager and an assistant manager, each of whom receives a
 base salary and may receive a bonus based on the individual supermarkets overall
 performance and management of labor costs within the supermarket. The store manager
 and assistant manager are supported by their store management staff who have the
 training and skills necessary to provide proper customer service, operate the store
 and manage personnel in each department. Each store has individual department managers
 for grocery, meat, produce, and where applicable, hot service bakeries and hot service
 delicatessens. Store managers report to one of nine district managers, each of
 whom is responsible for an average of 17 supermarkets. District managers report
 to one of three Regional Vice Presidents.

Customer Service.
     The Company considers
 customer service and customer confidence to be critical to the success of its business
 strategy. This strategy, to provide courteous and efficient customer service through
 specific programs and training, is a focus of the executive officers and is implemented
 by employees at all levels of the Company. The Company maintains an intensive checker
 training school to train prospective checkers and to provide a refresher program
 for existing checkers. All of the Companys supermarkets provide customers
 with purchase carry-out service and have express checkout lanes.

6



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##### Table of Contents





|Item 1. |  | Business (contd.)
|------- |  | -----------------

Santee Dairies, LLC
Stater Bros. and The Kroger Co., which operates
 as Ralphs Supermarkets, currently each own a 50% interest in Santee Dairies,
 LLC, and have jointly owned the Santee Dairies operation since 1986. Santee Dairies
 operates one of the largest dairy plants in California and provides fluid milk products
 to Stater Bros., Ralphs, and other customers in Southern California. Santee
 Dairies processes, packages and distributes whole, low-fat and non-fat milk, as
 well as orange juice, fruit drinks and certain other cultured milk products under
 the Knudsen, Foremost and certain store brand names. Santee Dairies is the exclusive
 licensee of the Knudsen trademark from Kraft Foods, Inc. for fluid milk, juices
 and certain other cultured milk products in the Southern California market. In
 addition, Santee Dairies is the exclusive licensee for Foremost Farms USA, Cooperative
 of the Foremost trademark for fluid milk in Southern California. Santee Dairies
 also distributes Hershey chocolate milk under license. In calendar year 2001, Santee
 Dairies processed approximately 66.8 million gallons of fluid products, including
 54.1 million gallons of fluid milk. Total revenues in Santee Dairies 52-week
 fiscal year ended December 29, 2001 were $190.8 million, of which approximately
 $91.3 million were sales to Stater Bros. and Ralphs. Santee Dairies also
 sells to unaffiliated supermarkets, independent food distributors, military bases
 and foodservice providers in Southern California.

In 1998, Santee Dairies moved to a new dairy
 plant in City of Industry, California. The new dairy increased Santee Dairies
 capacity to process milk to approximately 250,000 to 350,000 gallons per day, with
 the ability to expand capacity to approximately 500,000 gallons per day.

Stater Bros. and Santee Dairies are parties
 to a ten-year fluid milk purchase agreement entered into in July 1997. It requires
 that Stater Bros. purchase its requirements of fluid milk and certain other products,
 subject to a minimum volume each year equal to approximately 80% of the volume purchased
 during Stater Bros. 1996 fiscal year. Prices under the agreement are calculated
 to cover Santee Dairies direct and indirect costs of production, including
 financing costs. However, recoverable costs by Santee Dairies may not include under
 any circumstances amounts owing solely by reason of the acceleration of principal
 payments under any loan agreement to which Santee Dairies is a party.

The Company accounts for its investment
 in Santee using the equity method of accounting.

Management Information Systems
The Companys management information
 systems and point-of-sale scanning technology reduce the labor costs attributable
 to product pricing and customer checkout, and provide management with information
 that facilitates purchasing, receiving and management of inventory and accounts
 payable. The Company has point-of-sale scanning checkout technology in all of its
 stores. All stores use electronic systems for employee time and attendance records,
 inventory orderings, and labor scheduling, which assist store management in developing
 a more efficient and customer-sensitive work schedule.

During fiscal 2002, the Company completed
 the installation of NCRs new generation of electronic scan systems, the 7452
 ACS Scan System. These new systems are more customer-oriented, operate more efficiently
 and reduce the time required to check out customers. In fiscal years 2000, 2001
 and 2002, fifteen, eleven and fifty-five systems were installed, respectively.

7



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##### Table of Contents





|Item 1. |  | Business (contd.)
|------- |  | -----------------

Management Information Systems (contd.)
The Company uses the Stater Express® system
 in all of the Companys supermarkets. Stater Express® is a combined supermarket
 technology platform that includes enhanced systems for check verification and acceptance
 and provides alternative pay choices such as most nationally recognized financial
 institution debit and credit cards. Stater Express® also provides each supermarket
 with the technology required to print in-store-advertising signs and connects each
 supermarket to the Companys host computer which provides certain efficiencies
 in data transfers between the supermarkets and the Companys main office.
 The Company has obtained a federal service mark for the name Stater Express.

Employees
The Company has approximately 13,400 employees,
 approximately 800 of whom are management and administrative employees and approximately
 12,600 of whom are hourly employees. Approximately 70% of the Companys employees
 work part-time. Substantially all of the Companys hourly employees are members
 of either the United Food & Commercial Workers or International Brotherhood
 of Teamsters labor unions and are represented by several different collective bargaining
 agreements. The Companys collective bargaining agreements with the United
 Food & Commercial Workers, which covers the largest number of employees, were
 renewed in October 1999 and expire in October 2003. The International Brotherhood
 of Teamsters agreement was renewed in September 2002 and expires in September 2005.

The Company values its employees and believes
 its relationship with them is good and that employee loyalty and enthusiasm are
 key elements of its operating performance.

Competition
The Company operates in a highly competitive
 industry characterized by narrow profit margins. Competitive factors include price,
 quality and variety of products, customer service, and store location and condition.
 The Company believes that its competitive strengths include its specialty services,
 everyday low prices, breadth of product selection, high product quality, one-stop
 shopping convenience, attention to customer service, convenient store locations
 and a long history of community involvement.

Given the wide assortment of products it
 offers, the Company competes with various types of retailers, including local, regional
 and national supermarket retailers, convenience stores, retail drug stores, national
 general merchandisers and discount retailers, membership clubs and warehouse stores.
 The Companys primary competitors include Vons, Albertsons, Ralphs,
 and a number of independent supermarket operators.

Government Regulation
The Company is subject to regulation by
 a variety of governmental authorities, including federal, state and local agencies
 that regulate trade practices, building standards, labor, health, safety and environmental
 matters and regulate the distribution and sale of alcoholic beverages, tobacco products,
 milk and other agricultural products and other food items.

Environmental
Environmental remediation costs incurred
 over the past five years were approximately $1.3 million, in the aggregate, including
 remediation costs of approximately $198,000 in 2000, $495,000 in 2001 and $324,000
 in 2002. Management believes that any such future remediation costs will not have
 a material adverse effect on the financial condition or results of operations of
 the Company.

8



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##### Table of Contents








|Item 2. |  | Properties
|------- |  | ----------

The Company leases its warehouse and distribution
 facilities located in Colton, California, and management believes that its warehouse
 and distribution facilities are well maintained and are adequate to meet its current
 volume.

The following schedule presents the Companys
 warehouse and distribution facilities by product classification and the size
 of each facility as of September 29, 2002.



|Facility                                       | SquareFeet
|---------------------------------------------- | ----------
|                                               |           
|Grocery                                        | 896,000   
|Health and beauty care and general merchandise | 131,000   
|Produce, meat and meat deli                    | 118,000   
|Grocery deli                                   | 116,000   
|Frozen                                         | 74,000    
|Bakery                                         | 40,000    
|Support and administrative offices             | 92,000    
|                                               |           
|Total                                          | 1,467,000 
|                                               |           

As of September 29, 2002, the Company owned
 45 of its supermarkets and leased the remaining 111 supermarkets. Management
 believes that its supermarkets are well maintained and adequately meet the
 expectations of its customers. The Company operates 156 supermarkets in the Southern
 California counties of San Bernardino, Riverside,
 Orange, Los Angeles, San Diego and Kern. The following schedule reflects the Companys
 store counts by size, county, and the number of stores that are either leased
 or owned as of September 29, 2002.



|               | No. of Stores |  | Total Square Feet
|-------------- | ------------- |  | -----------------
|               |               |  |                  
|               |               |  |                  
|County         | Total         |  |                  
|               |               |  |                  
|San Bernardino | 47            |  |                  
|Riverside      | 40            |  |                  
|Orange         | 30            |  |                  
|Los Angeles    | 27            |  |                  
|San Diego      | 10            |  |                  
|Kern           | 2             |  |                  
|               |               |  |                  
|Total          | 156           |  |                  
|               |               |  |                  

The total size of the Companys supermarkets
 is approximately 5,161,000 square feet, of which 3,693,000 is selling square feet.

9



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##### Table of Contents








|Item 3. |  | Legal Proceedings
|------- |  | -----------------

In the ordinary course of its business,
 the Company is party to various legal actions which the Company believes are incidental
 to the operation of the business of the Company and its subsidiaries. The Company
 records an appropriate provision when the occurrence of loss is probable and can
 be reasonably estimated. The Company believes that the outcome of such legal proceedings
 to which the Company is currently a party will not have a material adverse effect
 upon its results of operations or its consolidated financial condition.

In September of 2000, two lawsuits were
 filed against Stater Bros. Markets in the State of California Superior Court, County
 of San Bernardino alleging that certain of its employees are entitled to overtime
 wages. The two cases were purportedly filed on behalf of certain Stater Bros. Markets
 store managers and assistant store managers, respectively, alleging that such workers
 are non-exempt under California labor laws and are therefore entitled to overtime
 wages. The Companys position is that the store managers and assistant managers
 are highly compensated employees with duties and responsibilities which place them
 in the exempt category under California law and that such employees are not entitled
 to overtime wages. This is consistent with the position taken by other supermarket
 chains in California. The Company believes it has complied in all respects with
 California laws and regulations relative to employee wages and that each of these
 Complaints is without merit.

Environmental Matters
Environmental remediation costs incurred
 during the last five years were approximately $1.3 million, in the aggregate, including
 remediation costs of approximately $198,000 in 2000, $495,000 in 2001 and $324,000
 in 2002. Management believes that any such future remediation costs will not have
 a material adverse effect on the financial condition or results of operations of
 the Company.






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

During fiscal 2002, the Company obtained
 consent of the holders of its 10.75% Senior Notes due 2006 (the 10.75% Notes)
 to make a distribution and payment to stockholders consisting of $25.0 million
 in cash and a subordinated note in the principal amount of $20.0 million.




PART II






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



|(a) Market Information
|----------------------
|                      
|                      
|(b) Holders           
|                      
|                      
|(c) Dividends         
|                      

10



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##### Table of Contents








|Item 6. |  | Selected Financial
 Data
|------- |  | ------------------------

The following table sets forth historical
 financial data derived from the audited financial statements of the Company as of
 and for the fiscal years ended September 27, 1998, September 26, 1999, September
 24, 2000, September 30, 2001 and September 29, 2002. The information set forth
 below should be read in conjunction with Managements Discussion and Analysis
 of Financial Condition and Results of Operations, the Consolidated Financial Statements
 of the Company and related notes thereto contained elsewhere herein. The information
 included in Other Operating and Financial Data and Store Data is unaudited.



|                                                                          | Fiscal Years Ended                                       
|------------------------------------------------------------------------- | ---------------------------------------------------------
|                                                                          |                                                          
|                                                                          |                                                          
|                                                                          |                                                          
|                                                                          | (In thousands of dollars except per share and store data)
|Statement of Earnings Data:                                               |                                                          
|Sales                                                                     | $                                                        
|Cost of goods sold                                                        |                                                          
|                                                                          |                                                          
|Gross profit                                                              |                                                          
|Selling, general and administrative expenses                              |                                                          
|Depreciation and amortization                                             |                                                          
|Acquisition integration expenses                                          |                                                          
|                                                                          |                                                          
|Total operating expenses                                                  |                                                          
|                                                                          |                                                          
|Operating profit                                                          |                                                          
|Interest and other income                                                 |                                                          
|Interest expense                                                          |                                                          
|Equity in income (loss) from unconsolidated affiliate                     |                                                          
|                                                                          |                                                          
|Income (loss) before income taxes (benefit) and extraordinary gain (loss) |                                                          
|Income taxes (benefit)                                                    |                                                          
|                                                                          |                                                          
|Income (loss) before extraordinary gain (loss)                            |                                                          
|Extraordinary gain (loss) (1) (2)                                         |                                                          
|                                                                          |                                                          
|Net income (loss)                                                         | $                                                        
|                                                                          |                                                          
|Earnings (loss) per common share before extraordinary gain (loss)         | $                                                        
|Earnings (loss) per common share                                          | $                                                        



(footnotes
 on following page)


11



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##### Table of Contents





|Item 6. |  | Selected Financial
 Data (contd.)
|------- |  | ---------------------------------



|                                                                      | Fiscal Years Ended                                        
|--------------------------------------------------------------------- | ----------------------------------------------------------
|                                                                      |                                                           
|                                                                      | Sept. 27,1998                                             
|                                                                      |                                                           
|                                                                      | (In thousands of dollars except per
 share and store data)
|Balance Sheet Data (end of fiscal year):                              |                                                           
|Working capital                                                       | $                                                         
|Total assets                                                          |                                                           
|Long-term notes                                                       |                                                           
|Long-term capitalized lease obligations                               |                                                           
|Other long-term liabilities                                           |                                                           
|Common stockholders deficit                                          |                                                           
|Dividends paid per share, Class A Common Stock                        |                                                           
|Cash Flow Data:                                                       |                                                           
|Cash provided by operating activities                                 |                                                           
|Cash provided by (used in) financing activities                       |                                                           
|Cash used in investing activity                                       |                                                           
|Other Operating and Financial Data:                                   |                                                           
|Sales increases (decreases):                                          |                                                           
|Total stores                                                          |                                                           
|Like stores (comparable 52-weeks)                                     |                                                           
|EBITDA(3)                                                             | $                                                         
|Operating profit                                                      | $                                                         
|Ratio of earnings to fixed charges(4)                                 |                                                           
|Gross profit as a percentage of sales                                 |                                                           
|Selling, general and administrative expenses as a percentage of sales |                                                           
|Store Data:                                                           |                                                           
|Number of stores (at end of fiscal year)                              |                                                           
|Average sales per store (000s)                                        | $                                                         
|Average store size:                                                   |                                                           
|Total square feet                                                     |                                                           
|Selling square feet                                                   |                                                           
|Total square feet (at end of fiscal year) (000s)                      |                                                           
|Total selling square feet (at end of fiscal year) (000s)              |                                                           
|Sales per total sq. ft.                                               | $                                                         
|Sales per selling sq. ft.                                             | $                                                         



|(1) |  | The extraordinary loss in 1999 represents
 the after-tax loss from the early extinguishment of debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The extraordinary gain in 2000 represents
 the after-tax gain from the early extinguishment of debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(3) |  | EBITDA represents earnings before extraordinary
 gain (loss), interest expense, depreciation and amortization and income tax expense.
 The Company has included information concerning EBITDA here as it is relevant for
 covenant analysis under the Notes and because it is used by certain investors as
 a measure of a companys ability to service its debt. EBITDA is not a measure
 of financial performance under generally accepted accounting principals and it should
 not be used as an alternative to, or be construed as more meaningful than, operating
 profit or cash flows as an indicator of the Companys operating performance.



(footnotes continued
 on following page)


12



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##### Table of Contents





|Item 6. |  | Selected Financial
 Data (contd.)
|------- |  | ---------------------------------



|(4) |  | For the purpose of determining the ratio
 of earnings to fixed charges, earnings consist of income before income taxes and
 the extraordinary gain or loss and amortization of previously capitalized interest.
 Fixed charges consist of interest expense whether expensed or capitalized, amortization
 of deferred debt expense, and such portion of rental expense as can be deemed by
 management to be representative of the interest factor in the particular case.
 Included in earnings and fixed charges is the Companys 50% share of an unconsolidated
 affiliate.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) |  | The fiscal year 2001 was a 53-week year,
 whereas fiscal years 1998, 1999, 2000 and 2002 were 52-week years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   






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

Critical Accounting Policies
The Companys discussion and analysis
 of financial condition and results of operations are based upon the Companys
 audited consolidated financial statements prepared in accordance with accounting
 principles generally accepted in the United States. The preparation of the financial
 statements requires the use of estimates and judgements on the part of management.
 The Company based its estimates on the Companys historical experience combined
 with managements understanding of current facts and circumstances. The Company
 believes that the following critical accounting policies are the most important
 to the Companys financial statement presentation and require the most difficult,
 subjective and complex judgements on the part of management.

Vendor Rebates and AllowancesThe
 Company receives certain rebates and
 allowances (allowances) from its vendors. The Company recognizes these allowances
 as a reduction in cost of goods sold as the allowances are earned. These allowances
 are earned by promoting certain products or by purchasing specified amounts of product.
 The Company records a liability for allowance funds that have been received but
 not yet earned.

Self-Insurance
The Company is primarily self-insured, subject
 to certain retention levels for workers compensation, automobile and general
 liability costs. The Company records its self-insurance liability based on the
 claims filed and an estimate of claims incurred but not yet reported. The estimates
 used by management are based on the Companys historical experiences as well
 as current facts and circumstances. The Company uses third party actuarial analysis
 in making its estimates. Actuarial projections and the Companys estimate
 of ultimate losses are subject to a high degree of variability. The variability
 in the projections and estimates are subject to, but not limited to, such factors
 as judicial and administrative rulings, legislative actions, and changes in compensation
 benefits structure. In recent years, the Company and employers within the State
 of California as a whole have seen significant increases in the severity of workers
 compensation claims. While the Company has factored these increases into
 its estimates of ultimate loss, no assurance can be given that future events will
 not require a change in these estimates. The Company discounts its workers
 compensation, automobile and general liability insurance reserves at a discount
 rate of approximately 7.5%.

Inventories
Inventories are stated at the lower of cost
 (first-in, first-out) or market. Management believes that its inventory turns and
 inventory controls are sufficient and that reserves are not needed for excess, obsolete
 or discontinued inventory.

13



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##### Table of Contents





|Item 7. |  | Managements Discussion
 and Analysis of FinancialCondition and Results of Operations (contd.)
|------- |  | ----------------------------------------------------------------------------------------------

Critical Accounting Policies (contd.)

Investment in Affiliate
The Company owns 50% of Santee Dairies,
 LLC. The Company is not the controlling stockholder and accordingly accounts for
 its investment using the equity method of accounting.

Deferred Debt Issuance Costs
Direct costs incurred as a result of financing
 transactions are capitalized and amortized to expense over the term of the applicable
 debt agreements.

Deferred Taxes
Although there can be no assurances as to
 future taxable income of the Company, the Company believes that its expectations
 of future taxable income, when combined with the income taxes paid in prior years,
 will be adequate to realize its deferred tax assets.

Phantom Stock Plan
It is the Companys policy to expense
 phantom stock units to the extent that they vest and appreciate during the accounting
 period.

Ownership of the Company
La Cadena is the sole shareholder of the
 Company and holds all of the shares of the Companys Class A Common Stock.
 La Cadena is a California General Partnership whose partners include Jack H. Brown,
 Chairman of the Board, President and Chief Executive Officer of the Company and
 a former member of senior management of the Company. Jack H. Brown has a majority
 interest in La Cadena and is the managing general partner with the power to vote
 the shares of the Company held by La Cadena.

Acquisition
On May 7, 1999, the Company entered into
 an agreement with Albertsons to acquire 43 supermarkets and one future store
 site. The stores were formerly operated by Albertsons or Lucky Stores and
 were divested in connection with the merger of Albertsons and American Stores
 Company, the parent of Lucky Stores. The supermarkets were acquired sequentially
 over a twenty-four day period beginning August 9, 1999. The purchase price for
 the property, plant, equipment and inventories of 43 supermarkets and one future
 store site was approximately $134.0 million plus capital lease obligations assumed
 of $13.3 million and approximately $2.2 million of capitalized costs related to
 the transfer of ownership of the supermarkets. The acquisition was accounted for
 using the purchase method of accounting and the results of operations of the 43
 supermarkets are included in the Companys consolidated results of operations
 from the acquisition date of each supermarket.

14



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##### Table of Contents





|Item 7. |  | Managements Discussion
 and Analysis of FinancialCondition and Results of Operations (contd.)
|------- |  | ----------------------------------------------------------------------------------------------

Results of Operations
The following table sets forth certain income
 statement components expressed as a percent of sales for the fiscal years ended
 September 24, 2000, September 30, 2001 and September 29, 2002. The fiscal year
 ended September 30, 2001 was a 53-week year whereas fiscal years ended September
 24, 2000 and September 29, 2002 were 52-week years.



|                                                          | Fiscal Years Ended
|--------------------------------------------------------- | ------------------
|                                                          |                   
|                                                          | 2000              
|                                                          |                   
|Sales                                                     | 100.00            
|Gross profit                                              | 24.76             
|Operating expenses:                                       |                   
|Selling, general and administrative expenses              | 22.01             
|Depreciation and amortization                             | 1.06              
|Acquisition integration expenses                          | 0.19              
|Operating profit                                          | 1.50              
|Interest income                                           | 0.13              
|Interest expense                                          | (2.22             
|Equity in income from unconsolidated affiliate            | 0.06              
|Other income (expense) net                                | 0.01              
|Income (loss) before income taxes and
 extraordinary gain | (0.52             

Total sales amounted to $2.666 billion in
 2002 compared to $2.574 billion in 2001 and $2.418 billion in 2000. Like-store
 sales increased 5.3% in fiscal 2002, compared to 4.5% (52-week basis) in fiscal
 2001 and an increase of 1.9% (before erosion of like-store sales of 0.5% to newly
 acquired stores) in fiscal 2000. The increase in sales during fiscal 2002 was due
 to favorable customer response to the Companys marketing plan and to the addition
 of a new store in Chino Hills, California. The increase in sales during fiscal
 2001was due to favorable customer response to the Companys marketing plan
 and to the replacement of one of its stores in San Bernardino, California.

Gross profits increased to $708.8 million
 or 26.58% of sales in 2002 compared to $662.8 million or 25.75% of sales in 2001
 and $598.6 million or 24.76% of sales in 2000. The increase in gross profits, as
 a percent of sales, during the last three fiscal years was due to the introduction
 of higher gross margin products achieved through the Companys merchandising
 expansion and upgrading programs including significant investments in product display
 fixtures. The Company adjusts its pricing strategy as necessary to retain its aggressive
 every day low price marketing position.

Operating expenses include selling, general
 and administrative expenses, depreciation and amortization and acquisition integration
 expenses. In fiscal year 2002, selling, general and administrative expenses amounted
 to $608.3 million or 22.81% of sales compared to $572.8 million or 22.25% of sales
 in 2001 and $532.1 million or 22.01% of sales in 2000. Selling, general and administrative
 expenses, as a percentage of sales, for fiscal 2002 increased over fiscal 2001 due
 primarily to increased payroll related costs resulting primarily from increases
 in union insurance and direct labor costs. Selling, general and administrative
 expenses, as a percentage of sales, for fiscal 2001 increased over fiscal 2000 due
 primarily to increased utility costs resulting from the energy crisis within the
 State of California.

15



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##### Table of Contents





|Item 7. |  | Managements Discussion
 and Analysis of FinancialCondition and Results of Operations (contd.)
|------- |  | ----------------------------------------------------------------------------------------------

Results of Operations (contd.)
Depreciation and amortization expenses amounted
 to $31.5 million in 2002 compared to $29.1 million in 2001 and $25.6 million in
 2000. Depreciation and amortization expense, as a percentage of sales, was 1.18%,
 1.13% and 1.06% for fiscal years 2002, 2001 and 2000, respectively. The changes
 in depreciation expense from year-to-year are due primarily to store additions,
 remodels and store and warehouse expenditures.

Acquisition integration expenses amounted
 to $4.6 million in fiscal 2000 and were related to the acquisition of 43 supermarkets
 acquired from Albertsons in August 1999. No additional acquisition integration
 costs were incurred in fiscal 2001 or fiscal 2002 and none are anticipated in the
 future. Acquisition integration expenses consisted of salaries and wages, uniforms,
 supplies and non-recurring advertising expenses incurred during the integration
 of the supermarkets.

Operating profits amounted to $69.0 million
 or 2.59% of sales in 2002 compared to $61.0 million or 2.37% of sales in 2001 and
 $36.3 million or 1.50% of sales in 2000.

Interest expense amounted to $52.8 million,
 $52.4 million and $53.7 million for the 2002, 2001 and 2000 fiscal years, respectively.
 The increase in interest expense in fiscal 2002 over fiscal 2001 was due primarily
 to the issuance, in January 2002, of the $20 million 5% Subordinated Note due March
 2007. The decrease in interest expense in fiscal 2001 compared to fiscal 2000 was
 due to the retirement of the remaining $5.0 million of 11% notes in March of 2001
 and the early redemption of $11.0 million of 10.75% notes due 2006 in fiscal 2000.

The equity in income from unconsolidated
 affiliate amounted to $2.9 million in fiscal 2002 compared to $1.6 million in 2001
 and $1.5 million in 2000. The increase in income from unconsolidated affiliate
 in fiscal 2002 over fiscal 2001 is due primarily to the revaluation, by the affiliate,
 of deferred tax benefits arising from past net operating losses. The effect of
 the revaluation in fiscal 2002 was an increase of $1.1 million in income from unconsolidated
 affiliate. Stater Bros. Markets and The Kroger Co. (the Owners) are
 each party to ten-year fluid milk purchasing agreements entered into in July 1997.
 The agreements require the Owners to each purchase their fluid milk and certain
 other products, subject to a minimum volume each year equal to approximately 80%
 of the volume purchased in 1996. Prices under the agreements are calculated to
 cover Santees direct and indirect costs of production, including financing
 costs. However, recoverable costs by Santee may not include under any circumstance
 amounts owing solely by reason of acceleration of principal payments under any loan
 agreement to which Santee is a party.

16



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##### Table of Contents





|Item 7. |  | Managements Discussion
 and Analysis of FinancialCondition and Results of Operations (contd.)
|------- |  | ----------------------------------------------------------------------------------------------

Results of Operations (contd.)
Income (loss) before income taxes (benefit)
 and extraordinary gain amounted to income of $19.3 million in fiscal 2002, compared
 to $13.3 million in fiscal 2001 and a $12.7 million loss in fiscal 2000.

Income (loss) before extraordinary gain
 amounted to income of $11.8 million in 2002, compared to $7.8 million in 2000 and
 a $7.3 million loss in 2000.

Extraordinary gain in fiscal 2000 amounted
 to $1.1 million ($1.9 million less tax effect) from early extinguishment of $11.0
 million of 10.75% Senior Notes due 2006.

Net income, for fiscal 2002, amounted to
 $11.8 million, compared to $7.8 million in fiscal 2001 and a net loss of $6.2 million
 in fiscal year 2000.

Liquidity and Capital Resources
The Company has historically funded its
 daily cash flow requirements through funds provided by operations and through borrowings
 from short-term revolving credit facilities. The Companys credit agreement,
 as amended, became effective August 6, 1999 and expires in March 2003 and consists
 of a revolving loan facility for working capital of $50.0 million, and a letter
 of credit facility with a maximum availability of $25.0 million. The credit agreement
 was amended December 13, 2001, to include a $15.0 million letter of credit sublimit.
 As of September 29, 2002, the Company had $29.4 million of outstanding letters
 of credit and had $45.6 million available under the revolving loan facility. As
 of September 29, 2002, and for the fifty-two weeks then ended, the Company had no
 outstanding balances and had not drawn down on the revolving loan facility. The
 letter of credit facility is maintained pursuant to the Companys workers
 compensation and general liability self-insurance requirements and to secure certain
 rent obligations.

The Company had no short-term borrowings
 outstanding at the end of fiscal years 2002, 2001 and 2000, and the Company did
 not incur short-term borrowings during fiscal years 2002, 2001 and 2000.

17



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##### Table of Contents





|Item 7. |  | Managements Discussion
 and Analysis of FinancialCondition and Results of Operations (contd.)
|------- |  | ----------------------------------------------------------------------------------------------

Liquidity and Capital Resources (contd.)The following table sets forth the Companys contractual cash obligations
 and commercial commitments as of September 29, 2002.



|                                      | Contractual Cash Obligations (In thousands)
|------------------------------------- | -------------------------------------------
|                                      |                                            
|                                      | Total                                      
|                                      |                                            
|10.75% Senior Notes due August 2006   |                                            
|Principal                             | $                                          
|Interest                              |                                            
|                                      |                                            
|                                      |                                            
|5.0% Subordinated Note due March 2007 |                                            
|Principal                             |                                            
|Interest                              |                                            
|                                      |                                            
|                                      |                                            
|Capital Lease Obligations (1)         |                                            
|Principal                             |                                            
|Interest                              |                                            
|                                      |                                            
|                                      |                                            
|Operating Leases (1)                  |                                            
|                                      |                                            
|Total Contractual Cash Obligations    | $                                          
|                                      |                                            



|                                   | Other Commercial Commitments (In thousands)
|---------------------------------- | -------------------------------------------
|                                   |                                            
|                                   | Total                                      
|                                   |                                            
|Standby Letters of Credit (2)      | $                                          
|                                   |                                            
|Total Other Commercial Commitments | $                                          
|                                   |                                            



|(1) | The
 Company leases the majority of its retail
 stores, offices, warehouses and distribution facilities. Certain leases provide
 for additional rents based on sales. Primary lease terms range from 10 to 99 years
 and substantially all leases provide for renewal options.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) | Standby letters of credit are committed as
 security for workers compensation obligations and as security for current
 rent obligations. Outstanding letters of credit expire between December 12, 2002
 and December 31, 2002.                                              

18



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##### Table of Contents





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

Liquidity and Capital Resources (contd.)
 Working capital amounted to $123.5 million
 at September 29, 2002, $124.3 million at September 30, 2001 and $111.8 million at
 September 24, 2000. The Companys current ratios were 1.64:1, 1.64:1 and 1.63:1,
 respectively. Fluctuations in working capital and current ratios are not unusual
 in the industry.

Net cash provided by operating activities
 amounted to $51.2 million in 2002, $79.4 million in 2001 and $15.4 million in 2000.
 Fluctuations in operating assets and liabilities are not unusual in the industry.
 The change in cash provided by operating activities in fiscal 2002 compared to
 fiscal 2001 was due to normal operations. Cash provided by operating activities
 in fiscal 2002 consisted primarily of depreciation and amortization, increases in
 accrued liabilities and self-insurance reserves and decreases in receivables and
 other assets offset by increases in income tax receivables and inventories and decreases
 in accounts payable. The change in cash provided by operating activity in fiscal
 2001 compared to fiscal 2000 was due primarily to changes from normal operations
 and the termination of a lease guarantee escrow account. Cash provided from operating
 activities in fiscal 2001 consisted primarily of depreciation and amortization,
 increases in accrued liabilities and self-insurance reserves, increases in accounts
 payable and the termination of a lease guarantee escrow account.

Net cash used in financing activities in
 fiscal 2002 amounted to $31.2 million and consisted of the redemption of 11,699
 shares of the Companys stock previously held by La Cadena, for $20.0 million
 in cash and the issuance of a $20.0 million subordinated note, which bears interest
 at a rate of 5.0% per annum, payable semi-annually; $4.5 million for the payment
 of a dividend to La Cadena; and fees of approximately $5.0 million for the consent
 of the holders of its 10.75% Senior Notes and fees and expenses of the transaction,
 including a $500,000 financial advisory service fee to La Cadena. The Company redeemed
 $250,000 of its 10.75% Senior Notes due 2006 for $250,000 plus accrued interest.
 These Notes were restricted and unregistered. The remaining financial activities
 in the current year were for principal payment on capital lease obligations. Net
 cash used in financing activities during fiscal 2001 amounted to $7.1 million and
 consisted of the retirement of the remaining $5.0 million of 11% notes that matured
 in March 2001 and payment on capital lease obligations. Net cash used in financing
 activities during fiscal 2000 amounted to $10.7 million and consisted of funds of
 $8.7 million used to retire $11.0 million of 10.75% Senior Notes due 2006 and principal
 payment on capital lease obligations of $1.9 million.

Net cash used in investing activities in
 fiscal 2002 amounted to $40.5 million and consisted primarily of the purchase of
 property and equipment of $40.7 million. Net cash used in investing activities
 in fiscal 2001 amounted to $33.2 million and consisted primarily of the purchase
 of property and equipment of $33.5 million. Net cash used in investing activities
 during fiscal 2000 amounted to $35.4 million and consisted primarily of the purchase
 of property and equipment of $38.2 million which included approximately $21.8 million
 to fund projects related to the acquisition of the 43 supermarkets and related warehouse
 expansion. Additional capital expenditures were used to acquire land for a store
 site as well as fund normal maintenance capital expenditures. Proceeds from the
 sale of assets in fiscal 2000 amounted to $2.8 million and consisted primarily from
 the sale of a store site in Colton, California. The Colton store site was leased
 backed by the Company under an operating lease.

19



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##### Table of Contents





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

Liquidity and Capital Resources (contd.)
Management believes that cash capital expenditures for fiscal 2003 will be approximately
 $50.5 million.

Management believes that operating cash
 flow, supplemented by capital expenditures financed through capital and operating
 leases, will be sufficient to meet the Companys currently identified operating
 needs and scheduled capital expenditures. However, there can be no assurance that
 such lease financings will be available to the Company in the future.

The Company operated 156 supermarkets at
 September 29, 2002, and 155 supermarkets at September 30, 2001 and September 24,
 2000.

The Companys supermarkets had approximately
 5.2 million total square feet at September 29, 2002 and approximately 5.1 million
 total square feet at September 30, 2001 and September 24, 2000.

Credit
 Facilities
 The Companys principal operating subsidiary,
 Stater Bros. Markets, signed a credit facility with Bank of America N.A. on August
 6, 1999. The credit facility, as amended December 13, 2001, provides for (i) a
 $50.0 million three-year revolving loan facility and (ii) a $25.0 million three-year
 letter of credit facility and (iii) a Revolving Loan Commitment L/C Sublimit which
 is defined as an amount equal to the lesser of (a) the Revolving Loan Commitment
 and (b) $15,000,000. The Revolving Loan Commitment L/C Sublimit is part of, and
 not in addition to, the Revolving Loan Commitment. Borrowings under the revolving
 loan facility are unsecured and expected to be used for certain working capital
 and corporate purposes. Letters of credit under the letter of credit facility are
 expected to be used to support the purchase of inventory, obligations incurred in
 connection with the construction of stores, workers compensation insurance
 obligations and security for certain rent obligations.

The availability of the loans and letters
 of credit are subject to certain sublimits and other borrowing restrictions.

Indebtedness of Stater Bros. Markets under
 the credit facility is guaranteed by Stater Bros. Development, Inc., a subsidiary
 of the Company, and any subsidiaries that Stater Bros. Markets or Stater Bros. Development,
 Inc. acquires or forms after the date of the credit facility.

Loans under the credit facility bear interest
 at a rate based upon either (i) the Base Rate (defined as the higher of (a) the
 federal funds rate plus 0.50% and (b) the rate of interest publicly announced by
 Bank of America as its reference rate), plus 1.00%, or (ii) the Offshore Rate
 (defined as the average British Bankers Association Interest Settlement Rate for
 deposits in dollars, adjusted for the maximum reserve requirement for Eurocurrency
 funding), plus 2.25%. For Offshore Rate Loans, the Offshore Rate will be applied
 in consecutive periods of the earlier of (a) the maturity date of the loan or (b)
 periods, as selected by Stater Bros. Markets of one, two, three or six months.

The revolving loan facility, as amended
 January 18, 2002, will cease to be available and will be payable in full on March
 31, 2003. Letters of credit under the credit facility can be issued until March
 31, 2004. The loans under the revolving loan facility must be repaid for a period
 of ten consecutive days semi-annually.

20



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##### Table of Contents





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

Liquidity and Capital Resources (contd.)
      Credit Facilities (contd.)
 Loans under the revolving loan facility
 may be repaid and re-borrowed. The loans under the revolving loan facility may
 be prepaid at any time without penalty, subject to certain minimums and payment
 of any breakage and re-deployment costs in the case of loans based on the offshore
 rate. The commitments under the credit facility may be reduced by Stater Bros.
 Markets. Stater Bros. Markets will be required to pay a commitment fee equal to
 0.25% per annum on the actual daily unused portion of the revolving loan facility
 and the letter of credit facility, payable quarterly in arrears. Outstanding letters
 of credit under the credit facility are subject to a fee of 1.50% per annum on the
 face amount of such letters of credit, payable quarterly in arrears. The Company
 will be required to pay standard fees charged by Bank of America with respect to
 the issuance, negotiation, and amendment of commercial letters of credit issued
 under the letter of credit facility.

Availability of the loans and letters of
 credit under the credit facility is subject to a monthly borrowing base test based
 on inventory. The credit facility requires Stater Bros. Markets to meet certain
 financial tests, including minimum net worth and minimum EBITDA tests. The credit
 facility contains covenants which, among other things, will limit indebtedness,
 liens, guarantee obligations, mergers, consolidations, liquidations and dissolutions,
 asset sales, leases, investments, loans and advances, transactions with affiliates,
 sale and leaseback, other matters customarily restricted in such agreements and
 modifications to the holding company status of the Company.

The credit facility also contains covenants
 that apply to the Company and the Company is a party to the credit facility for
 purposes of these covenants. These covenants, among other things, limit dividends
 and other payments in respect of the Companys capital stock, prepayments and
 redemptions of the exchange notes and other debt, and limit indebtedness, investments,
 loans and advances by the Company.

The credit facility requires the Company
 and Stater Bros. Markets to comply with certain covenants intended to ensure that
 their legal identities remain separate.

The credit facility contains customary events
 of default, including payment defaults; material inaccuracies in representations
 and warranties; covenant defaults; cross-defaults to certain other indebtedness;
 certain bankruptcy events; certain ERISA events; judgment; defaults; invalidity
 of any guaranty; failure of Jack H. Brown to be Chairman of the Board and Chief
 Executive Officer of Stater Bros. Markets; and change of control.

As of September 29, 2002, for purposes of
 the credit facility with Bank of America, the Company was in compliance with all
 restrictive covenants and exceeded the minimum net worth covenant by approximately
 $64.3 million and exceeded minimum inventory coverage by approximately $49.6 million.
 The minimum EBITDA (as defined) covenant measurement period began (as amended)
 in the quarter ending June 25, 2000, and requires an annualized minimum EBITDA,
 as amended January 18, 2002, of $85.0 million. As of September 29, 2002, Stater
 Bros. Markets exceeded minimum annualized EBITDA by approximately $18.5 million.

As of September 29, 2002, for purposes of
 the credit facility with Bank of America, the Company was in compliance with all
 restrictive covenants.

The Company is also subject to certain covenants
 associated with its 10.75% Senior Notes due 2006. As of September 29, 2002, the
 Company was in compliance with all such covenants. However, there can be no assurance
 that the Company will be able to achieve the expected operating results or implement
 the capital expenditure strategy upon which future compliance with such covenants
 is based.

21



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##### Table of Contents





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

Liquidity and Capital Resources (contd.)      Labor Relations
 The Company and other major supermarket
 employers in Southern California negotiated a four-year contract, beginning October
 1999 and expiring in October 2003, with the United Food and Commercial Workers Union.
 The Companys collective bargaining agreement with the International Brotherhood
 of Teamsters was renewed in September 2002 and expires in September 2005. Management
 believes it has good relations with its employees.

Recent Accounting Pronouncements
During the Companys fiscal 2002, the Financial Accounting Standards Board (FASB)
 issued or required the adoption of Statement of Financial Accounting Standards (SFAS)
 No. 142, No. 143, No. 145 and No. 146. Adoption of SFAS No. 142,
 No. 143, No. 145 and No. 146 were either not applicable to the Company or were adopted
 by the Company in its fiscal 2002 and did not have a material effect on the Companys financial
 position or its results of operations in fiscal 2002. In August
 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
 Long-Lived Assets, which addresses accounting and financial reporting for the impairment
 or disposal of long-lived assets. This statement is effective for the Company beginning
 September 30, 2002, and the Company is evaluating the impact, if any, that the implementation
 will have on the financial statements.

Effect of Inflation and Competition
The Companys performance is affected by inflation. In recent years the impact
 of inflation on the operations of the Company has been moderate. As inflation has
 increased expenses, the Company has recovered, to the extent permitted by competition,
 the increase in expenses by increasing prices over time. However, the economic
 and competitive environment in Southern California continues to challenge the Company
 to become more cost efficient as its ability to recover increases in expenses through
 price increases is diminished. The future results of operations of the Company
 will depend upon the ability of the Company to adapt to the current economic environment
 as well as to the current competitive conditions.

The Company conducts business in one industry
 segment, the operation of retail food supermarkets, which offer for sale to the
 public most merchandise typically found in supermarkets. The supermarket industry
 is highly competitive and is characterized by low profit margins. The Companys
 primary competitors include Vons, Albertsons, Ralphs and a number of independent
 supermarket operators. Competitive factors typically include the price, quality
 and selection of products offered for sale, customer service, and the convenience
 and location of retail facilities. The Company monitors competitive activity and
 Senior Management regularly reviews the Companys marketing and business strategy
 and periodically adjusts them to adapt to changes in the Companys primary
 trading area.

Cautionary Statement
The
 Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
 statements. Certain information contained in the Companys filings with the
 Securities and Exchange Commission (as well as information included in oral statements
 or other written statements made or to be made by the Company) includes statements
 that are forward-looking, such as statements relating to plans for future activities.
 Such forward-looking information involves important risks and uncertainties that
 could significantly affect results in the future and, accordingly, such results
 may differ from those expressed in any forward-looking statements made by or on
 behalf of the Company. These risks and uncertainties include, but are not limited
 to, those relating to domestic economic conditions, seasonal and weather fluctuations,
 expansion and other activities of competitors, changes in federal or state laws
 and the administration of such laws and the general condition of the economy.

22



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##### Table of Contents








|Item 8. | Financial
 Statements and Supplementary Data
|------- | --------------------------------------------

Information called for by this item is set
 forth in the Companys financial statements and supplementary data contained
 in this report. Specific financial statements and supplementary data can be found
 on the pages listed in the following index.

INDEX TO CONSOLIDATED
 FINANCIAL STATEMENTS



|                                                                                              |  | Page Number
|--------------------------------------------------------------------------------------------- |  | -----------
|                                                                                              |  |            
|Report of
 Independent Auditors                                                               |  | F-2        
|Consolidated
 Balance Sheets at September 24, 2000, September 30, 2001 and September 29, 2002 |  | F-3        
|Fiscal years
 ended September 24, 2000, September 30, 2001 and September 29, 2002:            |  |            
|Consolidated
 Statements of Operations                                                        |  | F-5        
|Consolidated
 Statements of Cash Flows                                                        |  | F-6        
|Consolidated
 Statements of Stockholders Deficit                                             |  | F-7        
|Notes to Consolidated
 Financial Statements                                                   |  | F-8        






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

None

23



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##### Table of Contents






PART III






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

The following table sets forth certain information
 with respect to the current executive officers and directors of the Company, their
 ages and principal occupations for at least the past five years. Directors of the
 Company each serve for a term of one year, or until their successors are elected.
 The officers serve at the discretion of the Board of Directors of the Company.



|Name                  |  | Age |  | Position                                                     
|--------------------- |  | --- |  | -------------------------------------------------------------
|                      |  |     |  |                                                              
|Jack H. Brown         |  | 63  |  | Chairman of
 the Board, President and Chief Executive Officer
|Donald I.
 Baker      |  | 61  |  | Executive
 Vice President and Chief Operating Officer        
|Phillip J.
 Smith     |  | 55  |  | Senior Vice
 President and Chief Financial Officer           
|Dennis L.
 McIntyre   |  | 42  |  | Group Senior
 Vice President of Marketing                    
|James W. Lee          |  | 51  |  | Group Senior
 Vice President of Retail Operations            
|Edward A.
 Stater     |  | 51  |  | Senior Vice
 President of Retail Operations                  
|Bruce D. Varner       |  | 66  |  | Director and
 Secretary                                      
|Thomas W.
 Field, Jr. |  | 68  |  | Vice Chairman
 of the Board of Directors                     
|C. Dale Warman        |  | 73  |  | Director                                                     

Background of Directors and Executive
 Officers
     Jack H. Brown has been President and Chief Executive Officer of the Company
 since June 1981 and Chairman of the Board since 1986. From September 1978 to June
 1981, Mr. Brown served as President of Pantry Food Markets, Inc. and American Community
 Stores Corporation, Inc., both wholly owned subsidiaries of Cullum Companies, Inc.,
 a publicly held corporation. From 1972 to 1978, Mr. Brown served as Corporate Vice
 President of Marsh Supermarkets, Inc., a publicly held corporation. Mr. Brown has
 been employed in various capacities in the supermarket industry for 50 years. Mr.
 Brown has a majority interest and is the managing general partner of La Cadena.

Donald I. Baker has been Executive
 Vice President and Chief Operating Officer since November 2001 and Executive Vice
 President of the Company since October 1998. Mr. Baker joined the Company in November
 1983 as Vice President-Warehouse and Transportation and was Group Senior Vice President-Administration
 from July 1996 to October 1998. From July 1992 to July 1996, Mr. Baker was Group
 Senior Vice President-Human Resources and Distribution. From August 1986 to July
 1992, Mr. Baker was Senior Vice President-Human Resources and Distribution. Mr.
 Baker has approximately 36 years of experience in the supermarket industry. Prior
 to joining the Company, Mr. Baker was employed by American Community Stores Corporation,
 Inc., a subsidiary of Cullum Companies, Inc., a publicly held corporation, from
 1972 to 1983 in various capacities including Vice President of Retail Operations,
 and was also employed by The Kroger Co. from 1966 to 1972.

24



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##### Table of Contents





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

Background of Directors and Executive
 Officers (contd.)
     Phillip J. Smith has been Senior Vice President and Chief
 Financial Officer
 since November 2000, and was Vice President and Controller from April 1998 until
 November 2000. Mr. Smith joined the Company in 1987 as Controller. Mr. Smith has
 approximately 27 years experience in the supermarket industry. Prior to joining
 the Company, Mr. Smith was employed by Market Basket Foodstores as Vice President
 and Chief Financial Officer from 1985 to 1987. From 1975 until 1985, Mr. Smith
 was employed by various divisions of Cullum Companies, Inc., a publicly held corporation,
 in various financial capacities.

Dennis
 L. McIntyre has been Group Senior Vice President of Marketing since August 2002.
 Mr. McIntyre has served the Company for 24 years in various capacities including
 Courtesy Clerk, Assistant Manager, Buyer, Assistance Vice President of Marketing
 from 1994 until 1999, Vice President of Marketing from 1999 to 2000 and Senior Vice
 President of Marketing from 2000 to 2002.

James W.
 Lee joined the Company in August 2002 as Group Senior Vice President of Retail
 Operations. Mr. Lee has over 30 years experience in the supermarket industry.
 Prior to joining the Company, Mr. Lee was with Wild Oats Markets, Inc. between 1997
 and 2001 as Chief Operating Officer. Mr. Lee was employed in various operating
 capacities with Ralphs Grocery Company, a division of Kroger Co., from 1972 until
 1996.

Edward
 A. Stater has been Senior Vice President of Retail Operations since April 2000.
 Mr. Stater has served the Company for 34 years in various capacities including
 Clerk, Produce Buyer, Assistant Warehouse Supervisor, New Store Set-up Manager,
 Grocery Supervisor, District Manager and Regional Vice President from 1986 until
 2000.

Bruce D.
 Varner has been a Director of Stater Bros. Markets since September 1985 and
 a Director of Stater Bros. Holdings Inc. since May 1989. Since February 1997, Mr.
 Varner has been a partner in the law firm of Varner, Saleson & Brandt LLP.
 From 1967 to February 1997, Mr. Varner was a partner in the law firm of Gresham,
 Varner, Savage, Nolan & Tilden. Mr. Varner specializes in business and corporate
 matters. Mr. Varner and the law firm of Varner, Saleson & Brandt LLP have
 performed legal services in the past for the Company and the Company expects such
 services to continue in the future.

Thomas
 W. Field, Jr. has been Vice Chairman of the Board of Directors of the Company
 since May 1998 and a Director of the Company since 1994. He has been President
 of Field and Associates since 1989. From 1988 to 1989, Mr. Field was Chairman of
 the Board, President and Chief Executive Officer of McKesson Corporation and was
 its President since 1984, and President and Chief Executive Officer from 1986 to
 1988. Mr. Field was President of American Stores Company from 1981 to 1984 and
 was President of Alpha Beta Company from 1976 to 1984. Mr. Field was a Director
 of American Stores Company from 1979 to 1984. Mr. Field is a nationally recognized
 and highly regarded supermarket executive. Mr. Field has held various positions
 in the Supermarket Industry for over 43 years and serves as a Director for several
 companies including, Campbell Soup Company and Maxicare.

C.
 Dale Warman has been a Director of the Company since 2000. He served the
 Fred Meyer Company for over 41 years. He served as a Director of Fred Meyer from
 1975 to 1990. He served as President of Fred Meyer Foods from 1982 to 1990. He
 served as Executive Vice President of Fred Meyer Inc. from 1981 to 1990. He was
 Executive Vice President of Allied Foods from 1972 to 1975. He served as a Director
 of Big Bear Stores from 1987 to 1989 and as a Director of Allied Stores from 1973
 to 1975. He is considered one of the supermarket industrys outstanding executives.

25



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##### Table of Contents








|Item 11. | Executive
 Compensation
|-------- | -----------------------

The following table summarizes the compensation
 for services rendered during the prior three fiscal years paid to the CEO and the
 four most highly compensated executive officers other than the CEO of the Company:



|                             | Annual Compensation |      |  |        |          
|---------------------------- | ------------------- | ---- |  | ------ | ---------
|                             |                     |      |  |        |          
|Name andPrincipal Position   |                     | Year |  | Salary |          
|                             |                     |      |  |        |          
|Jack H. Brown                |                     | 2002 |  | $      | 1,188,000
|Chairman, President and      |                     | 2001 |  | $      | 1,128,000
|Chief Executive Officer      |                     | 2000 |  | $      | 1,044,000
|                             |                     |      |  |        |          
|Donald I. Baker              |                     | 2002 |  | $      | 473,000  
|Executive Vice President     |                     | 2001 |  | $      | 412,000  
|and Chief Operating
 Officer |                     | 2000 |  | $      | 360,000  
|                             |                     |      |  |        |          
|Phillip J. Smith             |                     | 2002 |  | $      | 202,000  
|Senior Vice President and    |                     | 2001 |  | $      | 187,000  
|Chief Financial Officer      |                     | 2000 |  | $      | 150,000  
|                             |                     |      |  |        |          
|Dennis L. McIntyre           |                     | 2002 |  | $      | 192,000  
|Group Senior Vice            |                     | 2001 |  | $      | 173,000  
|President of Marketing       |                     | 2000 |  | $      | 143,000  
|                             |                     |      |  |        |          
|Edward A. Stater             |                     | 2002 |  | $      | 182,000  
|Senior Vice President        |                     | 2001 |  | $      | 167,000  
|of Retail Operations         |                     | 2000 |  | $      | 140,000  



|(1) |  | The dollar
 value of perquisites and other personal benefits, if any, for each of the Named
 Executive Officers was less than the reporting thresholds established by the Securities
 and Exchange Commission.                                                                              
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Amounts shown
 for the Named Executive Officers represent the Companys contributions to the
 Companys Profit Sharing Plan, a defined contribution plan, for the account
 of each Named Executive Officer. Plan participants become fully vested in the plan
 after seven years of service.
|   
|(3) |  | Includes Mr.
 Browns Director Fees for 2000, 2001 and 2002, which amounted to $51,000, $50,500,
 and $51,500, respectively.                                                                                                                                                                
|   
|(4) |  | The Board
 of Directors of Stater Bros. Holdings Inc. unanimously awarded Mr. Brown a one-time
 bonus in 2000 for successful integration of the 43 acquired supermarkets.                                                                                                                   
|   
|(5) |  | Annual Bonuses
 to be paid to the Named Executive Officers for fiscal 2002 had neither been calculated
 nor awarded as of December 10, 2002, the latest practical date.                                                                                                                     
|    |  |                                                                                                                                                                                                                                                                                             

Stock Options and SARs

None

26



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##### Table of Contents





|Item 11. | Executive
 Compensation (contd.)
|-------- | --------------------------------

Pension Plan
The Companys Pension Plan for Salaried Employees (the Pension Plan) is a
 non-contributory, defined benefit plan which applies to all salaried employees who
 have completed one year of qualified service, including directors who are employees.
 For each year of credited service, the annual pension to which an employee is entitled
 under the Pension Plan upon normal retirement at age 65 is an amount equal to three
 quarters of one percent of the employees compensation for each year up to
 the social security wage base, plus 2.15 percent of the employees compensation
 for each year in excess of the social security wage base. The Named Executive Officers
 have the following years of credited service under the Pension Plan as of September
 29, 2002: Jack H. Brown - 21 years, Donald I. Baker - 19 years, Phillip J. Smith
 - 15 years, Dennis L. McIntyre - 24 years and Edward A. Stater - 34 years.

The amounts shown in the following table
 are estimated annual retirement benefits under the Pension Plan (assuming payments
 are made on the normal life annuity and not under any of the various survivor forms
 of benefits) based upon retirement at age 65, after various years of service at
 selected salary levels. Benefits under the Pension Plan do not become fully vested
 until the employee has five years of credited service with the Company. The Internal
 Revenue Code of 1986, as amended, places certain limitations on pension benefits
 that can be paid from a tax-qualified pension plan and trust, as well as the compensation
 that may be taken into account in determining such benefits. Such limitations are
 not reflected in the table below. The maximum annual benefit for 2002 retirees
 with ten or more years of service at retirement is $160,000. The maximum annual
 compensation that may be considered for 2002 retirees is $200,000.



|             |         | Pension
 Plan TableYears of Service
|------------ | ------- | -----------------------------------
|             |         |                                    
|Remuneration | 15      |                                    
|             |         |                                    
|$            | 50,000  | $                                  
|             | 75,000  |                                    
|             | 100,000 |                                    
|             | 125,000 |                                    
|             | 150,000 |                                    
|             | 175,000 |                                    
|             | 200,000 |                                    

Compensation of Directors
Directors of the Company are paid an annual fee of $50,000 plus $500 for each board
 meeting attended.

Employment and Severance Agreements
In June of 2000, the Companys principal operating subsidiary, Stater Bros.
 Markets, entered into Employment Agreements with Messrs. Brown, Baker, Smith, McIntyre
 and Stater. Under each of the Agreements, the employee is employed to serve as
 an officer of the Company and with certain exceptions the Agreements prohibits the
 employee from employment in any other business except for a parent or subsidiary
 of the Company. Each of the Agreements may be terminated by the Company with cause
 and by either party without cause upon ninety (90) days written notice. If the
 employment is terminated without cause, the Employees compensation continues
 through the expiration of the term of the Agreement then in effect except in
 the event of termination of

27



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##### Table of Contents





|Item 11. | Executive
 Compensation (contd.)
|-------- | --------------------------------

Employment and Severance Agreements (contd.)
any of the Agreements of Messrs. Baker, Smith, McIntyre and Stater by Mr. Brown or
 by the Board of Directors with the consent of Mr. Brown. If the employee is terminated
 as a result of a change of control, he is entitled to receive all salary and benefits
 provided under the Agreement for the original term notwithstanding termination of
 his employment. Each Agreement provides for annual base compensation at the employees current
 level with annual increases plus employee benefits and incentive
 bonus calculated in accordance with a formula based on the Companys earnings.
 Mr. Browns Agreement has an original term of five (5) years which is automatically
 renewed on July 1 of each year for a five (5) year term unless ninety (90) days
 notice of termination is given by either party. Mr. Bakers Agreement has
 an original term of four (4) years and unless sooner terminated is renewed automatically
 through April 20, 2006, the date of Mr. Bakers sixty-fifth (65th) birthday,
 the Companys normal retirement age. Mr. Smiths, Mr. McIntyres
 and Mr. Staters Agreements have an original term of three (3) years, which
 is automatically renewed for an additional term of three (3) years unless sooner
 terminated.

In addition, the Companys operating
 entity, Stater Bros. Markets has entered into employment contracts with 42 additional
 current members of Senior Management.

The Companys severance policies generally
 provide for two weeks of severance pay to full-time, non-bargaining unit employees
 for every year of service to the Company, up to a maximum of twelve weeks.

Phantom Stock Plan
The Company maintains a phantom stock plan to provide additional incentive compensation
 to certain executives of Stater Bros. Markets whose performance is considered especially
 critical to the Companys business. Under the plan, grants may be made by
 the Compensation Committee and Board of Directors to persons recommended by the
 Chairman of the Board or Chief Executive Officer. Existing stockholders and partners
 of La Cadena are not eligible to receive awards. Awards under the plan are for
 units that have an assigned value. The value of the units awarded under the plan
 will increase or decrease in accordance with net profits of the Company. Subject
 to vesting provisions of the plan, units are paid in cash either (i) in a lump sum
 upon a change in control of the Company; or (ii) if sooner, in either a lump sum
 or installments (with interest) over a five-year period (as the Company may determine)
 following termination of the participants employment by reason of retirement,
 permanent total disability or death. Awards under the plan vest after five years,
 except that upon a participants early retirement, permanent total disability
 or death, awards are considered partially vested at the rate of 20% for each year
 of employment following the grant. If a participant voluntarily terminates his
 or her employment, or is terminated for cause, any unvested awards under the plan
 will terminate and no payment will be made thereunder. As of September 30, 2001
 and September 29, 2002, there were 663,000 and 668,000 units outstanding, respectively.

Payments pursuant to units awarded under
 the plan are based upon the value of a unit at the date of retirement, permanent
 total disability or death, except that if such date occurs within two years of the
 grant the amount of payment, per unit, is limited to the appreciated value of the
 units during the period. Upon a change of control, the payment on all units is
 equal to the full value of the units.

28



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##### Table of Contents








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

The following table sets forth, as of December
 2, 2002, the number and percentage of outstanding shares of Class A Common Stock
 beneficially owned by (a) each person known by the Company to beneficially own more
 than 5% of such stock, (b) each director of the Company, (c) each of the Named Executive
 Officers, and (d) all directors and executive officers of the Company as a group:



|Name and Addressof
 Beneficial Owner                            | Shares ofClass
A CommonStockBeneficiallyOwned |  | Percentage of
Class ACommon StockOutstanding
|--------------------------------------------------------------- | --------------------------------------------- |  | --------------------------------------------
|                                                                |                                               |  |                                             
|La Cadena (1)                                                   | 38,301                                        |  |                                             
|Jack H. Brown (1)(2)                                            | 38,301                                        |  |                                             
|Richard C. Moseley (1)(2)                                       | 38,301                                        |  |                                             
|Donald I. Baker (2)                                             |                                              |  |                                             
|Phillip J. Smith (2)                                            |                                              |  |                                             
|Dennis L. McIntyre (2)                                          |                                              |  |                                             
|James W. Lee (2)                                                |                                              |  |                                             
|Edward A. Stater (2)                                            |                                              |  |                                             
|Bruce D. Varner (2)                                             |                                              |  |                                             
|Thomas W. Field, Jr. (2)                                        |                                              |  |                                             
|C. Dale Warman (2)                                              |                                              |  |                                             
|All directors and executive officers as a group (9 persons) (1) | 38,301                                        |  |                                             



|(1) |  | The 38,301
 outstanding shares of the Companys Class A Common Stock are owned by La Cadena
 and may be deemed to be beneficially owned by the partners of La Cadena. The general
 partners of La Cadena are Jack H. Brown and Richard C. Moseley. Mr. Brown has the
 majority interest and is the managing general partner of La Cadena and has the power
 to vote the shares of the Company owned by La Cadena on all matters. Certain La
 Cadena issues, such as the disposition of such shares of the Company, may require
 approval of 60% of the voting power of La Cadena. Accordingly, Messrs. Brown and
 Moseley may be deemed to have shared voting power or shared investment power with
 respect to the shares owned by La Cadena, and such individuals therefore may be
 deemed to be the beneficial owners thereof. The address of La Cadena is 3750 University
 Avenue, Suite 610, Riverside, California 92501.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(2) |  | The address
 of Messrs. Brown, Moseley, Baker, Smith, McIntyre, Lee, Stater, Varner, Field and
 Warman is c/o the Company at 21700 Barton Road, Colton, California 92324.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Change of Control Arrangements

None

29



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##### Table of Contents








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

Mr. Bruce D. Varner and the law firm of
 Varner, Saleson & Brandt LLP, of which Mr. Varner is a partner, have performed
 legal services in the past for the Company. The total cost of such legal services
 incurred by the Company during fiscal 2002 was approximately $1.9 million. The
 Company believes that the terms and costs of such legal services provided by Mr.
 Varner and the law firm of Varner, Saleson & Brandt LLP were at least as fair
 to the Company as could have been obtained from unaffiliated law firms. The Company
 expects such services to continue in the future.

In August 1999, in connection with the $450.0
 million debt offering, the redemption of all outstanding 9% Notes and substantially
 all outstanding 11% Notes and the acquisition of 43 supermarkets and one future
 store site from Albertsons, the Company retained La Cadena to provide financial
 advisory services for a fee of $4.5 million.

Effective January 2002, the Company redeemed
 11,699 shares of the Companys stock previously held by La Cadena and made
 a cash payment of $20.0 million and executed a $20.0 million subordinated note due
 March 31, 2007 to Mr. H. Harrison Lightfoot, a former partner of La Cadena. The
 subordinated note bears interest at a rate of 5.0% per annum, payable semi-annually.
 Effective February 2002, the Company paid a $4.5 million dividend and a $500,000
 financial advisory service fee to La Cadena.

The 38,301 outstanding shares of the Companys Class
 A Common Stock are owned by La Cadena and may be deemed to be beneficially
 owned by the partners of La Cadena. The general partners of La Cadena are Jack
 H. Brown and Richard C. Moseley. Mr. Brown has a majority interest and is the managing
 general partner. Mr. Brown is a director of the Company and a Named Executive Officer
 of the Company. Mr. Brown has the power to vote the shares of the Company owned
 by La Cadena, except with respect to certain fundamental corporate changes of the
 Company, including the disposition of such shares. Accordingly, Messrs. Brown and
 Moseley may be deemed to have shared voting power with respect to shares of the
 Company owned by La Cadena. Mr. Moseley served the Company for over 44 years in
 many executive capacities, most recently and from September 1995 until his retirement
 from the Company in January 1996, Mr. Moseley served as Executive Vice President
 of the Company.






|Item 14. | Controls
 and Procedures
|-------- | ------------------------

Within the past 90 days, we carried out
 an evaluation, under the supervision of the Chief Executive Officer and Chief Financial
 Officer, of the effectiveness of the Companys disclosure controls and procedures.
 Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
 have each concluded that those controls and procedures were effective in making
 known to them, on a timely basis, the material information needed for the preparation
 of this Report on Form 10-K. There were no significant changes in the Companys
 internal controls or in other factors that could significantly affect those internal
 controls since the date of their evaluation nor did they find any significant deficiencies
 or material weaknesses that would have required corrective actions to be taken with
 respect to those controls.

30



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##### Table of Contents






PART IV






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

|(a) |  | Document list
|--- |  | -------------
|    |  |              
|    |  | (1)          
|    |  |              
|    |  |              
|    |  | (2)          
|    |  |              
|    |  |              
|    |  | (3)          
|    |  |              
|    |  |              



| | EXHIBIT NO. |      |  | DESCRIPTION
| | ----------- | ---- |  | -----------
| |             |      |  |            
| |             | 1    |  |            
| |             |      |  |            
| |             | 2.1  |  |            
| |             |      |  |            
| |             | 3.1  |  |            
| |             |      |  |            
| |             | 3.2  |  |            
| |             |      |  |            
| |             | 4.2  |  |            
| |             |      |  |            
| |             | 4.6  |  |            
| |             |      |  |            
| |             | 4.7  |  |            
| |             |      |  |            
| |             | 4.8  |  |            
| |             |      |  |            
| |             | 5.0  |  |            
| |             |      |  |            
| |             | 10.1 |  |            
| |             |      |  |            

31



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##### Table of Contents





|Item 15. | Exhibits,
 Financial Statement Schedules
|-------- | ----------------------------------------
|         | and Reports
 on Form 8-K (contd.)       
|         |                                         

|(a) | (3) | Exhibits (contd.)
|--- | --- | -----------------
|    |     |                  

| | EXHIBIT NO. |       |     | DESCRIPTION
| | ----------- | ----- | --- | -----------
| |             |       |     |            
| |             | 10.2  |     |            
| |             |       |     |            
| |             | 10.3  |     |            
| |             |       |     |            
| |             | 10.4  |     |            
| |             |       |     |            
| |             | 10.5  |     |            
| |             |       |     |            
| |             | 10.6  |     |            
| |             |       |     |            
| |             | 10.7  |     |            
| |             |       |     |            
| |             | 10.8  |     |            
| |             |       |     |            
| |             | 10.9  |     |            
| |             |       |     |            
| |             | 10.10 |     |            
| |             |       |     |            
| |             | 10.12 |     |            
| |             |       |     |            
| |             | 10.12 | (a) |            
| |             |       |     |            
| |             | 10.12 | (b) |            
| |             |       |     |            
| |             | 10.12 | (c) |            
| |             |       |     |            
| |             | 10.13 |     |            
| |             |       |     |            
| |             | 10.15 |     |            

32



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##### Table of Contents





|Item 15. | Exhibits,
 Financial Statement Schedules
|-------- | ----------------------------------------
|         | and Reports
 on Form 8-K (contd.)       
|         |                                         

|(a) | (3) | Exhibits (contd.)
|--- | --- | -----------------
|    |     |                  

| | EXHIBIT NO. |         |  | DESCRIPTION
| | ----------- | ------- |  | -----------
| |             |         |  |            
| |             | 10.16   |  |            
| |             |         |  |            
| |             | 10.17   |  |            
| |             |         |  |            
| |             | 10.18   |  |            
| |             |         |  |            
| |             | 10.19   |  |            
| |             |         |  |            
| |             | 10.20   |  |            
| |             |         |  |            
| |             | 10.21.1 |  |            
| |             |         |  |            
| |             | 10.22.1 |  |            
| |             |         |  |            
| |             | 10.23   |  |            
| |             |         |  |            
| |             | 10.24   |  |            
| |             |         |  |            
| |             | 10.25   |  |            
| |             |         |  |            
| |             | 10.26   |  |            
| |             |         |  |            
| |             | 10.27   |  |            
| |             |         |  |            
| |             | 10.28   |  |            
| |             |         |  |            
| |             | 10.29   |  |            
| |             |         |  |            
| |             | 10.30   |  |            
| |             |         |  |            
| |             | 10.31   |  |            
| |             |         |  |            
| |             | 10.32   |  |            
| |             |         |  |            
| |             | 12      |  |            

33



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##### Table of Contents





|Item 15. | Exhibits,
 Financial Statement Schedules
|-------- | ----------------------------------------
|         | and Reports
 on Form 8-K (contd.)       
|         |                                         

|(a) | (3) | Exhibits (contd.)
|--- | --- | -----------------
|    |     |                  

| | EXHIBIT NO. |      |  | DESCRIPTION
| | ----------- | ---- |  | -----------
| |             |      |  |            
| |             | 21   |  |            
| |             |      |  |            
| |             | 24   |  |            
| |             |      |  |            
| |             | 25   |  |            
| |             |      |  |            
| |             | 99.3 |  |            



| | (1)                                                                                                                                                            | Previously filed with
 the Securities and Exchange Commission as an exhibit to the Registration Statement
 S-4 No. 33-77296 dated July 21, 1994.                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                |                                                                                                                                                                                 
| | (2)                                                                                                                                                            | Previously filed with
 the Securities and Exchange Commission as an exhibit to the
 Registrants Quarterly Report on Form 10-Q dated June 25, 1995
 and filed on August 8, 1995.
| |                                                                                                                                                                |                                                                                                                                                                                 
| | (3)                                                                                                                                                            | Previously filed
 with the Securities and Exchange Commission as exhibit 10.12(b) with the
 Annual Report on Form 10-K for the fiscal year ended September 29, 1996.            
| |                                                                                                                                                                |                                                                                                                                                                                 
| | (4)                                                                                                                                                            | Previously filed with the
 Securities and Exchange Commission as exhibits to the Registration
 Statement S-4, No. 333-34113 dated October 17, 1997.                             
| |                                                                                                                                                                |                                                                                                                                                                                 
| | (5)                                                                                                                                                            | Previously filed
 with the Securities and Exchange Commission as exhibits to the Registration Statement
 S-4, No. 333-85723 dated September 13, 1999.                           
| |                                                                                                                                                                |                                                                                                                                                                                 
| | (6)                                                                                                                                                            | Previously filed
 with the Securities and Exchange Commission as exhibits to Registrants
 Quarterly Report on Form 10-Q dated June 25, 2000 and filed on August 9, 2000.       
| |                                                                                                                                                                |                                                                                                                                                                                 
| | (7)                                                                                                                                                            | Filed with the
 Securities and Exchange Commission as exhibits with the Annual Report
 on Form 10-K for the fiscal year ended September 24, 2000.                               
| |                                                                                                                                                                |                                                                                                                                                                                 
| | (8)                                                                                                                                                            | Previously filed
 with the Securities and Exchange Commission as exhibits to the Registrants
 Quarterly Report on Form 10-Q dated December 31, 2001.                           
| |                                                                                                                                                                |                                                                                                                                                                                 
| | (9)                                                                                                                                                            | Filed with the
 Securities and Exchange Commission as exhibits with the Annual Report on Form 10-K
 for the fiscal year ended September 29, 2002.                               
| |                                                                                                                                                                |                                                                                                                                                                                 
| | Copies of Exhibits
 listed herein can be obtained by writing and requesting such Exhibits
 from: Corporate Secretary, P. O. Box 150, Colton, California 92324.
| |                                                                                                                                                                |                                                                                                                                                                                 

|(b) |  | Reports on Form 8-K                               
|--- |  | --------------------------------------------------
|    |  |                                                   
|    |  | Current Report
 on Form 8-K dated August 13, 2002.

34



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##### Table of Contents



STATER BROS. HOLDINGS INC.
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2002
FORM 10-K
SIGNATURES

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



|December 19, 2002 |  | Stater Bros. Holdings Inc.
|----------------- |  | --------------------------
|                  |  |                           
|Date              |  |                           



| | By:    /s/     Jack
 H. Brown                               
| | ------------------------------------------------------------
| |                                                             
| | Jack H. Brown                                               
| | Chairman of the Board,
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 and on the dates indicated.



|    | Signature            |  | Title                                                                                                    |  | Date             
|--- | -------------------- |  | -------------------------------------------------------------------------------------------------------- |  | -----------------
|    |                      |  |                                                                                                          |  |                  
|/s/ | Jack H. Brown        |  | Chairman of the
 Board, President and Chief Executive Officer and Director (Principal Executive Officer) |  | December 19, 2002
|    |                      |  |                                                                                                         
|    | Jack H. Brown        |  |                                                                                                          | 
|    |                      |  |                                                                                                          |  |                  
|/s/ | Thomas W. Field, Jr. |  | Vice Chairman of the
 Board and Director                                                                 |  | December 19, 2002
|    |                      |  |                                                                                                         
|    | Thomas W. Field, Jr. |  |                                                                                                          | 
|    |                      |  |                                                                                                          |  |                  
|/s/ | Bruce D. Varner      |  | Secretary
 and Director                                                                                  |  | December 19, 2002
|    |                      |  |                                                                                                         
|    | Bruce D. Varner      |  |                                                                                                          | 
|    |                      |  |                                                                                                          |  |                  
|/s/ | C. Dale Warman       |  | Director                                                                                                 |  | December 19, 2002
|    |                      |  |                                                                                                         
|    | C. Dale Warman       |  |                                                                                                          | 
|    |                      |  |                                                                                                          |  |                  
|/s/ | Phillip J. Smith     |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer)                          |  | December 19, 2002
|    |                      |  |                                                                                                         
|    | Phillip J. Smith     |  |                                                                                                          | 

35



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##### Table of Contents






CERTIFICATION PURSUANT TOSECTION 302 (a) OF
 THE SARBANES-OXLEY ACT

I, Jack H. Brown, certify that:

1.     I have reviewed this annual report
 on Form 10-K of Stater Bros. Holdings Inc.;

2.     Based on my knowledge, this annual
 report does not contain any untrue statement of a material fact or omit to state a material fact necessary
 to make the statements made, in light of the circumstances under which such statements were made, not
 misleading with respect to the period covered by this annual report;

3.     Based on my knowledge, the
 financial statements, and other financial information included in this annual report, fairly present
 in all material respects the financial condition, results of operations and cash flows of the registrant
 as of, and for, the periods presented in this annual report;

4.     The registrants other certifying
 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
 defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)     designed such disclosure controls
 and procedures to ensure that material information relating to the registrant, including its consolidated
 subsidiaries, is made known to us by others within those entities, particularly during the period in
 which this annual report is being prepared;

b)     evaluated the effectiveness of
 the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date
 of this annual report (the Evaluation Date); and

c)     presented in this annual report
 our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation
 as of the Evaluation Date;

5.     The registrants other certifying
 officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the
 audit committee of registrants board of directors (or persons performing the equivalent
 functions):

a)     all significant deficiencies in
 the design or operation of internal controls which could adversely affect the registrants ability to
 record, process, summarize and report financial data and have identified for the registrants auditors
 any material weaknesses in internal controls; and

b)     any fraud, whether or not material
, that involves management or other employees who have a significant role in the registrants internal
 controls; and

6.     The registrants other certifying
 officers and I have indicated in this annual report whether there were significant changes in internal
 controls or in other factors that could significantly affect internal controls subsequent to the date of
 our most recent evaluation, including any corrective actions with regard to significant deficiencies and
 material weaknesses.

Date: December 19, 2002

/s/ Jack H. Brown

---

36



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##### Table of Contents



CERTIFICATION PURSUANT TOSECTION 302 (a) OF
 THE SARBANES-OXLEY ACT

I, Phillip J. Smith, certify that:

1.     I have reviewed this annual report
 on Form 10-K of Stater Bros. Holdings Inc.;

2.     Based on my knowledge, this
 annual report does not contain any untrue statement of a material fact or omit to state a material fact
 necessary to make the statements made, in light of the circumstances under which such statements were
 made, not misleading with respect to the period covered by this annual report;

3.     Based on my knowledge, the
 financial statements, and other financial information included in this annual report, fairly present in
 all material respects the financial condition, results of operations and cash flows of the registrant as
 of, and for, the periods presented in this annual report;

4.     The registrants other certifying
 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
 defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)     designed such disclosure controls
 and procedures to ensure that material information relating to the registrant, including its consolidated
 subsidiaries, is made known to us by others within those entities, particularly during the period in
 which this annual report is being prepared;

b)     evaluated the effectiveness of
 the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date
 of this annual report (the Evaluation Date); and

c)     presented in this annual report
 our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation
 as of the Evaluation Date;

5.     The registrants other certifying
 officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the
 audit committee of registrants board of directors (or persons performing the equivalent
 functions):

a)     all significant deficiencies in
 the design or operation of internal controls which could adversely affect the registrants ability to
 record, process, summarize and report financial data and have identified for the registrants auditors
 any material weaknesses in internal controls; and

b)     any fraud, whether or not
 material, that involves management or other employees who have a significant role in the registrants
 internal controls; and

6.     The registrants other
 certifying officers and I have indicated in this annual report whether there were significant changes
 in internal controls or in other factors that could significantly affect internal controls subsequent
 to the date of our most recent evaluation, including any corrective actions with regard to significant
 deficiencies and material weaknesses.

Date: December 19, 2002

/s/ Phillip J. Smith

---

37



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                              |  | Page Number
|--------------------------------------------------------------------------------------------- |  | -----------
|                                                                                              |  |            
|Report of Independent Auditors                                                                |  | F-2        
|Consolidated Balance Sheets at September 24, 2000, September 30,
 2001 and September 29, 2002 |  | F-3        
|Fiscal years ended September 24, 2000, September 30, 2001 and
 September 29, 2002:            |  |            
|Consolidated Statements of Operations                                                         |  | F-5        
|Consolidated Statements of Cash Flows                                                         |  | F-6        
|Consolidated Statements of Stockholders Deficit                                              |  | F-7        
|Notes to Consolidated Financial Statements                                                    |  | F-8        

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors ofStater Bros. Holdings Inc.

We have audited
 the accompanying consolidated balance sheets of Stater Bros. Holdings Inc. and subsidiaries
 as of September 24, 2000, September 30, 2001 and September 29, 2002, and the related
 consolidated statements of operations, stockholders deficit, and cash flows
 for the 52-week periods ended September 24, 2000 and September 29, 2002 and the
 53-week period ended September 30, 2001. 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. Those standards require that we plan and perform the audit to obtain reasonable
 assurance about whether the financial statements are free of material misstatement.
 An audit includes examining, on a test basis, evidence supporting the amounts and
 disclosures in the financial statements. An audit also includes assessing the accounting
 principles used and significant estimates made by management, as well as evaluating
 the overall financial statement presentation. We believe that our audits provide
 a reasonable basis for our opinion.

In our opinion,
 the consolidated financial statements referred to above present fairly, in all material
 respects, the consolidated financial position of Stater Bros. Holdings Inc. and
 subsidiaries as of September 24, 2000, September 30, 2001 and September 29, 2002,
 and the consolidated results of their operations and their cash flows for the 52-week
 periods ended September 24, 2000 and September 29, 2002 and the 53-week period ended
 September 30, 2001, in conformity with accounting principles generally accepted
 in the United States.

ERNST & YOUNG LLP

Orange County, CaliforniaDecember 2, 2002

F-2



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##### Table of Contents



STATER BROS. HOLDINGS INC.CONSOLIDATED BALANCE
 SHEETS(In thousands)

ASSETS



|                                               |  | Sept. 24, |         | Sept. 30, |   | Sept. 29,
|---------------------------------------------- |  | --------- | ------- | --------- | - | ---------
|                                               |  | 2000      |         | 2001      |   | 2002     
|                                               |  |           |         |           |   |          
|Current assets                                 |  |           |         |           |   |          
|Cash and cash equivalents                      |  | $         | 62,631  |           | $ | 101,636  
|Lease guarantee escrow                         |  |           | 13,180  |           |   |         
|Receivables                                    |  |           | 28,181  |           |   | 29,894   
|Income tax receivables                         |  |           | 263     |           |   | 358      
|Inventories                                    |  |           | 165,332 |           |   | 170,189  
|Prepaid expenses                               |  |           | 5,337   |           |   | 6,743    
|Deferred income taxes                          |  |           | 10,776  |           |   | 6,634    
|Properties held for sale                       |  |           | 3,863   |           |   | 3,840    
|                                               |  |           |         |           |   |          
|Total current assets                           |  |           | 289,563 |           |   | 319,294  
|Investment in unconsolidated affiliate         |  |           | 11,082  |           |   | 12,666   
|Property and equipment                         |  |           |         |           |   |          
|Land                                           |  |           | 47,574  |           |   | 47,574   
|Buildings and improvements                     |  |           | 169,584 |           |   | 181,641  
|Store fixtures and equipment                   |  |           | 172,465 |           |   | 190,581  
|Property subject to capital leases             |  |           | 25,261  |           |   | 24,670   
|                                               |  |           |         |           |   |          
|                                               |  |           | 414,884 |           |   | 444,466  
|Less accumulated depreciation and amortization |  |           | 144,370 |           |   | 169,979  
|                                               |  |           |         |           |   |          
|                                               |  |           | 270,514 |           |   | 274,487  
|Deferred income taxes                          |  |           | 3,676   |           |   | 4,897    
|Deferred debt issuance costs, net              |  |           | 14,569  |           |   | 12,042   
|Other assets                                   |  |           | 5,884   |           |   | 5,908    
|                                               |  |           |         |           |   |          
|                                               |  |           | 24,129  |           |   | 22,847   
|                                               |  |           |         |           |   |          
|Total assets                                   |  | $         | 595,288 |           | $ | 629,294  
|                                               |  |           |         |           |   |          

See accompanying notes to consolidated
 financial statements.

F-3



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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (contd.)(In thousands, except share amounts)

LIABILITIES AND STOCKHOLDERS DEFICIT



|                                                                        |  | Sept. 24, |         |   | Sept. 30, |   |         | Sept. 29, | 
|----------------------------------------------------------------------- |  | --------- | ------- | - | --------- | - | ------- | --------- | 
|                                                                        |  | 2000      |         |   | 2001      |   |         | 2002      | 
|                                                                        |  |           |         |   |           |   |         |           | 
|Current liabilities                                                     |  |           |         |   |           |   |         |           | 
|Accounts payable                                                        |  | $         | 100,777 |   |           | $ | 107,485 |           | 
|Accrued payroll and related expenses                                    |  |           | 35,385  |   |           |   | 41,737  |           | 
|Other accrued liabilities                                               |  |           | 34,637  |   |           |   | 44,340  |           | 
|Current portion of capital lease obligations and long-term debt         |  |           | 6,994   |   |           |   | 1,435   |           | 
|                                                                        |  |           |         |   |           |   |         |           | 
|Total current liabilities                                               |  |           | 177,793 |   |           |   | 194,997 |           | 
|Deferred income taxes, long-term                                        |  |           |        |   |           |   |        |           | 
|Long-term debt, less current portion                                    |  |           | 439,000 |   |           |   | 439,000 |           | 
|Capital lease obligations, less current portion                         |  |           | 13,679  |   |           |   | 12,098  |           | 
|Long-term portion of self-insurance and other reserves                  |  |           | 9,875   |   |           |   | 15,852  |           | 
|Other long-term liabilities                                             |  |           | 4,195   |   |           |   | 8,756   |           | 
|                                                                        |  |           |         |   |           |   |         |           | 
|Total liabilities                                                       |  |           | 644,542 |   |           |   | 670,703 |           | 
|Stockholders deficit                                                   |  |           |         |   |           |   |         |           | 
|Common Stock, $.01 par value:                                           |  |           |         |   |           |   |         |           | 
|Authorized shares - 100,000                                             |  |           |         |   |           |   |         |           | 
|Issued and outstanding shares - 0 in 2000, 2001 and 2002                |  |           |        |   |           |   |        |           | 
|Class A Common Stock, $.01 par value:                                   |  |           |         |   |           |   |         |           | 
|Authorized shares - 100,000                                             |  |           |         |   |           |   |         |           | 
|Issued and outstanding shares - 50,000 in 2000 and 2001; 38,301 in 2002 |  |           | 1       |   |           |   | 1       |           | 
|Additional paid-in capital                                              |  |           | 12,715  |   |           |   | 12,715  |           | 
|Retained deficit                                                        |  |           | (61,970 | ) |           |   | (54,125 | )         | 
|                                                                        |  |           |         |   |           |   |         |           | 
|Total stockholders deficit                                             |  |           | (49,254 | ) |           |   | (41,409 | )         | 
|                                                                        |  |           |         |   |           |   |         |           | 
|Total liabilities and stockholders deficit                             |  | $         | 595,288 |   |           | $ | 629,294 |           | 
|                                                                        |  |           |         |   |           |   |         |           | 

See accompanying notes to consolidated financial statements.

F-4



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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share and share amounts)



|                                                                   |  | Fiscal Year Ended
|------------------------------------------------------------------ |  | -----------------
|                                                                   |  |                  
|                                                                   |  | Sept. 24,        
|                                                                   |  | 2000             
|                                                                   |  |                  
|Sales                                                              |  | $                
|Cost of goods sold                                                 |  |                  
|                                                                   |  |                  
|Gross profit                                                       |  |                  
|Operating expenses:                                                |  |                  
|Selling, general and administrative expenses                       |  |                  
|Depreciation and amortization                                      |  |                  
|Acquisition integration expenses                                   |  |                  
|                                                                   |  |                  
|Total operating expenses                                           |  |                  
|                                                                   |  |                  
|Operating profit                                                   |  |                  
|Interest income                                                    |  |                  
|Interest expense                                                   |  |                  
|Equity in income from unconsolidated affiliate                     |  |                  
|Other expenses - net                                               |  |                  
|                                                                   |  |                  
|Income (loss) before income taxes (benefit) and extraordinary gain |  |                  
|Income taxes (benefit)                                             |  |                  
|                                                                   |  |                  
|Income (loss) before extraordinary gain                            |  |                  
|Extraordinary gain, net of tax effect of $773 in 2000              |  |                  
|                                                                   |  |                  
|Net income (loss)                                                  |  | $                
|                                                                   |  |                  
|Earnings (loss) per common share:                                  |  |                  
|Before extraordinary gain                                          |  |                  
|Extraordinary gain                                                 |  |                  
|                                                                   |  |                  
|Earnings (loss) per common share                                   |  | $                
|                                                                   |  |                  
|Average common shares outstanding                                  |  |                  
|                                                                   |  |                  
|Common shares outstanding at end of year                           |  |                  
|                                                                   |  |                  

See accompanying notes to consolidated financial statements.

F-5



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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)



|                                                                                         |  | Fiscal Year Ended
|---------------------------------------------------------------------------------------- |  | -----------------
|                                                                                         |  |                  
|                                                                                         |  | Sept. 24,        
|                                                                                         |  | 2000             
|                                                                                         |  |                  
|Operating activities:                                                                    |  |                  
|Net income (loss)                                                                        |  | $                
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                  
|Extraordinary gain                                                                       |  |                  
|Depreciation and amortization                                                            |  |                  
|Deferred income taxes                                                                    |  |                  
|Loss on disposals of assets                                                              |  |                  
|Net undistributed income in unconsolidated affiliate                                     |  |                  
|Changes in operating assets and liabilities:                                             |  |                  
|(Increase) decrease in receivables                                                       |  |                  
|(Increase) decrease in income tax receivables                                            |  |                  
|Increase in inventories                                                                  |  |                  
|(Increase) decrease in prepaid expenses                                                  |  |                  
|(Increase) decrease in other assets                                                      |  |                  
|Increase (decrease) in accounts payable                                                  |  |                  
|Increase in accrued liabilities and long-term portion of self-insurance reserves         |  |                  
|                                                                                         |  |                  
|Net cash provided by operating activities                                                |  |                  
|                                                                                         |  |                  
|Financing activities:                                                                    |  |                  
|Debt issuance costs                                                                      |  |                  
|Stock redemption                                                                         |  |                  
|Dividends paid                                                                           |  |                  
|Principal payments on long-term debt                                                     |  |                  
|Principal payments on capital lease obligations                                          |  |                  
|                                                                                         |  |                  
|Net cash used in financing activities                                                    |  |                  
|                                                                                         |  |                  
|Investing activities:                                                                    |  |                  
|Purchase of property and equipment                                                       |  |                  
|Proceeds from sale of property and equipment and properties held for sale                |  |                  
|                                                                                         |  |                  
|Net cash used in investing activities                                                    |  |                  
|                                                                                         |  |                  
|Net increase (decrease) in cash and cash equivalents                                     |  |                  
|Cash and cash equivalents at beginning of year                                           |  |                  
|                                                                                         |  |                  
|Cash and cash equivalents at end of year                                                 |  | $                
|                                                                                         |  |                  
|Interest paid                                                                            |  | $                
|                                                                                        
|Income taxes paid                                                                        |  | $                

See accompanying notes to consolidated financial
 statements

F-6



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##### Table of Contents



STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
(In thousands)



|                                                 |  |        |   |        | Class A |         | Additional |          |   |        |  
|------------------------------------------------ |  | ------ | - | ------ | ------- | ------- | ---------- | -------- | - | ------ | -
|                                                 |  | Common |   | Common |         | Paid-in |            | Retained
|                                                 |  | Stock  |   | Stock  |         | Capital |            | Deficit 
|                                                 |  |        |   |        |         |         |            |         
|Balance at September 26, 1999                    |  | $      |  |        | $       | 1       |            |          | $ | 12,715 |  
|Net loss for 52 weeks ended September 24, 2000   |  |        |  |        |         |        |            |          |   |       |  
|                                                 |  |        |   |        |         |         |            |          |   |        |  
|Balances at September 24, 2000                   |  |        |  |        |         | 1       |            |          |   | 12,715 |  
|Net income for 53 weeks ended September 30, 2001 |  |        |  |        |         |        |            |          |   |       |  
|                                                 |  |        |   |        |         |         |            |          |   |        |  
|Balances at September 30, 2001                   |  |        |  |        |         | 1       |            |          |   | 12,715 |  
|Net income for 52 weeks ended September 29, 2002 |  |        |  |        |         |        |            |          |   |       |  
|Dividend paid                                    |  |        |  |        |         |        |            |          |   |       |  
|Stock redemption                                 |  |        |  |        |         | (1      | )          |          |   | (2,975 | )
|                                                 |  |        |   |        |         |         |            |          |   |        |  
|Balances at September 29, 2002                   |  | $      |  |        | $       |        |            |          | $ | 9,740  |  
|                                                 |  |        |   |        |         |         |            |          |   |        |  

See accompanying notes to consolidated financial statements.

F-7



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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES
 TO CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 29, 2002

Note 1 - The Company and Summary of Significant Accounting
 Policies

Description of Business
     Stater Bros. Holdings Inc. (the Company) is engaged primarily in the
 operation of retail supermarkets. As of September 29, 2002, the Company operated 156
 retail food supermarkets under the name Stater Bros. Markets. The Companys supermarkets are
 located in Southern Californias San Bernardino, Riverside, Los Angeles, Orange, San Diego and Kern
 counties. The Company and its predecessor companies have operated retail grocery stores under
 the Stater Bros. Markets name in the Inland Empire of Southern California since 1936.

Principles of Consolidation
     The consolidated financial statements include the accounts of the
 Company and its wholly-owned subsidiaries, Stater Bros. Markets (Markets) and Stater Bros.
 Development, Inc. All significant inter-company transactions have been eliminated in
 consolidation.

Use of Estimates
     The preparation of financial statements in conformity with accounting
 principles generally accepted in the United States requires management to make estimates and
 assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual
 results could differ from those estimates.

Fiscal Year
     The Companys fiscal year ends on the last Sunday in September. The
 fiscal years ended September 24, 2000 and September 29, 2002 were 52-week years and the fiscal year
 ended September 30, 2001 was a 53-week year.

Cash and Cash Equivalents
     Cash and cash equivalents are reflected at cost, which approximates their fair
 value, and consist primarily of overnight repurchase agreements, certificates of deposit and money market
 funds with maturities of less than three months when purchased.

Inventories
     Inventories are stated at the lower of cost (first-in, first-out) or market.

Receivables
     Receivables represent amounts expected to be received during the next operating
 cycle of the Company. The carrying amount reported in the balance sheet for receivables approximates
 their fair value.

Properties Held for Sale
     Properties expected to be sold within one year are classified as current
 assets and are stated at the lower of cost or estimated net realizable value and consist of land, buildings
 and equipment.

Deferred Debt Issuance Costs
     Direct costs incurred as a result of financing transactions are capitalized and
 amortized to interest expense over the terms of the applicable debt agreements.

Self-insurance Reserves
     The Company provides reserves, subject to certain retention levels, for
 workers compensation, general and automobile liability claims. Actuaries assist the Company in developing
 reserve estimates for its self-insured liabilities. Such reserves are discounted at a rate
 approximating 7.5%. The Company is self-insured, subject to certain retention levels, for health care
 costs of eligible non-bargaining unit employees. Such health care reserves are not discounted.

F-8



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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES
 TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 1 - The Company and Summary of Significant Accounting
 Policies (contd.)

Property and Equipment
     Property and equipment are stated at cost and are depreciated or amortized,
 principally on the straight-line method over the estimated useful lives of the assets, and for capitalized
 leases over the initial lease term or the estimated economic life of the asset.

The average estimated economic
 lives are as follows:



|                                   |  | Range |               | Most Prevalent
|---------------------------------- |  | ----- | ------------- | --------------
|                                   |  |       |               |               
|Buildings and improvements         |  |       | 8 - 30 Years  |               
|Store furniture and equipment      |  |       | 3 - 10 Years  |               
|Property subject to capital leases |  |       | Life of Lease |               

Income Taxes
     The Company provides for deferred income taxes as timing differences
 arise between income and expenses recorded for financial and income tax reporting purposes.

Revenue Recognition
     The Company recognizes revenue from the sale of its products at the point
 of sale to the customer. Sales are recognized net of any discounts given to the customer. The Company
 recognizes, as a reduction to cost of goods sold, certain rebates and allowances (allowances) from
 its vendors as the allowances are earned. Allowances are earned by promoting certain products or by
 purchasing specified amounts of product. The Company records a liability for allowance funds that have
 been received but not yet earned.

Cost of Goods Sold
     Costs of goods sold include certain warehousing, transportation and
 distribution costs.

Advertising
     The Companys advertising costs, net of vendor allowances for co-op
 advertising, are recognized in the period the advertising is incurred and are included in selling, general
 and administrative expenses. Advertising costs were $34.5 million, $32.6 million and $35.7 million
 in fiscal 2000, 2001 and 2002, respectively.

Recent Accounting Pronouncements
     During the Companys fiscal 2002, the Financial Accounting Standards
 Board (FASB) issued or required the adoption of Statement of Financial Accounting Standards
 (SFAS) No. 142, No. 143, No. 145 and No. 146. Adoption of SFAS No. 142, No. 143, No. 145 and
 No. 146 were either not applicable to the Company or were adopted by the Company in its fiscal 2002 and
 did not have a material effect on the Companys financial position or its results of operations in
 fiscal 2002. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal
 of Long-Lived Assets, which addressed accounting and financial reporting for the impairment or disposal
 of long-lived assets. This statement is effective for the Company beginning September
 30, 2002, and the Company is evaluating the impact, if any, that the implementation will have on the
 financial statements.

F-9



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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES
 TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 2 - Debt

Long-term debt consisted of the
 following:



|                              |  | Sept. 24,2000  |         | Sept. 30,2001 |  | Sept. 29,2002
|----------------------------- |  | -------------- | ------- | ------------- |  | -------------
|                              |  |                |         |               |  |              
|                              |  | (In thousands)
|5% Subordinated Note due 2007 |  | $              |        |               |  | $            
|11% Senior Notes due 2001     |  |                | 5,048   |               |  |              
|10.75% Senior Notes due 2006  |  |                | 439,000 |               |  |              
|                              |  |                |         |               |  |              
|Total long-term debt          |  | $              | 444,048 |               |  | $            
|                              |  |                |         |               |  |              

Interest on the 10.75% Senior Notes
 due 2006 is payable semi-annually on February 15 and August 15. Principal on the 10.75% Senior Notes
 is due in the fiscal year 2006.

Interest on the 5% Subordinated
 Note due March 2007, is payable semi-annually on March 31 and September 30. Principal on the
 5% subordinated note is due in the fiscal year 2007.

Interest capitalized during fiscal
 years 2000, 2001 and 2002 amounted to $35,000, $238,000 and $144,000 respectively. Interest expense
 incurred, before the effect of capitalized interest, during 2000, 2001 and 2002 amounted to $53,715,000,
 $52,648,000 and $52,958,000, respectively.

During fiscal 2002, the Company
 redeemed $250,000 of its 10.75% Senior Notes due 2006. The Notes were restricted and unregistered. The
 Notes were redeemed for $250,000 plus accrued interest.

Note 3 - Unconsolidated Affiliate

The Company owns 50% of Santee
 Dairies LLC. Through its wholly owned subsidiary, Santee Dairies, Inc. (Santee), it operates a
 fluid milk processing plant located in City of Industry. The Company is not the controlling stockholder.
 Accordingly, the Company accounts for its investment in Santee Dairies LLC using the equity method of
 accounting and recognized income of $1,483,000, $1,584,000 and $2,914,000 for fiscal years 2000, 2001 and
 2002, respectively. The Company is a significant customer of Santee which supplies the Company with a
 substantial portion of its fluid milk and dairy products.

Summary of unaudited financial information for Santee Dairies LLC
 is as follows:



|                        |  | 53 Weeks       |         | 52 Weeks       |  | 52 Weeks      
|----------------------- |  | -------------- | ------- | -------------- |  | --------------
|                        |  |                |         |                |  |               
|                        |  | Sept. 30, 2000 |         | Sept. 29, 2001 |  | Sept. 28, 2002
|                        |  |                |         |                |  |               
|                        |  | (In thousands)
|Current assets          |  | $              | 19,341  |                |  | $             
|Non-current assets      |  |                | 100,681 |                |  |               
|Current liabilities     |  |                | 25,639  |                |  |               
|Non-current liabilities |  |                | 72,220  |                |  |               
|Shareholders equity    |  |                | 22,163  |                |  |               
|                       
|Sales                   |  |                | 177,336 |                |  |               
|Gross profit            |  |                | 29,045  |                |  |               
|Net income              |  | $              | 2,965   |                |  | $             

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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES
 TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 4 - Bank Facilities

The Companys principal
 operating subsidiary, Stater Bros. Markets, signed a credit facility with Bank of America N.A. on
 August 6, 1999. The credit facility, as amended December 13, 2001, provides for (i) a $50.0 million
 three-year revolving loan facility and (ii) a $25.0 million three-year letter of credit facility and
 (iii) a Revolving Loan Commitment L/C Sublimit which is defined as an amount equal to the lesser
 of (a) the Revolving Loan Commitment and (b) $15,000,000. The Revolving Loan Commitment L/C Sublimit
 is part of, and not in addition to, the Revolving Loan Commitment. Borrowings under the revolving loan
 facility are unsecured and expected to be used for certain working capital and corporate
 purposes. Letters of credit under the letter of credit facility are expected to be used to support
 the purchase of inventory, obligations incurred in connection with the construction of stores,
 workers compensation insurance obligations and security for certain rent obligations.

The availability of the loans and
 letters of credit are subject to certain sublimits and other borrowing restrictions.

Indebtedness of Stater Bros. Markets
 under the credit facility is guaranteed by Stater Bros. Development, Inc., a subsidiary of the Company, and
 any subsidiaries that Stater Bros. Markets or Stater Bros. Development, Inc. acquires or forms after the
 date of the credit facility.

Loans under the credit facility
 bear interest at a rate based upon either (i) the Base Rate (defined as the higher of (a) the federal
 funds rate plus 0.50% and (b) the rate of interest publicly announced by Bank of America as its reference
 rate), plus 1.00%, or (ii) the Offshore Rate (defined as the average British Bankers
 Association Interest Settlement Rate for deposits in dollars, adjusted for the maximum reserve requirement
 for Eurocurrency funding), plus 2.25%. For Offshore Rate Loans, the Offshore Rate will be applied in
 consecutive periods of the earlier of (a) the maturity date of the loan or (b) periods, as selected by
 Stater Bros. Markets of one, two, three or six months.

The revolving loan facility, as
 amended January 18, 2002, will cease to be available and will be payable in full on March 31, 2003. Letters
 of credit under the credit facility can be issued until March 31, 2004. The loans under the revolving loan
 facility must be repaid for a period of ten consecutive days semi-annually.

Loans under the revolving loan
 facility may be repaid and re-borrowed. The loans under the revolving loan facility may be prepaid at
 any time without penalty, subject to certain minimums and payment of any breakage and re-deployment costs
 in the case of loans based on the offshore rate. The commitments under the credit facility may be
 reduced by Stater Bros. Markets. Stater Bros. Markets will be required to pay a commitment fee equal to
 0.25% per annum on the actual daily unused portion of the revolving loan facility and the letter of
 credit facility, payable quarterly in arrears. Outstanding letters of credit under the credit facility
 are subject to a fee of 1.50% per annum on the face amount of such letters of credit, payable quarterly
 in arrears. The Company will be required to pay standard fees charged by Bank of America with respect
 to the issuance, negotiation, and amendment of commercial letters of credit issued under the letter of
 credit facility.

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##### Table of Contents



STATER BROS. HOLDINGS INC.NOTES
 TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 4 - Bank Facilities (contd.)

Availability of the loans and
 letters of credit under the credit facility is subject to a monthly borrowing base test based on
 inventory. The credit facility requires Stater Bros. Markets to meet certain financial tests, including
 minimum net worth and minimum EBITDA tests. The credit facility contains covenants which, among other
 things, will limit indebtedness, liens, guarantee obligations, mergers, consolidations, liquidations and
 dissolutions, asset sales, leases, investments, loans and advances, transactions with affiliates, sale
 and leaseback, other matters customarily restricted in such agreements and modifications to the holding
 company status of the Company.

The credit facility also contains
 covenants that apply to the Company and the Company is a party to the credit facility for purposes of
 these covenants. These covenants, among other things, limit dividends and other payments in respect of
 the Companys capital stock, prepayments and redemptions of the exchange notes and other debt, and limit
 indebtedness, investments, loans and advances by the Company.

The credit facility requires the
 Company and Stater Bros. Markets to comply with certain covenants intended to ensure that their legal
 identities remain separate.

The credit facility contains
 customary events of default, including payment defaults; material inaccuracies in representations and
 warranties; covenant defaults; cross-defaults to certain other indebtedness; certain bankruptcy events;
 certain ERISA events; judgment; defaults; invalidity of any guaranty; failure of Jack H. Brown to be
 Chairman of the Board and Chief Executive Officer of Stater Bros. Markets; and change of
 control.

The Company did not have
 short-term borrowings outstanding at September 24, 2000, September 30, 2001 and September 29, 2002. The
 Company did not incur any short-term borrowings during fiscal years 2000, 2001 and 2002.

As of September 29, 2002, for purposes
 of the credit facility with Bank of America, the Company was in compliance with all restrictive covenants
 and exceeded the minimum net worth covenant by approximately $64.3 million and exceeded minimum inventory
 coverage by approximately $49.6 million. The minimum EBITDA (as defined) covenant measurement
 period began (as amended) in the quarter ending June 25, 2000, and requires an annualized minimum EBITDA, as
 amended January 18, 2002, of $85.0 million. As of September 29, 2002, Stater Bros. Markets exceeded
 minimum annualized EBITDA by approximately $18.5 million.

As of September 29, 2002, for purposes
 of the credit facility with Bank of America, the Company was in compliance with all restrictive
 covenants.

The Company is also subject to
 certain covenants associated with its 10.75% Senior Notes due 2006. As of September 29, 2002, the Company
 was in compliance with all such covenants. However, there can be no assurance that the Company will be
 able to achieve the expected operating results or implement the capital expenditure strategy upon which
 future compliance with such covenants is based.

F-12



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##### Table of Contents



STATER BROS. HOLDINGS
 INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 5 - Leases

The Company
 leases the majority of its retail stores, offices, warehouses and distribution facilities.
 Certain leases provide for additional rents based on sales. Primary lease terms
 range from 10 to 99 years and substantially all leases provide for renewal options.

As of September
 24, 2000, a portion of the Companys lease obligations were guaranteed by Petrolane
 Incorporated (Petrolane) or its successor. The leases guaranteed by
 Petrolane had initial terms of 20 years and expired in 2003. Lease payments for
 the properties subject to the Petrolane guarantees were approximately $10.0 million
 per year. Under the terms of the agreement related to the Companys acquisition
 of Stater Bros. Markets from Petrolane in 1983, as amended in 1985, Stater Bros.
 Markets was required to make annual deposits into a lease guarantee escrow account.
 In addition, 10 shares of Stater Bros. Markets $11.00 Cumulative Redeemable
 Preferred Stock due 2003 were held by Petrolane in connection with the lease guarantees.

During the
 first quarter of fiscal 2001, Stater Bros. Markets redeemed all 10 outstanding shares
 of its $11.00 Cumulative Redeemable Preferred Stock due 2003 from Texas Eastern
 Corporation, Petrolanes assignee of such preferred stock. The Petrolane lease
 guarantees were terminated in exchange for a $400,000 fee and a letter of credit
 was issued in favor of Texas Eastern to secure a portion of the remaining lease
 payments through 2003. As part of these transactions, the lease guarantee escrow
 account was terminated and the $13.2 million in such account was released to Stater
 Bros. Markets. All of the store leases that had been guaranteed by Petrolane were
 extended for an additional five years following expiration of their respective initial
 terms in 2003.

F-13



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##### Table of Contents



STATER BROS. HOLDINGS
 INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 5 - Leases (contd.)

Following
 is a summary of future minimum lease payments as of September 29, 2002:



|Fiscal Year                             |                | CapitalLeases |        | OperatingLeasesMinimumPayment
|--------------------------------------- | -------------- | ------------- | ------ | -----------------------------
|                                        |                |               |        |                              
|                                        | (In thousands)
|2003                                    |                | $             | 3,013  |                              
|2004                                    |                |               | 2,781  |                              
|2005                                    |                |               | 2,453  |                              
|2006                                    |                |               | 2,225  |                              
|2007                                    |                |               | 2,139  |                              
|Thereafter                              |                |               | 11,040 |                              
|                                        |                |               |        |                              
|Total minimum lease payments            |                |               | 23,651 |                              
|                                        |                |               |        |                              
|Less amounts representing interest      |                |               | 11,553 |                              
|                                        |                |               |        |                              
|Present value of minimum lease payments |                |               | 12,098 |                              
|Less current portion                    |                |               | 1,117  |                              
|                                        |                |               |        |                              
|Long-term portion                       |                | $             | 10,981 |                              
|                                        |                |               |        |                              

Rental expense
 and sublease income were as follows:



|                       | Sept. 24, 2000 |        | Sept. 30, 2001 |  | Sept. 29, 2002
|---------------------- | -------------- | ------ | -------------- |  | --------------
|                       |                |        |                |  |               
|                       | (In thousands)
|                       |                |        |                |  |               
|Minimum rentals        | $              | 24,280 |                |  | $             
|Rentals based on sales | $              | 10,318 |                |  | $             
|Sublease income        | $              | 970    |                |  | $             

Aggregate
 sublease income to be received subsequent to September 29, 2002 is approximately
 $2,384,000.

Note 6 - Preferred Stock

During fiscal
 2001, the Company paid all cumulative deferred dividends and redeemed all outstanding
 $11.00 Cumulative Redeemable Preferred Stock due 2003 of Stater Bros. Markets (see
 Note 5).

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##### Table of Contents



STATER BROS. HOLDINGS
 INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 7 - Income Taxes

The provision
 for income taxes (benefit) consisted of the following:



|                             | Sept. 24, 2000 |        |   | Sept. 30, 2001 |  | Sept. 29, 2002
|---------------------------- | -------------- | ------ | - | -------------- |  | --------------
|                             |                |        |   |                |  |               
|                             | (In thousands)
|Current                      |                |        |   |                |  |               
|Federal                      | $              |       |   |                |  | $             
|State                        |                |       |   |                |  |               
|                             |                |        |   |                |  |               
|                             |                |       |   |                |  |               
|                             |                |        |   |                |  |               
|Deferred                     |                |        |   |                |  |               
|Federal                      |                | (4,810 | ) |                |  |               
|State                        |                | (559   | ) |                |  |               
|                             |                |        |   |                |  |               
|                             |                | (5,369 | ) |                |  |               
|                             |                |        |   |                |  |               
|Income tax expense (benefit) | $              | (5,369 | ) |                |  | $             
|                             |                |        |   |                |  |               

Federal and
 State income taxes benefit for fiscal year ended September 24, 2000 is exclusive
 of the income tax expense associated with the extraordinary gain from the early
 extinguishment of debt. Such Federal and State income tax expense in 2000 amounted
 to $605,000 and $168,000, respectively.

A reconciliation
 of the provision for income taxes to amounts computed at the federal statutory rate
 is as follows:



|                                                            | Sept. 24, 2000 |      | Sept. 30, 2001 |  | Sept. 29, 2002 |     
|----------------------------------------------------------- | -------------- | ---- | -------------- |  | -------------- | ----
|                                                            |                |      |                |  |                |     
|Statutory federal income tax rate                           |                | 35.0 | %              |  |                | 35.0
|State franchise tax rate, net of federal income tax benefit |                | 2.8  |                |  |                | 5.8 
|Tax credits                                                 |                | 4.6  |                |  |                | (4.6
|Other                                                       |                |     |                |  |                | 4.8 
|                                                            |                |      |                |  |                |     
|                                                            |                | 42.4 | %              |  |                | 41.0
|                                                            |                |      |                |  |                |     

Components of deferred income taxes are
 as follows:



|                                              | Sept. 24, 2000 |        | Sept. 30, 2001 |  | Sept. 29, 2002
|--------------------------------------------- | -------------- | ------ | -------------- |  | --------------
|                                              |                |        |                |  |               
|Deferred income tax assets:                   | (In thousands)
|Self-insurance reserves                       | $              | 6,290  |                |  | $             
|Pension and vacation liabilities              |                | 3,425  |                |  |               
|Inventories                                   |                | 1,495  |                |  |               
|Investment in unconsolidated affiliate        |                | 1,073  |                |  |               
|Income deferred for book purposes             |                | 2,789  |                |  |               
|Tax credits and operating loss carry forwards |                | 8,954  |                |  |               
|                                              |                |        |                |  |               
|Total deferred income tax assets              |                | 24,026 |                |  |               
|Deferred income tax liabilities:              |                |        |                |  |               
|Property and equipment                        |                | (4,090 | )              |  |               
|Other assets                                  |                | (2,058 | )              |  |               
|Investment in unconsolidated affiliate        |                |       |                |  |               
|Other, net                                    |                | (3,426 | )              |  |               
|                                              |                |        |                |  |               
|Total deferred income tax liabilities         |                | (9,574 | )              |  |               
|                                              |                |        |                |  |               
|Net deferred income tax assets                | $              | 14,452 |                |  | $             
|                                              |                |        |                |  |               

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##### Table of Contents



STATER BROS. HOLDINGS
 INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 7 - Income Taxes (contd.)

Although there
 can be no assurances as to future taxable income of the Company, the Company believes
 that its expectations of future taxable income, when combined with the income taxes
 paid in prior years, will be adequate to realize the deferred income tax assets.

Note 8 - Retirement Plans

Pension
 Plan     The Company
 has a noncontributory defined benefit pension plan covering substantially all non-union
 employees. The plan provides for benefits based on an employees compensation
 during the three years before retirement. The Companys funding policy for
 this plan is to contribute annually at a rate that is intended to provide sufficient
 assets to meet future benefit payment requirements.

Net periodic
 pension cost included the following components:



|                                                 | Sept. 24, 2000 |        | Sept. 30, 2001 |  | Sept. 29, 2002
|------------------------------------------------ | -------------- | ------ | -------------- |  | --------------
|                                                 |                |        |                |  |               
|                                                 | (In thousands)
|Service cost - benefits earned during the period | $              | 898    |                |  | $             
|Interest cost on projected benefit obligation    |                | 1,688  |                |  |               
|Actual return on assets                          |                | (1,248 | )              |  |               
|Net amortization and deferral                    |                | 27     |                |  |               
|Recognized gains or losses                       |                | 203    |                |  |               
|Prior service cost recognized                    |                | (5     | )              |  |               
|                                                 |                |        |                |  |               
|Net periodic pension cost                        | $              | 1,563  |                |  | $             
|                                                 |                |        |                |  |               
|Assumptions used for accounting were:            |                |        |                |  |               
|Discount rate                                    |                | 7.75   | %              |  |               
|Rate of increase in compensation levels          |                | 5.00   | %              |  |               
|Expected long-term rate of return on assets      |                | 9.00   | %              |  |               

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##### Table of Contents



STATER BROS. HOLDINGS
 INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 8 - Retirement Plans (contd.)

Pension
 Plan (contd.)     The
 following table sets forth the plans funded status and amounts recognized
 in the Companys balance sheet at:



|                                                          | Sept. 24, 2000 |         | Sept. 30, 2001 |  | Sept. 29, 2002
|--------------------------------------------------------- | -------------- | ------- | -------------- |  | --------------
|                                                          |                |         |                |  |               
|                                                          | (In thousands)
|Actuarial present value of benefit obligations:           |                |         |                |  |               
|Vested benefit obligation                                 | $              | 16,284  |                |  | $             
|                                                          |                |         |                |  |               
|Accumulated benefit obligation                            | $              | 16,326  |                |  | $             
|                                                          |                |         |                |  |               
|Projected benefit obligation                              | $              | (24,259 | )              |  | $             
|Plan assets
 at fair value, primarily notes and bonds     |                | 15,227  |                |  |               
|                                                          |                |         |                |  |               
|Projected benefit obligation
 in excess of plan assets    |                | (9,032  | )              |  |               
|Unrecognized net loss                                     |                | 5,695   |                |  |               
|Unrecognized prior service cost                           |                | (51     | )              |  |               
|Unrecognized net obligations
 established October 1, 1987 |                | 108     |                |  |               
|                                                          |                |         |                |  |               
|Pension liability recognized in the balance sheet         | $              | (3,280  | )              |  | $             
|                                                          |                |         |                |  |               

Expenses recognized
 for this retirement plan were $1,678,000, $1,795,000 and $2,418,000 in 2000, 2001
 and 2002, respectively.

Profit
 Sharing Plan     The Company
 has a noncontributory defined contribution profit sharing plan covering substantially
 all non-union employees. Union employees may participate if their collective bargaining
 agreement specifically provides for their inclusion. The Company may contribute
 up to 7.5% of total compensation paid or accrued during the year to each plan participant
 subject to limitations imposed by the Internal Revenue Code. The Company recognized
 expenses for this plan in the amount of $425,000, $787,000 and $550,000 in 2000,
 2001 and 2002, respectively.

Multi-Employer
 Plans     The Company
 also contributes to multi-employer defined benefit retirement plans in accordance
 with the provisions of the various labor agreements that govern the plans. Contributions
 to these plans are generally based on the number of hours worked. Information for
 these plans as to vested and non-vested accumulated benefits and net assets available
 for benefits is not available.

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##### Table of Contents



STATER BROS. HOLDINGS
 INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 8 - Retirement Plans (contd.)

Multi-Employer
 Plans (contd.)
      The Companys expense for these retirement plans and
 health and welfare plans consisted of the following:



|                                  | Sept. 24, 2000 |        | Sept. 30, 2001 |  | Sept. 29, 2002
|--------------------------------- | -------------- | ------ | -------------- |  | --------------
|                                  |                |        |                |  |               
|                                  | (In thousands)
|Multi-Employer Pension Plans      | $              | 8,312  |                |  | $             
|Multi-Employer Health and Welfare |                | 56,552 |                |  |               
|                                  |                |        |                |  |               
|Total Multi-Employer Benefits     | $              | 64,864 |                |  | $             
|                                  |                |        |                |  |               

The Companys
 employer contributions fluctuate as a result of periodic resumptions and
 suspensions of employer contributions to collective bargaining trusts.

Note 9 - Labor Relations

The Company
 and other major supermarket employers in Southern California negotiated a four-year
 contract, beginning October 1999 and expiring in October 2003, with the United Food
 and Commercial Workers Union. The Companys collective bargaining agreement
 with the International Brotherhood of Teamsters was renewed in September 2002 and
 expires in September 2005. Management believes it has good relations with its employees.

Note 10 - Fair Value of Financial Instruments

The following
 methods and assumptions were used to estimate the fair value of each class of financial
 instruments for which it is practicable to estimate that value:

Cash and
 Cash Equivalents
      The carrying amount approximates fair value because of
 the short-term maturity of these instruments.

Receivables
      The carrying amount approximates fair value because
 of the short-term maturity of these instruments.

Long-Term
 Debt
      The fair value of the 10.75% Notes, is based on quoted market prices.
 Although market quotes for the fair value of the Companys capitalized lease
 obligations and the 5% Subordinated Note are not readily available, the Company
 believes the stated value approximates fair value.

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##### Table of Contents



STATER BROS. HOLDINGS
 INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 10 - Fair Value of Financial Instruments
 (contd.)

The estimated
 fair values of the Companys financial instruments are as follows:



|                              | As of             
|----------------------------- | ------------------
|                              | September 29, 2002
|                              |                   
|                              | (In thousands)    
|                              | CarryingAmount    
|                              |                   
|Cash and cash equivalents     | $                 
|Receivables                   | $                 
|Long-term debt                | $                 
|Capitalized lease obligations | $                 

Note 11 - Litigation Matters

In the ordinary
 course of its business, the Company is party to various legal actions which the
 Company believes are incidental to the operation of the business of the Company
 and its subsidiaries. The Company records an appropriate provision when the occurrence
 of loss is probable and can be reasonably estimated. The Company believes that
 the outcome of such legal proceedings to which the Company is currently a party
 will not have a material adverse effect upon its results of operations or its consolidated
 financial condition.

In September
 of 2000, two lawsuits were filed against Stater Bros. Markets in the State of California
 Superior Court, County of San Bernardino alleging that certain of its employees
 are entitled to overtime wages. The two cases were purportedly filed on behalf
 of certain Stater Bros. Markets store managers and assistant store managers, respectively,
 alleging that such workers are non-exempt under California labor laws and are therefore
 entitled to overtime wages. The Companys position is that the store managers
 and assistant managers are highly compensated employees with duties and responsibilities
 which place them in the exempt category under California law and that such employees
 are not entitled to overtime wages. This is consistent with the position taken
 by other supermarket chains in California. The Company believes it has complied
 in all respects with California laws and regulations relative to employee wages
 and that each of these Complaints is without merit.

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##### Table of Contents



STATER BROS. HOLDINGS
 INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 12 - Acquisition

On May 7,
 1999, the Company entered into an agreement with Albertsons to acquire 43
 supermarkets and one future store site. The stores were formerly operated by Albertsons
 or Lucky Stores and were divested in connection with the merger of Albertsons
 and American Stores Company, the parent of Lucky Stores. The supermarkets
 were acquired sequentially over a twenty-four day period beginning August 9, 1999.
 The purchase price for the property, plant, equipment and inventories of 43 supermarkets
 and one future store site was approximately $134.0 million plus capital lease obligations
 assumed of $13.3 million and approximately $2.2 million of capitalized costs related
 to the transfer of ownership of the supermarkets. The acquisition was accounted
 for using the purchase method of accounting and the results of operations of the
 43 supermarkets are included in the Companys fiscal 1999 consolidated results
 of operations from the acquisition date of each supermarket.

Note 13 - Extraordinary Gain (Loss)

In fiscal
 2000, the Company incurred an extraordinary gain of $1.1 million ($1.9 million less
 tax effect) from early extinguishment of $11.0 million of 10.75% Senior Notes due
 2006.

Note 14 - Stock Redemption

During fiscal
 2002, the Company obtained consent of the holders of its 10.75% Senior Notes due
 2006 to make a distribution and payment to stockholders consisting of $25.0 million
 in cash and a subordinated note in the principal amount of $20.0 million. On January
 22, 2002, the Company redeemed 11,699 shares of the Companys stock previously
 held by La Cadena Investments (La Cadena), the sole shareholder of the Company,
 and made a cash payment of $20.0 million and executed a $20.0 million subordinated
 note due March 31, 2007 to a former partner of La Cadena. The subordinated note
 bears interest at a rate of 5.0% per annum, payable semi-annually. On February
 1, 2002, the Company paid a $4.5 million dividend to La Cadena. Fees for consent
 of the holders of its 10.75% Senior Notes and fees and expenses of the transaction,
 including a $500,000 financial advisory service fee to La Cadena, were approximately
 $5.0 million.

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##### Table of Contents



STATER BROS. HOLDINGS
 INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (contd.)

Note 15  Phantom Stock Plan

The Company
 maintains a phantom stock plan for certain executives of Stater Bros. Markets.
 Existing stockholders and partners of La Cadena are not eligible to receive awards.
 Awards under the plan are for units that have an assigned value. Awards under
 the plan vest after five years, except that upon a participants early retirement,
 permanent total disability or death, awards are considered partially vested at the
 rate of 20% for each year of employment following the grant. If a participant voluntarily
 terminates his or her employment, or is terminated for cause, any unvested awards
 under the plan will terminate and no payment will be made thereunder. As of September
 30, 2001 and September 29, 2002, there were 663,000 and 668,000 units outstanding,
 respectively. The Company recognized an expense for the plan of $4.8 million and
 $6.0 million in 2001 and 2002, respectively.

Note 16  Quarterly Results (unaudited)

Quarterly
 results for fiscal 2000, 2001 and 2002 are as follows:

(In thousands)




|                        |  |       |           |        |  | Gross         |         | Operating     |  | Net
|----------------------- |  | ----- | --------- | ------ |  | ------------- | ------- | ------------- |  | ---
|                        |  | Sales |           | Profit |  | Profit (loss) |         | Income (loss)
|                        |  |       |           |        |  |               |         |              
|Fiscal 2000 Quarters    |  |       |           |        |  |               |         |               |  |    
|13 weeks ended 12/26/99 |  | $     | 597,168   |        |  | $             | 155,822 |               |  | $  
|13 weeks ended 03/26/00 |  |       | 607,286   |        |  |               | 136,691 |               |  |    
|13 weeks ended 06/25/00 |  |       | 607,300   |        |  |               | 152,503 |               |  |    
|13 weeks ended 09/24/00 |  |       | 605,956   |        |  |               | 153,626 |               |  |    
|                        |  |       |           |        |  |               |         |               |  |    
|                        |  | $     | 2,417,710 |        |  | $             | 598,642 |               |  | $  
|                        |  |       |           |        |  |               |         |               |  |    
|Fiscal 2001 Quarters    |  |       |           |        |  |               |         |               |  |    
|13 weeks ended 12/24/00 |  | $     | 624,849   |        |  | $             | 157,892 |               |  | $  
|13 weeks ended 03/25/01 |  |       | 612,305   |        |  |               | 155,670 |               |  |    
|13 weeks ended 06/24/01 |  |       | 639,925   |        |  |               | 166,119 |               |  |    
|14 weeks ended 09/30/01 |  |       | 696,834   |        |  |               | 183,167 |               |  |    
|                        |  |       |           |        |  |               |         |               |  |    
|                        |  | $     | 2,573,913 |        |  | $             | 662,848 |               |  | $  
|                        |  |       |           |        |  |               |         |               |  |    
|Fiscal 2002 Quarters    |  |       |           |        |  |               |         |               |  |    
|13 weeks ended 12/30/01 |  | $     | 662,587   |        |  | $             | 176,163 |               |  | $  
|13 weeks ended 03/31/02 |  |       | 654,213   |        |  |               | 172,813 |               |  |    
|13 weeks ended 06/30/02 |  |       | 672,779   |        |  |               | 177,142 |               |  |    
|13 weeks ended 09/29/02 |  |       | 676,767   |        |  |               | 182,702 |               |  |    
|                        |  |       |           |        |  |               |         |               |  |    
|                        |  | $     | 2,666,346 |        |  | $             | 708,820 |               |  | $  
|                        |  |       |           |        |  |               |         |               |  |    



|(1) | Reflects acquisition
 integration expenses of $4,594 ($2,646 net of tax) for fiscal 2000 in connection
 with the acquisition of supermarkets
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) | Reflects an
 extraordinary gain of $1,896 ($1,123 net of tax) in connection with the early extinguishment
 of debt.                         

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