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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended September 30,
2003



or



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



For the transition period from
             to



Commission File Number: 333-63722



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MICHAEL FOODS, INC.

(Exact name of registrant as specified in its charter)



|Minnesota                                                      |  | 41-0498850                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|301 Carlson Parkway Suite 400 Minnetonka, MN                   |  | 55305                               
|(Address of principal executive offices)                       |  | (Zip code)                          



(952) 258-4000

(Registrants telephone number, including area code)



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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 (Exchange Act) during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes ̈No



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



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PART I - FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



MICHAEL FOODS, INC.

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

Condensed Consolidated Balance Sheets

(Unaudited, dollars in thousands)



|                                                                               |  | September 30, 2003 |         |   | December 31, 2002 |  
|------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ----------------- | -
|ASSETS                                                                         |  |                    |         |   |                   |  
|Current assets                                                                 |  |                    |         |   |                   |  
|Cash and equivalents                                                           |  | $                  | 25,316  |   |                   | $
|Accounts receivable, less allowances                                           |  |                    | 106,162 |   |                   |  
|Inventories                                                                    |  |                    | 89,681  |   |                   |  
|Prepaid expenses and other                                                     |  |                    | 10,921  |   |                   |  
|Assets held for sale                                                           |  |                    | 58,909  |   |                   |  
|                                                                               |  |                    |         |   |                   |  
|Total current assets                                                           |  |                    | 290,989 |   |                   |  
|Property, plant and equipment, net                                             |  |                    | 230,725 |   |                   |  
|Other assets                                                                   |  |                    |         |   |                   |  
|Goodwill                                                                       |  |                    | 336,094 |   |                   |  
|Joint ventures and other assets                                                |  |                    | 33,050  |   |                   |  
|                                                                               |  |                    |         |   |                   |  
|                                                                               |  |                    | 369,144 |   |                   |  
|                                                                               |  |                    |         |   |                   |  
|                                                                               |  | $                  | 890,858 |   |                   | $
|                                                                               |  |                    |         |   |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                           |  |                    |         |   |                   |  
|Current liabilities                                                            |  |                    |         |   |                   |  
|Current maturities of long-term debt                                           |  | $                  | 13,841  |   |                   | $
|Accounts payable                                                               |  |                    | 66,931  |   |                   |  
|Accrued liabilities                                                            |  |                    |         |   |                   |  
|Compensation                                                                   |  |                    | 14,076  |   |                   |  
|Insurance                                                                      |  |                    | 8,841   |   |                   |  
|Customer programs                                                              |  |                    | 40,983  |   |                   |  
|Income taxes                                                                   |  |                    | 10,748  |   |                   |  
|Interest                                                                       |  |                    | 14,615  |   |                   |  
|Hedging derivative liability                                                   |  |                    | 6,943   |   |                   |  
|Other                                                                          |  |                    | 12,822  |   |                   |  
|Liabilities related to business to be sold                                     |  |                    | 6,813   |   |                   |  
|                                                                               |  |                    |         |   |                   |  
|Total current liabilities                                                      |  |                    | 196,613 |   |                   |  
|Long-term debt, less current maturities                                        |  |                    | 428,284 |   |                   |  
|Deferred income taxes                                                          |  |                    | 55,127  |   |                   |  
|Commitments and contingencies                                                  |  |                    |        |   |                   |  
|Non-controlling interest                                                       |  |                    |        |   |                   |  
|Shareholders equity                                                           |  |                    |         |   |                   |  
|Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding |  |                    |        |   |                   |  
|Additional paid-in capital                                                     |  |                    | 147,498 |   |                   |  
|Retained earnings                                                              |  |                    | 63,991  |   |                   |  
|Accumulated other comprehensive loss                                           |  |                    | (655    | ) |                   |  
|                                                                               |  |                    |         |   |                   |  
|                                                                               |  |                    | 210,834 |   |                   |  
|                                                                               |  |                    |         |   |                   |  
|                                                                               |  | $                  | 890,858 |   |                   | $
|                                                                               |  |                    |         |   |                   |  



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



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MICHAEL FOODS, INC.

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

Condensed Consolidated Statements of Operations

Three months ended September 30,

(Unaudited, dollars in thousands)



|                                             |  | 2003 |         | 2002
|-------------------------------------------- |  | ---- | ------- | ----
|Net sales                                    |  | $    | 346,065 |     
|                                             |  |     
|Cost of sales                                |  |      | 286,900 |     
|                                             |  |      |         |     
|Gross profit                                 |  |      | 59,165  |     
|                                             |  |     
|Selling, general and administrative expenses |  |      | 31,227  |     
|                                             |  |      |         |     
|Operating profit                             |  |      | 27,938  |     
|                                             |  |     
|Interest expense, net                        |  |      | 11,873  |     
|                                             |  |      |         |     
|Earnings before income taxes                 |  |      | 16,065  |     
|                                             |  |     
|Income tax expense                           |  |      | 6,297   |     
|                                             |  |      |         |     
|Net earnings                                 |  | $    | 9,768   |     
|                                             |  |      |         |     



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



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MICHAEL FOODS, INC.

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

Condensed Consolidated Statements of Operations

Nine months ended September 30,

(Unaudited, dollars in thousands)



|                                             |  | 2003 |         | 2002
|-------------------------------------------- |  | ---- | ------- | ----
|Net sales                                    |  | $    | 968,209 |     
|                                             |  |     
|Cost of sales                                |  |      | 800,753 |     
|                                             |  |      |         |     
|Gross profit                                 |  |      | 167,456 |     
|                                             |  |     
|Selling, general and administrative expenses |  |      | 91,545  |     
|                                             |  |      |         |     
|Operating profit                             |  |      | 75,911  |     
|                                             |  |     
|Interest expense, net                        |  |      | 35,840  |     
|                                             |  |      |         |     
|Earnings before income taxes                 |  |      | 40,071  |     
|                                             |  |     
|Income tax expense                           |  |      | 15,556  |     
|                                             |  |      |         |     
|Net earnings                                 |  | $    | 24,515  |     
|                                             |  |      |         |     



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



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MICHAEL FOODS, INC.

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

Condensed Consolidated Statements of Cash Flows

Nine months ended September 30,

(Unaudited, dollars in thousands)



|                                                       |  | 2003 |         |   | 2002 |  
|------------------------------------------------------ |  | ---- | ------- | - | ---- | -
|Net cash provided by operating activities              |  | $    | 98,379  |   |      | $
|                                                       |  |     
|Cash flows from investing activities:                  |  |      |         |   |      |  
|Capital expenditures                                   |  |      | (22,802 | ) |      |  
|Business acquisition                                   |  |      |        |   |      |  
|Investments in joint ventures and other assets         |  |      |        |   |      |  
|                                                       |  |      |         |   |      |  
|Net cash used in investing activities                  |  |      | (22,802 | ) |      |  
|                                                       |  |     
|Cash flows from financing activities:                  |  |      |         |   |      |  
|Proceeds on notes payable and revolving line of credit |  |      |        |   |      |  
|Payments on long-term debt                             |  |      | (70,951 | ) |      |  
|Capital contribution from parent                       |  |      |        |   |      |  
|                                                       |  |      |         |   |      |  
|Net cash used in financing activities                  |  |      | (70,951 | ) |      |  
|                                                       |  |     
|Effect of exchange rate changes on cash                |  |      | 118     |   |      |  
|                                                       |  |      |         |   |      |  
|Net increase in cash and equivalents                   |  |      | 4,744   |   |      |  
|                                                       |  |     
|Cash and equivalents at beginning of period            |  |      | 20,572  |   |      |  
|                                                       |  |      |         |   |      |  
|Cash and equivalents at end of period                  |  | $    | 25,316  |   |      | $
|                                                       |  |      |         |   |      |  



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



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MICHAEL FOODS, INC.

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

Notes to Condensed Consolidated Financial Statements

(Unaudited)



NOTE A  2001 MERGER



On April 10, 2001, Michael Foods, Inc. and its subsidiaries (Michael Foods, Company, we, us, our) was acquired
in a transaction (the Merger) led by an investor group comprised of a management group led by Michael Foods Chairman, President and Chief Executive Officer, Gregg Ostrander; affiliates of Jeffrey Michael, a member of the board of
directors; and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated (collectively, M-Foods Investors, LLC). Michael Foods, Inc. is a wholly-owned subsidiary of
M-Foods Holdings, Inc., which is a subsidiary of M-Foods Investors, LLC. Under the terms of the Merger Agreement, all outstanding shares of Michael Foods common stock were converted into the right to receive $30.10 per share in cash, or value equal
thereto, and all outstanding stock options were converted into the right to receive, in cash, $30.10 per share reduced by the exercise price per share for all shares subject to such stock options. The purchase of the outstanding shares was financed
through equity financing of approximately $175,000,000, a senior secured credit facility of up to $470,000,000 at market-based variable interest rates, and $200,000,000 of senior subordinated notes at an 11.75% annual interest rate. As a result of
the Merger, the stock of pre-merger Michael Foods (Predecessor) is no longer publicly traded and, therefore, earnings per share calculations are no longer included for financial statement presentation.



Immediately after the close of the Merger, we contributed the assets of our Dairy Products
Division into two limited liability companies, M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC (collectively, the Dairy LLCs) and in exchange received voting preferred and voting common units from these entities equal to the fair value of
the net assets contributed, which collectively was approximately $35,800,000. The preferred units issued to us by the Dairy LLCs have an annual 10% preferred return guarantee and represent 100% of the preferred units issued and outstanding. In
addition, we received 5% of the common units issued by the Dairy LLCs, which represents 100% of the voting common units issued and outstanding. These common units have a stated value of $25,000. The remaining 95% of the common units, which are
non-voting, are owned by M-Foods Dairy Holdings, LLC, another entity which is owned by the same owners or affiliates of such owners, in the same proportion, as the unit holders of M-Foods Investors, LLC. The common unit interests owned by M-Foods
Dairy Holdings, LLC were issued in exchange for $475,000 and are reflected as non-controlling interest in the accompanying consolidated balance sheet. See also Note D.



The 2001 Merger was accounted for as a purchase in accordance with Accounting Principles Board Opinion 16, Business Combinations and
Emerging Issues Task Force Issue No. 88-16, Basis in Leveraged Buyout Transactions. Accordingly, the acquired assets and liabilities have been recorded at fair value for the interests acquired by new investors and at the carryover basis for
continuing investors. As a result, the assets and liabilities were assigned new values, which are part Predecessor cost and part fair value in the same proportions as the carryover basis of the residual interests retained by the continuing
management investors and continuing affiliate investors of the Michael family, and the new interests acquired by the new investors. The amount of carryover basis was reflected as a deemed dividend of $66,631,000.



NOTE B  SUBSEQUENT EVENT



On October 10, 2003, THL Food Products Holding Co. and its wholly owned subsidiary, THL Food
Products Co., entered into a merger agreement with M-Foods Holdings, Inc., among others, pursuant to which THL Food Products Holding Co. will acquire M-Foods Holdings, Inc. for approximately $1.05 billion, subject to certain adjustments. THL Food
Products Co. and THL Food Products Holding Co. are affiliates of Thomas H. Lee Partners, a Boston-based private equity firm. It is expected the merger transaction will be completed prior to year end.



NOTE C  BASIS OF PRESENTATION



The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.



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We utilize a fiscal year consisting of either 52 or 53 weeks, ending on the Saturday nearest to December 31 each year.
The quarters ended September 30, 2003 and 2002 each included 13 weeks of operations. For clarity of presentation, the Company has described both periods presented as if the quarters ended on September 30th.



In the opinion of management, the unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations for the periods
indicated. The results of operations and cash flows of the Company for the period ended September 30, 2003 are not necessarily indicative of the results expected for the full year.



These unaudited interim consolidated financial statements should be read in conjunction with our consolidated financial statements and notes
thereto, contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.



In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations which provides accounting
requirements for retirement obligations associated with tangible long-lived assets. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and was adopted by the Company effective January 1, 2003. The adoption of SFAS No. 143 did
not have a material effect on our consolidated financial statements.



In June
2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at
fair value when the liability is incurred. Prior to the adoption of this standard, a liability for an exit cost, as defined by Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring), was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 was effective for the Company for exit plans or disposal activities initiated after
December 31, 2002. Effective January 1, 2003, we adopted the provisions of SFAS 146, which had no impact on our financial statements.



In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation elaborates on the disclosure requirements in the financial statements concerning obligations under certain guarantees. It also clarifies the requirements related to the recognition of liabilities by
a guarantor at the inception of certain guarantees. The disclosure requirements of this interpretation were effective for us on December 31, 2002. The adoption of this standard did not impact our financial statements.



FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), as amended, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN
46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial
statements with those of the business enterprise. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For variable
interest entities created before February 1, 2003, FIN 46 is effective for the first period ending after December 15, 2003. At September 30, 2003, we do not have ownership in any variable interest entities. We will apply the consolidation
requirements of FIN 46 in future periods should an interest in a variable interest entity be acquired.



In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 149 was effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on our financial
position or results of operations.



In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments
were classified as equity under previous guidance. SFAS No. 150 was effective for all financial instruments entered into or modified after May 31, 2003. Otherwise, it was effective on July 1, 2003. The adoption of SFAS No. 150 did not have a
material effect on our financial position or results of operations.



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NOTE D  ASSET PURCHASE



On August 26, 2002, we acquired the egg products assets of Canadian Inovatech Inc. for
approximately $18.0 million. The total purchase price was allocated to the acquired assets and liabilities based on their fair values at the acquisition date as determined by a third party appraisal firm. The allocation of the purchase price
resulted in goodwill of $4.8 million. We also entered into long-term leases for two plants operated by the seller. This entitys results of operations have been included in our operating results since the date of the asset purchase. Also, as a
result of this asset purchase, we own 67%, rather than 33%, of a Canadian egg products joint venture, Trilogy Egg Products, Inc. Hence, Trilogy became a consolidated entity under our financial reporting as of the date of the asset purchase.



The following unaudited pro forma statement of earnings information has been
prepared assuming the asset purchase had occurred on January 1, 2002. The net sales and earnings before income taxes for the nine months ended September 30, 2003 represent actual results for the period (dollars in thousands):



|                             |  | Nine months ended September 30, 2003 |         | Nine months ended September 30, 2002
|---------------------------- |  | ------------------------------------ | ------- | ------------------------------------
|Net sales                    |  | $                                    | 968,209 |                                     
|Earnings before income taxes |  |                                      | 40,071  |                                     



This unaudited pro forma information
is not necessarily indicative of the combined results of operations that would have occurred had the transaction occurred on the noted date, nor is it indicative of the results which may occur in the future.



NOTE E  OPERATING SEGMENT HELD FOR SALE



On October 15, 2003, we completed the sale of our Dairy Products Division operating segment
to Dean Foods Company for approximately $155 million. The Dairy Products Division is substantially made up of the assets of the Dairy LLCs. The Dairy Products Division processes and sells ice milk and ice cream mixes, creamers, milk and
specialty dairy products. In accordance with the transition services agreement, we will be compensated for certain transition services provided to the buyer for a period currently anticipated to be 12 to 18 months after the close of the transaction.
These transition services include services such as information technology, sales, customer service and procurement. By providing these transition services, we are deemed to have significant continuing involvement in the Dairy Products
Division operating segment. Therefore, we determined that the sale did not meet the accounting criteria for discontinued operations, but did meet the accounting criteria for classification as held for sale. Accordingly, the
related assets and liabilities of the Dairy Products Division operating segment were classified as current assets and liabilities held for sale at September 30, 2003, and any related depreciation and amortization of the assets was stopped beginning
in June 2003. The operations of the Dairy Products Division operating segment are included in the statement of earnings of the Company through September 30, 2003.



External net sales and earnings from the Dairy Products Division operating segment held for sale as of September 30, 2003 were as follows
(dollars in thousands):



|                             |  | Nine months ended September 30, 2003 |         | Nine months ended September 30, 2002
|---------------------------- |  | ------------------------------------ | ------- | ------------------------------------
|External net sales           |  | $                                    | 144,667 |                                     
|Earnings before income taxes |  |                                      | 11,439  |                                     



Assets and liabilities of the Dairy
Products Division operating segment classified as held for sale in the Consolidated Balance Sheet as of September 30, 2003 are as follows (dollars in thousands):



|                                     |  | September 30, 2003 |       
|------------------------------------ |  | ------------------ | ------
|Assets                               |  |                    |       
|Accounts receivable, less allowances |  | $                  | 12,720
|Inventories                          |  |                    | 7,485 
|Property, plant and equipment, net   |  |                    | 36,073
|Other assets                         |  |                    | 2,631 
|                                     |  |                    |       
|                                     |  | $                  | 58,909
|                                     |  |                    |       
|Liabilities                          |  |                    |       
|Accounts payable                     |  | $                  | 6,559 
|Accrued liabilities                  |  |                    | 4,385 
|Deferred income taxes                |  |                    | (4,606
|Non-controlling interest             |  |                    | 475   
|                                     |  |                    |       
|                                     |  | $                  | 6,813 
|                                     |  |                    |       



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NOTE F  OTHER FINANCIAL STATEMENT DATA



Inventories



Inventories, other than flocks, are stated at the lower of cost (determined on a first-in, first-out basis) or market. Flock inventory
represents the cost of purchasing and raising flocks to laying maturity, at which time their cost is amortized to operations over their expected useful life of generally one to two years, assuming no salvage value.



Inventories consisted of the following (dollars in thousands):



|                                   |  | September 30,2003 |        | December 31,2002
|---------------------------------- |  | ----------------- | ------ | ----------------
|Raw materials and supplies         |  | $                 | 15,024 |                 
|Work in process and finished goods |  |                   | 54,345 |                 
|Flocks                             |  |                   | 20,312 |                 
|                                   |  |                   |        |                 
|                                   |  | $                 | 89,681 |                 
|                                   |  |                   |        |                 



Goodwill



The change in the carrying amount of goodwill for the period ended September 30, 2003 is as
follows:



|Balance at December 31, 2002                                                                    |  | $ | 341,028 |  
|----------------------------------------------------------------------------------------------- |  | - | ------- | -
|Reduction related to resolution of certain tax contingencies recorded at the date of the Merger |  |   | (3,171  | )
|Goodwill related to Dairy Division (see Note E)                                                 |  |   | (1,763  | )
|                                                                                                |  |   |         |  
|Balance at September 30, 2003                                                                   |  | $ | 336,094 |  
|                                                                                                |  |   |         |  



NOTE
G  COMMITMENTS AND CONTINGENCIES



Potato Procurement Contract



We have a contract to purchase potatoes expiring in 2004 which will
supply approximately 45% and 40% of the Potato Products Divisions raw material needs in 2003 and 2004, respectively, at an approximate cost of $5.3 million each year.



Egg Procurement Contracts



We maintain egg procurement contracts with numerous cooperatives and egg producers throughout the Midwestern and Eastern United States and Canada which supply
approximately 50% of our egg requirements. Most of these contracts vary in length from 18 months to 7 years with prices primarily indexed to grain or Urner Barry egg market indices. No single egg supplier provides more than 10% of our egg
requirements. Based upon the best estimates available to us for grain and egg prices, we project that our purchases from our top five long-term contracted egg suppliers will approximate $141 million in 2003, $138 million in 2004, $82 million in
2005, $20 million in 2006, and $16 million in 2007. The 2003 amount will account for approximately 60% of our contracted egg purchases this year.



Patent Litigation



We have an exclusive license agreement for a patented process for the production and sale of extended shelf-life liquid egg products. Under the license agreement, we have the right to defend and prosecute infringement
of the underlying patents. We may offset 50% of our costs of defending the patents against royalty payments due to the patent holder - North Carolina State University. The U.S. Federal Court of Appeals has upheld the validity of the patents on two
separate occasions. In September 2000, the U.S. Patent and Trademark Office allowed product claims beyond the process claims previously allowed for the extended shelf-life egg product. These patents are scheduled to expire beginning in 2006.



In 2000, litigation was settled with one party related to the infringement of
these patents and a sub-license was issued to the infringing party granting them the right to manufacture and distribute extended shelf-life liquid whole egg product subject to a royalty payable to us and the patent holder on all future product
sold. In connection with this settlement, the patent holder received a lump sum payment for the past production and sale of the product and other matters related to the infringement.



We are continuing to pursue litigation related to other parties who we believe are infringing the product and process patents, including
Rose Acre Farms, Inc. and Cutler Egg Products, Inc. The patent infringement trial with Sunny Fresh Foods, Inc., a subsidiary of Cargill, Inc., concluded with a jury verdict issued on August 12, 2003. The jury found the licensed patents to be valid
and enforceable, but also found that Sunny Fresh Foods, Inc. did not infringe the patents. All post-trial motions were denied. We are pursuing the appeals process.



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Other Litigation



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



Other Matter



As of September 30, 2003, we have an approximate $3.7 million investment
recorded for Belovo S.A. (Belovo), a Belgium egg products company, which represents our approximate 36% interest accounted for under the equity method. Earlier in 2003, Belovo notified the Belgium government of a potential finished products
inventory contamination issue. Belovo is currently working with the Belgium government to resolve the status of inventory held in quarantine. The potential loss, if any, related to this matter has not been determined.



NOTE H  COMPREHENSIVE INCOME (LOSS)



The components of and changes in accumulated other comprehensive loss (AOCL), net of taxes,
during the nine months ended September 30, 2003 were as follows (dollars in thousands):



|                                          |  | Cash FlowHedges |        |   | Foreign Currency Translation |   | TotalAOCL | 
|----------------------------------------- |  | --------------- | ------ | - | ---------------------------- | - | --------- | 
|Balance at December 31, 2002              |  | $               | (7,799 | ) |                              | $ | 151       | 
|Foreign currency translation adjustment   |  |                 |       |   |                              |   | 2,711     | 
|Net unrealized change on cash flow hedges |  |                 | 4,282  |   |                              |   |          | 
|                                          |  |                 |        |   |                              |   |           | 
|Balance at September 30, 2003             |  | $               | (3,517 | ) |                              | $ | 2,862     | 
|                                          |  |                 |        |   |                              |   |           | 



Comprehensive income, net of taxes,
for the nine months ended September 30, 2003 and 2002 was as follows (dollars in thousands):



|Net income for the nine months ended September 30, 2003             |  |        |   |  | $ | 24,515 |  
|------------------------------------------------------------------- |  | ------ | - |  | - | ------ | -
|Net gains arising during the period from cash flow hedges:          |  |        |   |  |   |        |  
|Net unrealized derivative gains during period                       |  | 4,282  |   |  |   |        |  
|Foreign currency translation adjustment                             |  | 2,711  |   |  |   |        |  
|                                                                    |  |        |   |  |   |        |  
|Other comprehensive income                                          |  |        |   |  |   | 6,993  |  
|                                                                    |  |        |   |  |   |        |  
|Comprehensive income for the nine months ended September 30, 2003   |  |        |   |  | $ | 31,508 |  
|                                                                    |  |        |   |  |   |        |  
|Net income for the nine months ended September 30, 2002             |  |        |   |  | $ | 20,041 |  
|Net gains (losses) arising during the period from cash flow hedges: |  |        |   |  |   |        |  
|Net unrealized derivative losses during period                      |  | (1,211 | ) |  |   |        |  
|Foreign currency translation adjustment                             |  | 326    |   |  |   |        |  
|                                                                    |  |        |   |  |   |        |  
|Other comprehensive loss                                            |  |        |   |  |   | (885   | )
|                                                                    |  |        |   |  |   |        |  
|Comprehensive income for the nine months ended September 30, 2002   |  |        |   |  | $ | 19,156 |  
|                                                                    |  |        |   |  |   |        |  



10



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##### Table of Contents

NOTE I  BUSINESS SEGMENTS



We operate in four reportable segments  Egg Products, Refrigerated Distribution, Dairy
Products and Potato Products. See Note E regarding the sale of the Dairy Products Division operating segment. Certain financial information on our operating segments is as follows (unaudited, dollars in thousands):



|                                       |  | Company    
|-------------------------------------- |  | -----------
|                                       |  | EggProducts
|THREE MONTHS ENDED SEPTEMBER 30, 2003: |  |            
|External net sales                     |  | $          
|Intersegment sales                     |  |            
|Operating profit (loss)                |  |            
|Depreciation and amortization          |  |            
|                                       |  |            
|THREE MONTHS ENDED SEPTEMBER 30, 2002: |  |            
|External net sales                     |  | $          
|Intersegment sales                     |  |            
|Operating profit (loss)                |  |            
|Depreciation and amortization          |  |            
|                                       |  |            
|NINE MONTHS ENDED SEPTEMBER 30, 2003:  |  |            
|External net sales                     |  | $          
|Intersegment sales                     |  |            
|Operating profit (loss)                |  |            
|Depreciation and amortization          |  |            
|                                       |  |            
|NINE MONTHS ENDED SEPTEMBER 30, 2002:  |  |            
|External net sales                     |  | $          
|Intersegment sales                     |  |            
|Operating profit (loss)                |  |            
|Depreciation and amortization          |  |            



NOTE
J  SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION



Our revolving line of
credit, A and B term loans and senior subordinated notes have been guaranteed, on a joint and several basis, by us and our domestic subsidiaries. The revolving line of credit and A and B term loans are also guaranteed by our parent, M-Foods
Holdings, Inc.



The following condensed consolidating financial information
presents our consolidated balance sheet as of September 30, 2003 and December 31, 2002 and the statements of operations for the three and nine month periods ended September 30, 2003 and 2002 and statements of cash flows for the nine month periods
ended September 30, 2003 and 2002. These financial statements reflect Michael Foods, Inc. (the Parent), the wholly owned guarantor subsidiaries (on a combined basis), the non-wholly owned guarantor subsidiaries, and elimination entries necessary to
reflect such entities on a consolidated basis. Included elsewhere in this Form 10-Q are the unaudited financial statements of the non-wholly owned guarantor subsidiaries. The assets and liabilities of the Dairy Products segment are presented in
current assets held for sale and liabilities related to business to be sold (see Note E).



11



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##### Table of Contents

Condensed Consolidating Balance Sheets

September 30, 2003

(Unaudited, dollars in thousands)



|                                             |  | Parent |                  |   | WhollyOwnedGuarantorSubsidiaries |   |         | Non-wholly OwnedGuarantorSubsidiaries |  | Eliminations |        |  | Consolidated
|-------------------------------------------- |  | ------ | ---------------- | - | -------------------------------- | - | ------- | ------------------------------------- |  | ------------ | ------ |  | ------------
|                                             |  |        | M-FoodsDairy,LLC |   | M-FoodsDairyTXCT, LLC            |   |        
|Assets                                       |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|Current assets                               |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|Cash and equivalents                         |  | $      | 27,278           |   |                                  | $ | (1,962  | )                                     |  | $            |       |  | $           
|Accounts receivable, less allowances         |  |        | 129              |   |                                  |   | 106,767 |                                       |  |              | 7,642  |  |             
|Inventories                                  |  |        |                 |   |                                  |   | 89,681  |                                       |  |              | 4,024  |  |             
|Prepaid expenses and other                   |  |        | 374              |   |                                  |   | 10,547  |                                       |  |              | 388    |  |             
|Assets held for sale                         |  |        |                 |   |                                  |   |        |                                       |  |              |       |  |             
|                                             |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|Total current assets                         |  |        | 27,781           |   |                                  |   | 205,033 |                                       |  |              | 12,054 |  |             
|Property, plant and equipment, net           |  |        | 21               |   |                                  |   | 230,703 |                                       |  |              | 21,676 |  |             
|Other assets                                 |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|Goodwill                                     |  |        | 2,410            |   |                                  |   | 333,684 |                                       |  |              | 1,763  |  |             
|Joint ventures and other assets              |  |        | 11,937           |   |                                  |   | 23,530  |                                       |  |              | 104    |  |             
|Preferred return receivable for subsidiaries |  |        |                 |   |                                  |   | 27,302  |                                       |  |              |       |  |             
|Investment in subsidiaries                   |  |        | 609,132          |   |                                  |   |        |                                       |  |              |       |  |             
|                                             |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|                                             |  |        | 623,479          |   |                                  |   | 384,516 |                                       |  |              | 1,867  |  |             
|                                             |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|                                             |  | $      | 651,281          |   |                                  | $ | 820,252 |                                       |  | $            | 35,597 |  | $           
|                                             |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|Liabilities and shareholders equity         |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|Current liabilities                          |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|Current maturities of long-term debt         |  | $      | 13,283           |   |                                  | $ | 558     |                                       |  | $            |       |  | $           
|Accounts payable                             |  |        | 196              |   |                                  |   | 67,471  |                                       |  |              | 3,004  |  |             
|Accrued liabilities                          |  |        | 41,011           |   |                                  |   | 68,017  |                                       |  |              | 2,944  |  |             
|Liabilities related to business to be sold   |  |        |                 |   |                                  |   |        |                                       |  |              |       |  |             
|                                             |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|Total current liabilities                    |  |        | 54,490           |   |                                  |   | 136,046 |                                       |  |              | 5,948  |  |             
|Long-term debt, less current maturities      |  |        | 386,807          |   |                                  |   | 41,477  |                                       |  |              |       |  |             
|Deferred income taxes                        |  |        | (1,325           | ) |                                  |   | 56,452  |                                       |  |              |       |  |             
|                                             |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|Total liabilities                            |  |        | 439,972          |   |                                  |   | 233,975 |                                       |  |              | 5,948  |  |             
|Non-controlling interest                     |  |        | 475              |   |                                  |   |        |                                       |  |              |       |  |             
|Preferred unit holder return payable         |  |        |                 |   |                                  |   |        |                                       |  |              | 20,301 |  |             
|Shareholders equity                         |  |        | 210,834          |   |                                  |   | 586,277 |                                       |  |              | 9,348  |  |             
|                                             |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             
|                                             |  | $      | 651,281          |   |                                  | $ | 820,252 |                                       |  | $            | 35,597 |  | $           
|                                             |  |        |                  |   |                                  |   |         |                                       |  |              |        |  |             



12



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##### Table of Contents

Condensed Consolidating Balance Sheets

December 31, 2002

(Unaudited, dollars in thousands)



|                                             |  | Parent |                    |   | WhollyOwnedGuarantorSubsidiaries |   | Non-wholly Owned GuarantorSubsidiaries |  | Eliminations |        |  | Consolidated
|-------------------------------------------- |  | ------ | ------------------ | - | -------------------------------- | - | -------------------------------------- |  | ------------ | ------ |  | ------------
|                                             |  |        | M-Foods Dairy, LLC |   | M-Foods Dairy TXCT, LLC          |   |                                       
|Assets                                       |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|Current assets                               |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|Cash and equivalents                         |  | $      | 19,665             |   |                                  | $ | 907                                    |  | $            |       |  | $           
|Accounts receivable, less allowances         |  |        | 314                |   |                                  |   | 90,108                                 |  |              | 7,836  |  |             
|Inventories                                  |  |        |                   |   |                                  |   | 88,376                                 |  |              | 3,412  |  |             
|Prepaid expenses and other                   |  |        | 202                |   |                                  |   | 12,704                                 |  |              | 600    |  |             
|                                             |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|Total current assets                         |  |        | 20,181             |   |                                  |   | 192,095                                |  |              | 11,848 |  |             
|Property, plant and equipment, net           |  |        | 44                 |   |                                  |   | 252,825                                |  |              | 18,104 |  |             
|Other assets                                 |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|Goodwill                                     |  |        |                   |   |                                  |   | 339,265                                |  |              | 1,763  |  |             
|Joint ventures and other assets              |  |        | 15,362             |   |                                  |   | 22,082                                 |  |              | 139    |  |             
|Preferred return receivable for subsidiaries |  |        |                   |   |                                  |   | 17,170                                 |  |              |       |  |             
|Investment in subsidiaries                   |  |        | 639,819            |   |                                  |   |                                       |  |              |       |  |             
|                                             |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|                                             |  |        | 655,181            |   |                                  |   | 378,517                                |  |              | 1,902  |  |             
|                                             |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|                                             |  | $      | 675,406            |   |                                  | $ | 823,437                                |  | $            | 31,854 |  | $           
|                                             |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|Liabilities and shareholders equity         |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|Current liabilities                          |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|Current maturities of long-term debt         |  | $      | 14,714             |   |                                  | $ | 557                                    |  | $            |       |  | $           
|Accounts payable                             |  |        | 426                |   |                                  |   | 60,933                                 |  |              | 2,836  |  |             
|Accrued liabilities                          |  |        | 35,372             |   |                                  |   | 49,953                                 |  |              | 2,352  |  |             
|                                             |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|Total current liabilities                    |  |        | 50,512             |   |                                  |   | 111,443                                |  |              | 5,188  |  |             
|Long-term debt, less current maturities      |  |        | 448,734            |   |                                  |   | 44,984                                 |  |              |       |  |             
|Deferred income taxes                        |  |        | (3,641             | ) |                                  |   | 50,760                                 |  |              |       |  |             
|                                             |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|Total liabilities                            |  |        | 495,605            |   |                                  |   | 207,187                                |  |              | 5,188  |  |             
|Non-controlling interest                     |  |        | 475                |   |                                  |   |                                       |  |              |       |  |             
|Preferred unit holder return payable         |  |        |                   |   |                                  |   |                                       |  |              | 12,442 |  |             
|Shareholders equity                         |  |        | 179,326            |   |                                  |   | 616,250                                |  |              | 14,224 |  |             
|                                             |  |        |                    |   |                                  |   |                                        |  |              |        |  |             
|                                             |  | $      | 675,406            |   |                                  | $ | 823,437                                |  | $            | 31,854 |  | $           
|                                             |  |        |                    |   |                                  |   |                                        |  |              |        |  |             





13



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##### Table of Contents

Condensed Consolidating Statements of Operations

Three months ended September 30, 2003

(Unaudited, dollars in thousands)



|                                                                           |  | Parent |                  |   | Wholly Owned Guarantor Subsidiaries |                       | Non-wholly Owned GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated
|-------------------------------------------------------------------------- |  | ------ | ---------------- | - | ----------------------------------- | --------------------- | -------------------------------------- |  | - | ------------ | - |  | ------------
|                                                                           |  |        | M-FoodsDairy,LLC |   |                                     | M-FoodsDairyTXCT, LLC |                                        |  |  
|Net sales                                                                  |  | $      |                 |   |                                     | $                     | 300,008                                |  | $ | 27,173       |   |  | $           
|Cost of sales                                                              |  |        |                 |   |                                     |                       | 248,367                                |  |   | 23,068       |   |  |             
|                                                                           |  |        |                  |   |                                     |                       |                                        |  |   |              |   |  |             
|Gross profit                                                               |  |        |                 |   |                                     |                       | 51,641                                 |  |   | 4,105        |   |  |             
|Selling, general and administrative expenses                               |  |        | 2,297            |   |                                     |                       | 27,726                                 |  |   | 1,962        |   |  |             
|                                                                           |  |        |                  |   |                                     |                       |                                        |  |   |              |   |  |             
|Operating profit (loss)                                                    |  |        | (2,297           | ) |                                     |                       | 23,915                                 |  |   | 2,143        |   |  |             
|Interest expense, net                                                      |  |        | 11,099           |   |                                     |                       | 1,602                                  |  |   | (676         | ) |  |             
|Other income                                                               |  |        | 1,735            |   |                                     |                       |                                       |  |   |             |   |  |             
|                                                                           |  |        |                  |   |                                     |                       |                                        |  |   |              |   |  |             
|Earnings (loss) before equity in earnings of subsidiaries and income taxes |  |        | (11,661          | ) |                                     |                       | 22,313                                 |  |   | 2,819        |   |  |             
|Equity in earnings of subsidiaries                                         |  |        | 16,967           |   |                                     |                       | 4,016                                  |  |   | (2,819       | ) |  |             
|                                                                           |  |        |                  |   |                                     |                       |                                        |  |   |              |   |  |             
|Earnings (loss) before income taxes                                        |  |        | 5,306            |   |                                     |                       | 26,329                                 |  |   |             |   |  |             
|Income tax expense (benefit)                                               |  |        | (4,462           | ) |                                     |                       | 10,759                                 |  |   |             |   |  |             
|                                                                           |  |        |                  |   |                                     |                       |                                        |  |   |              |   |  |             
|Net earnings (loss)                                                        |  |        | 9,768            |   |                                     |                       | 15,570                                 |  |   |             |   |  |             
|Other comprehensive income (loss)                                          |  |        |                  |   |                                     |                       |                                        |  |   |              |   |  |             
|Foreign currency translation adjustment                                    |  |        |                 |   |                                     |                       | 16                                     |  |   |             |   |  |             
|Change in cash flow hedges                                                 |  |        | 1,221            |   |                                     |                       | 735                                    |  |   |             |   |  |             
|                                                                           |  |        |                  |   |                                     |                       |                                        |  |   |              |   |  |             
|Comprehensive income (loss)                                                |  | $      | 10,989           |   |                                     | $                     | 16,321                                 |  | $ |             |   |  | $           
|                                                                           |  |        |                  |   |                                     |                       |                                        |  |   |              |   |  |             



Condensed
Consolidating Statements of Operations

Three months ended September 30, 2002

(Unaudited, dollars in thousands)



|                                                                           |  | Parent |                    |   | Wholly owned Guarantor Subsidiaries |                         |         | Non-wholly ownedGuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |       
|-------------------------------------------------------------------------- |  | ------ | ------------------ | - | ----------------------------------- | ----------------------- | ------- | ------------------------------------- |  | - | ------------ | - |  | ------------ | ------
|                                                                           |  |        | M-Foods Dairy, LLC |   |                                     | M-Foods Dairy TXCT, LLC |         |                                       | 
|Net sales                                                                  |  | $      |                   |   |                                     | $                       | 246,491 |                                       |  | $ | 28,016       |   |  | $            | 23,409
|Cost of sales                                                              |  |        |                   |   |                                     |                         | 196,733 |                                       |  |   | 26,325       |   |  |              | 20,681
|                                                                           |  |        |                    |   |                                     |                         |         |                                       |  |   |              |   |  |              |       
|Gross profit                                                               |  |        |                   |   |                                     |                         | 49,758  |                                       |  |   | 1,691        |   |  |              | 2,728 
|Selling, general and administrative expenses                               |  |        | 1,921              |   |                                     |                         | 26,175  |                                       |  |   | 1,325        |   |  |              | 992   
|                                                                           |  |        |                    |   |                                     |                         |         |                                       |  |   |              |   |  |              |       
|Operating profit (loss)                                                    |  |        | (1,921             | ) |                                     |                         | 23,583  |                                       |  |   | 366          |   |  |              | 1,736 
|Interest expense, net                                                      |  |        | 11,995             |   |                                     |                         | 889     |                                       |  |   | (29          | ) |  |              | (11   
|Other income                                                               |  |        | 1,206              |   |                                     |                         |        |                                       |  |   |             |   |  |              |      
|                                                                           |  |        |                    |   |                                     |                         |         |                                       |  |   |              |   |  |              |       
|Earnings (loss) before equity in earnings of subsidiaries and income taxes |  |        | (12,710            | ) |                                     |                         | 22,694  |                                       |  |   | 395          |   |  |              | 1,747 
|Equity in earnings of subsidiaries                                         |  |        | 15,776             |   |                                     |                         | 2,142   |                                       |  |   | (395         | ) |  |              | (1,747
|                                                                           |  |        |                    |   |                                     |                         |         |                                       |  |   |              |   |  |              |       
|Earnings (loss) before income taxes                                        |  |        | 3,066              |   |                                     |                         | 24,836  |                                       |  |   |             |   |  |              |      
|Income tax expense (benefit)                                               |  |        | (4,300             | ) |                                     |                         | 9,060   |                                       |  |   |             |   |  |              |      
|                                                                           |  |        |                    |   |                                     |                         |         |                                       |  |   |              |   |  |              |       
|Net earnings (loss)                                                        |  |        | 7,366              |   |                                     |                         | 15,776  |                                       |  |   |             |   |  |              |      
|Other comprehensive income (loss)                                          |  |        |                    |   |                                     |                         |         |                                       |  |   |              |   |  |              |       
|Foreign currency translation adjustment                                    |  |        |                   |   |                                     |                         | (1,000  | )                                     |  |   |             |   |  |              |      
|Change in cash flow hedges                                                 |  |        | (2,511             | ) |                                     |                         | 1,562   |                                       |  |   |             |   |  |              |      
|                                                                           |  |        |                    |   |                                     |                         |         |                                       |  |   |              |   |  |              |       
|Comprehensive income (loss)                                                |  | $      | 4,855              |   |                                     | $                       | 16,338  |                                       |  | $ |             |   |  | $            |      
|                                                                           |  |        |                    |   |                                     |                         |         |                                       |  |   |              |   |  |              |       



14



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##### Table of Contents

Condensed Consolidating Statements of Operations

Nine months ended September 30, 2003

(Unaudited, dollars in thousands)



|                                                                           |  | Parent |                    |   | Wholly Owned Guarantor Subsidiaries |                         | Non-wholly Owned GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated
|-------------------------------------------------------------------------- |  | ------ | ------------------ | - | ----------------------------------- | ----------------------- | -------------------------------------- |  | - | ------------ | - |  | ------------
|                                                                           |  |        | M-Foods Dairy, LLC |   |                                     | M-Foods Dairy TXCT, LLC |                                        |  |  
|Net sales                                                                  |  | $      |                   |   |                                     | $                       | 837,874                                |  | $ | 79,847       |   |  | $           
|Cost of sales                                                              |  |        |                   |   |                                     |                         | 689,310                                |  |   | 67,548       |   |  |             
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |             
|Gross profit                                                               |  |        |                   |   |                                     |                         | 148,564                                |  |   | 12,299       |   |  |             
|Selling, general and administrative expenses                               |  |        | 5,952              |   |                                     |                         | 81,513                                 |  |   | 5,074        |   |  |             
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |             
|Operating profit (loss)                                                    |  |        | (5,952             | ) |                                     |                         | 67,051                                 |  |   | 7,225        |   |  |             
|Interest expense, net                                                      |  |        | 33,416             |   |                                     |                         | 3,223                                  |  |   | (634         | ) |  |             
|Other income                                                               |  |        | 4,172              |   |                                     |                         |                                       |  |   |             |   |  |             
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |             
|Earnings (loss) before equity in earnings of subsidiaries and income taxes |  |        | (35,196            | ) |                                     |                         | 63,828                                 |  |   | 7,859        |   |  |             
|Equity in earnings of subsidiaries                                         |  |        | 46,198             |   |                                     |                         | 9,598                                  |  |   | (7,859       | ) |  |             
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |             
|Earnings (loss) before income taxes                                        |  |        | 11,002             |   |                                     |                         | 73,426                                 |  |   |             |   |  |             
|Income tax expense (benefit)                                               |  |        | (13,513            | ) |                                     |                         | 29,069                                 |  |   |             |   |  |             
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |             
|Net earnings (loss)                                                        |  |        | 24,515             |   |                                     |                         | 44,357                                 |  |   |             |   |  |             
|Other comprehensive income (loss)                                          |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |             
|Foreign currency translation adjustment                                    |  |        |                   |   |                                     |                         | 2,711                                  |  |   |             |   |  |             
|Change in cash flow hedges                                                 |  |        | 2,380              |   |                                     |                         | 1,902                                  |  |   |             |   |  |             
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |             
|Comprehensive income (loss)                                                |  | $      | 26,895             |   |                                     | $                       | 48,970                                 |  | $ |             |   |  | $           
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |             



Condensed
Consolidating Statements of Operations

Nine months ended September 30, 2002

(Unaudited, dollars in thousands)



|                                                                           |  | Parent |                    |   | Wholly Owned Guarantor Subsidiaries |                         | Non-wholly Owned GuarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |       
|-------------------------------------------------------------------------- |  | ------ | ------------------ | - | ----------------------------------- | ----------------------- | -------------------------------------- |  | - | ------------ | - |  | ------------ | ------
|                                                                           |  |        | M-Foods Dairy, LLC |   |                                     | M-Foods Dairy TXCT, LLC |                                        |  |  
|Net sales                                                                  |  | $      |                   |   |                                     | $                       | 725,767                                |  | $ | 79,841       |   |  | $            | 67,886
|Cost of sales                                                              |  |        |                   |   |                                     |                         | 580,747                                |  |   | 71,230       |   |  |              | 62,020
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |              |       
|Gross profit                                                               |  |        |                   |   |                                     |                         | 145,020                                |  |   | 8,611        |   |  |              | 5,866 
|Selling, general and administrative expenses                               |  |        | 5,642              |   |                                     |                         | 79,436                                 |  |   | 4,182        |   |  |              | 2,986 
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |              |       
|Operating profit (loss)                                                    |  |        | (5,642             | ) |                                     |                         | 65,584                                 |  |   | 4,429        |   |  |              | 2,880 
|Interest expense, net                                                      |  |        | 35,295             |   |                                     |                         | 2,493                                  |  |   | 34           |   |  |              | 18    
|Other income                                                               |  |        | 3,590              |   |                                     |                         |                                       |  |   |             |   |  |              |      
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |              |       
|Earnings (loss) before equity in earnings of subsidiaries and income taxes |  |        | (37,347            | ) |                                     |                         | 63,091                                 |  |   | 4,395        |   |  |              | 2,862 
|Equity in earnings of subsidiaries                                         |  |        | 43,438             |   |                                     |                         | 7,257                                  |  |   | (4,395       | ) |  |              | (2,862
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |              |       
|Earnings (loss) before income taxes                                        |  |        | 6,091              |   |                                     |                         | 70,348                                 |  |   |             |   |  |              |      
|Income tax expense (benefit)                                               |  |        | (13,950            | ) |                                     |                         | 26,910                                 |  |   |             |   |  |              |      
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |              |       
|Net earnings (loss)                                                        |  |        | 20,041             |   |                                     |                         | 43,438                                 |  |   |             |   |  |              |      
|Other comprehensive income (loss)                                          |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |              |       
|Foreign currency translation adjustment                                    |  |        |                   |   |                                     |                         | 326                                    |  |   |             |   |  |              |      
|Change in cash flow hedges                                                 |  |        | (5,218             | ) |                                     |                         | 4,007                                  |  |   |             |   |  |              |      
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |              |       
|Comprehensive income (loss)                                                |  | $      | 14,823             |   |                                     | $                       | 47,771                                 |  | $ |             |   |  | $            |      
|                                                                           |  |        |                    |   |                                     |                         |                                        |  |   |              |   |  |              |       



15



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##### Table of Contents

Condensed Consolidating Statements of Cash Flows

Nine months ended September 30, 2003

(Unaudited, dollars in thousands)



|                                                |  | Parent |                    |   | Wholly Owned GuarantorSubsidiaries |                         |         | Non-wholly Owned Guarantor Subsidiaries |  |   | Consolidated |  
|----------------------------------------------- |  | ------ | ------------------ | - | ---------------------------------- | ----------------------- | ------- | --------------------------------------- |  | - | ------------ | -
|                                                |  |        | M-Foods Dairy, LLC |   |                                    | M-Foods Dairy TXCT, LLC |         |                                        
|Net cash provided by operating activities       |  | $      | 36,251             |   |                                    | $                       | 46,411  |                                         |  | $ | 10,293       |  
|Cash flows from investing activities:           |  |        |                    |   |                                    |                         |         |                                         |  |   |              |  
|Capital expenditures                            |  |        |                   |   |                                    |                         | (16,649 | )                                       |  |   | (5,417       | )
|                                                |  |        |                    |   |                                    |                         |         |                                         |  |   |              |  
|Net cash used in investing activities           |  |        |                   |   |                                    |                         | (16,649 | )                                       |  |   | (5,417       | )
|                                                |  |        |                    |   |                                   
|Cash flows from financing activities:           |  |        |                    |   |                                    |                         |         |                                         |  |   |              |  
|Payments on long-term debt                      |  |        | (67,965            | ) |                                    |                         | (586    | )                                       |  |   |             |  
|Distribution to preferred unit holders          |  |        |                   |   |                                    |                         | 7,164   |                                         |  |   | (4,876       | )
|Investment in subsidiaries                      |  |        | 39,327             |   |                                    |                         | (39,327 | )                                       |  |   |             |  
|                                                |  |        |                    |   |                                    |                         |         |                                         |  |   |              |  
|Net cash used in financing activities           |  |        | (28,638            | ) |                                    |                         | (32,749 | )                                       |  |   | (4,876       | )
|                                                |  |        |                    |   |                                   
|Effect of exchange rate changes on cash         |  |        |                   |   |                                    |                         | 118     |                                         |  |   |             |  
|                                                |  |        |                    |   |                                    |                         |         |                                         |  |   |              |  
|Net increase (decrease) in cash and equivalents |  |        | 7,613              |   |                                    |                         | (2,869  | )                                       |  |   |             |  
|Cash and equivalents at beginning of period     |  |        | 19,665             |   |                                    |                         | 907     |                                         |  |   |             |  
|                                                |  |        |                    |   |                                    |                         |         |                                         |  |   |              |  
|Cash and equivalents at end of period           |  | $      | 27,278             |   |                                    | $                       | (1,962  | )                                       |  | $ |             |  
|                                                |  |        |                    |   |                                    |                         |         |                                         |  |   |              |  



Condensed
Consolidating Statements of Cash Flows

Nine Months ended September 30, 2002

(Unaudited, dollars in thousands)



|                                               |  | Parent |         |                    | Wholly Owned GuarantorSubsidiaries |   |                         | Non-wholly Owned GuarantorSubsidiaries |  |   | Consolidated |  
|---------------------------------------------- |  | ------ | ------- | ------------------ | ---------------------------------- | - | ----------------------- | -------------------------------------- |  | - | ------------ | -
|                                               |  |        |         | M-Foods Dairy, LLC |                                    |   | M-Foods Dairy TXCT, LLC |                                        | 
|Net cash provided by operating activities      |  | $      | 31,229  |                    |                                    | $ | 37,684                  |                                        |  | $ | 5,243        |  
|                                               |  |        |         |                    |                                   
|Cash flows from investing activities:          |  |        |         |                    |                                    |   |                         |                                        |  |   |              |  
|Capital expenditures                           |  |        |        |                    |                                    |   | (13,847                 | )                                      |  |   | (3,760       | )
|Business acquisition                           |  |        |        |                    |                                    |   | (17,593                 | )                                      |  |   |             |  
|Investments in joint ventures and other assets |  |        | (156    | )                  |                                    |   | 2,642                   |                                        |  |   | (150         | )
|                                               |  |        |         |                    |                                    |   |                         |                                        |  |   |              |  
|Net cash used in investing activities          |  |        | (156    | )                  |                                    |   | (28,798                 | )                                      |  |   | (3,910       | )
|                                               |  |        |         |                    |                                   
|Cash flows from financing activities:          |  |        |         |                    |                                    |   |                         |                                        |  |   |              |  
|Proceeds from revolving line of credit         |  |        | 5,000   |                    |                                    |   |                        |                                        |  |   |             |  
|Payments on long-term debt                     |  |        | (17,641 | )                  |                                    |   | (227                    | )                                      |  |   |             |  
|Capital contribution from parent               |  |        | 656     |                    |                                    |   |                        |                                        |  |   |             |  
|Distribution to preferred unit holders         |  |        |        |                    |                                    |   | 1,719                   |                                        |  |   | (1,333       | )
|Investment in subsidiaries                     |  |        | 7,544   |                    |                                    |   | (7,544                  | )                                      |  |   |             |  
|                                               |  |        |         |                    |                                    |   |                         |                                        |  |   |              |  
|Net cash used in financing activities          |  |        | (4,441  | )                  |                                    |   | (6,052                  | )                                      |  |   | (1,333       | )
|                                               |  |        |         |                    |                                    |   |                         |                                        |  |   |              |  
|Net increase in cash and equivalents           |  |        | 26,632  |                    |                                    |   | 2,834                   |                                        |  |   |             |  
|Cash and equivalents at beginning of period    |  |        | 33,947  |                    |                                    |   | (6,287                  | )                                      |  |   |             |  
|                                               |  |        |         |                    |                                    |   |                         |                                        |  |   |              |  
|Cash and equivalents at end of period          |  | $      | 60,579  |                    |                                    | $ | (3,453                  | )                                      |  | $ |             |  
|                                               |  |        |         |                    |                                    |   |                         |                                        |  |   |              |  



16



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##### Table of Contents

M-FOODS DAIRY, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Index to Financial Statements



|                              |  | Page
|----------------------------- |  | ----
|Balance Sheets                |  | 18  
|Statements of Operations      |  | 19  
|Statements of Cash Flows      |  | 21  
|Notes to Financial Statements |  | 22  



17



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##### Table of Contents

M-FOODS DAIRY, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Condensed Balance Sheets

(Unaudited, dollars
in thousands)



|                                                      |  | September 30,2003 |        | December 31,2002
|----------------------------------------------------- |  | ----------------- | ------ | ----------------
|ASSETS                                                |  |                   |        |                 
|Current assets                                        |  |                   |        |                 
|Accounts receivable, less allowances                  |  | $                 | 7,642  |                 
|Inventories                                           |  |                   | 4,024  |                 
|Prepaid expenses and other                            |  |                   | 388    |                 
|                                                      |  |                   |        |                 
|Total current assets                                  |  |                   | 12,054 |                 
|Property, plant and equipment                         |  |                   |        |                 
|Land                                                  |  |                   | 855    |                 
|Buildings and improvements                            |  |                   | 5,921  |                 
|Machinery and equipment                               |  |                   | 19,996 |                 
|                                                      |  |                   |        |                 
|                                                      |  |                   | 26,772 |                 
|Less accumulated depreciation                         |  |                   | 5,096  |                 
|                                                      |  |                   |        |                 
|                                                      |  |                   | 21,676 |                 
|Other assets                                          |  |                   |        |                 
|Goodwill                                              |  |                   | 1,763  |                 
|Other assets                                          |  |                   | 104    |                 
|                                                      |  |                   |        |                 
|                                                      |  |                   | 1,867  |                 
|                                                      |  |                   |        |                 
|                                                      |  | $                 | 35,597 |                 
|                                                      |  |                   |        |                 
|LIABILITIES AND UNIT HOLDER AND OPERATING UNIT EQUITY |  |                   |        |                 
|Current liabilities                                   |  |                   |        |                 
|Accounts payable                                      |  | $                 | 3,004  |                 
|Accrued liabilities                                   |  |                   |        |                 
|Compensation                                          |  |                   | 849    |                 
|Insurance                                             |  |                   | 57     |                 
|Customer programs                                     |  |                   | 1,362  |                 
|Other                                                 |  |                   | 676    |                 
|                                                      |  |                   |        |                 
|Total current liabilities                             |  |                   | 5,948  |                 
|Commitments and contingencies                         |  |                   |       |                 
|Preferred unit holder return payable                  |  |                   | 20,301 |                 
|Unit holder equity                                    |  |                   | 9,348  |                 
|                                                      |  |                   |        |                 
|                                                      |  | $                 | 35,597 |                 
|                                                      |  |                   |        |                 



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



18



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M-FOODS DAIRY, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Condensed Statements of Operations

Three
months ended September 30,

(Unaudited, dollars in thousands)



|                                             |  | 2003 |        | 2002
|-------------------------------------------- |  | ---- | ------ | ----
|Net sales                                    |  | $    | 27,173 |     
|                                             |  |     
|Cost of sales                                |  |      | 23,068 |     
|                                             |  |      |        |     
|Gross profit                                 |  |      | 4,105  |     
|                                             |  |     
|Selling, general and administrative expenses |  |      | 1,962  |     
|                                             |  |      |        |     
|Operating profit                             |  |      | 2,143  |     
|                                             |  |     
|Other income (expense)                       |  |      | 676    |     
|                                             |  |      |        |     
|Net earnings                                 |  | $    | 2,819  |     
|                                             |  |      |        |     



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



19



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##### Table of Contents

M-FOODS DAIRY, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Condensed Statements of Operations

Nine months ended September 30,

(Unaudited,
dollars in thousands)



|                                             |  | 2003 |        | 2002 |  
|-------------------------------------------- |  | ---- | ------ | ---- | -
|Net sales                                    |  | $    | 79,847 |      | $
|                                             |  |     
|Cost of sales                                |  |      | 67,548 |      |  
|                                             |  |      |        |      |  
|Gross profit                                 |  |      | 12,299 |      |  
|                                             |  |     
|Selling, general and administrative expenses |  |      | 5,074  |      |  
|                                             |  |      |        |      |  
|Operating profit                             |  |      | 7,225  |      |  
|                                             |  |     
|Other income (expense)                       |  |      | 634    |      |  
|                                             |  |      |        |      |  
|Net earnings                                 |  | $    | 7,859  |      | $
|                                             |  |      |        |      |  



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



20



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##### Table of Contents

M-FOODS DAIRY, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Condensed Statements of Cash Flows

Nine Months
ended September 30,

(Unaudited, dollars in thousands)



|                                                |  | 2003 |        |   | 2002 |  
|----------------------------------------------- |  | ---- | ------ | - | ---- | -
|Net cash provided by operating activities       |  | $    | 10,293 |   |      | $
|                                                |  |     
|Cash flows from investing activities:           |  |      |        |   |      |  
|Capital expenditures                            |  |      | (5,417 | ) |      |  
|Investments in joint ventures and other assets  |  |      |       |   |      |  
|                                                |  |      |        |   |      |  
|Net cash used in investing activities           |  |      | (5,417 | ) |      |  
|                                                |  |     
|Cash flows from financing activities:           |  |      |        |   |      |  
|Dividends paid to Michael Foods, Inc.           |  |      | (4,876 | ) |      |  
|                                                |  |      |        |   |      |  
|Net cash used in financing activities           |  |      | (4,876 | ) |      |  
|                                                |  |      |        |   |      |  
|Net increase (decrease) in cash and equivalents |  |      |       |   |      |  
|                                                |  |     
|Cash and equivalents at beginning of period     |  |      |       |   |      |  
|                                                |  |      |        |   |      |  
|Cash and equivalents at end of period           |  | $    |       |   |      | $
|                                                |  |      |        |   |      |  



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



21



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##### Table of Contents

M-FOODS DAIRY, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Notes to Condensed Financial Statements

Unaudited



NOTE A2001 MERGER



On April 10, 2001, Michael Foods, Inc. and its subsidiaries (Michael
Foods) was acquired in a transaction (the Merger) led by an investor group comprised of a management group led by Michael Foods Chairman, President and Chief Executive Officer, Gregg Ostrander; affiliates of Jeffrey Michael,
a member of the board of directors; and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated (collectively, M-Foods Investors, LLC). Michael Foods, Inc. is a
wholly-owned subsidiary of M-Foods Holdings, Inc., which is a subsidiary of M-Foods Investors, LLC. Under the terms of the Merger Agreement, all outstanding shares of Michael Foods common stock were converted into the right to receive $30.10 per
share in cash, or value equal thereto, and all outstanding stock options were converted into the right to receive, in cash, $30.10 per share reduced by the exercise price per share for all shares subject to such stock options. The purchase of the
outstanding shares was financed through equity financing of approximately $175,000,000, a senior secured credit facility of up to $470,000,000 at market-based variable interest rates, and $200,000,000 of senior subordinated notes at an 11.75% annual
interest rate. As a result of the Merger, the stock of pre-merger Michael Foods (Predecessor) is no longer publicly traded and, therefore, earnings per share calculations are no longer included for financial statement presentation.



Immediately after the close of the Merger, Michael Foods contributed the
assets of its Dairy Products Division into two limited liability companies, M-Foods Dairy, LLC (the Operating Unit) and M-Foods Dairy TXCT, LLC (collectively, the Dairy LLCs) and in exchange received voting preferred and
voting common units from these entities equal to the fair value of the net assets contributed, which collectively was approximately $35,800,000. The preferred units issued to Michael Foods by the Dairy LLCs have an annual 10% preferred return
guarantee and represent 100% of the preferred units issued and outstanding. In addition, Michael Foods received 5% of the common units issued by the Dairy LLCs, representing 100% of the voting common units issued and outstanding. These common units
have a stated value of $25,000. The remaining 95% of the common units, which are non-voting, are owned by M-Foods Dairy Holdings, LLC, another entity which is owned by the same owners or affiliates of such owners, in the same proportion, as the unit
holders of M-Foods Investors, LLC. The common unit interests owned by M-Foods Dairy Holdings, LLC were issued in exchange for $475,000 and are reflected as non-controlling interest in the accompanying consolidated balance sheet. See also Note D.



The 2001 Merger was accounted for as a purchase in accordance with Accounting
Principles Board Opinion 16, Business Combinations and Emerging Issues Task Force Issue No. 88-16, Basis in Leveraged Buyout Transactions. Accordingly, the acquired assets and liabilities have been recorded at fair value for the
interests acquired by new investors and at the carryover basis for continuing investors. As a result, the assets and liabilities were assigned new values, which are part Predecessor cost and part fair value in the same proportions as the carryover
basis of the residual interests retained by the continuing management investors and continuing affiliate investors of the Michael family, and the new interests acquired by the new investors. The amount of carryover basis was reflected as a deemed
dividend of $66,631,000.



NOTE B  BASIS
OF PRESENTATION



The accompanying unaudited financial statements and footnote
information of the Operating Unit as of and for the three and nine month periods ended September 30, 2003 and 2002 have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the SEC using the adjusted cost basis of
assets and liabilities of the Operating Unit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations and cash flows for the periods
indicated. For the period ended September 30, 2003, the Operating Units financial statements include an allocation for general and administrative costs of approximately $1,779,000 incurred by Michael Foods. Management believes its allocations
to these Operating Unit financial statements are reasonable. Additionally, Operating Unit equity includes the cumulative net advances between the Operating Unit and Michael Foods, which are considered additional capital invested from or,
constructive dividends to, Michael Foods. Accordingly, the accompanying financial statements may not necessarily be indicative of the results that could have been obtained if the Operating Unit had been operated as a stand-alone entity. The
historical results of the Operating Unit for the periods indicated are not necessarily indicative of the results expected for the full year.



22



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##### Table of Contents

These unaudited interim financial statements should be read in conjunction with our financial statements and notes
thereto, contained in Michael Foods Annual Report on Form 10-K for the fiscal year ended December 31, 2002.



NOTE C  ORGANIZATION AND BUSINESS



Organization



The Operating Unit is a majority owned subsidiary of Michael Foods, Inc., a wholly owned subsidiary of M-Foods Holdings, Inc.



Business



The Operating Unit processes and distributes soft serve ice cream mix, frozen yogurt mix,
milk, creamers and other specialty dairy products, many of which are ultra-high temperature pasteurized, from its facility in Minnesota.



NOTE D  SALE OF THE OPERATING UNIT



In May 2003, Michael Foods signed a letter of intent for the sale of our Dairy Products Division operating segment, which includes the Operating Unit to Dean Foods
Company. The Dairy Products Division is substantially made up of the assets of the Operating Unit and M-Foods Dairy TXCT, LLC. The transaction closed on October 15, 2003.



NOTE E  INVENTORIES



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



Inventories consisted of
the following (dollars in thousands):



|                                   |  | September 30, 2003 |       | December 31,2002
|---------------------------------- |  | ------------------ | ----- | ----------------
|Raw materials and supplies         |  | $                  | 1,467 |                 
|Work in process and finished goods |  |                    | 2,557 |                 
|                                   |  |                    |       |                 
|                                   |  | $                  | 4,024 |                 
|                                   |  |                    |       |                 



NOTE
F  INCOME TAXES



The Operating Unit is a limited liability company and,
accordingly, no provision or liability for U.S. income taxes is reflected in the Operating Units financial statements. The U.S. taxable income of the Operating Unit and related deductions are allocated to and reported in the individual income
tax returns of the owners of the Operating Unit.



NOTE G  COMMITMENTS AND CONTINGENCIES



Litigation



The Operating Unit is engaged in routine litigation
incidental to its business. Management believes the ultimate outcome of this litigation will not have a material effect on the Operating Units financial position, liquidity or results of operations.



23



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##### Table of Contents

M-FOODS DAIRY TXCT, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Index to Financial Statements



|                              |  | Page
|----------------------------- |  | ----
|Balance Sheets                |  | 25  
|Statements of Operations      |  | 26  
|Statements of Cash Flows      |  | 28  
|Notes to Financial Statements |  | 29  



24



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##### Table of Contents

M-FOODS DAIRY TXCT, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Condensed Balance Sheets

(Unaudited, dollars
in thousands)



|                                                      |  | September 30, 2003 |        | December 31, 2002
|----------------------------------------------------- |  | ------------------ | ------ | -----------------
|ASSETS                                                |  |                    |        |                  
|Current assets                                        |  |                    |        |                  
|Accounts receivable                                   |  | $                  | 5,078  |                  
|Inventories                                           |  |                    | 3,461  |                  
|Prepaid expenses and other                            |  |                    | 67     |                  
|                                                      |  |                    |        |                  
|Total current assets                                  |  |                    | 8,606  |                  
|Property, plant and equipment                         |  |                    |        |                  
|Leasehold improvements                                |  |                    | 3,176  |                  
|Machinery and equipment                               |  |                    | 12,528 |                  
|                                                      |  |                    |        |                  
|                                                      |  |                    | 15,704 |                  
|Less accumulated depreciation                         |  |                    | 5,388  |                  
|                                                      |  |                    |        |                  
|                                                      |  |                    | 10,316 |                  
|Other assets                                          |  |                    |        |                  
|Non-compete agreement, net                            |  |                    | 132    |                  
|                                                      |  |                    |        |                  
|                                                      |  | $                  | 19,054 |                  
|                                                      |  |                    |        |                  
|LIABILITIES AND UNIT HOLDER AND OPERATING UNIT EQUITY |  |                    |        |                  
|Current liabilities                                   |  |                    |        |                  
|Current maturities of non-compete commitment          |  | $                  |       |                  
|Accounts payable                                      |  |                    | 3,555  |                  
|Accrued liabilities                                   |  |                    |        |                  
|Compensation                                          |  |                    | 368    |                  
|Insurance                                             |  |                    | 42     |                  
|Customer programs                                     |  |                    | 464    |                  
|Other                                                 |  |                    | 567    |                  
|                                                      |  |                    |        |                  
|Total current liabilities                             |  |                    | 4,996  |                  
|                                                      |  |                   
|Commitments and contingencies                         |  |                    |       |                  
|Preferred unit holder return payable                  |  |                    | 7,001  |                  
|Unit holder and operating unit equity                 |  |                    | 7,057  |                  
|                                                      |  |                    |        |                  
|                                                      |  | $                  | 19,054 |                  
|                                                      |  |                    |        |                  



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



25



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##### Table of Contents

M-FOODS DAIRY TXCT, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Condensed Statements of Operations

Three
months ended September 30,

(Unaudited, dollars in thousands)



|                                             |  | 2003 |        | 2002
|-------------------------------------------- |  | ---- | ------ | ----
|Net sales                                    |  | $    | 24,642 |     
|                                             |  |     
|Cost of sales                                |  |      | 22,487 |     
|                                             |  |      |        |     
|Gross profit                                 |  |      | 2,155  |     
|                                             |  |     
|Selling, general and administrative expenses |  |      | 1,110  |     
|                                             |  |      |        |     
|Operating profit                             |  |      | 1,045  |     
|                                             |  |     
|Other income (expense)                       |  |      | 152    |     
|                                             |  |      |        |     
|Net earnings                                 |  | $    | 1,197  |     
|                                             |  |      |        |     



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



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M-FOODS DAIRY TXCT, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Condensed Statements of Operations

Nine months ended September 30,

(Unaudited,
dollars in thousands)



|                                             |  | 2003 |        |   | 2002
|-------------------------------------------- |  | ---- | ------ | - | ----
|Net sales                                    |  | $    | 64,907 |   |     
|                                             |  |     
|Cost of sales                                |  |      | 59,979 |   |     
|                                             |  |      |        |   |     
|Gross profit                                 |  |      | 4,928  |   |     
|                                             |  |     
|Selling, general and administrative expenses |  |      | 3,354  |   |     
|                                             |  |      |        |   |     
|Operating profit                             |  |      | 1,574  |   |     
|                                             |  |     
|Other expense (income)                       |  |      | (165   | ) |     
|                                             |  |      |        |   |     
|Net earnings                                 |  | $    | 1,739  |   |     
|                                             |  |      |        |   |     



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



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M-FOODS DAIRY TXCT, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Condensed Statements of Cash Flows

Nine months
ended September 30,

(Unaudited, dollars in thousands)



|                                                |  | 2003 |        |   | 2002 |  
|----------------------------------------------- |  | ---- | ------ | - | ---- | -
|Net cash provided by operating activities       |  | $    | 5,424  |   |      | $
|                                                |  |     
|Cash flows from investing activities:           |  |      |        |   |      |  
|Capital expenditures                            |  |      | (736   | ) |      |  
|                                                |  |      |        |   |      |  
|Net cash used in investing activities           |  |      | (736   | ) |      |  
|                                                |  |     
|Cash flows from financing activities:           |  |      |        |   |      |  
|Payments on long-term debt                      |  |      | (2,400 | ) |      |  
|Dividends paid to Michael Foods, Inc.           |  |      | (2,288 | ) |      |  
|                                                |  |      |        |   |      |  
|Net cash used in financing activities           |  |      | (4,688 | ) |      |  
|                                                |  |      |        |   |      |  
|Net increase (decrease) in cash and equivalents |  |      |       |   |      |  
|                                                |  |     
|Cash and equivalents at beginning of period     |  |      |       |   |      |  
|                                                |  |      |        |   |      |  
|Cash and equivalents at end of period           |  | $    |       |   |      | $
|                                                |  |      |        |   |      |  



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



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##### Table of Contents

M-FOODS DAIRY TXCT, LLC

(A Majority Owned Subsidiary of Michael Foods, Inc.)

Notes to Condensed Financial Statements

Unaudited



NOTE A2001 MERGER



On April 10, 2001, Michael Foods, Inc. and its subsidiaries (Michael
Foods) was acquired in a transaction (the Merger) led by an investor group comprised of a management group led by Michael Foods Chairman, President and Chief Executive Officer, Gregg Ostrander; affiliates of Jeffrey Michael,
a member of the board of directors; and affiliates of two private equity investment firms, Vestar Capital Partners and Goldner Hawn Johnson & Morrison Incorporated (collectively, M-Foods Investors, LLC). Michael Foods, Inc. is a
wholly-owned subsidiary of M-Foods Holdings, Inc., which is a subsidiary of M-Foods Investors, LLC. Under the terms of the Merger Agreement, all outstanding shares of Michael Foods common stock were converted into the right to receive $30.10 per
share in cash, or value equal thereto, and all outstanding stock options were converted into the right to receive, in cash, $30.10 per share reduced by the exercise price per share for all shares subject to such stock options. The purchase of the
outstanding shares was financed through equity financing of approximately $175,000,000, a senior secured credit facility of up to $470,000,000 at market-based variable interest rates, and $200,000,000 of senior subordinated notes at an 11.75% annual
interest rate. As a result of the Merger, the stock of pre-merger Michael Foods (Predecessor) is no longer publicly traded and, therefore, earnings per share calculations are no longer included for financial statement presentation.



Immediately after the close of the Merger, Michael Foods contributed the
assets of its Dairy Products Division into two limited liability companies, M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC the Operating Unit)(collectively, the Dairy LLCs) and in exchange received voting preferred and voting
common units from these entities equal to the fair value of the net assets contributed, which collectively was approximately $35,800,000. The preferred units issued to Michael Foods by the Dairy LLCs have an annual 10% preferred return guarantee and
represent 100% of the preferred units issued and outstanding. In addition, Michael Foods received 5% of the common units issued by the Dairy LLCs, representing 100% of the voting common units issued and outstanding. These common units have a stated
value of $25,000. The remaining 95% of the common units, which are non-voting, are owned by M-Foods Dairy Holdings, LLC, another entity which is owned by the same owners or affiliates of such owners, in the same proportion, as the unit holders of
M-Foods Investors, LLC. The common unit interests owned by M-Foods Dairy Holdings, LLC were issued in exchange for $475,000 and are reflected as non-controlling interest in the accompanying consolidated balance sheet. See also Note D.



The 2001 Merger was accounted for as a purchase in accordance with Accounting Principles
Board Opinion 16, Business Combinations and Emerging Issues Task Force Issue No. 88-16, Basis in Leveraged Buyout Transactions. Accordingly, the acquired assets and liabilities have been recorded at fair value for the interests
acquired by new investors and at the carryover basis for continuing investors. As a result, the assets and liabilities were assigned new values, which are part Predecessor cost and part fair value in the same proportions as the carryover basis of
the residual interests retained by the continuing management investors and continuing affiliate investors of the Michael family, and the new interests acquired by the new investors. The amount of carryover basis was reflected as a deemed dividend of
$66,631,000.



NOTE B  BASIS OF
PRESENTATION



The accompanying unaudited financial statements and footnote
information of the Operating Unit as of and for the three and nine month periods ended September 30, 2003 and 2002 have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the SEC using the adjusted cost basis of
assets and liabilities of the Operating Unit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations and cash flows for the periods
indicated. For the period ended September 30, 2003, the Operating Units financial statements include an allocation for general and administrative costs of approximately $1,874,000 incurred by Michael Foods. Management believes its allocations
to these Operating Unit financial statements are reasonable. Additionally, Operating Unit equity includes the cumulative net advances between the Operating Unit and Michael Foods, which are considered additional capital invested from or,
constructive dividends to, Michael Foods. Accordingly, the accompanying financial statements may not necessarily be indicative of the results that could have been obtained if the Operating Unit had been operated as a stand-alone entity. The
historical results of the Operating Unit for the periods indicated are not necessarily indicative of the results expected for the full year.



These unaudited interim financial statements should be read in conjunction with our financial statements and notes thereto, contained in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2002.



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NOTE C  ORGANIZATION AND BUSINESS



Organization



The Operating Unit is a majority owned subsidiary of Michael Foods, Inc., a wholly owned
subsidiary of M-Foods Holdings, Inc.



Business



The Company processes and distributes soft serve ice cream mix, frozen yogurt
mix, milk, creamers and other specialty dairy products, many of which are ultra-high temperature pasteurized, from its facilities in Texas and Connecticut.



NOTE D  SALE OF THE OPERATING UNIT



In May 2003, Michael Foods signed a letter of intent for the sale of our Dairy Products Division operating segment, which includes the Operating Unit, to Dean Foods
Company. The dairy products division is substantially made up of the assets of M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC. The transaction closed on October 15, 2003.



NOTE E  INVENTORIES



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



Inventories consisted of
the following (dollars in thousands):



|                                   |  | September 30, 2003 |       | December 31,2002
|---------------------------------- |  | ------------------ | ----- | ----------------
|Raw materials and supplies         |  | $                  | 2,239 |                 
|Work in process and finished goods |  |                    | 1,222 |                 
|                                   |  |                    |       |                 
|                                   |  | $                  | 3,461 |                 
|                                   |  |                    |       |                 



NOTE
F  NON-COMPETE AGREEMENT AND COMMITMENT



During 1999, as part of the
consideration for its Connecticut dairy asset purchase, the Operating Unit entered into a $12 million non-compete agreement. Under the agreement, the Operating Unit agreed to make five annual $2.4 million payments beginning in 1999. As of September
30, 2003, the commitment has been fulfilled.



Our acquired intangible
non-compete asset that has been determined to have a definite life and continues to be amortized as of September 30, 2003 is as follows (dollars in thousands):



|            |  | Gross CarryingAmount |       | AccumulatedAmortization |  
|----------- |  | -------------------- | ----- | ----------------------- | -
|Non-compete |  | $                    | 1,398 |                         | $
|            |  |                      |       |                         |  



NOTE
G  INCOME TAXES



The Operating Unit is a limited liability company and,
accordingly, no provision or liability for U.S. income taxes is reflected in the Operating Units financial statements. The U.S. taxable income of the Operating Unit and related deductions are allocated to and reported in the individual income
tax returns of the owners of the Operating Unit.



NOTE H  COMMITMENTS AND CONTINGENCIES



Litigation



The Operating Unit is engaged in routine litigation
incidental to its business. Management believes the ultimate outcome of this litigation will not have a material effect on the Operating Units financial position, liquidity or results of operations.



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##### Table of Contents

ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



GENERAL



Michael Foods, Inc. and its subsidiaries (the Company, we,
us, our) is a diversified producer and distributor of food products in four areas - egg products, refrigerated distribution, dairy products and potato products. We believe, through our Egg Products Division, we are the
largest producer of processed egg products in North America. The Refrigerated Distribution Division distributes a broad line of refrigerated grocery products to retail grocery outlets, including cheese, shell eggs, bagels, butter, margarine,
muffins, potato products, juice and ethnic foods. The Dairy Products Division processes and distributes soft-serve mix, ice cream mix, and extended shelf-life ultrapasteurized milk, creamers and other specialty dairy products to domestic quick
service businesses and other foodservice outlets, ice cream manufacturers and others. We sold the Dairy Products Division on October 15, 2003 (see Note D to the financial statements). The Potato Products Division processes and distributes
refrigerated potato products sold to the foodservice and retail grocery markets in the United States. Please see Note I to our consolidated financial statements for additional information about our business segments.



Our strategy is to grow value-added food product sales, primarily in the foodservice market,
by focusing on developing, marketing and distributing innovative, refrigerated products. The key to this strategy is value-added, whether that is in the product, the distribution channel or in the service provided to customers.



THREE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002



RESULTS OF OPERATIONS



Readers are directed to Note I - Business Segments for data on the unaudited financial
results of our four business segments for the three months ended September 30, 2003 and September 30, 2002.



Net sales for the 2003 period were $346.1 million, an increase of 18%, compared to net sales of $294.0 million in the 2002 period.Net sales increased in the 2003 period due largely to significant sales
growth at our largest division, Egg Products, which saw strong unit sales growth and the positive impact of the Canadian operations, which had the result of increasing sales by approximately $10.4 million in the 2003 period compared to 2002.



Egg Products Division external net sales for the 2003 period increased by
$41.9 million, or 25%, to $207.8 million from $165.9 million in the 2002 period. Net sales reflect an increase in unit sales from core operations related to improved sales efforts which increased market penetration, and the impact of an egg products
acquisition (see Note D to the financial statements). Unit sales increased 10%, with most product categories showing growth, except for frozen items and shell eggs. Frozen product sales declined due to our decision to not pursue certain unprofitable
sales. Unit sales rose 14% for higher value-added items. Inflation was also a factor in our higher Egg Products net sales, with the average sales price per unit increasing 15% year-over-year. Graded shell egg prices increased approximately 35%
compared to third quarter 2002 levels, as reported by Urner Barry Publications - a widely quoted industry pricing service. Related egg market increases raised the cost of purchased eggs, which was not fully reflected in our selling prices, and
resulted in lower margins for most of our egg products. However, margins increased significantly for shell eggs.



Approximately two-thirds of the Egg Products Divisions annual egg needs are purchased under contracts or in the spot market. A substantial majority of these eggs
are priced according to the cost of grain inputs or to egg market prices as reported by Urner Barry. Approximately one-third of annual egg needs are sourced from internal flocks, where feed costs typically represent roughly two-thirds of the cost of
producing such eggs. Feed costs were higher in the 2003 period compared to the 2002 period, with both corn and soybean meal costs 10-15% higher than those experienced in the 2002 period. Because of higher open market egg costs and higher feed costs,
overall egg costs increased significantly in the 2003 period as compared to the 2002 period. This kept egg products profitability about unchanged from 2002 period levels, but shell egg profitability, driven by market factors, was strong enough
to increase overall divisional profitability. Overall, the Divisions operating earnings increased by approximately $0.8 million in the 2003 period.



Refrigerated Distribution Division external net sales for the 2003 period increased by $9.4 million, or 16%, to $67.8 million from $58.4 million in the 2002 period. Net
sales reflected higher unit sales and significantly higher prices related to market conditions for the key product categories of cheese, butter and eggs. Divisional operating earnings decreased by approximately $0.1 million, due to a rapid rise in
costs which reduced margins for cheese.



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Potato Products Division external net sales for the 2003 period increased $0.5 million, or 3%, to $18.7 million from
$18.2 million in the 2002 period. Net sales reflected increases in unit volume and stable selling prices. Sales were particularly strong for mashed items  both at retail and at foodservice. Mashed unit sales, in total, rose 30% year-over-year.
New account activity, same-account sales growth, expanded distribution and higher marketing spending levels all contributed to the sales increase. Operating earnings for the 2003 period decreased approximately $0.4 million due to lower processing
yields which resulted from a lower quality 2002 potato harvest and increased sales and marketing spending related to raising customer awareness of our mashed potato products.



Dairy Products Division external net sales for the 2003 period increased $0.4 million, or 1%, to $51.8 million from $51.4 million in the
2002 period. Net sales reflected lower unit sales, mainly reflecting lower cartoned product sales, related to a customer diversifying its supplier base, that were not fully offset by unit sales gain from creamers. However, higher pricing, due to
market conditions, offset the lower unit sales. Ingredient and production costs compared favorably to those experienced in 2002. Operating earnings increased by approximately $3.1 million in the 2003 period, with the 2003 period excluding
approximately $1.4 million of depreciation due to the divisions held for sale status.



Gross profit in the 2003 period increased $5.0 million, or 9%, to $59.2 million from $54.2 million in the 2002 period. Our gross profit margin was 17.1% of net sales in the 2003 period compared to 18.4% in the 2002
period. The decrease in our gross profit margin for the 2003 period compared to the 2002 period reflected the factors discussed above, particularly increased raw material costs in the Egg Products, Refrigerated Distribution and Potato Products
divisions. It is our strategy to increase value-added product sales as a percent of total sales over time, while decreasing commodity-sensitive products contribution to consolidated sales. These efforts historically have been beneficial to
gross profit margins in most periods.



Selling, general and administrative
expenses in the 2003 period increased $2.0 million, or 7%, to $31.2 million from $29.2 million in the 2002 period.Such expenses were 9.0% of net sales in the 2003 period compared to 9.9% of net sales in the 2002 period. The decrease in
expenses as a percentage of sales is reflective of the strong sales growth we achieved and our cost control efforts across all divisions.



Operating profit in the 2003 period increased $2.9 million, or 11.6%, to $27.9 from $25.0 million in the 2002 period. Our operating profit margin was 8.1% of net sales in
the 2003 period compared to 8.5% in the 2002 period. The decline in gross profit margin more than offset the improvement seen in the selling, general and administrative expense ratio in the 2003 period, resulting in the lower operating profit
margin.



Interest expense declined $1.0 million in the 2003 period, reflecting
lower debt levels and lower short-term interest rates. Our tax rate was 39.2% in the 2003 period compared to 39.3% in the 2002 period.



NINE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002



RESULTS OF OPERATIONS



Readers are directed to Note I - Business Segments for data on the unaudited financial results of our four business segments for the nine months ended September 30, 2003
and September 30, 2002.



Net sales for the 2003 period were $968.2 million, an
increase of 12%, compared to net sales of $862.1 million in the 2002 period.Net sales increased because of the factors discussed below, but were higher in the 2003 period due largely to significant sales growth at our largest division, Egg
Products, which saw strong unit sales growth and the positive impact of a 2002 acquisition. Our newly acquired Canadian operations had the result of increasing sales by approximately $36.7 million in the 2003 period compared to 2002.



Egg Products Division external net sales for the 2003 period increased by $92.6 million, or
19%, to $575.6 million from $483.0 million in the 2002 period. Sales reflected increased unit sales from core operations related to improved sales efforts which increased market penetration and the sales impact of a Canadian egg products company
acquisition (see Note D to the financial statements). Unit sales rose in all categories, except for frozen items and shell eggs, and rose 11% for higher value-added items. Graded shell egg prices increased approximately 22% compared to 2002 period
levels, as reported by Urner Barry. Such egg market increases raised the cost of purchased eggs which was not fully reflected in our selling prices and resulted in lower margins for most of our egg products.



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Approximately two-thirds of the Egg Products Divisions annual egg needs are purchased under contracts or in the
spot market. A substantial majority of these eggs are priced according to the cost of grain inputs or to egg market prices as reported by Urner Barry. Approximately one-third of our annual egg needs are sourced from internal flocks where feed costs
typically represent roughly two-thirds of the cost of producing such eggs. Feed costs were moderately higher in the 2003 period compared to the 2002 period. Costs for our largest feed component, corn, rose by approximately 22% in the 2003 period as
compared to the 2002 period. Because of higher open market egg prices and higher feed costs, overall egg costs increased significantly in the 2003 period as compared to the 2002 period. As a result, the Divisions operating earnings decreased
by approximately $1.6 million in the 2003 period. Operating earnings for the 2003 period also included a gain of approximately $2.7 million from the partial settlements of two litigation matters.



Refrigerated Distribution Division external net sales for the 2003 period increased by $14.4
million, or 8%, to $193.0 million from $178.6 million in the 2002 period. Net sales reflected higher unit sales for the key product categories of cheese, butter and eggs. Pricing was mixed, rising slightly in total, but declining slightly for the
key cheese category reflective of market conditions. Divisional operating earnings increased by approximately $4.3 million, caused primarily by an improvement in cheese margins, due to favorable market conditions (i.e., historically low cheese
costs) through the first half of 2003. Cheese costs in the 2002 period were higher than in the 2003 period and were in-line with historical levels. Also, we increased our allowance for doubtful accounts in the 2003 period by approximately $1.7
million in recognition of the bankruptcy filing by a major customer.



Potato
Products Division external net sales for the 2003 period increased $2.1 million, or 4%, to $54.9 million from $52.8 million in the 2002 period. Net sales reflected modest increases in both volume and selling prices. Sales were particularly strong
for mashed items  both at retail and at foodservice. Mashed unit sales rose nearly 25% year-over-year. New account activity, same-account sales growth, expanded distribution and higher marketing spending levels all contributed to the sales
increase. Operating earnings for the 2003 period decreased approximately $1.3 million due to lower processing yields, which resulted from a lower quality 2002 potato harvest, and increased sales and marketing spending related to raising customer
awareness of our mashed potato products.



Dairy Products Division external net
sales for the 2003 period decreased $3.0 million, or 2%, to $144.7 million from $147.7 million in the 2002 period. Net sales reflected lower unit sales due to lower cartoned product sales, related to a customer diversifying its supplier base, that
were not fully offset by unit sales gains from creamers. Pricing rose slightly from 2002 period levels. Ingredient costs improved related to national dairy market conditions. Also, production costs were more favorable than those experienced in 2002,
particularly for the Texas facility. These factors, along with the 2003 period excluding approximately $1.8 million of depreciation due to the divisions held for sale status, caused operating earnings to increase by approximately
$4.0 million from 2002 period levels.



Gross profit in the 2003 period
increased $5.0 million, or 3%, to $167.5 million from $159.5 million in the 2002 period. Our gross profit margin was 17.3% of net sales in the 2003 period compared to 18.5% in the 2002 period. The decrease in our gross profit margin for the 2003
period compared to the 2002 period reflected the factors discussed above, particularly increased raw material costs in the Egg Products, Refrigerated Distribution and Potato Products divisions. It is our strategy to increase value-added product
sales as a percent of total sales over time, while decreasing commodity-sensitive products contribution to consolidated sales. These efforts historically have been beneficial to gross profit margins in most periods.



Selling, general and administrative expenses in the 2003 period increased $2.8 million, or
3%, to $91.5 million from $88.7 million in the 2002 period and reflected the partial litigation settlements gain noted above. Such expenses were 9.4% of net sales in the 2003 period compared to 10.3% of net sales in the 2002 period, and were
reflective of the strong sales growth we achieved, our cost control efforts across all divisions and the approximate $2.7 million litigation gain. Core operating expenses, excluding the litigation settlements, rose approximately 6% in the 2003
period.



Operating profit in the 2003 period increased $5.1 million, or
7%, to $75.9 million from $70.8 million in the 2002 period, inclusive of the litigation gain. Our operating profit margin was 7.8% of net sales in the 2003 period compared to 8.2% in the 2002 period. The decline in gross profit margin more than
offset the improvement seen in the selling, general and administrative expense ratio in the 2003 period, resulting in the lower operating profit margin.



Interest expense declined by approximately $2.0 million in the 2003 period, reflecting lower debt levels and lower short-term interest rates. Our tax rate was 38.8% in
the 2003 period compared to 39.3% in the 2002 period.



Earnings before
interest, taxes, depreciation and amortization (EBITDA, as defined in our credit agreement) for the nine months ended September 30, 2003 were $119.4 million, an increase of 5%, compared to $113.9 million for the nine months ended
September 30, 2002. EBITDA increased because of the factors discussed in the above divisional results of operations. We believe that EBITDA is a relevant indication of the strength of our operating performance as measured in terms of operating cash
earnings capabilities.



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We believe it is the key measurement used by our debtholders to assess our operating performance. Because of this, we use
EBITDA as the primary internal measurement of our operating performance and it is the main focus of our employee incentive compensation programs.



We believe EBITDA is a widely accepted financial indicator used to analyze and compare companies on the basis of operating performance. It should not be considered in
isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles nor as an alternative to cash flows as a measure of liquidity and is not indicative of operating profit as determined under
generally accepted accounting principles. The following table reconciles our net earnings to EBITDA as most commonly defined, and then to EBITDA as we are required to define it in accordance with our credit agreement, for the nine months ended
September 30 (dollars in thousands):



|                                                                      |  | 2003 |         | 2002
|--------------------------------------------------------------------- |  | ---- | ------- | ----
|Net earnings                                                          |  | $    | 24,515  |     
|                                                                      |  |     
|Total interest expense, excluding amortization of debt issuance costs |  |      | 32,450  |     
|                                                                      |  |     
|Amortization of debt issuance costs                                   |  |      | 3,559   |     
|                                                                      |  |     
|Income taxes                                                          |  |      | 15,556  |     
|                                                                      |  |     
|Depreciation and amortization                                         |  |      | 41,286  |     
|                                                                      |  |      |         |     
|EBITDA (as commonly defined)                                          |  |      | 117,366 |     
|                                                                      |  |      |         |     
|Equity sponsor management fee                                         |  |      | 951     |     
|                                                                      |  |     
|Industrial revenue bonds related expenses                             |  |      | 719     |     
|                                                                      |  |     
|Other                                                                 |  |      | 324     |     
|                                                                      |  |      |         |     
|EBITDA (as defined in our credit agreement)                           |  | $    | 119,360 |     
|                                                                      |  |      |         |     



Under our credit agreement, we are
required to report quarterly on our compliance with three financial covenants, with the calculations based primarily on EBITDA as defined in the credit agreement and done on a trailing twelve month basis. As of September 30, 2003, our leverage ratio
was 2.68:1.00, versus a requirement of less than or equal to 4.50:1.00, our interest coverage ratio was 3.68:1.00, versus a requirement of greater than or equal to 2.00:1.00, and our fixed charge coverage ratio was 1.97:1.00, versus a requirement of
greater than or equal to 1.00:1.00.



COMMODITIES AND PRODUCT PRICING



Certain of our products are
sensitive to changes in commodity prices. Value-added egg products, such as extended shelf-life liquid and precooked products, account for approximately 60% of the Egg Products Divisions net sales. The remainder of Egg Products Division sales
is derived from the sale of other egg products and shell eggs which are commodity-sensitive. Gross profit from shell eggs is primarily dependent upon the relationship between shell egg prices and the cost of feed, both of which can fluctuate
significantly. Graded shell egg pricing in the 2003 period was significantly higher than in the 2002 period as measured by a widely quoted pricing service, and feed costs also rose significantly year-over-year. Gross profit margins for extended
shelf-life liquid eggs, egg substitutes, and precooked and hardcooked egg products are less sensitive to commodity price fluctuations than are other egg products or shell eggs. Our Refrigerated Distribution Division derives approximately 80% of its
net sales from refrigerated products produced by others, thereby somewhat reducing the effects of commodity price swings. However, a majority of the approximately 80% represents cheese and butter, and the costs for both fluctuate with national dairy
markets. Time lags between cost changes for these lines and wholesale/retail pricing changes can result in margin expansion or compression which can be significant. The balance of Refrigerated Distribution sales are mainly from shell eggs, some of
which are produced by the Egg Products Division, sold on a distribution, or non-commodity, basis.



The Dairy Products Division sells its products primarily on a cost-plus basis and, therefore, the Divisions earnings are not typically affected greatly by raw ingredient price fluctuations, except over short
time periods.



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The Potato Products Division typically purchases 75%-95% of its raw potatoes from contract producers under annual
contracts. The remainder is purchased at market prices to satisfy short-term production requirements or to take advantage of market prices when they are lower than contracted prices. Moderate variations in the purchase price of raw materials or the
selling price per pound of finished products can have a significant effect on Potato Products Division operating results.



Inflation is not expected to have a significant impact on our business. We have generally been able to offset the impact of inflation through a combination of
productivity gains and price increases.



CAPITAL RESOURCES AND LIQUIDITY



We have a credit agreement with
various lenders, including commercial banks, other financial institutions and investment groups, which expires in 2007 and 2008 and provides credit facilities which originally provided $470 million. Within these credit facilities, there is a $100
million revolving line of credit. At September 30, 2003, there was approximately $6.5 million utilized under the revolving line of credit for letters of credit, while the outstanding balance of the term A portion of the credit facility approximated
$51.8 million and the term B portion approximated $180.6 million. We reduced our debt under the credit agreement by approximately $68 million in the first nine months of 2003 through a combination of scheduled payments and voluntary prepayments.
There is also $200 million outstanding on our 11 3⁄4% senior subordinated notes due 2011.



The weighted average interest rate for our borrowings under the credit agreement, adjusted for the effects of hedging activities, was approximately 7.4% at September 30, 2003. Given our business trends and cash flow
forecast, we do not anticipate a significant use of the revolving line of credit during the balance of 2003.



The credit agreement contains various restrictive covenants. The agreement prohibits us from prepaying other indebtedness, including the subordinated notes, and it requires us to maintain specified financial ratios.
In addition, the credit agreement prohibits us from declaring or paying any dividends and prohibits us from making any payments with respect to the notes if we fail to perform our obligations under, or fail to meet the conditions of, the credit
agreement or if payment creates a default under the credit agreement. The indenture governing the subordinated notes, among other things: (i) restricts our ability and the ability of our subsidiaries to incur additional indebtedness, issue shares of
preferred stock, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; (ii) prohibits certain restrictions on the ability of certain of our subsidiaries to pay dividends or make
certain payments to us; and (iii) places restrictions on our ability and the ability of our subsidiaries to merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our
assets. The indenture related to the notes and the credit agreement also contains various covenants which limit our discretion in the operation of our businesses. We were in compliance with all of the covenants in the indenture and the credit
agreement as of and for the nine months ended September 30, 2003. The Company, principal shareholders or their affiliates may, from time to time, enter the market to purchase or sell our subordinated notes, in compliance with applicable securities
laws.



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



We invested $22.8 million in capital expenditures during the nine months ended September 30, 2003. We plan to spend approximately $12 million on capital expenditures
during the balance of 2003. Our principal sources of funds are anticipated to be cash flows from operating activities and borrowings under our senior credit facility. We believe that these funds will provide us with sufficient liquidity and capital
resources for us to meet our current year and longer-term plans, including the working capital and capital expenditure needs such plans may generate.



On October 15, 2003, we completed the sale of our Dairy Products Division operating segment to Dean Foods Company for approximately $155 million. The net proceeds from
the sale of the Dairy Products Division were used to repay debt under our credit agreement. For further information regarding the sale of the Dairy Products Division and its historical contribution to us, see Note E to the financial statements.



On October 10, 2003, THL Food Products Holding Co. and its wholly owned
subsidiary, THL Food Products Co., entered into a merger agreement with M-Foods Holdings, Inc., among others, pursuant to which THL Food Products Holding Co. will acquire our parent, M-Foods Holdings, Inc., for approximately $1.05 billion, subject
to certain adjustments. THL Food Products Co. and THL Food Products Holding Co. are affiliates of Thomas H. Lee Partners, a Boston-based private equity firm. It is expected the merger transaction will be completed prior to year end. It is
anticipated that some or all of our existing debt obligations, including our credit agreement, will be refinanced if the acquisition occurs. We can not assure you what impact any such refinancing may have on our liquidity and capital resources.





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SEASONALITY



Consolidated quarterly operating results are affected by the seasonality of our net sales and operating profits. Specifically, shell egg
prices typically rise seasonally in the first and fourth quarters of the year due to increased demand during holiday periods. Generally, refrigerated distribution operations experience higher net sales and operating profits in the fourth quarter,
coinciding with incremental consumer demand during the holiday season. Net sales and operating profits from dairy operations typically are significantly higher in the second and third quarters due to increased consumption of ice milk and ice cream
products during the summer months. Operating profits from potato products are less seasonal, but tend to be higher in the second half of the year coinciding with the potato harvest.



FORWARD-LOOKING STATEMENTS



Certain items in this Form 10-Q may be forward-looking statements, which are made in reliance upon the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous risks and uncertainties, including variances in the demand for our products due to consumer, industry and broad economic developments, as well as
variances in the costs to produce such products, including normal volatility in egg, feed and dairy ingredients costs. Our actual financial results could differ materially from the results estimated by, forecasted by, or implied by us in such
forward-looking statements. Forward-looking statements contained in this Form 10-Q speak only as of the date hereof. We disclaim any obligation or understanding to publicly release updates to, or revisions of, forward-looking statements to reflect
changes in our expectations or events, conditions or circumstances on which any such statement is made.



|ITEM  3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------



There were no material changes in our market risk during the nine month period ended September 30, 2003.



|ITEM  4. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------



a. Evaluation of disclosure controls and procedures.



Under the supervision, and with the participation of, our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Rules 13a-14(c)/15d-14(c) under the Exchange Act) as of a date (the Evaluation Date) within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC
filings.



b. Changes in internal controls.



There were no significant changes made in our internal controls during the period covered by
this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.



PART II - OTHER INFORMATION



|ITEM  1. |  | LEGAL PROCEEDINGS
|-------- |  | -----------------



On August 12, 2003 a jury in the patent infringement case, captioned Sunny Fresh Foods, Inc. v. Michael Foods, Inc. and North Carolina State University, upheld the validity of certain patents we license from North
Carolina State University, but also found that Sunny Fresh Foods, Inc. did not infringe the patents. We are pursuing the appeals process. See Note G to our financial statements.



|ITEM  5. |  | OTHER INFORMATION
|-------- |  | -----------------



We issued a news release on October 29, 2003, pertaining to our financial results for the three and nine month periods ended September 30, 2003. In this news release we also provided guidance on our expected 2003 net
sales and EBITDA exclusive of the recently sold Dairy Products Division. Please see exhibit 99.1.



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##### Table of Contents

|ITEM  6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|-------- |  | --------------------------------



|(a) | Exhibits and Exhibit Index.
|--- | ---------------------------



The following exhibits are filed as part of this report:



|EXHIBITNO. |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           | 
|2.1        |  | Agreement and Plan of Merger, dated December 21, 2000, by and among Michael Foods Acquisition Corp., Michael Foods, Inc. and M-Foods Holdings, Inc.(1)                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | 
|2.2        |  | Amendment Number One to Agreement and Plan of Merger, dated March 6, 2001, by and among Michael Foods Acquisition Corp., Michael Foods, Inc. and M-Foods Holdings,
Inc.(1)                                                                                                                                                                                                                                                                                                                                                                                                        
|           | 
|2.3        |  | Agreement and Plan of Merger, dated as of October 10, 2003, by an among M-Foods Holdings, Inc., THL Food Products Holding Co., THL Food Products Co., M-Foods Investors, LLC, as
representative for the stockholders of the Company, and the stockholders of M-Foods Holdings, Inc.(2)                                                                                                                                                                                                                                                                                            
|           | 
|2.4        |  | Securities Purchase Agreement with Suiza Dairy Group, Inc. dated October 1, 2003.(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | 
|3.1        |  | Amended and Restated Articles of Incorporation of Michael Foods, Inc.(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | 
|3.2        |  | Bylaws of Michael Foods, Inc.(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           | 
|4.1        |  | Purchase Agreement, dated March 16, 2001, between Michael Foods Acquisition Corp., Michael Foods, Inc., and Banc of America Securities, LLC and Bear, Stearns &
Co.(1)                                                                                                                                                                                                                                                                                                                                                                                                            
|           | 
|4.2        |  | Indenture, dated March 27, 2001, between Michael Foods Acquisition Corp. and BNY Midwest Trust Company, as trustee(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           | 
|4.3        |  | Supplemental Indenture, dated as of April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc., Michael Foods of Delaware, Inc., Northern Star Co., Minnesota
Products, Inc., Farm Fresh Foods, Inc., Crystal Farms Refrigerated Distribution Company, WFC, Inc., Wisco Farm Cooperative, M. G. Waldbaum Company, Papettis Hygrade Egg Products, Inc., Casa Trucking, Inc., Papetti Electroheating Corporation,
Kohler Mix Specialties, Inc., Midwest Mix, Inc., Kohler Mix Specialties of Connecticut, Inc. and Midwest Mix, Inc. and BNY Midwest Trust Company(1)
|           | 
|4.4        |  | Second Supplemental Indenture, dated as of May 2, 2001, by and among M-Foods Dairy, LLC and M-Foods Dairy TXCT, LLC, Michael Foods, Inc. and BNY Midwest Trust
Company(1)                                                                                                                                                                                                                                                                                                                                                                                                         
|           | 
|4.5        |  | Registration Rights Agreement, dated March 27, 2001, by and among Michael Foods Acquisition Corp., and Banc of America Securities, LLC and Bear, Stearns &
Co.(1)                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | 
|4.6        |  | Collateral Pledge and Security Agreement, dated March 27, 2001, between Michael Foods Acquisition Corp., and Banc of America Securities, LLC and Bear, Stearns & Co. and BNY
Midwest Trust Company as collateral agent and securities intermediary(1)                                                                                                                                                                                                                                                                                                                             
|           | 
|10.1       |  | Credit Agreement, dated April 10, 2001, among Michael Foods, Inc., M-Foods Holdings, Inc., the Guarantors, Bank of America, N.A., as Agent, Banc of America Securities, LLC, as
Sole Lead Arranger and Sole Book Running Manager, and Bear, Stearns & Co., as Syndication Agent(1)                                                                                                                                                                                                                                                                                                
|           | 
|10.2       |  | Pledge Agreement, dated April 10, 2001, between Michael Foods, Inc., Bank of America, N.A. and Banc of America Securities, LLC(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | 
|*10.3      |  | M-Foods Holdings, Inc. 2001 Stock Option Plan(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           | 
|*10.4      |  | Form of M-Foods Holdings 2001 Stock Option Plan Stock Option Award Agreement(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | 
|*10.5      |  | Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Gregg A. Ostrander(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | 
|*10.6      |  | Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and John D. Reedy(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           | 
|*10.7      |  | Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and James D. Clarkson(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | 
|*10.8      |  | Employment Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Bill L. Goucher(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | 
|*10.9      |  | Severance and Deferred Compensation Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and James Mohr(1)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | 
|*10.10     |  | Severance and Deferred Compensation Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Harold D. Sprinkle(1)                                                                                                                                                                                                                                                                                                                                                                                                                           
|           | 
|*10.11     |  | Severance and Deferred Compensation Agreement, dated April 10, 2001, by and among Michael Foods, Inc., M-Foods Holdings, Inc. and Max Hoffmann(1)                                                                                                                                                                                                                                                                                                                                                                                                                                 



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##### Table of Contents

|       | 
|------ | 
|*10.12 | 
|       | 
|10.13  | 
|       | 
|*10.14 | 
|       | 
|*10.15 | 
|       | 
|*10.16 | 
|       | 
|*10.17 | 
|       | 
|*10.18 | 
|       | 
|*10.19 | 
|       | 
|*10.20 | 
|       | 
|*10.21 | 
|       | 
|*10.22 | 
|       | 
|*10.23 | 
|       | 
|*10.24 | 
|       | 
|*10.25 | 
|       | 
|*10.26 | 
|       | 
|*10.27 | 
|       | 
|*10.28 | 
|       | 
|*10.29 | 
|       | 
|*10.30 | 
|       | 
|*10.31 | 
|       | 
|31.1   | 
|       | 
|31.2   | 
|       | 
|99.1   | 

---

|* | Management Contract or Compensation Plan Arrangement
|- | ----------------------------------------------------

|(1) | Incorporated by reference from the Companys Registration Statement on Form S-4 filed July 18, 2001.
|--- | ----------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from the Companys Form 8-K filed October 16, 2003.
|--- | -----------------------------------------------------------------------------

|(3) | Incorporated by reference from the Companys Form 8-K filed October 17, 2003 and Form 8-K/A filed October 29, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(b) | Reports on Form 8-K
|--- | -------------------



Reference is made to a report filed on Form 8-K dated July 25, 2003 pertaining to our financial results for the three months and six months ended June 30, 2003.



Reference is made to a report filed on Form 8-K dated October 16, 2003 pertaining to our
merger agreement with affiliates of Thomas H. Lee Partners.



Reference is made
to a report filed on Form 8-K dated October 17, 2003 pertaining to the completion of the sale of our dairy business to Suiza Dairy Group, Inc., a subsidiary of Dean Foods Company.



Reference is made to a report on Form 8-K/A dated October 29, 2003 pertaining to our pro forma financial results per the sale of our dairy
products business to Suiza Dairy Group, Inc., a subsidiary of Dean Foods Company.



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SIGNATURES



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



|                       |  | MICHAEL FOODS, INC.
|---------------------- |  | -------------------
|                       |  | (Registrant)       
|                       |  |                    
|Date: October 29, 2003 |  | By:                
|                       |  |                    
|                       |  |                    
|                       |  |                    
|Date: October 29, 2003 |  | By:                
|                       |  |                    
|                       |  |                    



40