<PAGE>   1
MICHAEL FOODS, INC.                                                EXHIBIT 13.1
1995 ANNUAL REPORT

The Company

Michael Foods, Inc. and Subsidiaries

Michael Foods, Inc. is a diversified food processor and distributor with
businesses in egg products, refrigerated grocery products, frozen and
refrigerated potato products and specialty dairy products. Our strategic thrust
is to continue to transition Michael Foods into a value-added food products
company by being a leader in the food industry in introducing innovative food
technology and customer solutions. The key to this strategy is "value-added",
whether that is in the product, the distribution channel or in the service we
provide to our customers. Principal subsidiaries include M.G. Waldbaum Company,
Crystal Farms Refrigerated Distribution Company, Northern Star Co. and its
related potato businesses and Kohler Mix Specialties, Inc.

Financial Highlights


(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
  YEARS ENDED DECEMBER 31,                    1995      1994      1993
  ------------------------------------------------------------------------
  <S>                                         <C>       <C>       <C>
  Net sales................................   $536,627  $505,965  $474,783
  Net earnings (loss)......................     17,591    15,189   (16,320)
                                              --------   -------  --------
  Net earnings (loss) per share............   $    .91  $    .79  $   (.84)
  Cash dividends per share.................   $    .20  $    .20  $    .20
  Weighted average common shares 
   outstanding.............................     19,328    19,315    19,416
                                              --------   -------  --------
  AT DECEMBER 31,

  Working capital..........................   $ 42,095  $ 33,589  $ 22,267
  Total assets.............................    359,227   336,645   329,087
  Long-term debt...........................     89,690    88,795    94,194
  Stockholders' equity.....................    180,095   166,029   155,003
</TABLE>                                      --------  --------  --------



<PAGE>   2
To Our Stockholders

Your company had a strong year. The benefits of being well down the path
toward value-added product sales, and away from commodity-sensitive products,
were quite evident. For the year, sales from the operations of the company rose
8% and net earnings increased 16%.
     The two biggest operating challenges we faced in 1995 related to raw
material sourcing. In the third quarter, the cost of grain, which impacts our
feed costs in the egg production area, started to rise sharply and open market
potatoes increased in value as it became apparent that the size of the national
corn, soybean and potato crops would come in below expectations. Also, there
were quality problems with the fall potato crop. These issues were even more
prevalent in the fourth quarter and will be with us well into 1996. We have
seen, however, some off-sets to these production cost factors in the form of
increased pricing for certain egg and potato products. However, this price
relief probably will not be enough to overcome the raw material cost pressures
expected to be evident until this fall's harvest. During this period of
unusually strong cost pressure, we will steadfastly maintain our primary focus
of growing the value-added portion of our sales mix by providing innovative
solutions for our customers.
     Considerable effort went into developing a long-range strategic plan for
Michael Foods this past year. We now have a formal "blue print" of what we want
the company to look like in the year 2000. The core focus of "MFI 2000" is on
providing foodservice and retail solutions for our customers. Through this
effort we see Michael Foods increasingly becoming a partner with our customers
by establishing strong strategic alliances. With this focus, aggressive new
product development and acquisitions, we believe we can drive our sales to much
higher levels and grow our earnings at a greater, and more consistent, rate
than we have in the past.
     Our management team has established six "strategic imperatives" that
should enable the company to successfully execute the MFI 2000 long-range plan.
They are:

  1) TO COMMUNICATE THE VISION OF MFI 2000 TO ALL 2,600 MICHAEL FOODS EMPLOYEES.
     This was accomplished in the fourth quarter of 1995.

  2) TO REFOCUS AND STREAMLINE OUR SALES EFFORTS WITH OUR FOODSERVICE AND
     RETAIL CUSTOMERS.
     This effort was started last year with the integration of the Kohler Mix   
     sales team into the Michael Foods Sales group. At the same time we
     integrated the retail sales team into the Crystal Farms sales group. The
     result is a separate, dedicated sales focus for both foodservice and
     retail customers.

  3) TO RE-ENERGIZE INNOVATION AT MICHAEL FOODS. 
     This will be a priority, as much of our growth in the coming years will
     come from businesses and products we are not in today. In December         
     1995 a group of R&D experts and other managers from across the operating
     companies began work on several new product/business initiatives.

  4) TO INTEGRATE OUR MANAGEMENT INFORMATION SYSTEMS (MIS) ACROSS THE COMPANY.
     A major MIS upgrade was started in late 1994 and significant progress was  
     made in this area in 1995. The goal is to have all of our operating
     companies on the new integrated system by the end of 1997. When completed,
     this system will enable us to be a faster and smarter competitor in our
     markets.

  5) TO SYNERGIZE COSTS OUT OF MICHAEL FOODS.  
     We have initiatives underway to leverage the purchasing power of the
     company to procure lower cost packaging, supplies, labels and other
     key materials for each of our operating companies. We expect meaningful
     cost savings from these efforts and others that are underway across the
     company.

  6) TO DEVELOP THE PARAMETERS OF, AND THEN EXECUTE, AN AGGRESSIVE
     ACQUISITION STRATEGY.
     Acquisition guidelines were refined in late 1995 which will drive our
     efforts in this area. In order to achieve the aggressive sales goal that
     we have set for the year 2000, over half of our sales growth will have to
     come from acquisitions.

     We are excited about the vision that MFI 2000 sets for the company and, as
described above, we have already started executing this long-range plan. We
will report on the progress made toward our MFI 2000 goals and objectives in
the months and years ahead.
     As many of you will recall, in late 1994 we began a test under which we
marketed, sold and distributed refrigerated pastas and related sauces in the
foodservice market under an agreement with Romance Foods Co.


                                      1


<PAGE>   3
concluded late last year that the opportunity in pasta was not large enough to
warrant using significant corporate resources to develop the line further and 
the test was ended.
     In other corporate news, in December we completed the first acquisition we
have made in over four years. We purchased the institutional refrigerated
potato products line of Interstate Food Processing Corp. Interstate is the
second largest producer in the U.S. foodservice refrigerated potato products
market after our Northern Star subsidiary. The purchase included all of the
foodservice potato products volume and related processing equipment and a
long-term license for the use of Interstate's brand in this market. Taking over
our primary competitor's volume should allow for increased growth and improved
efficiencies in our value-added potato products business.
     On the patent litigation front, 1995 was largely a year of waiting. We
received mixed messages regarding the status of the patents we license for the
production of long shelf-life liquid whole eggs. In early July, North Carolina
State University ("NCSU"), the patent-holder, prevailed at the United States
Court of Appeals. The Court reversed a decision by the United States Patent and
Trademark Office ("PTO"), which had rejected NCSU's arguments that one of its
process patents should be reissued as a product patent. Later that month, the
PTO issued a First Office Action in a separate, but related,
Reissue/Reexamination, which preliminarily rejected claims under the fourth
NCSU process patent being reexamined as a result of challenges filed by egg
industry competitors. In early 1996, a Second Office Action in that
Reissue/Reexamination was received which continued the rejections and it is
expected that claims under the other three NCSU patents will also be rejected.
Pending the ultimate outcome of this Reissue/Reexamination process, patent
infringement lawsuits with two egg products competitors have been stayed and
another has been dismissed without prejudice. An appeal of the rejections has
been started within the PTO and an appeal will also be made, if necessary, to
the Court of Appeals. Counsel estimates that the appeal process, in total,
could take as long as two years. In the meantime, the four patents remain valid
and fully in force.
     Late in the year, we announced an agreement with North Star Universal,
Inc. ("NSU") to enter into a tax-free business combination of our companies, in
which Michael Foods will be the surviving company. As a result of the
transactions, we will in effect repurchase and retire a portion of NSU's
Michael Foods stock holdings, at a discount to the market price of Michael
Foods' stock prior to closing, by assuming NSU's debt. NSU presently owns
7,354,950 shares, or approximately 38%, of Michael Foods' common stock. NSU's
remaining Michael Foods stock holdings will then be allocated pro rata to NSU's
stockholders in a tax-free distribution. The debt to be assumed by Michael
Foods will be $25-$38 million and the price per share discount will be
8%-10% depending upon the level of debt assumed. All of NSU's other assets and
liabilities will be transferred to a new company and distributed to its
stockholders.
     Assuming a favorable tax ruling from the IRS, satisfaction of certain
other conditions, and approval by the stockholders of both companies, we expect
to close the NSU transaction this summer. This should be good news for you as a
Michael Foods stockholder, as your percentage ownership in Michael Foods will
increase, earnings per share will improve as a result of the stock retirement,
the stock's publicly-held float will increase and we will enjoy increased
flexibility as a corporation. As I write this, the necessary governmental
filings are being prepared. You will receive additional information on the
proposed transaction in the months ahead. We tentatively expect to hold the
Annual Meeting of Stockholders in June and will consider a vote on this matter
at that meeting.
     The opportunities and challenges ahead will demand the best from  all of
the employees of Michael Foods. We have made plans for the future and we are
executing those plans. All of us are excited about moving your company ahead to
new heights. Thank you for your support of our efforts.

Sincerely,



/s/ Gregg A. Ostrander

Gregg A. Ostrander
President and Chief Executive Officer




                                      2


<PAGE>   4
EGG PRODUCTS DIVISION

The M. G. Waldbaum Company had a strong 1995. Sales rose moderately and
earnings increased an even greater amount. There were three areas that were
responsible for the majority of the earnings growth.
     First, Easy Eggs(R) unit sales again increased. This product had a solid
showing in its seventh year of commercial sales. Sales continued to benefit
from the growth key Easy Eggs(R) customers are seeing in their businesses,
primarily from opening new restaurant locations, and from the focus the Michael
Foods Sales group has brought to this product. This rising volume, in turn,
provided notable efficiencies in the operation of the Gaylord, Minnesota egg
products plant.
     Second, the MicroFresh(TM) frozen egg patty and omelet line had excellent
sales. Waldbaum has devoted a considerable amount of attention to this business
over the past two years and 1995 was the first full year that MicroFresh(TM)
had a full-time sales resource devoted to the line. There is growing interest
in this microwaveable egg product line as consumers and foodservice operations
move increasingly to convenient, but high quality, foods.
     Third, losses were reduced in the shell egg area. Though grain prices
began to rise sharply at mid-year, which raised feed costs for all of
Waldbaum's egg production, egg selling prices also increased as the year
unfolded. The latter was a response to both the grain situation and the
reduction in the national laying flock last summer as a result of extensive hot
weather. Grain prices will likely hold relatively high levels, at least through
the first half of 1996. Therefore, significantly higher egg production costs
are expected through much of 1996 versus those which prevailed in 1995. Egg and
egg product pricing in 1996 will depend, in part, upon how egg producers
respond to this high cost environment and the speed at which hens are replaced
in the national flock.

     In other egg news, Simply Eggs(TM) Brand Scrambled Egg Mix was 
discontinued in the retail market in late 1995. The product had a niche in the
egg substitute category, but management concluded that the consumer support
costs to grow the sales meaningfully would be too high relative to the 
product's longer-term profit margin potential. The product remains available in
the foodservice market, where it has experienced good sales results.

[ARTWORK]
MICROFRESH(TM) EGG PATTIES ARE USED IN A VARIETY OF PREPARED BREAKFAST ITEMS, 
INCLUDING MICROWAVEABLE  SANDWICHES.

                                      3


<PAGE>   5
POTATO PRODUCTS DIVISION


Northern Star Co. had mixed results in 1995. While the division's sales
increase was the largest recorded within Michael Foods, earnings were down for
the year. Sales benefited from strong growth in the refrigerated potato
products line-both at retail and foodservice. On the retail side, the Simply
Potatoes(TM) consumer advertising and promotion program was expanded from three
to 16 markets early in the year and there has been a good response to this
campaign. A further expansion of this program to 26 markets is planned for
early  1996.   With the help of increased consumer awareness, the newest item
in the Simply Potatoes(TM) family-Sliced Home Fries-became the second largest
selling item in the line late in the year. On the foodservice side, the Michael
Foods Sales group was successful in growing the refrigerated potato products
volume. Increasingly, foodservice customers are finding these products to be
high quality, and convenient, alternatives to frozen, dehydrated or hand-made
potato products. During 1995 the Potato Products Division also added a major
new foodservice account which is using refrigerated, sliced potatoes to make
high quality mashed potatoes in its rapidly expanding operations.
     Frozen potato products had a difficult year. Soft volumes and weak pricing
were experienced through most of the year. Additionally, raw material issues
hurt production yields. Potatoes held in storage from the fall 1994 harvest
offered less-than-desired production yields when they were processed in the
spring and summer of 1995. Then new crop potatoes, many of which are grown for
Northern Star under contract, were smaller than expected and were available in
lesser quantities than anticipated. This has kept processing yields below
normal and has also raised raw material sourcing costs. Fortunately, there are
industry-wide potato sourcing issues this year, which have resulted in pricing
for all potato products to be in an uptrend since the fall, as foodservice
demand has not noticeably slackened.
     The management team at Northern Star was realigned last summer when a new
president of the division was named. He had previously been an officer at the
Crystal Farms Refrigerated Distribution Division and brings a wealth of
experience and managerial expertise to his new position.

[ARTWORK]
SIMPLY POTATOES(TM) SLICED HOME FRIES ARE AN INCREASINGLY POPULAR PRODUCT IN 
THE RETAIL GROCERY MARKET.



                                      4


<PAGE>   6
REFRIGERATED DISTRIBUTION DIVISION

Crystal Farms had an excellent 1995. Sales rose at a rate greater than
that of the company in total and strong expense management resulted in an even
stronger increase in divisional profitability.
     The division continued to strengthen alliances with key customers and
build new relationships with several large warehouse customers. While sales
volumes last year from these new accounts were relatively modest, it is
expected that 1996 will see these customers contribute significant volume
gains.
     Twenty-six new products and product line extensions were introduced in
1995 to ensure Crystal's broad refrigerated product line remains responsive to
changing consumer tastes. Among the new products introduced last year were a
line of bagel spreads to complement Crystal's bagel offerings, "cracker
toppers" spreadable cheese, and two new flavor extensions to the It's So Cheesy
brand of cheese sauce.
     In the fourth quarter of 1995, the Michael Foods retail sales and broker
network was combined with the sales group of the Crystal Farms Division. This
combination provides two distinct opportunities for the company. First, it
enables Michael Foods to have a unified sales presence in the retail grocery
market. Second, it provides Crystal Farms, which presently distributes to a 23
state area, access to a national sales force to present its products to the
U. S. grocery trade.

[ARTWORK]
CRYSTAL FARMS' BAGEL TOPPER LINE COMPLIMENTS THIS DIVISION'S LARGE RETAIL 
BAGEL BUSINESS.







                                      5


<PAGE>   7
DAIRY PRODUCTS DIVISION


1995 was a solid year for the Dairy Products Division. Sales and earnings
rose, though modestly in comparison to a very strong 1994.
     Late in the year the corporate sales efforts in the foodservice and
industrial markets were further consolidated. The stand-alone sales staff of
Kohler Mix Specialties was melded into the Michael Foods Sales Group, adding
roughly 90 people to the list of sales personnel who are talking about Kohler's
specialty dairy products with their customers every work day.
     The increased sales emphasis on dairy products, coupled with an increased
capacity at the second Kohler plant in Texas, has resulted in significant new
national account activity. It is expected that other national chain account
business will arise as Kohler looks to expand its business to a truly national
level in the coming years. While the feasibility of additional dairy plant
locations is explored, the capacity at the Texas facility is being expanded.
This new processing capacity should be operational by the second quarter of
1996.
     Kohler's product offerings were broadened last year with the addition of
shelf-stable, or "no chill", creamers last summer. This product, available in
Half & Half or non-dairy formulations, is sold in 3/8th ounce cups in the
foodservice market, is ultra-high temperature ("UHT") pasteurized and is
aseptically packaged for an unrefrigerated shelf life in excess of 90 days.
Sales are targeted to the foodservice market. The product is gaining acceptance
with new accounts that previously have not been Kohler creamer customers and
also with existing clients looking to upgrade to a creamer line which provides
enhanced food safety and convenience.
     Kohler is a leader in dairy mix formulations and manufacturing of
specialty dairy products.  This expertise is focused on providing customers
with cost effective solutions to their dairy products problems. During 1995
Kohler continued to build on this expertise by making investments in: a pilot
plant, research and development, and manufacturing capabilities, including the
aseptic creamer packaging line and a bar-code scanning system. The latter
allows for more comprehensive tracking of products through the customer order
and manufacturing cycle than has been available in the past.

"NO CHILL" ASEPTIC COFFEE CREAMERS WERE INTRODUCED IN THE FOODSERVICE MARKET  
BY KOHLER MIX LAST SUMMER.

                                      6




<PAGE>   8
Management's Discussion and Analysis of                      
Financial Condition and Results of Operations                  

Michael Foods, Inc. and Subsidiaries

GENERAL
The following table sets forth the percentage of net sales accounted for by
each of the Company's operating divisions for the periods indicated:


<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,               1995  1994  1993
--------------------------------------------------------
<S>                                   <C>   <C>   <C>
Egg Products........................    42%   42%   42%
Refrigerated Distribution...........    34    33    34
Potato Products.....................    16    15    15
Dairy Products......................    14    14    14
Prepared Foods*.....................     -     2     2
Intercompany Sales..................    (6)   (6)   (7)
                                       -----------------
Total...............................   100%  100%  100%
                                       =================
</TABLE>


The following table sets forth the percentage of operating earnings (before
corporate, interest and income tax expenses) accounted for by each of the
Company's operating divisions for the periods indicated:


<TABLE>
YEAR ENDED DECEMBER 31,               1995  1994  1993**
--------------------------------------------------------
<S>                                   <C>   <C>   <C> 
Egg Products........................    59%   51%   46%
Refrigerated Distribution...........    15    13    17
Potato Products.....................    12    23    20
Dairy Products......................    14    14    19
Prepared Foods*.....................     -    (1)   (2)
                                       -----------------
Total                                  100%  100%  100%
                                       =================
</TABLE>


*  The assets of the subsidiary comprising the Prepared Foods Division were sold
   in late 1994.
** Before disposal of product line and restructuring charges.

RESULTS OF OPERATIONS
The Egg Products Division had higher dollar sales and higher dollar
earnings in 1995, as compared to the results for 1994. Sales increased for
certain value-added egg products, notably Easy Eggs(R) and MicroFresh(TM),
which helped produce a divisional operating profit improvement. Profitability
increased for certain other egg products. Egg prices increased approximately 9%
in 1995, as compared to 1994, as reported by Urner Barry Publications - a
widely quoted industry pricing service. Feed costs, which typically represent
roughly two-thirds of the cost of producing an egg, were slightly lower in 1995
than in 1994.
     The Refrigerated Distribution Division had higher dollar sales and higher
dollar earnings in 1995, as compared to the results for 1994. Unit sales
increased compared to 1994 levels. The combination of volume growth, pricing
improvements in certain product lines and effective expense control allowed for
divisional profit improvement.
     The Potato Products Division had higher dollar sales and lower dollar
earnings in 1995, as compared to the results for 1994. A competitive
environment in the french fry processing industry depressed unit sales and
selling prices for frozen potato products. Additionally, certain varieties of
potatoes held in storage since the fall 1994 harvest offered below normal
processing yields and potatoes from the fall 1995 harvest were generally
available in lesser quantities, and were smaller, than expected. These factors
depressed french fry margins. Strong demand for value-added refrigerated potato
products in both foodservice and retail markets resulted in sharply higher
sales for these products. Margins for these products were also affected by the
raw material/processing yield issues.
     The Dairy Products Division had higher dollar sales and higher dollar
earnings in 1995, as compared to the results for 1994. Unit sales rose
slightly, with an increase in core UHT ("ultra-high temperature"
pasteurization) dairy mixes more than offsetting declines in certain other 
non-UHT product lines. Pricing and operating costs were relatively stable 
year-over-year.
     The gross profit margin of the Company was 15.3 percent in 1995, as
compared to 14.8 percent in 1994 and 12.6 percent in 1993. This improvement
reflected the factors discussed above, particularly the increased unit sales in
value-added product lines. Additionally, in 1993 a gross loss from a
discontinued product line of $5,881,000 was recorded, or 1.2 percent of net
sales. It is management's 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.
     Selling, general and administrative expenses were 8.5 percent of net sales
in 1995, as compared to 8.3 percent in 1994 and 8.2 percent in 1993. This
increase was due to factors such as increased staffing, inflation and increased
marketing support for certain product lines, particularly the Company's retail
refrigerated potato products. Selling, general and administrative expenses in
1993 included $2,505,000 directly attributable to a discontinued product line.
     Disposal of product line costs in 1993 relate to the elimination of an egg
product. The Company had invested in a joint venture with an unrelated company
for the purpose of producing reduced cholesterol liquid whole eggs. Due to
significant continuing losses and lack of adequate market acceptance, the
Company decided in December 1993 to acquire the interest of its joint venture
partner and cause the early termination of the partnership. Consequently, the
Company recorded a one-time charge of approximately $22,769,000, and a related
income tax benefit of $8,485,000, in 1993 related to the disposal of the
product line. The Company recorded pre-tax losses directly attributable to the
discontinued product line in 1993 of approximately $7,689,000. Certain of the
net assets held for sale by the Company from the joint venture were sold or
transferred to operating divisions during 1994 and 1995.
     Restructuring charges in 1993 relate to a number of items, the largest
being costs from a significant reorganization of a former subsidiary of the
Company. This portion of the restructuring charges included $5,129,000 for the
elimination of unamortized goodwill and $2,108,000 for site abandonment,
relocation and other costs. In late 1994, the Company ceased its efforts to
restructure the subsidiary's operations and completed a sale of its remaining
assets. During the fourth quarter of 1993, in conjunction with restructuring
its egg operations, the Company recorded additional restructuring charges of
$3,927,000, primarily related to certain egg production facilities held for
sale to reflect their then current net realizable value. One facility was sold
during 1994 and another remained for sale as of December 31, 1995.

                                      7


<PAGE>   9
     Interest expense was lower in 1995 than in 1994. The decrease resulted
from continued principal payments on long-term debt and lower average
borrowings under the Company's unsecured revolving line of credit. Generally,
interest rates on the Company's bank borrowings were lower, on average, in 1995
than in 1994, but they were higher in 1994 than in 1993.
     Interest income in 1993 consisted, in part, of $697,000 related to
interest received on notes receivable from the joint venture that produced the
discontinued reduced cholesterol liquid whole eggs product line.
     Certain of the Company's products are sensitive to changes in commodity
prices. Currently, the Company's egg products operations derive approximately
16 percent of net sales from shell eggs which are sensitive to commodity price
changes. The remainder of egg products division sales are derived from the sale
of egg products that are value-added to varying degrees. Gross profit from
shell eggs is primarily dependent upon the relationship between shell egg
prices and feed costs, both of which can fluctuate significantly. While certain
egg products exhibit commodity price sensitivity, gross margins from egg
products are generally less sensitive to commodity price fluctuations than are
shell eggs. The Company's refrigerated distribution operations derive
approximately 70 percent of net sales from refrigerated products, with the
balance coming from shell egg sales. As a majority of these eggs are supplied
by the egg products division and are, in-turn, sold on a distribution or
non-commodity basis by the refrigerated distribution division, this division's
sales are generally not sensitive to commodity price fluctuations. The potato
products division typically purchases approximately 80 to 90 percent of its
estimated annual potato needs under annual grower contracts. The remainder is
purchased at market prices to satisfy short-term production requirements or to
take advantage of spot prices when they are lower than contract prices. French
fry pricing for both the industry and the Company is significantly influenced
by the size and quality of the annual U.S. potato crop, as well as consumer
demand. While small variations in potato prices or selling prices of end
products can have a significant effect on the earnings of the potato products
division, such impacts have been lessened in recent years through significant
increases in higher value-added refrigerated potato product sales. The dairy
products division sells its products primarily on a cost-plus basis. Therefore,
the earnings of this division are not typically affected by raw ingredient
price fluctuations.
     Inflation is not expected to have a significant impact on the Company's
business. The Company generally has been able to offset the impact of inflation
through a combination of productivity gains and price increases.
     Competitors have infringed the Company's exclusive license for a patented
technology to safely extend the shelf-life of liquid eggs and the Company is
pursuing its legal rights. The Company has prevailed in U. S. District Court
cases in Florida and New Jersey. The judgment in the New Jersey case was
appealed in 1994 and the Court of Appeals for the Federal Circuit upheld the
summary judgment of the U. S. District Court, which found the patents valid and
enforceable. Since then, present and potential extended shelf-life liquid egg
competitors have filed protests with the U. S. Patent and Trademark Office
("PTO") challenging the validity of one or more of the claims under the
patents. As a result, litigation in two patent infringement lawsuits where the
Company is a plaintiff have been stayed and another lawsuit has been dismissed
without prejudice. During 1995 and early 1996 the PTO issued two actions in
which an examiner rejected claims under one of the four patents licensed by the
Company. Counsel advises the patent holder and the Company that the claims
under the three related patents could be similarly rejected. The Company will
either continue to prosecute the claims with the examiner, or will appeal the
rejection to the PTO's Board of Patent Appeals and Interferences and may, if
necessary, appeal further to the Court of Appeals for the Federal Circuit. The
patents will remain valid and in full force and effect during this appeal
process.
     While management is resolved to protect the Company's proprietary rights
and expects those rights to continue to be upheld, the number of present and
potential competitors in this egg product category continues to increase. As a
result of such competition, pricing pressure in the category may increase
beyond that which has already been experienced. Sales of extended shelf-life
liquid eggs represent the largest contributor to operating profits within the
Company's Egg Products Division.

CAPITAL RESOURCES AND LIQUIDITY
The Company's investments in acquisitions and capital expenditures have
been a significant use of capital. The Company plans to continue to invest in
state-of-the-art production facilities to enhance its competitive position.
Historically, the Company has financed its growth principally from internally
generated funds, bank borrowings, issuance of senior debt and the sale of
common stock. The Company believes that these financing alternatives will
continue to meet its anticipated needs.
     The Company invested $23,782,000 in capital expenditures in 1995,
$22,839,000 in 1994 and $8,669,000 in 1993.  In late 1995, the Company acquired
the institutional refrigerated potato products line of Interstate Food
Processing Corp. There were no acquisitions in 1994 or 1993.
     As more fully described in Note B to the consolidated financial
statements, the Company expects to complete a merger with North Star Universal,
Inc. ("NSU"). Through the merger the Company will effectively repurchase shares
of its common stock with a discounted value of $25 million to $38 million       
through the assumption of NSU debt of the same amount. The merger is subject to
approval by stockholders of both companies and other conditions. The 
transaction is expected to close in mid-1996. If this transaction is completed,
the Company expects to refinance and extinguish the debt assumed in the
transaction during 1996 or 1997. The Company has an unsecured line of credit
for $55,000,000 from its principal banks. As of December 31, 1995, $42,500,000
was borrowed under this line of credit.

                                      8
<PAGE>   10


Consolidated Balance Sheets            

Michael Foods, Inc. and Subsidiaries




<TABLE>
<CAPTION>
DECEMBER 31,                                                    1995              1994
-------------------------------------------------------------------------------------------
<S>                                                        <C>               <C>
ASSETS                                                               

CURRENT ASSETS                                                       
  Cash and cash equivalents . . . . . . . . . . . . . . .   $  1,921,000      $  1,641,000
  Accounts receivable, less allowances. . . . . . . . . .     40,583,000        36,622,000
  Inventories . . . . . . . . . . . . . . . . . . . . . .     58,845,000        54,631,000
  Prepaid expenses and other. . . . . . . . . . . . . . .      1,622,000         1,091,000
                                                            ------------------------------
     Total current assets . . . . . . . . . . . . . . . .    102,971,000        93,985,000
 
PROPERTY, PLANT AND EQUIPMENT - AT COST                                   
  Land  . . . . . . . . . . . . . . . . . . . . . . . . .      4,117,000         4,149,000
  Buildings and improvements. . . . . . . . . . . . . . .     95,109,000        93,807,000
  Machinery and equipment . . . . . . . . . . . . . . . .    203,557,000       182,805,000
                                                            ------------------------------
                                                             302,783,000       280,761,000
  Less accumulated depreciation . . . . . . . . . . . . .    118,642,000        99,702,000
                                                            ------------------------------
                                                             184,141,000       181,059,000
OTHER ASSETS                                                              
  Goodwill, net . . . . . . . . . . . . . . . . . . . . .     57,829,000        47,439,000
  Net assets held for sale. . . . . . . . . . . . . . . .      4,431,000         7,761,000
  Other . . . . . . . . . . . . . . . . . . . . . . . . .      9,855,000         6,401,000
                                                            ------------------------------
                                                              72,115,000        61,601,000
                                                            ------------------------------
                                                            $359,227,000      $336,645,000
                                                            ==============================
LIABILITIES AND STOCKHOLDERS' EQUITY                                      
CURRENT LIABILITIES                                                       
  Current maturities of long-term debt . . . . . . . . . .  $ 11,731,000      $ 11,809,000
  Accounts payable . . . . . . . . . . . . . . . . . . . .    27,362,000        26,360,000
  Accrued compensation . . . . . . . . . . . . . . . . . .     6,543,000         5,168,000
  Accrued insurance. . . . . . . . . . . . . . . . . . . .     6,945,000         6,326,000
  Other accrued expenses . . . . . . . . . . . . . . . . .     7,095,000         7,633,000
  Deferred income taxes  . . . . . . . . . . . . . . . . .     1,200,000         3,100,000
                                                            ------------------------------
    Total current liabilities. . . . . . . . . . . . . . .    60,876,000        60,396,000
                                                                          
LONG-TERM DEBT, less current maturities  . . . . . . . . .    89,690,000        88,795,000
                                                                          
DEFERRED INCOME TAXES  . . . . . . . . . . . . . . . . . .    28,566,000        21,425,000
                                                                          
CONTINGENCIES  . . . . . . . . . . . . . . . . . . . . . .             -            -
                                                                          
STOCKHOLDERS' EQUITY                                                      
  Preferred stock, $.01 par value, 3,000,000 shares                       
    authorized, none issued  . . . . . . . . . . . . . . .             -            -
  Common stock, $.01 par value, 25,000,000                                
    shares authorized, shares issued 19,332,001                           
    in 1995 and 19,915,489 in 1994 . . . . . . . . . . . .       193,000           199,000
  Additional paid-in capital . . . . . . . . . . . . . . .   112,374,000       117,640,000
  Retained earnings  . . . . . . . . . . . . . . . . . . .    67,528,000        53,801,000
  Treasury stock, 613,912 shares held in 1994 - at cost  .             -        (5,611,000)
                                                            ------------------------------
  Total stockholders' equity . . . . . . . . . . . . . . .   180,095,000       166,029,000
                                                            ------------------------------
                                                            $359,227,000      $336,645,000
                                                            ==============================
</TABLE>
                                                                          
                                                                     
The accompanying notes are an integral part of these statements.






                                                                 9






<PAGE>   11
Consolidated Statements of Earnings        

Michael Foods, Inc. and Subsidiaries


<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                               1995                   1994                 1993
------------------------------------------------------------------------------------------------------------
<S>                                               <C>                  <C>                   <C>
Net sales . . . . . . . . . . . . . . . . . . .     $536,627,000           $505,965,000        $474,783,000

Cost of sales . . . . . . . . . . . . . . . . .      454,652,000            430,917,000         414,965,000
                                                    --------------------------------------------------------

       Gross profit . . . . . . . . . . . . . .       81,975,000             75,048,000          59,818,000

Selling, general and administrative expenses  .       45,729,000             41,851,000          39,122,000

Disposal of product line  . . . . . . . . . . .                -                      -          22,769,000

Restructuring charges . . . . . . . . . . . . .                -                      -          11,164,000
                                                    --------------------------------------------------------

                                                      45,729,000             41,851,000          73,055,000
                                                    --------------------------------------------------------

       Operating profit (loss)  . . . . . . . .       36,246,000             33,197,000         (13,237,000)

Interest (income) expense                                       

  Interest expense  . . . . . . . . . . . . . .        7,917,000              8,842,000           9,210,000

  Interest capitalized  . . . . . . . . . . . .         (172,000)              (304,000)           (116,000)
                                                    --------------------------------------------------------

                                                       7,745,000              8,538,000           9,094,000

Interest income . . . . . . . . . . . . . . . .         (110,000)               (40,000)           (731,000)
                                                    --------------------------------------------------------

                                                       7,635,000              8,498,000           8,363,000
                                                    --------------------------------------------------------

       Earnings (loss) before income taxes  . .       28,611,000             24,699,000         (21,600,000)

Income tax expense (benefit)  . . . . . . . . .       11,020,000              9,510,000          (5,280,000)
                                                    --------------------------------------------------------

       NET EARNINGS (LOSS)  . . . . . . . . . .      $17,591,000            $15,189,000        $(16,320,000)
                                                    ========================================================

       NET EARNINGS (LOSS) PER SHARE  . . . . .      $       .91            $       .79        $       (.84)
                                                    ========================================================

Weighted average shares outstanding . . . . . .       19,328,000             19,315,000          19,416,000
                                                    ========================================================

</TABLE>                                                            
                                                                    


The accompanying notes are an integral part of these statements.


                                                                10



<PAGE>   12
Consolidated Statements of Stockholders' Equity             

Michael Foods, Inc. and Subsidiaries


<TABLE>
<CAPTION>
                                                             
                                      COMMON STOCK               ADDITIONAL        TOTAL                             TOTAL  
                                 -------------------------        PAID-IN         RETAINED       TREASURY         STOCKHOLDERS'
                                 SHARES ISSUED      AMOUNT        CAPITAL         EARNINGS        STOCK              EQUITY
---------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>            <C>          <C>             <C>            <C>              <C>

Balance at

  January 1, 1993 . . . . .         19,915,489    $199,000     $117,640,000     $62,681,000    $(3,483,000)         $177,037,000

  Purchase of shares. . . . 

    for treasury. . . . . .                  -           -                -               -     (1,828,000)           (1,828,000)

  Net loss. . . . . . . . .                  -           -                -     (16,320,000)             -           (16,320,000)

  Cash dividends. . . . . .                  -           -                -      (3,886,000)             -            (3,886,000)
                                -------------------------------------------------------------------------------------------------

Balance at. . . . . . . . .

  December 31, 1993 . . . .         19,915,489     199,000      117,640,000      42,475,000     (5,311,000)          155,003,000

  Purchase of shares 

    for treasury. . . . . .                  -           -                -               -       (300,000)             (300,000)

  Net earnings  . . . . . .                  -           -                -      15,189,000              -            15,189,000

 Cash dividends . . . . . .                  -           -                -      (3,863,000)             -            (3,863,000)
                                                                                                       
                                -------------------------------------------------------------------------------------------------
Balance at

 December 31, 1994 . . . . .        19,915,489     199,000      117,640,000      53,801,000     (5,611,000)          166,029,000

 Treasury stock retired  . .          (613,912)     (6,000)      (5,605,000)              -      5,611,000                     -

 Incentive plan stock

   compensation . . . . . . .           30,424           -          339,000               -              -               339,000

 Net earnings . . . . . . . .                -           -                -      17,591,000              -            17,591,000

 Cash dividends . . . . . . .                -           -                -      (3,864,000)             -            (3,864,000)

                                -------------------------------------------------------------------------------------------------
Balance at

 December 31, 1995  . . . . .       19,332,001    $193,000     $112,374,000     $67,528,000     $        -          $180,095,000

                                =================================================================================================
</TABLE>




The accompanying notes are an integral part of these statements.



11


<PAGE>   13


Consolidated Statements of Cash Flows

Michael Foods, Inc. and Subsidiaries


<TABLE>
YEARS ENDED DECEMBER 31,                            1995                   1994              1993
----------------------------------------------------------------------------------------------------------
<S>                                                  <C>                  <C>              <C>
Cash flows from operating activities:
   Net earnings (loss)                               $17,591,000            $15,189,000       $(16,320,000)  
   Adjustments to reconcile net earnings (loss) to                                                           
      net cash provided by operating activities:                                                             
      Depreciation                                    22,461,000             21,616,000        22,446,000    
      Amortization                                     1,575,000              1,633,000         1,741,000    
      Deferred income taxes                            5,241,000              6,095,000        (7,660,000)   
      Disposal of product line                                 -            (10,820,000)       22,769,000    
      Restructuring charges                                    -               (525,000)       11,164,000    
      Incentive plan stock compensation                  339,000                      -                 -    
      Cash provided from changes in                                                                          
         working capital employed, net of effect                                                             
         of disposal of product line and                                                                     
         restructuring charges:                                                                              
         Accounts receivable                          (3,961,000)            (3,535,000)          392,000    
         Inventories                                  (4,214,000)            (5,493,000)        2,968,000    
         Prepaid expenses and other                     (531,000)               188,000          (122,000)   
         Accounts payable                              1,002,000              5,824,000         3,440,000    
         Accrued expenses                              1,456,000              1,706,000         2,708,000    
                                                     -----------            -----------      ------------  
          Total adjustments                           23,368,000             16,689,000        59,846,000  
                                                     -----------            -----------      ------------  
                                                                                                           
Net cash provided by operating activities             40,959,000             31,878,000        43,526,000  
Cash flows from investing activities:                                                                      
   Capital expenditures                              (23,782,000)           (22,839,000)       (8,669,000) 
   Sale of net assets held for sale                      889,000              1,786,000                 -  
   Business acquisition and other assets             (15,419,000)            (1,840,000)       (3,194,000) 
                                                     -----------            -----------      ------------  
Net cash used in investing activities                (38,312,000)           (22,893,000)      (11,863,000) 
Cash flows from financing activities:                                                                      
   Payments on long-term debt                       (100,806,000)          (100,604,000)     (109,713,000) 
   Proceeds from long-term debt                      102,303,000             97,200,000        77,923,000  
   Purchase of shares for treasury                             -               (300,000)       (1,828,000) 
   Cash dividends                                     (3,864,000)            (3,863,000)       (3,886,000) 
                                                     -----------            -----------      ------------  
Net cash used in financing activities                 (2,367,000)            (7,567,000)      (37,504,000) 
                                                     -----------            -----------      ------------  
Net increase (decrease) in cash                                                                            
and cash equivalents                                     280,000              1,418,000        (5,841,000) 
Cash and cash equivalents at                                                                               
beginning of year                                      1,641,000                223,000         6,064,000  
                                                     -----------            -----------      ------------  
Cash and cash equivalents at end of year             $ 1,921,000            $ 1,641,000       $   223,000  
                                                     ===========            ===========      ============  
Supplemental disclosures of                                                                                
cash flow information:                                                                                     
   Cash paid during the year for:                                                                          
      Interest                                       $ 8,183,000            $ 8,853,000       $ 9,445,000  
      Income taxes                                     6,363,000              4,432,000         3,858,000  
</TABLE>



The accompanying notes are an integral part of these statements.

                                      12


<PAGE>   14


Notes To Consolidated Financial Statements

Michael Foods, Inc. and Subsidiaries

NOTE A
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

Michael Foods, Inc. (the "Company") is a holding company which, through its
operating subsidiaries, is engaged in the food processing and distribution
business primarily throughout the United States. Principal products, as a
percent of 1995 sales, before the effect of intercompany sales of 6%, are egg
products 42%, refrigerated distribution 34%, fresh and frozen potato products
16%, ice milk mix, ice cream mix and milk 14%.
     At December 31, 1995, North Star Universal, Inc. ("NSU") held 7,354,950
shares of the issued and outstanding common stock of the Company or 38.0%.
Certain directors of the Company are also officers and directors of NSU.

1. PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All significant intercompany
accounts and transactions have been eliminated. In 1994, the Company began
utilizing a fifty-two, fifty-three week fiscal year ending on the Saturday
nearest to December 31. For clarity of presentation, the Company has described
all periods as if the year end is December 31.

2. CASH AND CASH EQUIVALENTS
The Company considers highly liquid temporary investments with original
maturities of three months or less to be cash equivalents.

3. INVENTORIES
Inventories other than flocks, raw potatoes, and potato products 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 1 to 2 years assuming no salvage value. Raw
potatoes and potato products are stated at the lower of average cost for the
year in which produced or at market.

Inventories consist of the following:


<TABLE>
<CAPTION>

DECEMBER 31,                       1995         1994
-----------------------------------------------------------
<S>                            <C>          <C>
Raw materials and supplies...   $16,597,000  $15,327,000
Work in process and            
   finished goods............    19,848,000   16,233,000
Flocks.......................    22,400,000   23,071,000
                               ----------------------------
                                $58,845,000  $54,631,000
                               ============================
</TABLE>

4. DEPRECIATION
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives,
principally on the straight-line basis. Estimated service lives range from
10-40 years for buildings and improvements and 3-10 years for machinery and
equipment.

5. GOODWILL AND AMORTIZATION
Goodwill has resulted from various acquisitions made by the Company. All
acquisitions were accounted for as purchases and the excess of the total
acquisition cost over the fair value of the net assets acquired was recorded as
goodwill. Currently, goodwill is amortized on the straight-line basis over 40
years. Accumulated amortization was $9,415,000 and $7,330,000 at December 31,
1995 and 1994, respectively. The Company maintains separate financial records
for each of its acquired entities and performs periodic strategic and
long-range planning for each entity. The Company evaluates its goodwill
annually to determine potential impairment by comparing the carrying value to 
the undiscounted future cash flows of the related assets. The Company modifies
the life or adjusts the value of a subsidiary's goodwill if an impairment is 
identified. See note D for an impairment identified during 1993.

6. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued two accounting standards
which the Company is required to adopt January 1, 1996. The first standard
establishes guidance on when and how to measure impairment of long-lived
assets, certain identifiable intangibles, and how to value long-lived assets to
be disposed of. The second standard establishes accounting and reporting for
stock-based compensation plans. This standard permits the Company to select the
new fair value based method of

                                      13




<PAGE>   15
Notes to Consolidated Financial Statements

Michael Foods, Inc. and Subsidiaries


accounting for employee stock options or the existing intrinsic value method
which the Company currently follows. The Company intends to continue to use the
intrinsic value method which will require additional footnote disclosures
concerning its stock-based compensation plans. Management believes the adoption
of these new accounting standards will not have a material effect on the
Company's financial statements.

NOTE B
MERGER AND SHARE REPURCHASE
On December 21, 1995, the Company entered into a merger agreement with NSU, a
38.0% stockholder of the Company. The resulting publicly-held company will
operate the present businesses of the Company. Under the terms of the
agreement, NSU will distribute to its stockholders through a new corporation
all of its operating companies and its investment in CorVel Corporation. The
primary asset and liability remaining in NSU at the time of the merger will be
its investment in the Company's common stock and debt in an amount ranging from
$25 million to $38 million. Through the merger, the Company will effectively
repurchase shares of its common stock from NSU based on the amount of debt
assumed. The number of shares reacquired will be based on the actual amount of
debt assumed divided by the average trading price for a period of time prior to
the merger, reduced by a discount ranging from 8-10%. The remaining Company
shares, which are not reacquired by the Company, will be effectively
distributed tax-free to the NSU stockholders.
     The transaction is subject to approval by the stockholders of both
companies and the receipt of a favorable ruling from the Internal Revenue
Service that the transaction is tax-free to both stockholder groups. The
agreement can be terminated by either party under various circumstances. The
transaction is expected to close in mid-1996. The effective share repurchase
will decrease the Company's stockholders' equity and increase indebtedness by
an amount ranging from $25 million to $38 million.

NOTE C
DISPOSAL OF PRODUCT LINE
The Company invested in a joint venture with an unrelated company for the
purpose of producing reduced cholesterol liquid whole eggs. Due to significant
continuing losses and lack of adequate market acceptance, the Company decided
in December 1993 to acquire the interest of its joint venture partner and cause
early termination of this joint venture. Consequently, the Company recorded a
one-time charge of approximately $22,769,000 and a related income tax benefit
of $8,485,000 in 1993. The Company recorded the acquired partnership assets at
their appraised value and included them in net assets held for sale.
     Certain of the net assets held for sale were sold during 1995 and 1994.
Certain of the net assets held for sale were transferred to the Company's
operating subsidiaries in 1995.
     In 1993, the revenues and expenses directly attributable to the
discontinued product line were net sales of $4,664,000, cost of sales of
$10,545,000, selling, general and administrative expenses of $2,505,000 and
interest income of $697,000. The Company recorded a pre-tax loss directly
attributable to the discontinued product line in 1993 of approximately
$7,689,000.

NOTE D
RESTRUCTURING CHARGES
During the fourth quarter of 1993, the Company recorded a restructuring charge
of $7,237,000 to provide for the elimination of goodwill and the significant
reorganization of the operations of Sunnyside Vegetable Packing, Inc.
("Sunnyside"). In the fourth quarter of 1994, the Company ceased its efforts to
restructure these operations and completed a sale of Sunnyside's remaining
assets.
     During the fourth quarter of 1993, in conjunction with restructuring its
egg operations, the Company recorded restructuring charges of $3,927,000,
primarily related to certain egg production facilities held for sale to reflect
their current net realizable value. At December 31, 1995, one of these
production facilities remained held for sale.

                                      14


<PAGE>   16
Notes to Consolidated Financial Statements

Michael Foods, Inc. and Subsidiaries




NOTE E
LONG-TERM DEBT
Long-term debt consists of:

<TABLE>
<CAPTION>

DECEMBER 31,                   1995         1994
-------------------------------------------------------
<S>                        <C>             <C>
Revolving line of
credit (a)................  $ 42,500,000   $ 29,400,000
9.5% senior promissory
   note (b)...............    32,000,000     38,000,000
9.85% senior promissory
   notes (c)..............    14,400,000     17,200,000
10.4% senior promissory
   notes (d)..............    10,000,000     12,500,000
Other                          2,521,000      3,504,000
                           ----------------------------
                             101,421,000    100,604,000
Less current maturities...    11,731,000     11,809,000
                           ----------------------------
                            $ 89,690,000   $ 88,795,000
                           ============================
</TABLE>


     Under the discounted cash flow method, the fair value of total long-term
debt approximates $100,508,000 and $99,325,000 at December 31, 1995 and 1994,
respectively.
     Aggregate minimum annual principal payments of long-term debt maturing in
years subsequent to December 31, 1995 are as follows:


<TABLE>
<CAPTION>

YEAR ENDING DECEMBER 31,              AMOUNT
--------------------------------------------
<S>                             <C>
1996                            $ 11,731,000
1997                              56,225,000
1998                              13,588,000
1999                              15,609,000
2000                               3,513,000
Thereafter                           755,000
                                ------------
                                $101,421,000
                                ============
</TABLE>


(a) The Company has an unsecured revolving line of credit with its principal
    banks for $55,000,000 with interest at the principal banks' reference rate,
    or alternative variable rates, at the Company's option. At December 31, 
    1995, the Company had $5,500,000 outstanding at the reference rate of 8.5% 
    and $37,000,000 outstanding at an average variable rate of 6.1%. This
    revolving line of credit, which matures on March 31, 1997, contains certain
    restrictive covenants similar to the covenants contained in the senior
    promissory notes. At December 31, 1995, $12,500,000 of this line was unused.

(b) The 9.5% senior promissory note is due in varying semi-annual installments 
    of $3,000,000 to $5,000,000 from June, 1996 through December, 1999. 
    Interest is payable semi-annually. The note is unsecured and contains 
    certain restrictive covenants. The most significant covenants are: minimum 
    net worth requirements, limitations on additional indebtedness and liens, 
    minimum interest coverage and limitations on a change in control of the
    Company.

(c) The 9.85% senior promissory notes are due in annual installments of 
    $2,800,000 from October, 1996 through October, 1999, with the remaining 
    principal of $3,200,000 due in October, 2000. Interest is payable 
    quarterly. The notes are unsecured and contain certain restrictive 
    covenants similar to the covenants contained in the 9.5% senior promissory
    note. 

(d) The 10.4% senior promissory notes are due in annual installments of 
    $2,500,000 from December, 1996 through December, 1999, with interest 
    payable semi-annually. The notes are unsecured and contain certain 
    restrictive covenants similar to the 9.5% senior promissory note.

NOTE F
INCOME TAXES

The provision for income taxes consists of the following:


<TABLE>
<CAPTION>

YEARS ENDED
DECEMBER 31,               1995              1994        1993
---------------------------------------------------------------------
<S>                     <C>              <C>         <C>
Current
   Federal..........    $ 4,893,000        $2,888,000  $ 1,968,000
   State............        886,000           527,000      412,000
                        ---------------------------------------------
                          5,779,000         3,415,000    2,380,000

Deferred
   Federal..........      4,804,000         5,510,000   (6,746,000)
   State............        437,000           585,000     (914,000)
                        ---------------------------------------------
                          5,241,000         6,095,000   (7,660,000)
                        ---------------------------------------------
                        $11,020,000        $9,510,000  $(5,280,000)
                        =============================================
</TABLE>


     Included in the 1993 provision for deferred income taxes is a $1,200,000
expense resulting from the increase in enacted Federal income tax rates.
     Deferred income taxes arise from temporary differences between financial
and tax reporting. The tax effects of the

                                      15
                                      

<PAGE>   17
Notes to Consolidated Financial Statements                  

Michael Foods, Inc. and Subsidiaries


cumulative temporary differences resulting in the deferred tax liability are as
follows:


<TABLE>
<CAPTION>
DECEMBER 31,                        1995                                      1994
--------------------------------------------------------------------------------------------
<S>                               <C>                                       <C>                          
Depreciation..........            $32,831,000                               $33,941,000
Farm inventory                                      
  accounting..........              4,516,000                                 5,726,000
AMT credit............               (754,000)                               (3,975,000)
Disposal of                                         
  product line........             (1,938,000)                               (6,948,000)
Other.................             (4,889,000)                               (4,219,000)
                                  -----------                               -----------
                                  $29,766,000                               $24,525,000
                                  ===========                               ===========
</TABLE>

The following is a reconciliation of the Federal statutory income tax rate to 
the consolidated effective tax rate:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,                       1995                1994                 1993
------------------------------------------------------------------------------------------------------
<S>                                        <C>                  <C>                  <C>
Federal statutory rate                         35.0%               35.0%                (35.0)%
State tax effect                                3.0                 2.9                  (1.5)
Goodwill                                        1.7                 2.0                  10.8
Tax rate change                                 -                   -                     5.6
Other                                          (1.2)               (1.4)                 (4.3)
                                              -----               -----                ------
                                               38.5%               38.5%                (24.4)%
                                              =====               =====                ======
</TABLE>


NOTE G
EMPLOYEE RETIREMENT PLANS
Full-time employees of the Company who meet service requirements are eligible
to participate in the Michael Foods, Inc. Retirement Savings Plan. The Company
will match up to 4% of each participant's eligible compensation. Contributions
of $1,312,000, $1,256,000 and $1,088,000 were charged to operations for the
years ended December 31, 1995, 1994 and 1993.

NOTE H
CONTINGENCIES
Use of Estimates
In the preparation of the Company's consolidated financial statements,
management is required to make estimates and assumptions that affect reported
amounts of assets and liabilities and related revenues and expenses. Actual
results could differ from the estimates used by management.

Patent Litigation
At December 31, 1995 and 1994, the Company had prepaid royalty payments of
approximately $8,300,000 and $5,200,000 included in other assets related to an
exclusive license agreement for the production and sale of extended shelf-life
liquid egg products. These amounts have arisen as a result of the Company
making payments to prosecute and defend the patents related to the exclusive
license agreement. In January, 1996, the Company was informed by the U.S.
Patent and Trademark  Office that a patent examiner rejected the claims under
one of the four process patents which are the subject of the license agreement.
As the claims of the other three related process patents are reviewed, it is
possible that they will be similarly rejected. Management intends to appeal the
decision of the examiner and believes the validity of the patents will
ultimately be upheld. During the appeal process, the patents remain valid and
in full force and effect. There can be no assurance that the Company will be
able to fully recover its prepaid royalty payments. If the patents are
ultimately denied, the Company would continue to produce and market the
products currently subject to the license agreement without incurring royalty
cost.

Product Litigation
In the fall of 1994, a customer of the Company recalled product which was
potentially contaminated and is settling claims with consumers who became ill
after eating the product before the recall. The customer has filed a suit,
whereby the Company is a co-defendant with other companies alleged to have
supplied contaminated product to the customer's plant. The customer is seeking
damages for losses incurred, as well as alleged loss of past and future
profits. Management and its counsel believe the Company has substantial
defenses to the allegations and believe it is unlikely the Company will incur a
loss from this claim materially in excess of its insurance coverage.

Other Litigation
The Company is also engaged in routine litigation incidental to its business,
which management believes will not have a material effect upon its business or
consolidated financial position.

                                      16



<PAGE>   18
Notes to Consolidated Financial Statements                  

Michael Foods, Inc. and Subsidiaries

NOTE I
STOCKHOLDERS' EQUITY
In December, 1995, the Company's Board of Directors authorized the retirement
of all 613,912 shares of treasury stock.
     During 1994, the Company purchased 14,562 shares of its common stock for
$300,000 under the terms of a put agreement that was part of a business
acquisition completed in 1989. In 1993, the Company purchased 220,600 shares of
its common stock for $1,828,000 on the open market under a stock repurchase
plan.
     The Company's Non-Qualified Stock Option Plan (the "Plan") was adopted by
the Board of Directors in 1987. The Plan provides for the grant of options to
officers and other key employees of the Company and its subsidiaries. The
exercise price of the options granted is typically the fair market value at the
date of grant. The ten-year options are generally not exercisable in the first
year and vest ratably over the first five years.
     Option transactions under the Plan during each of the three years ended
December 31, are summarized as follows:

<TABLE>
<CAPTION>
                                       NUMBER OF        OPTION PRICE
                                         SHARES           PER SHARE
                                ------------------------------------------
           <S>                        <C>             <C>   
           Outstanding at                                      
             January 1, 1993......    1,499,614         $7.11-$18.88
           Granted................      226,847          8.00- 10.13
           Cancelled..............      (50,231)         9.33- 18.88
                                     ----------        -------------
           Outstanding at                                     
             December 31, 1993....    1,676,230          7.11- 18.88
           Granted................       59,000          8.13- 12.25
           Cancelled..............       (5,253)        10.13- 17.83
                                     ----------        -------------
           Outstanding at                                     
             December 31, 1994....    1,729,977          7.11- 18.88
           Granted................      176,000          9.13- 13.00
           Cancelled..............      (17,461)         9.38- 17.83
                                     ----------        -------------
           Outstanding at                                     
             December 31, 1995....    1,888,516         $7.11-$18.88
                                     ==========        =============
</TABLE>                                                      

     Options to purchase 1,556,726 shares were exercisable at December 31,
1995.
     The Company also has an Incentive Stock Option Plan (the "ISO Plan");
however, no shares have been granted under its provisions. The Company has
reserved 2,142,500 shares for the Plan and the ISO Plan.
     The Company has adopted a Non-Qualified Stock Option Plan for Non-Employee
Directors (the "Director Plan").  The Director Plan provides for 150,000 shares
reserved for grant. The exercise price of the options granted is the fair
market value at the date of grant. All options are exercisable one year from
the date of grant and have a term of ten years.
     Option transactions under the Director Plan during each of the three years
ended December 31, are summarized as follows:

<TABLE>
<CAPTION>
                                              NUMBER OF        OPTION PRICE  
                                               SHARES           PER SHARE   
                                        --------------------------------------
           <S>                          <C>             <C>             
           Outstanding at                                                          
             January 1, 1993.......          45,000          $9.67-$14.67 
           Granted.................          20,000           7.63- 10.13  
           Cancelled...............         (16,250)          9.67- 11.25  
                                         ----------         -------------
           Outstanding at                                                 
             December 31, 1993.....          48,750           7.63- 14.67  
           Granted.................           5,000                 13.00  
           Cancelled...............         (11,250)                12.42  
                                         ----------         -------------
           Outstanding at                                          
             December 31,                                          
             1994 and 1995.........          42,500          $7.63-$14.67
                                         ==========         =============
</TABLE>

No options were granted or cancelled under the Director Plan in 1995.
     The Company has an incentive compensation plan for officers. Under this
plan the Company issued $339,000 of common stock to its officers in 1995.

NOTE J
MAJOR CUSTOMER
Sales to one customer accounted for 11% and 10% of consolidated net sales in
1995 and 1994.

                                      17


<PAGE>   19

Report of Independent
Certified Public Accountants

                         [GRANT THORNTON LETTERHEAD]

BOARD OF DIRECTORS AND STOCKHOLDERS
MICHAEL FOODS, INC.

We have audited the accompanying consolidated balance sheets of Michael Foods,
Inc. and Subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Michael Foods,
Inc. and Subsidiaries as of December 31, 1995 and 1994 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
February 14, 1996

                                      18


<PAGE>   20


Summary Consolidated Financial Data      

Michael Foods, Inc. and Subsidiaries

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                        

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,           1995          1994           1993        1992           1991
-----------------------------------------------------------------------------------------------
<S>                            <C>           <C>           <C>          <C>            <C>
STATEMENT OF EARNINGS DATA
Net sales                      $536,627      $505,965      $474,783     $442,734       $454,735
Cost of sales                   454,652       430,917       414,965      390,185        380,270
                               ----------------------------------------------------------------
Gross profit                     81,975        75,048        59,818       52,549         74,465
Selling, general and
administrative expenses          45,729        41,851        39,122       36,936         34,217
Disposal of product line              -             -        22,769            -              -
Restructuring charges                 -             -        11,164            -              -
                               ----------------------------------------------------------------
                                 45,729        41,851        73,055       36,936         34,217
                               ----------------------------------------------------------------

Operating profit (loss)          36,246        33,197       (13,237)      15,613         40,248
Interest expense, net             7,635         8,498         8,363        9,588          9,511
                               ----------------------------------------------------------------
Earnings (loss) before income 
   taxes                         28,611        24,699       (21,600)       6,025         30,737
Income tax expense (benefit)     11,020         9,510        (5,280)       2,175         11,070
                               ----------------------------------------------------------------
   Net earnings (loss)         $ 17,591      $ 15,189      $(16,320)    $  3,850       $ 19,667
                               ================================================================
Net earnings (loss) per share  $    .91      $    .79          (.84)    $    .20       $   1.07
                               ================================================================
Weighted average shares 
   outstanding                   19,328        19,315        19,416       19,516         18,400
Dividends per common share     $    .20      $    .20      $    .20     $    .20       $    .20
BALANCE SHEET DATA
(end of period)
Working capital                $ 42,095      $ 33,589      $ 22,267     $ 54,826       $ 58,988
Total assets                    359,227       336,645       329,087      370,218        357,171
Long-term debt, including
   current maturities           101,421       100,604       104,008      135,798        120,645
Stockholders' equity            180,095       166,029       155,003      177,037        176,321
                               ================================================================
</TABLE>


19




<PAGE>   21


Quarterly Financial Data (Unaudited)

Michael Foods, Inc. and Subsidiaries

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>

                                                   QUARTER
                               -------------------------------------------------------------
                               FIRST            SECOND             THIRD            FOURTH
--------------------------------------------------------------------------------------------
<S>                           <C>             <C>               <C>              <C>
1995
Net sales...................   $126,692         $130,872           $136,257         $142,806
Gross profit................     19,943           19,951             20,014           22,067
Net earnings................      3,692            4,223              4,229            5,447
Net earnings per share......   $    .19         $    .22           $    .22         $    .28
Weighted average
shares outstanding..........     19,314           19,332             19,332           19,332

1994
Net sales...................   $121,641         $125,530           $127,878         $130,916
Gross profit................     17,168           18,331             18,323           21,226
Net earnings................      3,211            3,693              3,640            4,645
Net earnings per share......   $    .17         $    .19           $    .19         $    .24
Weighted average
shares outstanding..........     19,316           19,316             19,316           19,311
</TABLE>




Board of Directors

JAMES H. MICHAEL
Chairman of the Board of Directors
of the Company
Chairman of the Executive Committee
of the Board of Directors
North Star Universal, Inc.

RICHARD A. COONROD
President
Coonrod Agriproduction Corp.

MILES E. EFRON
(Chair, Compensation Committee)
Chairman of the Board of Directors
North Star Universal, Inc.

ORVILLE L. FREEMAN
Visiting Scholar
Humphrey Institute
University of Minnesota


ARVID C. KNUDTSON
(Chair, Audit Committee)
Consultant

JOSEPH D. MARSHBURN
Senior Vice President
Citrus World, Inc.

JEFFREY J. MICHAEL
President and Chief Executive Officer
North Star Universal, Inc.

RICHARD G. OLSON
Retired President and Chief Executive Officer of the Company

GREGG A. OSTRANDER
President and Chief Executive Officer of the Company

                                      20


<PAGE>   22
Corporate Information

ANNUAL MEETING:
Stockholders and members of the investment community are cordially invited to
attend the Annual Meeting, which is scheduled to be held at
4:00 p.m., local time, on Tuesday, June 4, 1996, in the auditorium of the
Lutheran Brotherhood Building,
625 Fourth Avenue South in Minneapolis, Minnesota.

INVESTOR INQUIRIES:
Requests for financial publications, including Form 10-K filed with the
Securities and Exchange Commission, should be addressed to:

MICHAEL FOODS, INC.
Attention: Mark D. Witmer
Assistant Treasurer
324 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416

CERTIFIED PUBLIC ACCOUNTANTS:
Grant Thornton LLP
500 Pillsbury Center
Minneapolis, Minnesota 55402

CORPORATE COUNSEL:
Maun & Simon
2000 Midwest Plaza
801 Nicollet Mall
Minneapolis, Minnesota 55402

TRANSFER AGENT
AND REGISTRAR:
The First National Bank of Boston
Investor Relations
Mail Stop 45-02-09
P.O. Box 644
Boston, Massachusetts 02102-0644
Stockholder Inquiries:
800-442-2001

LISTING:
The Company's common stock
trades on The Nasdaq National Market under the symbol: MIKL.

MARKET PRICE RANGES:
The following table sets forth the high and low daily sale prices for the
common stock for each quarter of 1995 and 1994.

<TABLE>
<CAPTION>
1995                                                                 Low    High
-----------------------------------------------------------------------------------
<S>                                                                <C>     <C>
First Quarter                                                        9 1/4   12 3/8
Second Quarter                                                      10 1/4   13 1/4
Third Quarter                                                       10 5/8   14 1/2
Fourth Quarter                                                      10 3/4   13 3/4

<CAPTION>
1994                                                                 Low    High
-----------------------------------------------------------------------------------
<S>                                                                 <C>    <C>
First Quarter                                                        7 7/8   11 1/4
Second Quarter                                                       9       12 3/8
Third Quarter                                                       10 1/8   13 1/4
Fourth Quarter                                                       9 1/4   13

</TABLE>

The following table sets forth the regular quarterly cash dividends
paid per share in 1995 and 1994.

<TABLE>
<CAPTION>
                                                                    1995    1994
-----------------------------------------------------------------------------------
<S>                                                                  <C>    <C>
First Quarter                                                        $.05   $.05
Second Quarter                                                        .05    .05
Third Quarter                                                         .05    .05
Fourth Quarter                                                        .05    .05
</TABLE>


At year end 1995 the Company had 547 common stockholders of record and an
estimated 5,500 beneficial owners whose shares were held by nominees or broker
dealers.

Other Information

CORPORATE HEADQUARTERS:
MICHAEL FOODS, INC.
324 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
612-546-1500

CORPORATE EXECUTIVE OFFICERS:
GREGG A. OSTRANDER
President and Chief Executive Officer

JEFFREY M. SHAPIRO
Executive Vice President and Secretary

JOHN D. REEDY
Vice President-Finance,
Chief Financial Officer and Treasurer

MARK D. WITMER
Assistant Treasurer

SUBSIDIARY OFFICES:
CRYSTAL FARMS REFRIGERATED
DISTRIBUTION COMPANY
Park Place West, Suite 200
6465 Wayzata Boulevard
Minneapolis, Minnesota 55426

DRALLOS POTATO CO., INC.
6500 East Warren
Detroit, Michigan 48207

FARM FRESH FOODS, INC.
6602 Clara Street
Bell Gardens, California 90201

KOHLER MIX SPECIALTIES, INC.
4041 Highway 61
White Bear Lake, Minnesota 55110

M.G. WALDBAUM COMPANY
500 Park National Bank Building
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416

NORTHERN STAR CO.
3171 Fifth Street Southeast
Minneapolis, Minnesota 55414

WISCO FARM COOPERATIVE
450 North CP Avenue
Lake Mills, Wisconsin 53551