Letter From The President

Building on our platform of success...

Vision... Strategy... Clarity... Collaboration.... Accountability... Pride of Ownership — independently these are powerful components of any team or organization. Successfully blended together, they represent the foundation and cornerstones that ensure long-term success. This successful blend has become the lifestyle and culture of the Monterey Gourmet Foods team.

While talent, innovation and execution have been at the forefront of every initiative and deliverable the organization has undertaken in 2007, the foundational cornerstones noted above have been the basis on which to build these initiatives. These include building teams that trust and support each other and have a clear vision as to their goal; new product developments that fit into the strategy of the brand; efficient production processes that encourage accountability and pride of ownership; and ultimately, the availability of exciting new products that clearly fit into our portfolio of brands and core categories for our customers and consumers. The whole family at Monterey Gourmet Foods—from senior management to every single employee on the production floor—has set a new standard of success for the Company and I’m excited, as we leverage this new performance lifestyle, to establish Monterey Gourmet Foods as an innovative leader in the specialty food industry.

Year 2007 brought much change as we grew and developed, but it was also a year of great progress and improvement. As a result of our aggressive initiatives, we attained several key milestones, most importantly our return to profitability— generating $1.68MM in net income ($0.10 per common share). This compares to a prior year post-impairment net loss of $3.1MM or loss of $0.19 per common share.

Net Sales 2007 increased $6.2MM over Net Sales 2006 performance, establishing $100MM as the new basis for measuring our success. The 2007 increase in net sales was due in part to growth in the sales of our Monterey Pasta Companybranded refrigerated pasta products, which grew $8.1MM or 24 percent. This growth included incremental sales of pastas made with organic ingredients, whole-wheat pasta items and new innovations by our culinary team. Our Casual Gourmetbranded chicken sausage and meatball products also drove additional sales growth in 2007. The Casual Gourmet brand has clearly re-established itself as a category leader—contributing more than $1.4MM in growth over 2006, representing a 31 percent increase year over year. Attaining our $100MM net sales milestone has been a significant accomplishment for our team. As we have shared in prior discussions, this revenue milestone included a $2.5MM or 23 percent reduction in net sales of our Sonoma Foods brand. Excluding the decline in Sonoma cheese sales, revenue grew $8.7MM or 10% for 2007 when compared to 2006.

In addition to driving top line revenue, we made progress in improving our financial performance. By managing our SG&A expenses—reflected in a reduction of $1.4MM or an 11 percent reduction in the percentage of SG&A expenses as a percent of net sales—Monterey Gourmet Foods generated $4.2MM in cash from operating activities directly related to our improved revenue and expense milestones. Our ability to generate cash, supported with a strong balance sheet, will allow us to continue our growth and acquisition initiatives.

In 2007, we focused on building our platform for growth. Our investment in talent, innovation and execution was clearly demonstrated in our ability to deliver timely, quality new products to the market. Our investment in pasta production and the announcement of our Seattle facility have set the stage for leveraging our new platform for success. To propel our prosperity in 2008 and in coming years, we will continue to make investments in culinary innovation and strategic growth initiatives, supported by the continued aggressive growth in our natural and organic categories.

With the close of 2007 and the prospect of a great 2008, we thank each and every one of our shareholders and employees for their continuous support as we build Monterey Gourmet Foods into a world-class company.

Respectfully and Sincerely,

Eric C. Eddings
President and Chief Executive Officer