U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) Interim Financial Statements

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information; therefore, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included using management’s best estimates and judgments where appropriate.  These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.  The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period.  Actual results could differ materially from these estimates and judgments.  For further information, refer to the audited Consolidated Financial Statements and Notes to Consolidated Financial Statements, which are included in the Company’s Annual Report on Form 10-K on file with the Securities and Exchange Commission (SEC) for the fiscal year ended August 25, 2007.  The results of operations for the interim periods presented are not necessarily indicative of the results for a full fiscal year. Certain prior year amounts have been reclassified in order to conform to the current year presentation, as further discussed in the most recent Annual Report on Form 10-K.

NB Finance Corp., a wholly-owned finance subsidiary of NBP, is a co-issuer on a joint and several basis with NBP of the Senior Notes, which are NBP’s senior unsecured obligations, ranking equal in right of payment with all of its other senior unsecured obligations.  NB Finance Corp. has nominal assets and conducts no business or operations. There are no significant restrictions on the ability of subsidiaries to transfer funds to NBP.

(2) New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB)FASB issued Statement of Financial Accounting Standard No. 157 (SFAS 157), Fair Value Measurements.  This statement establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements.  SFAS 157 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”  SFAS 157 will apply to fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  In February 2008, however, the FASB issued FASB Staff Position 157-2 (FSP 157-2) which defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually).  FSP 157-2 will apply to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.  The Company is currently evaluating the impact SFAS 157 may have, if any, on its Consolidated Financial Statements.

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities.  This statement provides companies with an option to report selected financial assets and liabilities at fair value.  SFAS 159 will apply to fiscal years beginning after November 15, 2007.  The Company is currently evaluating the impact SFAS 159 may have, if any, on its Consolidated Financial Statements.

In December 2007, the FASB issued Statement of Financial Accounting Standard No. 160 (SFAS 160), Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary.  SFAS 160 requires noncontrolling interests held by parties other than the parent in subsidiaries be clearly identified, labeled, and presented in the consolidated balance sheet within equity, but separate from the parent's equity.   SFAS 160 is effective for fiscal years beginning after December 15, 2008.  The Company is currently assessing the impact of SFAS 160 on its Consolidated Financial Statements.

In December 2007, the FASB issued Statement of Financial Accounting Standard No. 141R (SFAS 141R), Business Combinations.  This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date to be measured at their fair value as of that date.  An acquirer is required to recognize assets or liabilities arising from all other contingencies (contractual contingencies) as of the acquisition date, measured at their acquisition-date fair values, only if it is more likely than not that they meet the definition of an asset or a liability in FASB Concepts Statement No. 6, Elements of Financial Statements.  Any acquisition-related costs are to be expensed instead of capitalized.  The impact to the Company from the adoption of SFAS 141R in fiscal year 2009 will depend on acquisitions at the time.  This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

(3) Inventories

Inventories at November 24, 2007February 23, 2008 and August 25, 2007 consisted of the following (in thousands):

(4) Comprehensive Loss

Comprehensive loss, which consists of net loss and foreign currency translation adjustments, was as follows for the periods indicated (in thousands):

(5) Minority Interest 

At any time after certain dates, the earliest being July 31, 2008, the latest being July 31, 2011, certain members of NBP management and/or NBPCo Holdings, LLC have the right to request that NBP repurchase their interests, the value of which is to be determined by a mutually agreed appraisal process. If NBP is unable to effect the repurchase within a specified time, the requesting member(s) have the right to cause a sale process to commence.  The Company accounts for changes in the redemption value of these interests by accreting the change in value over the current period through the earliest redemption date of the respective interests.  At November 24, 2007,February 23, 2008, the minority interest in National Beef was revalued by an independent appraisal process, and the value was determined to be $66.2$178.2 million, which was in excess of its carrying value.  Accordingly, the carrying value of the minority interest in National Beef increased by approximately $0.2$25.5 million through accretion during the thirteen weeks ended November 24, 2007,February 23, 2008, resulting in a carrying value of $65.3$85.6 million, which is included in the accompanying Consolidated Balance Sheet as of NovemberFebruary 23, 2008.

The redemption value of the minority interest in NBP at February 23, 2008, increased by approximately $106.1 million compared to the value at August 24, 2007. 2007 primarily as a result of the Membership Interest Purchase Agreement (the Agreement) that was entered into on February 29, 2008 with JBS S.A. (JBS).  Under the Agreement, JBS will acquire all of the outstanding membership interests in NBP for an aggregate value of $560.0 million.  Generally accepted accounting principles require that the fair value of the Company’s minority interests in NBP that are redeemable be determined at the end of each reporting period.  This change in fair value is accreted over the redemption period as discussed above.  Offsetting the change in the redemption value of the minority interest is a corresponding change in members’ capital.  See Note 9 – Subsequent Event for more information related to the Agreement.

(6) Income Taxes

On August 26, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes.  FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classifications, interest and penalties, accounting in interim periods, disclosures and transition.  As a result of the adoption, tax reserves in the amount of approximately $0.5 million were reversed.reversed during the first quarter of fiscal year 2008.

Prior to the adoption of FIN 48, the Company did not recognize accrued interest or penalties on uncertain tax positions.  Should the Company be required to accrue interest and penalties in the future, it will likely record the interest accrual to interest expense and record the penalties accrual to selling, general and administrative expense.  As of August 26, 2007, the Company did not have any amounts recorded for accrued interest and penalties on uncertain tax positions.   

The Company’s subsidiary, National Carriers, Inc. (NCI), has concluded an examination of its U.S. federal income taxes for fiscal year 2005.  Based on federal income tax statute of limitations, NCI remains subject to examination of its income taxes for fiscal years 2006 and 2007. USPB does not currently have any ongoing income tax examinations with the Internal Revenue Service or other tax authorities.

(7) Legal Proceedings

Schumacher v. Tyson Foods, et al. On July 1, 2002, a lawsuit was filed against Farmland National Beef Packing Company, L.P. (FNBPC or the predecessor to NBP), ConAgra Beef Company, Tyson Foods, Inc. and Excel Corporation in the United States District Court for the District of South Dakota seeking certification of a class of all persons who sold cattle to the defendants for cash, or on a basis affected by the cash price for cattle, during the period from April 2, 2001 through May 11, 2001 and for some period up to two weeks thereafter. The case was filed by three named plaintiffs on behalf of a putative nationwide class that plaintiffs estimate is comprised of hundreds or thousands of members. The complaint alleged that the defendants, in violation of the Packers and Stockyards Act of 1921, knowingly used, without correction or disclosure, incorrect and misleading boxed beef price information generated by the USDA to purchase cattle offered for sale by the plaintiffs at a price substantially lower than was justified by the actual and correct price of boxed beef during this period. Plaintiffs also sought recovery against all defendants under a theory of unjust enrichment. The case was certified as a class-action matter in June of 2004. The plaintiffs claimed damages against FNBPC in the amount of approximately $4.5 million plus prejudgment interest, attorneys' fees and court costs. The claim is subject to reduction in an unknown amount by the number of class members who have opted out of the class. Trial began March 31, 2006. On April 13, 2006, the jury returned a verdict in favor of FNBPC but against the other defendants. The other defendants have filed an appeal in the United States Court of Appeals for the Eighth Circuit. The appeal was argued on November 14, 2007.  No decision has been made.  The plaintiffs did not appeal the verdict for the Company but no final judgment will be entered until after the appeal is decided.  The Eighth Circuit reversed the judgment against the other defendants and the District Court has dismissed plaintiffs’ complaint with prejudice.  The deadline for filing a petition for certiorari in the Supreme Court is April 29, 2008. 

The Company’s wholly owned subsidiary, NCI, has various independent contractor drivers who are involved in accidents from time to time.  Management believes the ultimate resolution of such matters should not have a material adverse effect on the Company’s financial condition, results of operations, or liquidity.

The Company is also a party to a number of other lawsuits and claims arising out of the operation of its business.  Management believes the ultimate resolution of such matters should not have a material adverse effect on the Company’s financial condition, results of operations, or liquidity.

(8) Earnings Per Unit

Basic earnings per unit (EPU) excludes dilution and is computed by dividing income or loss available to unitholders by the weighted-average number of linked Class A and Class B units outstanding for the period.  Class A units and Class B units shall be issued, redeemed, and transferred together on a one for one basis until the Board of Directors determines the extent and conditions under which Class A units and Class B units may be issued, redeemed, and transferred separately.

Diluted EPU reflects the potential dilution that could occur if potential unit purchase rights were exercised or contractual appreciation rights were converted into units.   Upon termination of the CEO employment agreement, at the election of the CEO, or upon mutual agreement of the Board of the Company and the CEO, the CEO may purchase up to 20,000 Class A and Class B units, or upon agreement of the CEO and the Board of Directors, the CEO may convert the contractual unit appreciation rights to up to 20,000 Class A and Class B units.  The diluted EPU reflects the circumstances of termination of the CEO employment agreement, and the election of CEO or agreement by the Board of the Company and the CEO for the CEO to purchase or convert contractual rights to the maximum 20,000 units at $55 per linked Class A and Class B unit for the periods as provided for in the CEO employment agreement.

The diluted loss per linked unit calculation in the following table excludes the effect of the 20,000 unit purchase rights noted above for the 13thirteen week periodand twenty-six week periods ending NovemberFebruary 23, 2008 and February 24, 2007, and November 25, 2006, respectively, as the effect of including them would have been anti-dilutive to the loss per linked unit calculation.

(9) Subsequent Event

On February 29, 2008, JBS, NBP, USPB and the other holders of membership interests in NBP, including NBPCO Holdings, LLC and parties controlled by three executive officers, John R. Miller, Timothy M. Klein and Scott H. Smith, entered into the Agreement. Under the Agreement, JBS will acquire all of the outstanding membership interests in NBP (including the membership interests issuable pursuant to deferred equity incentive compensation agreements with NBP’s Chief Executive Officer and Chief Operating Officer) for a combination of approximately $465.0 million cash and $95.0 million in common stock of JBS (the Purchase Price).

Pursuant to the Agreement, at closing USPB and certain other members of NBP will receive their proportionate share of the Purchase Price with 80.0% to be paid in cash and 20.0% to be paid in shares of common stock of JBS (the JBS Stock), which will be freely transferable on the Novo Mercado segment of the BOVESPA stock exchange in Brazil. The number of shares of JBS Stock will be determined based on the volume weighted average of the closing per share price of the JBS Stock on the BOVESPA stock exchange during the 20 trading days prior to closing, subject to certain adjustments. Certain of NBP’s members have elected to receive or, under certain circumstances, have the right to receive their portion of the Purchase Price entirely in cash. If JBS is unable to deliver JBS Stock on an unencumbered and freely transferable basis at closing, the sellers entitled to receive the JBS Stock may still dem and to close, but be paid their proportionate share of the Purchase Price entirely in cash.

Consummation of the Agreement is subject to customary conditions, including approval of the Agreement by the members of USPB and the shareholders of JBS and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and possible approvals by certain foreign jurisdictions.  On March 14, 2008, at a Special Meeting of Members, USPB’s members approved the Agreement and the transactions contemplated under the Agreement.  The shareholders of JBS are to vote on the Agreement no later than April 11, 2008.

The Agreement contains certain termination rights and provides that under certain circumstances, JBS or NBP may be required to pay NBP or JBS, respectively, a termination fee of $25 million plus certain costs.  The parties have agreed on the payment of certain fees and expenses, including those related to antitrust filings and compliance.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our consolidated financial statementsConsolidated Financial Statements and related notes and other financial information appearing elsewhere in this report.

Disclosure Regarding Forward-Looking Statements

This report contains “forward-looking statements,” which are subject to a number of risks and uncertainties, many of which are beyond our control. Forward-looking statements are typically identified by the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and similar expressions. Actual results could differ materially from those contemplated by these forward-looking statements as a result of many factors, including the satisfaction of all conditions to close the transaction with JBS S.A. (JBS) described below under Recent Developments, economic conditions generally and in our principal markets, the availability and prices of live cattle and commodities, food safety, livestock disease, including the identification of cattle with Bovine Spongiform Encephalopathy (BSE), competitive practices and consolidation in the cattle production and processing industries, actions of domestic or foreign governments, hedging risk, changes in interest rates and foreign currency exchange rates, consumer demand and preferences, the cost of compliance with environmental and health laws, loss of key customers, loss of key employees, labor relations, consolidation among our customers and the potential inability to receive the anticipated benefits from the acquisition of the processing facility in Brawley, CA.  

In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this report will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors.  See also the Risk Factors in Item 1A. Business of the Company’s Annual Report for the year ended August 25, 2007 on Form 10-K and the Risk Factors section of the Proxy Statement, which were filed with the Securities and Exchange Commission on November 14, 2007 and March 4, 2008, respectively, for other important factors that could cause actual results to differ materially from those in any such forward-looking statements, and which should be read in conjunction with this report.

Industry Outlook

The cattle herd in the United States (U.S.) remains in a no-growth phase.  Following the droughtThe increased cost of 2006 in the central region of the U.S., an extreme dryness in the southeastern region of the U.S. resulted in cow herd liquidation in the southeastern region during 2007.  Retention of femalesproduction and uncertainty about future costs has led to replenish and grow the U.S. cattle herd remains slow, resulting in long-term cattle supplies that show no appreciable signa lack of growth in overall fedthe beef cattle supplies oversegment.  Although the next twodairy cattle segment is also challenged by rapidly increasing costs, the dairy herd continues to three years.  Meanwhile,grow due to its ability to pass through higher production costs.  The cattle on feed supplies have returned to approximatelyare nearly 2.0% above the same level asprior year supplies and should remain above prior year levels into the same time last year. Anticipated higher live cattle weights should support expectations for year over year beef production gains during the first half of 2008early summer before trending back below 2007 levelscontracting for the remainder of 2008.

Recent Developments

            Negotiations for the Collective Bargaining Agreement with the United Foodsummer and Commercial Workers Union, Local 2, for the Liberal, Kansas facility, to replace the prior agreement that expired on December 16, 2007, were completed in December 2007.  The newly ratified agreement provides for a five-year term expiring in December 2012.  The new agreement includes changes in wages and benefits that allow us to continue to be cost competitive within the beef industry while ensuring the ability to attract and retain employees. early fall.

Beef Export Markets

Export markets for U.S. beef products remain significantly constrained since the discovery of a case of BSE in the State of Washington in December 2003, as well as several other isolated cases.  In July 2006, Japan agreed to reopen its market to U.S. beef from cattle aged 20 months and younger.  In September 2006, South Korea announced a provisional opening of its border to U.S. beef from animals 30 months and younger;younger in September 2006, however, restrictions imposed with the reopening have prompted furtherits border closings from time to time.was subsequently closed on October 5, 2007 and has not reopened.  These constraints and uncertainties have had a negative impact on beef margins.

The CompanyWe cannot presently assess the full economic impact of the consequences of BSE on the U.S. beef packing industry or on its operations.  Existing or new import restrictions or additional regulatory restrictions or disruptions in domestic consumer demand for beef may continue to have a material adverse affect on the Company’sour revenues and net income.

Recent Developments

Production Cutbacks:  On December 12, 2007, NBP announced production cutbacks to 32-36 hours at its beef processing facilities in Liberal and Dodge City, Kansas.  Production cuts began that week and have reduced slaughter by approximately 10,000 to 15,000 head per week.  Management’s decision to regulate production hours is driven by market conditions.

Membership Interest Purchase Agreement with JBS: On February 29, 2008, JBS, NBP, USPB and the other holders of membership interests in NBP, including NBPCO Holdings, LLC and parties controlled by three executive officers, John R. Miller, Timothy M. Klein and Scott H. Smith, entered into a Membership Interest Purchase Agreement (the Agreement). Under the Agreement, JBS will acquire all of the outstanding membership interests in NBP (including the membership interests issuable pursuant to deferred equity incentive compensation agreements with NBP’s Chief Executive Officer and Chief Operating Officer) for a combination of approximately $465.0 million cash and $95.0 million in common stock of JBS (the Purchase Price).

Pursuant to the Agreement, at closing USPB and certain other members of NBP will receive their proportionate share of the Purchase Price with 80.0% to be paid in cash and 20.0% to be paid in shares of common stock of JBS (the JBS Stock), which will be freely transferable on the Novo Mercado segment of the BOVESPA stock exchange in Brazil. The number of shares of JBS Stock will be determined based on the volume weighted average of the closing per share price of the JBS Stock on the BOVESPA stock exchange during the 20 trading days prior to closing, subject to certain adjustments. Certain of NBP’s members have elected to receive or, under certain circumstances, have the right to receive their portion of the Purchase Price entirely in cash. If JBS is unable to deliver JBS Stock on an unencumbered and freely transferable basis at closing, the sellers entitled to receive the JBS Stock may still demand to close, but be paid their proportionate share of the Purchase Pr ice entirely in cash.

Consummation of the Agreement is subject to customary conditions, including approval of the Agreement by the members of USPB and the shareholders of JBS and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and possible approvals by certain foreign jurisdictions.  On March 14, 2008, at a Special Meeting of Members, USPB’s members approved the Agreement and the transactions contemplated under the Agreement.  The shareholders of JBS are to vote on the Agreement no later than April 11, 2008.

The Agreement contains certain termination rights and provides that under certain circumstances, JBS or NBP may be required to pay NBP or JBS, respectively, a termination fee of $25 million plus certain costs.  The parties have agreed on the payment of certain fees and expenses, including those related to antitrust filings and compliance.

Results of Operations

Thirteen weeks ended November 24, 2007February 23, 2008 compared to thirteen weeks ended November 25, 2006February 24, 2007

General.  Net loss for the thirteen weeks ended November 24, 2007February 23, 2008 was $13.7$7.6 million compared to a net loss of $13.1$1.6 million for the thirteen weeks ended November 25, 2006,February 24, 2007, an increased loss of $0.6$6.0 million.  Sales and cost ofNet sales were both higherlower in the thirteen weeks ended November 24, 2007 thanFebruary 23, 2008 compared to those of the prior year period primarily due to an increase of approximately 5.9% in thereduced production at our beef processing plants.  The number of cattle processed higher live cattle prices that were approximately 4.9% more and heavier cattle at average weights 0.8% moreduring the current thirteen week period was 8.3% less than the same period of fiscal year 2007. last year.

Although sales increased by approximately 9.8% compared to the same period in the prior year, cost of sales also increased by approximately 9.8%, along with an approximate 12.5% increase in selling, general, and administrative expenses and an approximate 11.4% increase in depreciation expense, resulting in an increase in operating loss of $0.9 million.  The increase in cost of sales was primarily due to an increase in cattle processed at live cattle prices that were approximately 4.9% higher and cattle weighing an average of 0.8% more than the same period in the prior year.  Total costs and expenses of $1,414.2$1,310.2 million and $1,288.2$1,306.3 million for the thirteen weeks ended NovemberFebruary 23, 2008 and February 24, 2007, and November 25, 2006, respectively, were 101.2%100.3% as a percent of sales for both periods.the thirteen weeks ended February 23, 2008 compared to 99.5% for the thirteen weeks ended February 24, 2007.  High cattle prices contributed to an erosion of gross margin resulting in a decrease in operating income of approximately $11.4 million. 

Net Sales.  Net sales were $1,398.1$1,306.0 million for the thirteen weeks ended November 24, 2007February 23, 2008 compared to $1,273.0$1,313.3 million for the thirteen weeks ended November 25, 2006, an increaseFebruary 24, 2007, a decrease of $125.1$7.3 million, or 9.8%0.6%.  The increase in netNet sales principally resulted from an approximate 5.9% increasewere lower in the thirteen weeks ended February 23, 2008 compared to those of the prior period primarily due to reduced production at our beef processing plants.  The number of cattle processed during the current thirteen weeks ended November 24, 2007. week period was 8.3% less than the same period of last year.

Cost of Sales.  Cost of sales was $1,393.7$1,288.2 million for the thirteen weeks ended November 24, 2007February 23, 2008 compared to $1,269.9$1,287.5 million for the thirteen weeks ended November 25, 2006,February 24, 2007, an increase of $123.8$0.7 million, or 9.8%0.1%.   The increase was primarily a result of a combination of increased cattle processing of approximately 5.9%, higher live cattle prices that were approximately 4.9% more4.7% higher due to the continued tight supply of market-ready cattle and to the cattle being heavier, cattle at average weights 0.8%0.6% more, than the same period of fiscal year 2007.  The 4.9%last year.  Partially offsetting the increase in cattle prices was a decrease in cattle processing by approximately 8.3% for thisthe current thirteen week period resulted from a continued tight supplyas compared to the same period of market-ready cattle.fiscal year 2007.

Selling, General, and Administrative Expenses.  Selling, general, and administrative expenses were $11.7$13.2 million for the thirteen weeks ended November 24, 2007February 23, 2008 compared to $10.4$10.8 million for the thirteen weeks ended November 25, 2006,February 24, 2007, an increase of $1.3$2.4 million or 12.5%22.2%.  The increase reflects an increase in legal expense of approximately $1.2 million, which was primarily related to the proposed transaction with JBS, an increase in payroll and related expenses of approximately $0.7$0.9 million, due mainly to increases in bonus and salaries, an increase in marketing and advertising expense of approximately $0.3 million, an approximate $0.3 million increase in legal fees, an approximate $0.1 million increase in dues and subscription expense, and an increase in travel expenses of approximately $0.1 million, which were offset by a decrease of approximately $0.2 million in bad debt expense and a decrease in repairs and maintenance expense of approximately $0.2 million.million, and an increase of approximately $0.1 million in advertising expense.

Depreciation and Amortization Expense.  Depreciation and amortization expenses were $8.8 million for the thirteen weeks ended November 24, 2007February 23, 2008 compared to $7.9 million for the thirteen weeks ended November 25, 2006,February 24, 2007, an increase of $0.9 million, or 11.4%.  Most of the increase wasDepreciation expense increased due to increased depreciation expense resulting from assets being placed into service, primarily at the Dodge City and Brawley beef plants, during fiscal year 2007.

Operating Loss.  An operatingOperating loss of $16.1 million was incurred for the thirteen weeks ended November 24, 2007 compared to an operating loss of $15.2$4.2 million for the thirteen weeks ended November 25, 2006, an increased lossFebruary 23, 2008 compared to operating income of $0.9$7.0 million or 5.9%.for the thirteen weeks ended February 24, 2007, a decrease of $11.2 million.  The increasedecrease resulted primarily from a lower sales volume at our portion control meat facility.higher cattle costs during the second quarter of fiscal year 2008 as compared to the same period of last year. 

Interest Expense.  Interest expense was $9.2 million for the thirteen weeks ended November 24, 2007February 23, 2008 compared to $9.3$9.8 million for the thirteen weeks ended November 25, 2006,February 24, 2007, a slight decrease of $0.1$0.6 million, or 1.1%6.1%.  The decrease in interest expense during the thirteen weeks ended November 24, 2007February 23, 2008 as compared to the same period in fiscal year 2007 was due primarily to lower interest rates on our variable rate debt, a decrease of approximately 53192 basis points, during the thirteen weeks ended November 24, 2007 as compared to the same period in fiscal year 2007.points.  Offsetting this decrease in interest rates was an increase in the weighted average of variable rate debt outstanding of approximately $38.0$18.7 million at November 24, 2007February 23, 2008 as compared to November 25, 2006. February 24, 2007.

Minority Owners’ Interest in Net Loss of National Beef Packing Company, LLC.  Minority owners interest in the net loss of NBP was $4.9 million for the thirteen weeks ended February 23, 2008 compared to $1.2 million for the thirteen weeks ended February 24, 2007, an increase of $3.7 million.  The increase in minority owners’ interest in the net loss of NBP was due to increased net loss at NBP, which occurred primarily from higher cattle costs during the second quarter of fiscal year 2008 as compared to the same period of last year.

Other, net.  Other, net non-operating income was $1.5 million for the thirteen weeks ended February 23, 2008 compared to other, net non-operating income of $0.4 million for the thirteen weeks ended February 24, 2007, an increase of $1.1 million.  The increase in other, net non-operating income was primarily related to $1.3 million in proceeds received in redemption of an investment interest in which NBP’s basis had previously been written down to zero.

Income Tax Expense.  Income tax expense was $0.5 million for the thirteen weeks ended November 24, 2007February 23, 2008 compared to $0.2$0.7 million for the thirteen weeks ended November 25, 2006.February 24, 2007.  Income tax expense is recorded on income from National Carriers, Inc., which is organized as a Subchapter C Corporation.

Twenty-six weeks ended February 23, 2008 compared to twenty-six weeks ended February 24, 2007

General.  Net loss for the twenty-six weeks ended February 23, 2008 was $21.3 million compared to net loss of $14.7 million for the twenty-six weeks ended February 24, 2007, an increased loss of $6.6 million.  Net sales were higher in the twenty-six weeks ended February 23, 2008 compared to those of the prior period primarily due to an average increase in sales prices per head of approximately 6.5%.  The number of cattle processed during the current twenty-six week period was 1.4% less than the same period of last year.

Total costs and expenses of $2,724.3 million and $2,594.7 million for the twenty-six weeks ended February 23, 2008 and February 24, 2007, respectively, were 100.8% as a percent of sales for the twenty-six weeks ended February 23, 2008 compared to 100.3% for the twenty-six weeks ended February 24, 2007.  Continued high cattle prices contributed to an erosion of the gross margin for the current twenty-six week period as compared to the same period of last year. 

Net Sales.  Net sales were $2,704.1 million for the twenty-six weeks ended February 23, 2008 compared to $2,586.3 million for the twenty-six weeks ended February 24, 2007, an increase of $117.8 million, or 4.6%.  The moderate increase in net sales resulted primarily from an average increase in sales prices per head of 6.5% in the twenty-six weeks ended February 23, 2008 than the same period in the prior year while the volume of cattle processed decreased by approximately 1.4%.

Cost of Sales.  Cost of sales was $2,681.9 million for the twenty-six weeks ended February 23, 2008 compared to $2,557.6 million for the twenty-six weeks ended February 24, 2007, an increase of $124.3 million, or 4.9%.  The increase was a result of increased live cattle prices that were approximately 4.8% higher due to the continued tight supply of market-ready cattle and to the cattle being heavier, at average weights 0.7% more, than the twenty-six week period of last year.  Partially offsetting this increase was decreased cattle processing of approximately 1.4% for the current twenty-six week period as compared to the same period of fiscal year 2007.

Selling, General, and Administrative Expenses.  Selling, general, and administrative expenses were $24.9 million for the twenty-six weeks ended February 23, 2008 compared to $21.2 million for the twenty-six weeks ended February 24, 2007, an increase of $3.7 million, or 17.5%.  The increase for this period is primarily due an approximate $1.7 million increase in legal fees, an increase in payroll and benefit expenses of approximately $1.5 million and an increase in advertising expense of approximately $0.3 million. 

Depreciation and Amortization Expense.  Depreciation and amortization expenses were $17.6 million for the twenty-six weeks ended February 23, 2008 compared to $15.8 million for the twenty-six weeks ended February 24, 2007, an increase of $1.8 million, or 11.4%.  Depreciation expense increased due to assets being placed into service, primarily at the Dodge City and Brawley beef plants, during fiscal year 2007.

Operating Loss.  Operating loss was $20.3 million for the twenty-six weeks ended February 23, 2008 compared to operating loss of $8.3 million for the twenty-six weeks ended February 24, 2007, an increased loss of $12.0 million.  The increased operating loss in the current twenty-six week period resulted primarily from higher cattle prices as compared to the same period of last year.

Interest Expense.  Interest expense was $18.4 million for the twenty-six weeks ended February 23, 2008 compared to $19.2 million for the twenty-six weeks ended February 24, 2007, a decrease of $0.8 million, or 4.2%.  The decrease in interest expense during the twenty-six weeks ended February 23, 2008 as compared to the same period in fiscal year 2007 was due primarily to lower interest rates on our variable rate debt, a decrease of approximately 147 basis points.  Offsetting this decrease in interest rates was an increase in the weighted average of variable rate debt of approximately $42.8 million at February 23, 2008 as compared to February 24, 2007.

Minority Owners’ Interest in Net Loss of National Beef Packing Company, LLC.  Minority owners interest in the net loss of NBP was $16.3 million for the twenty-six weeks ended February 23, 2008 compared to $12.3 million for the twenty-six weeks ended February 24, 2007, an increase of $4.0 million.  The increase in minority owners’ interest in the net loss of NBP was due to increased net loss at NBP, which occurred primarily from higher cattle costs during the first twenty-six weeks of fiscal year 2008 as compared to the same period of last year.

Other, net.  Other, net non-operating income was $1.8 million for the twenty-six weeks ended February 23, 2008 compared to other, net non-operating income of $0.7 million for the twenty-six weeks ended February 24, 2007, an increase of $1.1 million.  The increase in other, net non-operating income was primarily related to $1.3 million in proceeds received in redemption of an investment interest in which NBP’s basis had previously been written down to zero.

Income Tax Expense.  Income tax expense was $1.1 million for the twenty-six weeks ended February 23, 2008 compared to $0.9 million for the twenty-six weeks ended February 24, 2007, an increase of $0.2 million, or 22.2%.  Income tax expense is recorded on income from National Carriers, Inc., which is organized as a Subchapter C Corporation.

Liquidity and Capital Resources

As of November 24, 2007,February 23, 2008, we had net working capital of $241.8$259.0 million, which included $0.3 million in distributions payable, and cash and cash equivalents of $53.7$60.7 million.  As of August 25, 2007, we had net working capital of $280.5 million, which included $2.7 million in distributions payable, and cash and cash equivalents of $62.9 million.  NBP’s primary sources of liquidity are cash flow from operations and available borrowings under its amended and restated credit facility.

As of November 24, 2007,February 23, 2008, we had $432.0$467.5 million of long-term debt, of which $4.5 million was classified as a current liability.  As of November 24, 2007,February 23, 2008, NBP’s amended and restated credit facility consisted of a $202.6 million term loan, all of which was outstanding, and a $200.0 million revolving line of credit loan, which had outstanding borrowings of $28.7$65.1 million, outstanding letters of credit of $55.3$60.6 million and available borrowings of $116.0$74.3 million, based on the most restrictive financial covenant calculations.  Cash flows from operations and borrowings under the amended and restated credit facility have funded working capital requirements, acquisitions, capital expenditures and other general corporate purposes.  NBP was in compliance with all of the financial covenants under its amended and restated credit facility as of November 24, 2007.February 23, 2008.

In addition to outstanding borrowings under the amended and restated credit facility, the Company had outstanding senior notes of $160.0 million, borrowings under industrial revenue bonds of $20.7 million, a term loan with CoBank, of which approximately $3.9$3.6 million was outstanding, and capital leases and other obligations of $16.1$15.5 million as of November 24, 2007.February 23, 2008.

NBP believes that available borrowings under its amended and restated credit facility and cash provided by operating activities will be sufficient to support its working capital, capital expenditures and debt service requirements for the foreseeable future.  NBP is authorized to purchase up to $50.0 million of its outstanding Senior Notes from time to time in accordance with the limits imposed under the amended and restated credit facility.  NBP’s ability to generate sufficient cash, however, is subject to certain general economic, financial, industry, legislative, regulatory and other factors beyond its control.  For a review of the obligations that affect liquidity, please see the Cash Payment Obligations table in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended August 25, 2007.

USPB may purchase a portion of its outstanding Class A and Class B units from time to time in accordance with the limits imposed under the CoBank Credit Agreement.

Operating Activities

Net cash used inprovided by operating activities in the thirteentwenty-six weeks ended November 24, 2007February 23, 2008 was $3.7$13.4 million compared to net cash used in operating activities of $10.0$42.5 million in the thirteentwenty-six weeks ended November 25, 2006.February 24, 2007. The $6.3 million changeimprovement was primarily due to a larger decreasenet cash being provided in working capital itemsoperating activities through accounts receivable, inventory, and accounts payable in the current period, as compared toyear while net cash was used in operating activities through accounts receivable, inventory, accounts payable and accrued compensation and benefits in the same comparable period a year ago, resulting primarily from an increase in accounts receivable collections, partially offset by an increase in beef inventory levels and a smaller decrease in accrued compensation.

of last year.

Investing Activities

Net cash used in investing activities was $11.6$24.0 million in the thirteentwenty-six weeks ended November 24, 2007February 23, 2008 compared to $9.9$19.9 million in the thirteentwenty-six weeks ended November 25, 2006.February 24, 2007.  This increase in cash used was primarily attributable to an increase in expenditures for property, plant and equipment related to improving operating efficiencies, primarily at our Liberal and Dodge City facilities, in the current year.

Financing Activities

Net cash provided by financing activities was $6.1$8.4 million in the thirteentwenty-six weeks ended November 24, 2007February 23, 2008 compared to $22.6$60.9 million in the thirteentwenty-six weeks ended November 25, 2006.February 24, 2007.  The change was primarily attributed to $9.6a $44.2 million in net paymentsdifference in revolving credit borrowings and an $18.1 million change in the impact of overdraft balances which was partially offset by $7.4 million in repayments on our term note, made in the 2007 period that did not recur in the 2008 period during the current thirteentwenty-six week period as compared to $15.5 million in net receipts in revolving credit borrowings during the same period of last year, partially offset by a $6.8 million change in the overdraft balance.year.

Amended and Restated Senior Credit Facility

Effective July 25, 2007, NBP amended and restated its existing senior credit facility with a consortium of banks.  The facility now consists of a $202.6 million term loan that matures in May 2016 and a $200.0 million revolving line of credit loan that matures in July 2012 andthat is subject to certain borrowing base limitations. 

Borrowings under the facility bear interest at LIBOR or the Base Rate, plus the applicable margin.  The applicable margin for the revolving line of credit will be based on borrowing base availability with grids greater than $150.0 million, $50.0 to $150.0 million and less than $50.0 million.  As of November 24, 2007,February 23, 2008, the interest rate for the revolving loan was approximately 6.7%4.8%.   The applicable margin for the term loan was also revised to a grid basis with different margins for Funded Debt to EBITDA Ratiosratios greater than 3.50 to 1.00 and less than 3.50 to 1.00.  As of November 24, 2007,February 23, 2008, the interest rate for the term loan was approximately 6.8%5.3%.

The revolving line of credit and the term loan will have no financial covenants unless the borrowing base availability is less than $50.0 million for five consecutive business days or less than $35.0 million on any single business day during any fiscal quarter.  If the borrowing base availability falls below these amounts, a fixed charge ratio of 1:15 to 1:00 must be maintained at the end of each subsequent fiscal quarter until the borrowing base availability has been greater than or equal to $50.0 million for 90 consecutive days.  NBP was not subject to the fixed charge ratio test at November 24, 2007.February 23, 2008.  The advance rates under the borrowing base are 90% on eligible accounts and 70% on eligible inventory.

The borrowings under the revolving loan are available for the NBP’s working capital requirements, capital expenditures and other general corporate purposes.  The amended and restated credit facility is secured by a first priority lien on substantially all of NBP’s assets.  The principal amount outstanding under the term loan is due and payable in equal installments of approximately $3.5 million on the last business day of each June and December commencing on June 30, 2011.  All outstanding amounts of the term loan are due and payable on May 30, 2016.  Prepayment is allowed at any time.

The amended and restated credit facility contains customary affirmative covenants, including, without limitation, conduct of business, the maintenance of insurance, compliance with laws, maintenance of properties, keeping of books and records, and the furnishing of financial statements.  The facility also contains customary negative covenants, including without limitation, restrictions on the following:  distributions, mergers, sale of assets, investments and acquisitions, encumbrances, indebtedness, affiliate transactions, and ERISA matters.

The amended and restated credit facility contains customary events of default, including without limitation, failure to make payment when due, materially incorrect representations and warranties, breach of covenants, events of bankruptcy, default of other indebtedness that would permit acceleration of such indebtedness, the occurrence of one or more unstayed or undischarged judgments in excess of $3.0 million, changes in custody or control of the Company’sNBP’s property, changes in control of the Company,NBP, the failure of any of the loan documents to remain in full force, and the Company’sNBP’s failure to properly fund its employee benefit plans.  The facility also includes customary provisions protecting the lenders against increased cost or loss of yield resulting from changes in tax, reserve, capital adequacy and other requirements of law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The principal market risks affecting our business are exposure to changes in prices for commodities, such as livestock and boxed beef, and interest rate risk.

Commodities. NBP uses various raw materials, many of which are commodities. Raw materials are generally available from several different sources, and NBP presently believes that it can obtain them as needed.  Commodities are subject to price fluctuations that may create price risk. When appropriate, NBP may hedge commodities in order to mitigate this price risk. While this may tend to limit NBP’s ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity prices. NBP reflects commodity contract gains and losses as adjustments to the basis of underlying commodities purchased; gains or losses are recognized in the statement of operations as a component of costs of goods sold.

NBP purchases cattle for use in its processing businesses. When appropriate, NBP enters into forward purchase contracts at prices determined prior to the delivery of the cattle. The commodity price risk associated with these activities can be hedged by selling (or buying) the underlying commodity, or by using an appropriate commodity derivative instrument. The particular hedging instrument NBP uses depends on a number of factors, including availability of appropriate derivative instruments.

NBP sells commodity beef products in its business. Commodity beef products are subject to price fluctuations that may create price risk. When appropriate, NBP enters into forward sales contracts at prices determined prior to shipment. NBP may hedge the commodity price risk associated with these activities in order to mitigate this price risk. While this may tend to limit NBP’s ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity beef prices. NBP reflects commodity contract gains and losses as adjustments to the basis of underlying commodities sold; gains or losses are recognized in the statement of operations as a component of net sales.

NBP may use futures contracts in order to reduce exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, NBP accounts for futures contracts and their related firm purchase commitments at fair value. Certain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are treated as “normal purchases and sales” and not marked to market.  SFAS No. 133 imposes extensive recordkeeping requirements in order to treat a derivative instrument as a hedge for accounting purposes. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the instrument and the related change in fair value of the underlying commitment. For derivatives that qualify as effective hedges, the change in fair value has no net effect on earnings until the hedged transaction affects earnings. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value does affect current period net earnings.

While management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges under SFAS No. 133 as a result of the extensive recordkeeping requirements of that statement. Accordingly, the gains and losses associated with the change in fair value of all futures contracts and the gains and losses associated with changes in the market value of certain of the firm commitments not designated as normal purchases are recorded to income and expense in the period of change.

NBP uses a sensitivity analysis to evaluate the effect that changes in the market value of commodities will have on these commodity derivative instruments.  As of November 24, 2007,February 23, 2008, the potential change in fair value of applicable commodity prices, assuming a hypothetical 10% decrease in the underlying commodity price, was $16.3$0.2 million.  As of August 25, 2007, the potential change in fair value of applicable commodity prices, assuming a hypothetical 10% decrease in the underlying commodity price, was $5.2 million.

Foreign Operations.  Transactions denominated in a currency other than an entity’s functional currency may expose that entity to currency risk.  Although NBP operates in international markets including Japan, and South Korea, and China, product sales are predominately made in United States dollars, and therefore, currency risks are limited.

Interest Rates. As a result of the Company’s normal borrowing and leasing activities, our operating results are exposed to fluctuations in interest rates, which we manage primarily through our regular financing activities. We generally maintain limited investments in cash and cash equivalents. 

We have long-term debt with variable interest rates. Short-term debt is primarily comprised of the current portion of long-term debt maturing twelve months from the balance sheet date.  Our variable interest expense is sensitive to changes in the general level of interest rates. As of November 24, 2007,February 23, 2008, the weighted average interest rate on our $255.9$292.0 million of variable rate debt was approximately 6.6%5.0%.

We had total interest expense of approximately $9.2$18.4 million during the thirteentwenty-six week period ending November 24, 2007.February 23, 2008.  The estimated increase in interest expense from a hypothetical 200 basis point increase in applicable variable interest rates would have been approximately $1.2$2.7 million in the thirteentwenty-six week period ending November 24, 2007.

February 23, 2008.

Item 4T.  Controls and Procedures.

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the Consolidated Financial Statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) under supervision and with the participation of management, including our Chief Executive Officer and Chief Reporting and Compliance Officer. Based upon that evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Reporting and Compliance Officer concluded that our disclosure controls and procedures were effective in alerting them, in a timely manner, to material information required to be included in our periodic Securities and Exchange Commission filings.  There have been no changes in our internal controls over financial reporting during the thirteen weeks ended November 24, 2007February 23, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

For information regarding legal proceedings, see Note 7. Legal Proceedings to our Consolidated Financial Statements included in Part I- Item 1 of this Form 10-Q.

Item 1A. Risk Factors.

TheOther than the satisfaction of closing conditions to complete the Agreement, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended August 25, 2007 have not materially changed.  Please refer to the Company’s report on Form 10-K for the fiscal year ended August 25, 2007 to consider those risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

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

The AnnualA Special Meeting of membersMembers of USPB was held on DecemberMarch 14, 2007. Other than2008.  January 26, 2008 was fixed as the record date for determining those members of the Company entitled to vote at the Special Meeting and any adjournments or postponements of the meeting.  Two proposals were presented for member consideration.  The first was to consider and vote upon a proposal to adopt and approve the Membership Interest Purchase Agreement, dated as of February 29, 2008, among JBS S.A. (JBS), National Beef Packing Company, LLC (NBP), and the several members of NBP, including the Company, and approve the transactions contemplated.  The second proposal was to grant the persons named as proxies discretionary authority to vote to adjourn the Special Meeting, if necessary, for the purpose of soliciting additional proxies to vote in favor of the approval and adoption of the Membership Interest Purchase Agreement and approval of the minutes from the previous annual meeting, the only proposal presented for member consideration at the Annual Meeting was the election of three (3) directors to serve for three-year terms expiring after the 2010 fiscal year.  The four nominees who stood for election to the Board of Directors were incumbent directors Mark Gardiner, Doug Laue, and Jerry Bohn and new candidate Joe Morgan.  Biographical information regarding Messrs. Gardiner, Laue, Bohn, and Morgan has previously been included inproposed transaction.

Under the Company’s Annual Report on Form 10-K forCertificate of Formation, Limited Liability Company Agreement and applicable Delaware law, the fiscal year ended August 25, 2007.   

At the Annual Meeting, under procedures established by the Company’s Nominating Committee, Messrs. Gardiner, Laue, Bohn, and Morgan stood for election for the three open seats on the USPB Boardaffirmative vote of Directors.  USPB’s members elected Mark Gardiner, Doug Laue, and Joe Morgan to serve as directors on the Board of Directors for a term that will expire after fiscal year 2010.  The election of the nominees was byholding a majority of the voting power of each class of units was required to approve the purchase agreement.  The members presentholding Class A units are each entitled to one vote per member, and voting at the Annual Meeting, expressedmembers holding Class B units are each entitled to one vote per Class B unit owned by a written ballot.  Insuch member.  For the election,Class A units, out of 110 valid ballots, Mr. Gardiner received a total447 votes, 421 voted for the first proposal and 420 voted for the second proposal.  For the Class B units, out of 97735,305 votes, Mr. Laue received a total of 96 votes, Mr. Bohn received a total of 47 votes729,715 voted for the first proposal and Mr. Morgan received a total of 63 votes.  The other members of727,215 voted for the Board of Directors, Mr. Fairleigh, Ms. Keiser, Mr. McCloy, and Mr. Ramsey continued in service as members of the USPB Board of Directors following the Annual Meeting.second proposal. 

Item 5. Other Information.

None.        

Item 6. Exhibits.