MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the notes to those statements and other financial information appearing elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

General

Overview . We believe that we are a leading producer and distributor of specialty egg products to the foodservice, retail and industrial ingredient markets. We believe that we are also a leading producer and distributor of refrigerated potato products to the retail market. In addition, we distribute refrigerated food items, primarily cheese and other dairy products, to the retail grocery market predominantly in the central United States. We focus our growth efforts on the specialty sectors within our food categories and strive to be a market leader in product innovation and low-cost production. Our strategic focus on value-added processing of food products is designed to capitalize on key food industry trends, such as the desire for improved safety and convenience, reduced labor and waste, as well as growth of food consumption away from home. In recent years, our net sales and operating profit, excluding transaction expenses, have each increased as a result of our focus on value-added products combined with favorable food industry trends, such as an increasing percentage of the total annual spending on food in the U.S. being devoted to eating away from home.

Capital Expenditures . From 1998 through 2003, we invested approximately $223.0 million in capital expenditures, excluding capital expenditures made in the dairy products division which was sold in late 2003. Of this amount, approximately $125.0 million was used for growth investments to expand our manufacturing capacity for value-added egg products, to upgrade our potato products operations, to improve and expand our distribution centers, to install a new company-wide management information system and to otherwise position ourselves for future growth. These expenditures included the installation of new precooked egg production lines, a new dried egg facility, automated packaging machines and quality control systems. We expect these investments to improve manufacturing efficiencies, customer service and product quality. The remainder of capital spending over the past six years was on routine major equipment and facilities betterment activities.

Acquisitions/Joint Ventures . We have grown by broadening our product offerings and through increasing our marketing and sales efforts, as well as through acquisitions. Since 1988, we have completed 17 acquisitions and three joint ventures, including the $106.0 million acquisition of Papetti’s in 1997. The acquisition of Papetti’s significantly increased our egg products division’s market share, scale, geographic scope and product offerings. We have focused in recent years on making small acquisitions that expand our current product offerings and/or geographic scope and broaden our technological expertise. For example, in August 2002, we bought the egg products division of Canadian Inovatech, Inc., a provider of processed egg products in Canada, which greatly expanded our presence in international markets, particularly in the industrial ingredients market.

Commodity and Interest Rate Risk Management . Our principal exposure to market risks that may adversely affect our results of operations and financial condition include changes in future commodity prices and interest rates. We seek to minimize or manage these market risks through normal operating and financing activities and through the use of commodity contracts and interest rate swap agreements, where practicable. We do not trade or use instruments with the objective of earning financial gains on commodity prices or interest rate fluctuations, nor do we use instruments where there are not underlying exposures. See “Market Risk—Commodity Risk Management.”

Sale of Dairy Products Division. Effective September 30, 2003, we completed the sale of our dairy products division to Dean Foods Company for approximately $155.0 million. Under terms of the Dairy LLC’s membership agreement, approximately $42.6 million of the $155.0 million of proceeds was allocated to the

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predecessor, with the remaining amount being allocated to the other members of the LLC. These members were required to contribute the $84.4 million of their net of tax proceeds to the predecessor as a capital contribution. In accordance with a transition services agreement, we were compensated for certain transition services we provided to the buyer through February 2004. These transition services included services such as information technology, sales, customer service and procurement. We determined that the sale did not meet the accounting criteria for “discontinued operations.” Accordingly, the results of operations of the dairy products division are included in the predecessor’s statements of operations through September 30, 2003.

Purchase Accounting Effects. The 2003 acquisition was accounted for using the purchase method of accounting. Accounting for the 2003 acquisition using this method may affect our results of operations in certain significant respects. The aggregate merger consideration, including purchase price adjustments, the assumption of liabilities and estimated transaction expenses, of approximately $1.018 billion was allocated to the tangible and intangible assets acquired and liabilities assumed by us, based upon their respective fair values as of the date of the 2003 acquisition. The allocation of the purchase price of the assets acquired in the 2003 acquisition resulted in a significant increase in our annual amortization expense. In addition, due to the effects of the increased borrowings to finance the 2003 acquisition, our interest expense may increase in the periods following the 2003 acquisition.

Results of Operations

The following table summarizes the historical results of our divisional operations and presents such data as a percentage of total net sales for the periods indicated. The financial data presented for the periods below include the results of our dairy products division, which was sold effective September 30, 2003. The information contained in this table should be read in conjunction with “Selected Historical Financial Data” and the consolidated financial statements and related notes included elsewhere in this prospectus. The consolidated historical financial data presented below include our financial data and the financial data of our predecessor and the 2001 predecessor, both of which were also named Michael Foods, Inc. The financial data presented below for the 2001 predecessor relates to our company and its consolidated subsidiaries for the periods prior to the acquisition of the 2001 predecessor in April 2001 by an investor group consisting of members of our senior management, two equity sponsors and affiliates of the Michael family. The financial data presented below for the predecessor relates to our company and its consolidated subsidiaries for the periods after the 2001 acquisition and prior to the acquisition of our predecessor in November 2003 by an investor group consisting of affiliates of Thomas H. Lee Partners and members of our management. Due to the 2001 acquisition and the 2003 acquisition, each of which was accounted for as a purchase, different bases of accounting have been used to prepare our, our predecessor’s and the 2001 predecessor’s consolidated financial statements. The 2003 acquisition and the 2001 acquisition resulted in additional interest expense for incurred indebtedness and higher depreciation and amortization of fixed assets and other intangible assets recorded.

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The financial data below was derived from our, our predecessor’s and the 2001 predecessor’s audited consolidated financial statements included elsewhere in this prospectus. We recommend that you combine the various periods in 2001 and 2003 in order to enable you to better compare our results of operations for the last three fiscal years.

Three Months Ended March 31, 2004 Compared to Predecessor’s Three Months Ended March 31 , 2003

Net Sales. Net sales for the three months ended March 31, 2004 increased $42.4 million, or approximately 14%, to $340.6 million from $298.2 million for the three months ended March 31, 2003. The strongest divisional sales growth occurred in the egg products division, which recorded a 40% external net sales increase. External net sales growth of 10% and 16% was recorded by the potato products and refrigerated distribution divisions, respectively.

Egg Products Division Net Sales. Egg products division external net sales for the three months ended March 31, 2004 increased $71.2 million, or 40%, to $249.8 million from $178.6 million for the three months ended March 31, 2003. External net sales increased for all products lines, with particular strength in extended shelf-life liquid egg products, egg substitutes, hardcooked products, dried products and short shelf-life liquid eggs. Most notably, dried products sales nearly doubled from the same period last year. Unit sales for egg products increased by 14% in the 2004 period. Consistent with our strategy to emphasize value-added egg product sales and diminish commodity sensitive sales, shell egg unit sales declined by 38% in the 2004 period. Egg market pricing remained strong in the first quarter of 2004, continuing a trend which began in mid-2003. During the 2004 period, shell egg prices were approximately 45% higher than in the 2003 period, as reported by Urner Barry Publications, resulting in notably better pricing for market-sensitive products such as frozen, dried and short shelf-life egg products, as well as shell eggs. Sales of higher value-added egg products represented approximately 54% of the egg products

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division’s external net sales in the 2004 period compared with 58% in the 2003 period. The increased contribution of lower value-added products reflected the impact of a significantly stronger pricing environment for market-sensitive egg products, whereas higher value-added lines are affected to a lesser extent, if at all, by egg market prices.

Potato Products Division Net Sales . Potato products division external net sales for the three months ended March 31, 2004 increased $1.8 million, or 10%, to $19.5 million from $17.7 million for the three months ended March 31, 2003. This increase was primarily attributable to strong unit sales growth for foodservice potato products, which increased approximately 13% from 2003 period levels. Retail unit sales increased by approximately 7%. Sales to new customers, growth in sales to existing customers, and new product introductions all contributed to the sales increase, with mashed potato products showing the greatest growth in both the foodservice and retail markets. Pricing in both markets was approximately stable year-over-year.

Refrigerated Distribution Division Net Sales . Refrigerated distribution division external net sales for the three months ended March 31, 2004 increased $10.0 million, or 16%, to $71.3 million from $61.3 million for the three months ended March 31, 2003. This increase was due, in part, to higher unit sales for cheese and butter. Overall, distributed products unit sales rose by 3% in the 2004 period compared to the 2003 period. Shell egg unit sales declined due to the closing of a distribution center. Increased product placements and stores served contributed to the division’s sales growth. Inflation also contributed to the divisional sales increase, with higher market prices prevailing for cheese and butter. The latter saw a 45% increase in average selling price per unit.

Dairy Products Division Net Sales . Dairy products division was sold effective late September 2003 (see Note B to our unaudited consolidated financial statements). Hence, the 2004 period had no sales from this division.

Gross Profit . Gross profit for the three months ended March 31, 2004 increased $4.4 million, or approximately 9%, to $55.3 million from $50.9 million for the three months ended March 31, 2003. Our gross profit margin was 16.2% for the 2004 period, compared with 17.1% for the 2003 period. The decrease in gross profit margin was due to decreased gross profit margins from egg products and refrigerated distribution operations. Egg and feed costs were higher in the 2004 period than in the 2003 period, reflecting much higher open market, and market-based contracted, egg prices and higher grain prices. A reduced national milk supply diminished the supply of cheese and butter, raising prices for these items. Normal delays in passing along increased raw material costs reduced gross profit margins for the egg products and refrigerated distribution divisions in the 2004 period.

Selling, General and Administrative Expenses . Selling, general and administrative expenses for the three months ended March 31, 2004 increased $1.8 million, or 6%, to $31.2 million from $29.4 million for the three months ended March 31, 2003. Selling, general and administrative expenses declined to 9.2% of net sales in the 2004 period versus 9.9% for the 2003 period. The decline in selling, general and administrative expenses as a percentage of net sales is attributable to expense management, significant net sales growth and the impact of the sale of the dairy products division.

Operating Profit . Operating profit for the three months ended March 31, 2004 increased $2.6 million, or approximately 12%, to $24.1 million from $21.5 million for the three months ended March 31, 2003. This increase is primarily attributable to the growth in net sales.

The operating profit margin declined to 7.1% in the 2004 period from 7.2% in the 2003 period, due to the lower gross profit margin.

Egg Products Division Operating Profit . Egg products division operating profit for the three months ended March 31, 2004 increased $6.7 million, or 44%, to $21.9 million from $15.2 million for the three months ended March 31, 2003. Operating profits for higher value-added egg products decreased due to the sharp increase in egg costs. However, operating profits from other egg products rose to significant levels from a collective small loss in the 2003 period, reflecting much improved market-driven pricing. Shell egg profitability in the 2004 period rose

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significantly from modest levels in the 2003 period, reflecting much higher Urner Barry pricing levels. The 2004 period included approximately $2.0 million related to amounts received under patent infringement settlements and the 2003 period included approximately $1.0 million related to a partial litigation settlement received.

Potato Products Division Operating Profit . Potato products division operating profit for the three months ended March 31, 2004 decreased $0.4 million, or 27%, to $1.2 million from $1.6 million for the three months ended March 31, 2003. This decrease reflected a small loss in the foodservice business in the 2004 period, compared to break-even levels in the 2003 period. Higher retail category operating profits were not enough to offset this weakness.

Refrigerated Distribution Division Operating Profit . Refrigerated distribution division operating profit for the three months ended March 31, 2004 decreased $1.0 million, or 23%, to $3.5 million from $4.5 million for the three months ended March 31, 2003. Operating profits for our key product line, cheese, declined in the 2004 period due to significantly increased cheese sourcing costs, which were not reflected in our wholesale/retail pricing. Delays in passing-through changes in market prices are common for the division.

Dairy Products Division Operating Profit . Dairy products division was sold effective late September 2003 (see Note B to our unaudited consolidated financial statements). Hence, the 2004 period had no operating profits from this division.

Interest Expense and Income Tax Expense . Interest expense declined by approximately $1.1 million in the 2004 period, reflecting lower interest rates and reduced amortization of deferred financing costs. Our tax rate was 38.5% in the 2004 period compared to 38.6% in the 2003 period.

Combined Results for the Year Ended December 31, 2003 Compared to Predecessor’s Results for the Year Ended December 31, 2002

Net Sales . Net sales for the year ended December 31, 2003 increased $157.0 million, or approximately 13%, to $1,325.2 million from $1,168.2 million for the year ended December 31, 2002. The strongest divisional sales growth occurred in the egg products division, which recorded a 26% external net sales increase. External net sales growth of 6% and 13% was recorded by the potato products and refrigerated distribution divisions, respectively. 2003 was a 53 week year, which added nearly 2% to annual net sales.

Egg Products Division Net Sales . Egg products division external net sales for the year ended December 31, 2003 increased $167.8 million, or 26%, to $825.6 million from $657.8 million for the year ended December 31, 2002. External net sales increased for all products lines, with particular strength in egg substitutes, precooked items, dried products and short shelf-life liquid. Consistent with our strategy to emphasize value-added egg product sales and diminish commodity sensitive sales, shell egg unit sales declined by 5% in 2003. However, shell egg dollar sales rose due to strong market prices. During 2003, shell egg prices increased by approximately 29%, as reported by Urner Barry, resulting in notably better pricing for market-sensitive products such as frozen and short shelf-life egg products as well as shell eggs. Sales of higher value-added egg products represented approximately 56% of the egg products division’s external net sales in 2003 compared with 59% in 2002. The increased contribution of lower value-added products reflected the impact of a significantly stronger pricing environment for market-sensitive egg products, whereas higher value-added lines are affected to a lesser extent, if at all, by egg market prices. Also, having a full year of Canadian operations, which largely has industrial sales, reduced the portion of total sales from value-added lines.

Potato Products Division Net Sales . Potato products division external net sales for the year ended December 31, 2003 increased $4.2 million, or 6%, to $76.4 million from $72.2 million for the year ended December 31, 2002. This increase was primarily attributable to strong unit sales growth for retail refrigerated potato products, which increased approximately 11% from 2002 levels. Foodservice unit sales increased by approximately 3%. Sales to new customers, growth in sales to existing customers, increased marketing and new product introductions all contributed to the sales increase, with mashed potato products showing the greatest growth in both the retail and foodservice markets. Approximately 60% of the division’s 2003 net sales were to the foodservice market, with 40% to the retail market. Pricing in both markets was stable year-over-year.

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Refrigerated Distribution Division Net Sales . Refrigerated distribution division external net sales for the year ended December 31, 2003 increased $30.9 million, or 13%, to $278.5 million from $247.6 million for the year ended December 31, 2002. This increase was due, in part, to higher unit sales for cheese and butter. Overall, unit sales rose by 3% in 2003. Inflation also contributed to the divisional sales increase, with higher market prices prevailing for cheese and butter. Increased product placements and stores served also contributed to the Division’s sales growth.

Dairy Products Division Net Sales . Dairy products division external net sales for the year ended December 31, 2003 decreased $45.9 million, or 24%, to $144.7 million from $190.6 million for the year ended December 31, 2002. This decrease was primarily due to the 2003 period being nine months, as the division was sold effective late September 2003. On a comparable basis, sales decreased slightly due to lower unit sales of carton products related to a customer diversifying its customer base, which were offset by unit sales gains by customers.

Gross Profit . Gross profit for the year ended December 31, 2003 increased $15.9 million, or approximately 7%, to $230.7 million from $214.8 million for the year ended December 31, 2002. Our combined gross profit margin was 17.4% of net sales for 2003, compared with 18.4% for 2002. The decrease in gross profit margin was due to decreased gross profit margins from egg products. Egg sourcing costs were higher in 2003 than in 2002, reflecting higher feed costs and much higher open market, and market-based contracted, egg costs.

Selling, General and Administrative Expenses . Selling, general and administrative expenses for the year ended December 31, 2003 increased $4.6 million, or 4%, to $121.0 million from $116.4 million for the year ended December 31, 2002. Selling, general and administrative expenses declined to 9% of net sales in 2003 versus 10% for 2002. The decline in selling, general and administrative expenses as a percentage of net sales is primarily attributable to expense management, significant net sales growth and owning the dairy products division for only nine months in 2003.

Operating Profit . Operating profit for the year ended December 31, 2003 decreased $11.2 million, or approximately 11%, to $87.2 million from $98.4 million for the year ended December 31, 2002. This decrease is primarily attributable to transaction expenses recorded by us and the predecessor of $22.5 million.

Egg Products Division Operating Profit . Egg products division operating profit for the year ended December 31, 2003 increased $6.8 million, or 10%, to $78.5 million from $71.7 million for the year ended December 31, 2002. Operating profit for higher value-added egg products decreased by $13.7 million, or 19%, from 2002, reflecting increased egg costs, as a result of increased grain and market-driven egg costs late in the year. Operating profits from other egg products rose significantly from near break-even levels in 2002, reflecting vastly improved market-driven pricing. Shell egg profitability in 2003 rose significantly from very modest 2002 levels, reflecting much higher Urner Barry pricing levels. Various legal settlements related to vendor price collusion added approximately $4.3 million to 2003 divisional operating profits.

Potato Products Division Operating Profit . Potato products division operating profit for the year ended December 31, 2003 decreased $1.4 million, or 13%, to $9.4 million from $10.8 million for the year ended December 31, 2002. This decrease reflected a gross profit decrease tied to reduced processing yields as a result of below-normal potato quality through the first nine months of 2003, partially offset by the favorable impact of rising sales volumes in the more profitable retail market.

Refrigerated Distribution Division Operating Profit . Refrigerated distribution division operating profit for the year ended December 31, 2003 increased $2.7 million, or 20%, to $16.4 million from $13.7 million for the year ended December 31, 2002. Profit margin for our key product line, cheese, rose in 2003 due to both normal (versus historical averages) product costs and retail pricing prevailing through much of the year. Also, our cheese hedging activities were more effective in 2003 than in 2002. Divisional operating profit results for the first several months of 2002 were depressed due to ineffective cheese hedging, which resulted in cheese costs being in

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excess of market levels. Improved 2003 profitability was partially offset by a charge of approximately $1.0 million in recognition of a bankruptcy filing by a major customer.

Dairy Products Division Operating Profit . Dairy products division operating profit for the year ended December 31, 2003 increased $2.0 million, or 20% to $11.9 million from $9.9 million for the year ended December 31, 2002 despite the 2003 period being nine months, as 2002 was affected by high operating costs at one facility that were rectified in 2003. Additionally, sales growth in the higher margin creamer category contributed to profit growth. The division was sold effective late September 2003.

Loss on Early Extinguishment of Debt and Loss on Dairy Disposition. The predecessor recorded a loss on the early extinguishment of debt related to the 2003 acquisition during the eleven month period ended November 30, 2003 of $61.2 million. The amount consists primarily of a $50.8 million redemption premium paid to the 11.75% senior subordinated note holders. The predecessor also recorded a loss on the sale of the dairy products division. The loss was primarily related to the difference in book basis of our investment in the division compared to the actual cash received by the predecessor of $42.6 million.

Predecessor’s Results for the Year Ended December 31, 2002 Compared to the Combined Results for the Year Ended December 31, 2001

Net Sales . Net sales for the year ended December 31, 2002 increased $6.9 million, or approximately 1%, to $1,168.2 million from $1,161.3 million for the year ended December 31, 2001. The strongest divisional sales growth occurred in the potato products division, which recorded an 8% external net sales increase. External net sales growth of 2% and 3% was recorded by the egg products and dairy products divisions, respectively, with the egg products division benefiting from the acquisition of a Canadian egg products business in August 2002. Refrigerated distribution external net sales declined by 6% due to lower commodity prices for butter, lower unit sales and customer store closings.

Egg Products Division Net Sales . Egg products division external net sales for the year ended December 31, 2002 increased $11.9 million, or 2%, to $657.8 million from $645.9 million for the year ended December 31, 2001. Sales rose for higher value-added products, in total, including precooked items, egg substitutes and hardcooked eggs, and declined for the more commodity price sensitive products, such as frozen and dried egg products. Reflecting our strategy to sell more higher value-added egg products, shell egg sales declined by 7% in 2002, while shell egg dozens sold decreased by over 12%. During 2002, shell egg prices increased by approximately 3%, as reported by Urner Barry resulting in somewhat better margins for frozen and dried egg products. However, in some cases, we declined to renew contracts for frozen products last year because of a lack of margin contribution. The Canadian egg products business acquired in August 2002, and the related consolidation of Trilogy Egg Products, Inc., one of our joint ventures, added approximately 3% to the 2002 Egg products division’s net sales. Sales of higher value-added egg products represented approximately 64% of the Egg Products Division’s sales in both 2002 and 2001.

Potato Products Division Net Sales . Potato products division external net sales for the year ended December 31, 2002 increased $5.3 million, or 8%, to $72.2 million from $66.9 million for the year ended December 31, 2001. This increase was mainly due to strong unit sales growth for retail refrigerated potato products, which increased approximately 16% from 2001. Foodservice unit sales increased by approximately 4%. Sales to new customers, growth in sales to existing customers, increased marketing and new product introductions all contributed to the sales increase, with mashed potato products showing the greatest growth in both retail and foodservice markets.

Refrigerated Distribution Division Net Sales . Refrigerated distribution division external net sales for the year ended December 31, 2002 decreased $15.1 million, or 6%, to $247.6 million from $262.7 million for the year ended December 31, 2001. This decrease was due, in part, to lower unit sales for cheese, margarine and bakery items. Customer store closings and a sluggish domestic food sales environment contributed to this sales

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decline. While net sales declined 6%, quantities of distributed products fell by less than 1%. Further, shell egg dozens sold declined by 6%, which was in line with our strategy to increase our focus on higher value-added egg products. Deflation also contributed significantly to the divisional sales decline, with lower market prices prevailing for butter and margarine.

Dairy Products Division Net Sales . Dairy products division external net sales for the year ended December 31, 2002 increased $4.7 million, or 3%, to $190.6 million from $185.9 million for the year ended December 31, 2001. This increase mainly was due to strong unit sales volumes for certain specialty cartoned items contract packed for other dairies and notable growth in non-refrigerated creamer sales. National dairy ingredient prices decreased during the year, resulting in a lower pricing environment of approximately 4%, on average, for the products sold by the dairy products division resulting in lower external net sales growth in 2002. We sold our dairy products division effective September 30, 2003.

Gross Profit . Gross profit for the year ended December 31, 2002 increased $15.2 million, or approximately 8%, to $214.8 million from $199.6 million for the year ended December 31, 2001. Our gross profit margin was 18.4% of net sales in 2002, whereas the combined gross profit margin was 17.2% in 2001. The increase in gross profit margin was due to increased gross profits from many products, including egg substitutes, precooked egg products, cheese and specialty dairy products. In general, raw material costs were more favorable in 2002 than in 2001, and cost savings were realized from production efficiencies in several product categories.

Selling, General and Administrative Expenses . Selling, general and administrative expenses for the year ended December 31, 2002 increased $1.5 million, or 1%, to $116.4 million from $114.9 million for the year ended December 31, 2001. Selling, general and administrative expenses were nearly consistent at 10% of net sales in 2002 versus 9.9% for 2001. Whereas 2002 expenses no longer included goodwill amortization, there were increases in depreciation and incentives accruals in 2002. The former reflected a full year of increased asset values, due to the purchase accounting at the time of the 2001 acquisition, being depreciated as compared to a partial year in 2001. Separate from selling, general and administrative expenses in 2001, the predecessor recorded non-recurring expenses related to the 2001 acquisition for financial, legal, advisory and regulatory filing fees. These expenses of approximately $11.1 million are reflected in the predecessor’s consolidated statements of operations as transaction expenses.

Operating Profit . Operating profit for the year ended December 31, 2002 increased $24.8 million, or approximately 34%, to $98.4 million from $73.6 million for the year ended December 31, 2001. This increase was due mainly to the increase in gross profit, as described above. Also, 2001 results included one-time transaction expenses for the predecessor relating to the 2001 acquisition.

Egg Products Division Operating Profit . Egg products division operating profit for the year ended December 31, 2002 increased $10.1 million, or 16%, to $71.7 million from $61.6 million for the year ended December 31, 2001. Operating profit for higher value-added egg products increased by $9.3 million, or 15%, from 2001, while operating profits from other egg products were near break-even levels, collectively, as compared to modest profitability in 2001. The increase in divisional operating margin was due mainly to increased gross profits from value-added items, resulting from favorable raw material costs and production efficiencies. The 2001 operating profit for the division was affected by an approximate $1.6 million loss from the egg product division’s termination of The Lipid Company S.A., a European egg products joint venture. The joint venture was terminated due to the predecessor’s concerns about the viability of the business and the prospects for profitability to be achieved. A legal settlement related to vendor price collusion added approximately $0.8 million to 2002 divisional operating profits.

Potato Products Division Operating Profit . Potato products division operating profit for the year ended December 31, 2002 increased $2.5 million, or 30%, to $10.8 million from $8.3 million for the year ended December 31, 2001. This increase reflected gross profit improvement tied to volume growth, particularly from the more profitable retail market, and continuing improvements in plant operations.

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Refrigerated Distribution Division Operating Profit . Refrigerated distribution division operating profit for the year ended December 31, 2002 increased $5.1 million, or 59%, to $13.7 million from $8.6 million for the year ended December 31, 2001. Profit margin for our key product line, cheese, rose in 2002 due to more normalized product costs prevailing through much of the year. However, operating profit results for the first several months of 2002 were depressed due to cheese hedging, which resulted in cheese costs being in excess of market levels. When cheese inventory costs returned to more normal levels, due to a reduction in hedging, operating profits for the division increased significantly in the latter part of the year.

Dairy Products Division Operating Profit . Dairy products division operating profit for the year ended December 31, 2002 decreased $1.9 million, or 16%, to $9.9 million from $11.8 million for the year ended December 31, 2001. Operating profit for the dairy products division in 2001 included a $3.2 million final insurance settlement payment related to our 1999 milk recall. Exclusive of this settlement amount, the operating profit for the dairy products division increased $1.3 million in 2002. This reflected more favorable ingredient costs, which more than offset higher than expected production costs at one dairy plant.

Seasonality and Inflation

Our consolidated quarterly operating results are affected by the seasonal fluctuations 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. Consequently, net sales in the egg products division may increase in the first and fourth quarters. Operating profits from the potato products division are less seasonal, but tend to be higher in the second half of the year coinciding with the potato harvest. Generally, the refrigerated distribution division has higher net sales and operating profits in the fourth quarter, coinciding with incremental consumer demand during the holiday season. In recent years, other than fluctuations in raw material costs, largely related to short-term supply and demand variances, inflation has not been a significant factor in our operations. Inflation is not expected to have a significant impact on our business, results of operations or financial condition since we can generally offset the impact of inflation through a combination of productivity gains and price increases. See “Risk Factors—Risks Relating to Our Company and the Industries We Serve—Our industry and the sales of our products are subject to seasonal variations and, as a result, our quarterly operating results may fluctuate.”