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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2008


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

For the transition period from to

Commission File Number 1-11165

INTERSTATE BAKERIES CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		43-1470322
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

12 East Armour Boulevard,
Kansas City, Missouri		64111
(Address of principal executive offices)		(Zip Code)

(816) 502-4000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Preferred Stock Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the 41,861,258 shares of voting stock of the registrant held by non-affiliates, computed by reference to the $0.06 closing price of such stock on November 16, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, was $2,511,675.

There were 45,202,826 shares of common stock, $0.01 par value per share, outstanding as of August 15, 2008. Giving effect to our senior subordinated convertible notes and common stock equivalents, there were 55,101,267 shares of common stock outstanding as of August 15, 2008.

DOCUMENTS INCORPORATED BY REFERENCE: None

INDEX


	Page Number
FORWARD-LOOKING STATEMENTS		1

PART I		5

ITEM 1. BUSINESS		5
ITEM 1A. RISK FACTORS		13
ITEM 1B. UNRESOLVED STAFF COMMENTS		24
ITEM 2. PROPERTIES		24
ITEM 3. LEGAL PROCEEDINGS		24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		27

PART II		28

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		28
ITEM 6. SELECTED FINANCIAL DATA		30
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		99
ITEM 9A. CONTROLS AND PROCEDURES		99
ITEM 9B. OTHER INFORMATION		100

PART III		101

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		101
ITEM 11. EXECUTIVE COMPENSATION		104
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		108
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		109
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES		111

PART IV		113

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE		113

FORWARD-LOOKING STATEMENTS

Some information contained in or incorporated by reference herein may be forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are not historical in nature and include statements that reflect, when made, our views with respect to current events and financial performance. These forward-looking statements can be identified by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “could,” “should” and “continue” or similar words. These forward-looking statements may also use different phrases. These forward-looking statements are not historical in nature and include statements relating to, among other things:

	•		our ability to continue as a going concern;

	•		our ability to obtain court approval with respect to motions filed by us from time to time in the Chapter 11 proceeding;

	•		our ability to operate pursuant to the covenants, terms and certifications of the DIP Facility;

	•		our ability to successfully negotiate an extension and increase in the amount available under, or refinance, our DIP Facility, if needed, which expires on February 9, 2009;

	•		our ability to consummate the Second Amended Plan (as defined below), if confirmed by the Bankruptcy Court;

	•		our ability to implement our business plan developed as a basis for one or more plans of reorganization, including the Second Amended Plan;

	•		our ability to obtain concessions from our unionized workforce to reduce costs and allow for greater flexibility in the method and manner of distributing our products;

	•		our ability to develop, propose, confirm, and consummate one or more plans of reorganization in to the Chapter 11 proceeding;

	•		our ability to obtain the financing necessary to implement our business plan and emerge from Chapter 11;

	•		risks associated with third parties seeking and obtaining court approval for the appointment of a Chapter 11 trustee or to convert the Chapter 11 proceeding to a Chapter 7 proceeding;

	•		risks associated with cost increases in materials, ingredients, energy, and employee wages and benefits;

	•		risks associated with our restructuring activities, including the risks associated with achieving the initiatives implemented by our CEO;

	•		our ability to obtain and maintain adequate terms with vendors and service providers;

	•		the potential adverse impact of the Chapter 11 proceeding on our liquidity or results of operations;

	•		risks associated with product price increases, including the risk that such actions will not effectively offset inflationary cost pressures and may adversely impact sales of our products;

	•		the effectiveness of our efforts to manage our exposure to price increases with respect to various ingredients and energy through our hedging strategies and our ability to hedge given our financial condition;

	•		our ability to attract, motivate and/or retain key executives and employees;

	•		changes in our relationship with employees and the unions that represent them;

	•		successful implementation of information technology improvements;

	•		increased costs and uncertainties with respect to the American Bakers Association Retirement Plan, or ABA Plan;

	•		successful remediation of material weaknesses in our internal controls;

	•		the continuing effects of changes in consumers’ eating habits and dietary preferences;

	•		the performance of new product introductions, including the success of such new products in achieving and retaining market share; and

	•		the outcome of legal proceedings to which we are or may become a party.

These forward-looking statements are and will be subject to numerous risks and uncertainties, many of which are beyond our control that could cause actual results to differ materially from such statements. Factors that could cause actual results to differ materially include, without limitation:

Bankruptcy-Related Factors

	•		the continued evaluation of various alternatives, including, but not limited to, the sale of the Company or some or all of our assets, infusion of capital, debt restructuring, amending the plan of reorganization previously filed with the Bankruptcy Court, filing a new plan of reorganization, or any combination of these options;

	•		our ability to formulate a rational strategy for maximizing value of the bankruptcy estates, including a sale of the Company and/or its assets in its entirety or in a series of transactions;

	•		the terms of any reorganization plan ultimately confirmed;

	•		our ability to implement our business plan developed as a basis for one or more plans of reorganization, including the Second Amended Plan;

	•		our ability to develop and implement a successful plan of reorganization in the Chapter 11 process;

	•		our ability to operate our business under the restrictions imposed by the Chapter 11 process and in compliance with the limitations contained in the debtor-in-possession credit facility;

	•		the instructions, orders and decisions of the Bankruptcy Court and other effects of legal and administrative proceedings, settlements, investigations and claims;

	•		changes in our relationships with suppliers and customers, including the ability to maintain those relationships and contracts that are critical to our operations, in light of the Chapter 11 process;

	•		our ability to maintain adequate liquidity and working capital under our DIP Facility, as well as our ongoing ability to purchase from vendors on satisfactory terms throughout the reorganization;

	•		the significant time that is and will be required by management to structure and implement the Second Amended Plan, as well as to continue to evaluate various alternatives in the event the Second Amended Plan is not confirmed by the Bankruptcy Court, including, but not limited to, the sale of the Company or some or all of our assets, infusion of capital and debt restructuring or any combination of these options;

	•		our reliance on key management personnel, including the effects of the Chapter 11 process on our ability to attract and retain key management personnel;

	•		our ability to successfully reject unfavorable contracts and leases; and

•

the duration of the Chapter 11 process.

General Factors

	•		the availability of capital on acceptable terms in light of the various factors discussed herein, including our reorganization under the Chapter 11 process;

	•		the availability and cost of raw materials, packaging, fuels and utilities, and the ability to recover these costs in the pricing of products, improved efficiencies and other strategies;

	•		increased pension, health care, workers’ compensation and other employee costs;

	•		actions of competitors, including pricing policies and promotional spending;

	•		increased costs, delays or deficiencies related to restructuring activities;

	•		the effectiveness of advertising and marketing spending;

	•		the effectiveness and adequacy of our information and data processing systems;

	•		changes in general economic and business conditions (including the bread and sweet goods markets);

	•		costs associated with increased contributions to single employer, multiple employer or multi-employer pension plans;

	•		any inability to protect and maintain the value of our intellectual property;

	•		future product recalls or food safety concerns;

	•		further consolidation in the retail food industry;

	•		changes in consumer tastes or eating habits;

	•		costs associated with environmental compliance and remediation;

	•		our ability to obtain concessions from our unionized workforce to reduce costs and allow for greater flexibility in the method and manner of distributing our products;

	•		obligations and uncertainties with respect to the ABA Plan;

	•		the impact of any withdrawal liability arising under our multi-employer pension plans as a result of prior actions or current consolidations;

	•		actions of governmental entities, including regulatory requirements;

	•		acceptance of new product offerings by consumers and our ability to expand existing brands;

	•		the performance of new product introductions, including the success of such new products in achieving and retaining market share;

	•		the effectiveness of hedging activities;

	•		expenditures necessary to carry out cost-saving initiatives and savings derived from these initiatives;

	•		changes in our business strategies;

	•		unexpected costs or delays incurred in connection with facility closings;

	•		bankruptcy filings by customers;

	•		changes in our relationship with employees and the unions that represent them;

	•		the outcome of legal proceedings to which we are or may become a party, including without limitation any litigation stemming from our sale of convertible notes on August 12, 2004 or events leading up to our filing of a voluntary petition for protection under Chapter 11 of the Bankruptcy Code;

	•		business disruption from terrorist acts, our nation’s response to such acts and acts of war; and

	•		other factors.

These statements speak only as of the date of this report, and we disclaim any intention or obligation to update or revise any forward-looking statements to reflect new information, future events or developments or otherwise, except as required by law. All subsequent written and oral forward-looking statements attributable to us and persons acting on our behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere herein.

Similarly, these and other factors, including the terms of any reorganization plan ultimately confirmed, can affect the value of our various pre-petition liabilities, common stock and/or other equity securities. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 proceeding to each of these liabilities and/or securities. Accordingly, we urge that the appropriate caution be exercised with respect to existing and future investments in any of these liabilities and/or securities.

PART I

ITEM 1. BUSINESS

General

Interstate Bakeries Corporation, a Delaware corporation incorporated in 1987, is one of the largest wholesale bakers and distributors of fresh baked bread and sweet goods in the United States. Unless otherwise noted, any reference to “IBC,” “us,” “we” or “our” refers to Interstate Bakeries Corporation and its subsidiaries, taken as a whole. We produce, market and distribute a wide range of breads, buns, rolls, croutons, stuffing, snack cakes, donuts and related products under national brand names such as “Wonder®,” “Home Pride®,” “Hostess®” and “Dolly Madison®,” as well as regional brand names such as “Merita®,” “Butternut®” and “Drake’s®.” Based on independent publicly available market data, “Wonder®” bread is the number one selling white bread brand sold in the United States and “Home Pride®” wheat bread is a leading wheat bread brand in the United States. “Hostess®” products, including “Twinkies®,” “Ding Dongs®” and “HoHos®,” are among the leading snack cake products sold in the United States.

Our principal executive offices are located at 12 East Armour Boulevard, Kansas City, Missouri 64111, and our telephone number is (816) 502-4000.

We operate 41 bakeries and approximately 600 distribution centers, from which our sales force delivers fresh baked goods on approximately 6,000 delivery routes. We also operate approximately 740 bakery outlets located in markets throughout the United States.

Proceedings Under Chapter 11 of the Bankruptcy Code

On September 22, 2004, or the Petition Date, we and each of our wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the Western District of Missouri, or the Bankruptcy Court (Case Nos. 04-45814, 04-45816, 04-45817, 04-45818, 04-45819, 04-45820, 04-45821 and 04-45822). On September 24, 2004, the official committee of unsecured creditors was appointed in our Chapter 11 cases. On November 29, 2004, the official committee of equity security holders was appointed in our Chapter 11 cases. Mrs. Cubbison’s Foods, Inc., or Mrs. Cubbison’s, a subsidiary of which we are an eighty percent owner, was not originally included in the Chapter 11 filing. However, on January 14, 2006, Mrs. Cubbison’s filed a voluntary petition for relief under the Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). We are continuing to operate our business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. In general, as a debtor-in-possession, we are authorized under the Bankruptcy Code to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.

On September 23, 2004, we entered into a debtor-in-possession Revolving Credit Agreement (as amended, the DIP Facility) with JPMorgan Chase Bank, or JPMCB, and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party thereto, together, with JPMCB, the Lenders, J.P. Morgan Securities Inc., as lead arranger and book runner, and JPMCB, as administrative and collateral agent for the Lenders. The DIP Facility received interim approval by the Bankruptcy Court on September 23, 2004 and final approval on October 22, 2004. We most recently amended the DIP Facility on September 12, 2008 to reflect certain modifications. The DIP Facility currently provides for a $313.0 million commitment, or the Commitment, of debtor-in-possession financing to fund our post-petition operating expenses, supplier and employee obligations. The Commitment provides for additional funding of $16.0 million based on the occurrence of certain events. The maturity date of the DIP Facility has been extended to February 9, 2009. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” below for a further discussion regarding the DIP Facility.

In conjunction with the commencement of the Chapter 11 process, we sought and obtained several orders from the Bankruptcy Court that were intended to enable us to operate in the ordinary course of business during the Chapter 11 process. The most significant of these orders:

	•		authorize us to pay pre-petition and post-petition employee wages and salaries and related benefits during our restructuring under Chapter 11;

	•		authorize us to pay trust fund taxes in the ordinary course of business, including pre-petition amounts; and

	•		authorize the continued use of our cash management systems.

Pursuant to the Bankruptcy Code, our pre-petition obligations, including obligations under debt instruments, generally may not be enforced against us. In addition, any actions to collect pre-petition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court.

As a debtor-in-possession, we have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, “assume” means that we agree to perform our obligations and cure all existing defaults under the contract or lease, and “reject” means that we are relieved from our obligations to perform further under the contract or lease but are subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 process unless such claims had been secured on a pre-petition basis. As of August 15, 2008, we have rejected approximately 540 unexpired leases and have accrued charges for our estimated liability related thereto in the period of rejection. We are in the process of reviewing our executory contracts and remaining unexpired leases to determine which, if any, we will reject. For these executory contracts and remaining unexpired leases, we cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting these contracts or leases, and no provisions have yet been made for these items.

We continue to communicate with principal vendors and customers, and we believe that most of our current relationships will continue. The loss of major vendors or customers, as well as significant adverse changes to vendor payment terms, could have a material adverse effect on our results of operations and financial condition, including our ability to operate as a going concern.

The Bankruptcy Code provides that we had the exclusive right for 120 days during which only we could file and solicit acceptances of a plan of reorganization. The periods during which we had the exclusive right to file a plan and solicit acceptances of a plan were extended on several occasions and expired on November 8, 2007 and January 7, 2008, respectively. As a result, any party in interest, including a creditor, an equity holder, a committee of creditors or equity holders or an indenture trustee, may file their own plan of reorganization.

Since the Petition Date, we have restructured our operations. As previously disclosed, we (i) restructured our 10 profit centers (PCs), which are now 8 business units; (ii) rationalized our delivery route network; (iii) reduced our workforce; (iv) disposed of certain non-core assets; and (v) commenced negotiations of long-term extensions with respect to most of our collective bargaining agreements (CBAs) with union-represented employees. We also initiated a marketing program designed to offset revenue declines by developing protocols to better anticipate and meet changing consumer demand through a consistent flow of new products.

In January 2007 our Board of Directors was reconstituted as a result of a Bankruptcy Court approved settlement among the Company and its various constituency groups. The following individuals now serve on our Board: Messrs. Michael J. Anderson, Robert B. Calhoun, Craig D. Jung, William P. Mistretta, David I. Pauker, Terry R. Peets and Philip A. Vachon. Pursuant to Bankruptcy Court order, these directors will serve until further order of the Bankruptcy Court.

In February 2007, we hired a new Chief Executive Officer, Craig D. Jung, and began the next stage of restructuring activities, which initially was focused on the development of a business plan to use as a basis for a plan of reorganization. In developing such a business plan, Mr. Jung established four operating priorities for the Company: (i) profitably grow revenues; (ii) improve productivity; (iii) lower our cost structure; and (iv) create a performance culture. In order to implement these four priorities, we have undertaken or determined to undertake the following initiatives, without limitation: (i) implement a distribution system with different delivery options for our customers based on customer size, growth potential and service needs to lower our cost structure and profitably grow the top line, (ii) implement a lean manufacturing program to drive productivity, (iii) improve brand management and innovation, including increased investment in marketing our brands, and (iv) redefine our organization to remove

unnecessary layers of management and implement a matrix structure to improve communications, leadership and accountability.

On June 28, 2007, we submitted our then current business plan to our various constituents in the bankruptcy, including representatives of our lender syndicates and official committees of creditors and equity security holders. In order to secure rational financing required to implement this business plan, however, we believed additional concessions from our unionized employees were required. As a result, in June of 2007, we initiated talks with representatives of the two labor organizations, the Bakery Confectionery, Tobacco Workers & Grain Millers International Union (BCTGM) and International Brotherhood of Teamsters (IBT), representing approximately 91% of our unionized employees to achieve further concessions, including greater flexibility in the method and manner by which we distribute our products to our customers and cost reductions related to health and welfare programs.

No agreement with the IBT was reached. We reached agreement with the BCTGM, which is in effect for all of its local bargaining units. We also reached agreements with all but one of the other unions representing our employees, which agreements are in effect.

In early October 2007, we embarked on the process of formulating a rational strategy for maximizing value of the bankruptcy estates. We continue to face substantial uncertainty with respect to the outcome of our efforts to maximize value of the bankruptcy estates, and there can be no assurance as to whether we will be able to successfully implement any such strategy.

On November 5, 2007, we filed a Plan of Reorganization and related Disclosure Statement with the Bankruptcy Court based upon the exit financing commitment by Silver Point Finance L.L.C. and plan funding agreements between certain pre-petition secured lenders. As a result of our inability to reach agreement with the IBT, Silver Point Finance L.L.C.’s financing commitment expired on March 14, 2008.

On September 12, 2008, we entered into a Commitment Letter (the Commitment Letter) with IBC Investors I, LLC (the Investors) setting forth the principal terms of the Second Amended Joint Plan of Reorganization (the Second Amended Plan). We plan to file a motion with the Bankruptcy Court seeking authorization for us to enter into and approve, among other things, the Commitment Letter, an asset-based revolving credit facility and a term loan facility. In connection with the Second Amended Plan, we would, among other things, issue new third lien notes, new senior secured convertible debt, shares of new common stock in the reorganized company and warrants to purchase new common stock. Under the terms of the Commitment Letter, the Investors have agreed to purchase 4,420,000 shares of new common stock for $44,200,000 and provide new convertible debt in the principal amount of $85,800,000.

Pursuant to the proposed Second Amended Plan, each administrative claim and priority claim will be paid in full pursuant to the Second Amended Plan on the latest to occur of the effective date, the date that such claim becomes an allowed claim and the date that such claim becomes payable under any agreement between the applicable Debtor and the holder of such claim. Secured tax claims and secured claims other than those of the senior secured lenders will be unimpaired. Intercompany claims will be (a) released, waived and discharged as of the Effective Date, (b) contributed to the capital of the obligor corporation, (c) dividended or (d) remain unimpaired. Claims of the senior secured lenders will be impaired and receive the treatment set forth in the Commitment Letter. Claims of unsecured creditors will be impaired and no distribution will be made to holders of unsecured claims. All existing equity interests of the Company, with the exception of equity interests in the subsidiary debtors, will be impaired with no distribution to be made to holders thereof and all such existing equity interests shall be deemed cancelled as of the effective date. The foregoing is subject to the Bankruptcy Court’s authorization and approval of the Second Amended Plan.

any such strategy on terms and conditions acceptable to the Company or to our various constituents in the bankruptcy or as to the ultimate recovery of value available to such constituents.

The Second Amended Plan, along with a disclosure statement approved by the Bankruptcy Court, will be sent to all creditors, equity holders and parties in interest. Following the solicitation period, the Bankruptcy Court will consider whether to confirm the plan. In order to confirm a plan of reorganization, the Bankruptcy Court, among other things, is required to find that:

	•		with respect to each impaired class of creditors and equity holders, each holder in such class has accepted the plan or will, pursuant to the plan, receive at least as much as such holder would receive in a liquidation;

	•		each impaired class of creditors and equity holders has accepted the plan by the requisite vote (except as described in the following sentence); and

	•		confirmation of the plan is not likely to be followed by a liquidation or the need for further financial reorganization unless the plan proposes such liquidation or reorganization.

If any impaired class of creditors or equity holders does not accept the plan and, assuming that all of the other requirements of the Bankruptcy Code are met, the proponent of the plan may invoke the “cram down” provisions of the Bankruptcy Code.

Under the “cram down” provisions, the Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. These requirements may, among other things, necessitate payment in full for senior classes of creditors before payment to a junior class can be made.

The administrative and reorganization expenses resulting from the Chapter 11 process will and have unfavorably affected our results of operations. Future results of operations may also be adversely affected by other factors related to the Chapter 11 process.

Company History

Our predecessor company, Schulze Baking Company, was founded in Kansas City in 1927. We were subsequently created through the merger of Schulze Baking Co. and Western Bakeries Ltd. in 1937. Since 1937, we have completed a number of acquisitions of other baking businesses. We have grown to our present size primarily through strategic acquisitions.

In July 1995, we acquired Continental Baking Company from Ralston Purina Company, adding the “Wonder®” and “Hostess®” brands to our portfolio of products. As a result of this acquisition we were the nation’s largest baker of fresh baked bread and sweet goods in terms of net sales. In January 1998, we acquired the assets of John J. Nissen Baking Company, a Maine-based baker and distributor of fresh bread primarily in New England and various related entities. In August 1998, we acquired the assets of Drake Bakeries, Inc. and the Drake’s Baking Division, which sold snack cakes throughout the northeastern U.S. under its well-known brand names, “Devil Dogs®,” “Ring Dings®,” “Yodels®” and “Yankee Doodles®.” Our acquisitions throughout the years have allowed us to increase scale, expand our product and brand portfolio and broaden our geographic presence, although we have not completed any significant acquisitions since 1998.

Products and Brands

We produce, market, distribute and sell white breads, variety breads, reduced calorie breads, English muffins, croutons, rolls, buns and baked sweet goods under a number of well-known national and regional brand names. Our brands are positioned across a wide spectrum of categories and price points. The following chart illustrates our principal categories and brands:


Category	Our National Brands	Our Regional Brands
Breads, Buns and Rolls	Wonder	Bunny*
(White, variety, crusty, reduced-calorie and bagels)	Home Pride	Butternut
	Baker’s Inn	Merita
	Bread du Jour	Millbrook
	Beefsteak	Eddy’s
		Cotton’s Holsum*
		Holsum*
		J.J. Nissen
		Sunbeam*
		Sweetheart
		Di Carlo
		Colombo
		Roman Meal*
		Sun-Maid*

Fresh Baked Sweet Goods	Hostess	Drake’s
(Donuts, sweet rolls, snack pies and snack cakes)	Twinkies	Devil Dogs
	Ding Dongs	Ring Dings
	HoHos	Yodels
	Suzy-Qs	Yankee Doodles
	100 Calorie Packs	Zingers
	Dolly Madison

Other	Mrs. Cubbison’s
(Croutons and stuffing mix)	Marie Callender’s*


*		Licensed brands

We believe that our brand trademarks such as “Wonder®,” “Home Pride®,” “Butternut®,” “Hostess®” and “Dolly Madison®” and product trademarks such as “Twinkies®,” “HoHos®” and “Zingers®” are of material importance to our strategy of brand building. We take appropriate action from time to time against third parties to prevent infringement of our trademarks and other intellectual property. We also enter into confidentiality agreements from time to time with employees and third parties, as necessary, to protect formulas and processes used in producing our products. Some of our products are sold under brands that we have licensed from others on terms that are generally renewable at our discretion. These licensed brands include “Bunny®,” “Cotton’s® Holsum,” “Holsum®,” “Marie Callender’s®,” “Roman Meal®,” “Sunbeam®” and “Sun-Maid®.”

In fiscal 2008 and 2007, we spent approximately $3.4 million and $2.8 million, respectively, on research and development activities. In the third quarter of fiscal 2008, we introduced the following Hostess® 100 Calorie Pack products on a national basis: blueberry streusel muffins, banana streusel muffins and cinnamon streusel coffee cake.

Marketing and Distribution

The majority of our bread is sold through supermarkets and national mass merchandisers, while our sweet goods are sold principally through supermarkets, national mass merchandisers and convenience stores. One customer, Wal-Mart Stores, Inc., accounted for approximately 16.3% of our net sales in fiscal 2008. No other single customer

accounted for more than 10.0% of our net sales. Sweet goods sales tend to be somewhat seasonal, with a historically weak winter period, which we believe is attributable to altered consumption patterns during the holiday season. Sales of buns and rolls products are historically higher in the spring and summer months.

Our marketing and advertising campaigns are conducted through targeted television, radio and print advertising, as well as coupon inserts in newspapers and other printed media. Our national accounts department manages our relationships with our largest customers. This group focuses on customer service and satisfaction and communicates on a regular basis to our customers regarding new products and upcoming product events.

We distribute our products in markets representing over 80% of U.S. supermarket volume. Our plants and distribution centers across the U.S. are located close to the major marketplaces enabling effective delivery and superior customer service. We do not keep a significant backlog of inventory, as our fresh bakery products are promptly distributed to our customers after being produced.

We deliver our fresh baked bread and sweet goods from our network of bakeries to our distribution centers. Our sales force then delivers primarily to mass merchandisers, supermarkets and convenience stores on approximately 6,000 delivery routes. We are one of only a few fresh baked bread and sweet goods producers with a national direct store delivery, or DSD, system that enables us to provide frequent and individualized service to our national and regional customers. Our DSD system allows us to effectively manage shelf space and efficiently execute in-store promotions and new product introductions. Our business plan calls for implementing a distribution system that evolves from our current system, which generally provides the same delivery to all customers, to one that utilizes different delivery options for our customers based on customer size, growth potential and service needs. We believe this system will lower our cost structure and contribute to profitable growth in revenues.

In accordance with industry practice, we repurchase dated and damaged products from most of our customers. A portion of our dated bread and other products are delivered to our approximately 740 bakery outlets for retail sale. Bakery outlet sales represented approximately 10.6% of our net sales during the 52-week period ended May 31, 2008.

We also deliver certain sweet goods under the Dolly Madison brand through a direct warehouse shipment program to certain customers. The program was implemented in May 2007. Sales from the Dolly Madison direct warehouse program represented approximately 1.5% of our net sales in fiscal 2008. Our ability to deliver products through this method is limited by the terms of our collective bargaining agreements.

Competition

We face intense competition in all of our markets from large national bakeries, smaller regional operators, small retail bakeries, supermarket chains with their own bakeries, grocery stores with their own in-store bakery departments or private label products and diversified food companies. Competition is based on product quality, price, customer service, brand recognition and loyalty, promotional activities, access to retail outlets and sufficient shelf space and the ability to identify and satisfy consumer preferences. Customer service, including responsiveness to delivery needs and maintenance of fully stocked shelves, is also an important competitive factor and is central to the competition for retail shelf space. Our ability to provide customer service through our DSD delivery system is highly reliant on the execution and performance of our route drivers. This system is operated under collective bargaining agreements that can restrict the implementation, timing and effectiveness of our sales operation. Campbell Soup Company, George Weston Limited, Flowers Foods, Inc., Grupo Bimbo, S.A. and Sara Lee Corporation are our largest fresh baked bread competitors, each marketing bread products under various brand names. Flowers Foods, Inc., George Weston Limited, Grupo Bimbo, S.A., Krispy Kreme Doughnuts, Inc., McKee Foods Corporation and Tasty Baking Company are our largest competitors with respect to fresh baked sweet goods. In addition, fresh baked sweet goods also compete with other sweet snack foods like cookies and candies. From time to time, we experience price pressure in certain of our markets as a result of competitors’ promotional pricing practices.

Sources and Availability of Raw Materials

Most ingredients in our products, principally flour, sugar and edible oils, are readily available from numerous sources. We utilize commodity hedging derivatives, including exchange traded futures and options on wheat, corn, soybean oil and certain fuels, to reduce our exposure to commodity price movements for future ingredient and energy needs. The terms of such instruments, and the hedging transactions to which they relate, generally do not exceed one year. Our ability to hedge may be negatively impacted by counterparty concern regarding our financial situation. We also purchase other major commodity requirements through advance purchase contracts, generally not longer than one year in duration, to lock in prices for raw materials. Through our program of central purchasing of baking ingredients and packaging materials, we believe we are able to utilize our national presence to obtain competitive prices.

Prices for our raw materials are dependent on a number of factors including the weather, crop production, transportation and processing costs, government regulation and policies, and worldwide market supply of, and demand for, such commodities. Although we believe that we are able to utilize our central purchasing function to obtain competitive prices, the inherent volatility of commodity prices occasionally exposes us to fluctuating costs. We attempt to recover the majority of our commodity cost increases by increasing prices, moving towards a higher margin product mix or obtaining additional operating efficiencies. We are limited, however, in our ability to take greater price increases than the bakery industry as a whole because demand for our products has shown to be negatively affected by such price increases.

Employees

We employ more than 22,000 people, over 20,000 of which are full-time employees. Approximately 82% of our employees are covered by one of approximately 410 union contracts, which vary in duration from two to five years. Most of our employees are members of either the IBT or the BCTGM. Because our union groups are concentrated in the two organizations listed, contract negotiations with any local unit can involve the threat of strike by other union members at other IBC facilities. Our Chapter 11 filing and restructuring activities, including changes to our benefit programs and labor negotiations in connection with our efforts to lower our cost structure and our operational restructuring process, have strained relations with certain employee groups and labor unions We are committed to working with those groups to attempt to resolve any conflicts that may arise. However, there can be no assurance that these efforts will be successful.

Governmental Regulation; Environmental Matters

Our operations are subject to regulation by various federal, state and local government entities and agencies. As a baker of fresh baked bread and sweet goods, our operations are subject to stringent quality, labeling and traceability standards, including the Federal Food and Drug Act of 1906 and Bioterrorism Act of 2002, and rules and regulations governing trade practices, including advertising. Our bakery operations and our delivery fleet are subject to various federal, state and local environmental laws and workplace regulations, including the federal Occupational Safety and Health Act of 1970, the federal Fair Labor Standards Act of 1938, the federal Clean Air Act of 1990, the federal Clean Water Act of 1972 and the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA. Future compliance with or violation of such laws or regulations, and future regulation by various federal, state and local government entities and agencies, which could become more stringent, may have a material adverse effect on our financial condition and results of operations. We could also be subject to litigation arising out of such governmental regulations that could have a material adverse effect on our financial condition and results of operations. We believe that our current legal and environmental compliance programs adequately address such concerns and that we are in substantial compliance with such applicable laws and regulations. From time to time the Company receives notices of violation relating to environmental and other regulations. When such notices are received, the Company works with the appropriate authorities to seek a resolution to the violations, which may include payment of fines or penalties, adjustment to company operations or protocols, site remediation, or the acquisition or repair of equipment at the facility in question.

We have underground storage tanks at various locations throughout the U.S. that are subject to federal and state regulations that establish minimum standards for these tanks and where necessary, require remediation of associated contamination. On some parcels of owned real property, we discovered that underground storage tanks containing gasoline or diesel fuel had leaked and contaminated the adjacent soil. Typically, the discovery of these leaks and the

resulting soil contamination is made in connection with the sale of a property or the removal of an underground storage tank. When we discover that a leaking tank has contaminated a site, we take appropriate steps to cleanup or remediate the site. We are presently in the process of or have completed remediating any known contaminated sites.

In addition, the Environmental Protection Agency, or EPA, has made inquiries into the refrigerant handling practices of companies in our industry. Two of these companies entered into a negotiated settlement with the EPA and made substantial settlement payments. In September 2000, we received a request for information from the EPA relating to our handling of regulated refrigerants, which we use in equipment in our bakeries for a number of purposes, including to cool our dough during the production process. In January 2002, the EPA offered a partnership program to members of the baking industry pursuant to which individual companies can elect to participate. Because we had previously received a request for information from the EPA, the EPA/Department of Justice (DOJ) policies indicated that we were not eligible to participate in the program. Nevertheless, we undertook our own voluntary program to convert our industrial equipment to eliminate the use of ozone-depleting refrigerants. Prior to our Chapter 11 filing, we had undertaken negotiations with the EPA. The DOJ, on behalf of the United States of America, filed a proof of claim in our bankruptcy case on March 21, 2005 based upon our refrigerant handling practices. Although the proof of claim does not set forth a specific amount, the claimants allege more than 3,400 violations during the period from 1998 through 2002 and assert that each violation is subject to penalties of up to $27,500 per day. We re-opened settlement negotiations with the DOJ and EPA, and as a result of those negotiations, we have reached an agreement in principle to settle the DOJ and EPA’s claims through an allowed, pre-petition, general unsecured claim in the amount of approximately $1.1 million, which is subject to Bankruptcy Court approval.

We have also received notices from the EPA, state agencies, and/or private parties seeking contribution, that we have been identified as a potentially responsible party, or PRP, under CERCLA arising out of the alleged disposal of hazardous substances at certain disposal sites on properties owned or controlled by others. Because liability to the United States under CERCLA is strict, joint and several and may be imposed retroactively without regard to fault, we may be required to share in the cleanup cost with respect to six currently active “Superfund” sites. Our ultimate liability in connection with these sites may depend on many factors including the volume and types of materials contributed to the site, the number of other PRPs and their financial viability and the remediation methods and technology to be used. We are in the process of attempting to negotiate a settlement of our liability at these sites in connection with our bankruptcy proceeding.

The Clean Air Act of 1970, as amended, provides for federal, state and local regulation of the emission of air pollutants. Under the Clean Air Act, many of our facilities are required to report and control air emissions, including volatile organic compounds, nitrogen oxides and ozone-depleting substances. In April 2004, the EPA promulgated rules relating to the EPA’s more stringent National Ambient Air Quality Standards (NAAQS) for ozone. State and local authorities may apply additional emissions limits to certain of our bakeries to comply with the ozone NAAQS. Federal, state and local laws and regulations, including the Clean Water Act of 1972, govern the wastewater generated in our manufacturing operations. Permits and local wastewater ordinances establish limits on the content of our wastewater discharge along with monitoring and reporting requirements. Failure to comply with discharge limits can have results including, but not limited to, surcharges, penalties, operational adjustments, and enforcement actions requiring the construction of wastewater pretreatment facilities at our plants.

While it is difficult to quantify the potential financial impact of actions involving environmental matters, particularly remediation costs at waste disposal sites and future capital expenditures for environmental control equipment, in the opinion of our management, the ultimate liability arising from such environmental matters, taking into account established accruals for estimated liabilities, should not be material to our overall financial position, but could be material to results of operations or cash flows for a particular quarter or annual period.

On February 4, 2008, we received notice that the Sacramento County California District Attorney’s Consumer and Environmental Protection Division had opened an inquiry into whether the packaging for our 100 Calorie Pack snack cakes violated California law. Specifically, the inquiry was focused on whether the packaging contained “nonfunctional slack fill” and/or constituted “misleading advertising”. If the allegations were found to be true, the maximum penalty could be up to $5,000 per package offered for sale or sold in the state of California. Subsequently, the inquiry was joined by the Yolo County California District Attorney’s office. To date no formal charges have been filed, and we continue to cooperate in the inquiry. However, we believe that our packaging is not

misleading and that any enforcement of slack fill regulations is pre-empted by federal statute and, therefore, only enforceable by the Federal Food and Drug Administration.

Availability of Reports; Website Access

Our Internet address is http://www.interstatebakeriescorp.com. We provide a hyperlink to the 10kWizard.com website on our website by selecting the heading “Investors” and then “SEC Filings”. Through that hyperlink, we make available, free of charge, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, we provide a hyperlink entitled “Restructuring Information” on the “Investors” webpage under “About Us” and “Corporate Profile” that provides access to all filings related to our Chapter 11 proceedings.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below, together with all of the other information included or incorporated in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem insignificant may also impair our business operations. The occurrence of any of these risks could adversely affect our financial condition, results of operations and cash flows.

We face significant challenges and uncertainties in connection with (i) the implementation of our business plan, (ii) the outcome of our efforts to maximize value of the bankruptcy estates, and (iii) the development of a new or revised plan of reorganization.

In February 2007, we hired a new Chief Executive Officer, Craig D. Jung, and began the next stage of restructuring activities, which initially was focused on the development of a business plan to use as a basis for a plan of reorganization. In developing such a business plan, Mr. Jung established four operating priorities for the Company: (i) profitably grow revenues; (ii) improve productivity; (iii) lower our cost structure; and (iv) create a performance culture. In order to implement these four priorities, we have determined to undertake the following initiatives, without limitation: (i) implement a distribution system with different delivery options for our customers based on customer size, growth potential and service needs to lower our cost structure and profitably grow revenues, (ii) implement a lean manufacturing program to drive productivity, (iii) improve brand management and innovation, including increased investment in marketing our brands, and (iv) redefine our organization to remove unnecessary layers of management and implement a matrix structure to improve communication, leadership and accountability.

On June 28, 2007, we submitted our then current business plan to our various constituents in the bankruptcy, including representatives of our lender syndicates and official committees of creditors and equity holders. In order to secure rational financing required to implement this business plan, however, we believed additional concessions from our unionized employees were required. As a result, in June of 2007, we initiated talks with representatives of the two labor organizations, the BCTGM and IBT, representing approximately 91% of our unionized employees to achieve further concessions, including greater flexibility in the method and manner by which we distribute our products to our customers and cost reductions related to health and welfare programs.

between certain pre-petition secured lenders. As a result of our inability to reach agreement with the IBT, Silver Point Finance L.L.C.’s financing commitment expired on March 14, 2008.

On September 12, 2008, we entered into the Commitment Letter setting forth the principal terms of the Second Amended Plan. We plan to file a motion with the Bankruptcy Court seeking authorization for us to enter into and approve, among other things, the Commitment Letter, an asset-based revolving credit facility and a term loan facility. In connection with the Second Amended Plan, we would, among other things, issue new third lien notes, new senior secured convertible debt, shares of new common stock in the reorganized company and warrants to purchase new common stock. Under the terms of the Commitment Letter, the Investors have agreed to purchase 4,420,000 shares of new common stock for $44,200,000 and provide new convertible debt in the principal amount of $85,800,000.

There can be no assurance that the necessary financing to fund any standalone plan to emerge from bankruptcy, including the Second Amended Plan, will be provided to us on acceptable terms or at all or that the Second Amended Plan will be confirmed. In the event the Second Amended Plan is not confirmed by the Bankruptcy Court, the Company will continue its efforts to maximize the value of the bankruptcy estates, which may include, but not limited to, the sale of the Company or some or all of our assets, infusion of capital and debt restructuring or any combination of these options. There can be no assurance as to whether we will be able to successfully implement any such strategy on terms and conditions acceptable to the Company or to our various constituents in the bankruptcy or as to the ultimate recovery of value available to such constituents. In addition, if the Second Amended Plan is not confirmed by the Bankruptcy Court or we are unable to file a new or revised plan of reorganization, third parties may seek and obtain (i) appointment of a Chapter 11 trustee or (ii) conversion of the Chapter 11 proceeding to a Chapter 7 proceeding, among other things. Such actions could adversely affect our results of operations, financial condition and our ability to continue as a going concern.

The Second Amended Plan, along with a disclosure statement approved by the Bankruptcy Court, will be sent to creditors, equity holders and parties in interest in order to solicit acceptance of the plan. Following the solicitation, the Bankruptcy Court will consider whether to confirm the plan. The Second Amended Plan may not receive the requisite acceptance by creditors, equity holders and parties in interest, or the Bankruptcy Court may not confirm the plan. Moreover, even if the Second Amended Plan receives the requisite acceptance by creditors, equity holders and parties in interest and is approved by the Bankruptcy Court, the plan may not be viable.

Our exclusive period within which to file a plan of reorganization expired on November 8, 2007, and our exclusive period within which to solicit acceptances of our plan of reorganization expired on January 7, 2008.

As a result, one or more of our constituents could propose their own plan of reorganization. Such a plan may include the sale of some or all of our assets and/or an orderly liquidation of the Company.

In addition, due to the nature of the reorganization process, actions may be taken by creditors and parties in interest that may have the effect of preventing or unduly delaying the filing and confirmation of a plan of reorganization in connection with the Chapter 11 process. Accordingly, we can provide no assurance as to whether or when a plan of reorganization may be filed or confirmed in the Chapter 11 process.

We face uncertainty regarding the adequacy of our capital resources, including liquidity, and have limited access to additional financing.

We currently have available a $313.0 million DIP Facility to fund our post-petition operating expenses, supplier and employee obligations. The DIP Facility provides for additional funding of $16.0 million based on the occurrence of certain events. The DIP Facility received interim approval by the Bankruptcy Court on September 23, 2004 and final approval on October 21, 2004. The DIP Facility has been amended numerous times.

The DIP Facility subjects us to certain obligations, including the delivery of a Borrowing Base Certificate (as defined in the DIP Facility), cash flow forecasts and operating budgets at specified intervals, as well as certain limitations on the payment of indebtedness, entering into investments, the payment of capital expenditures and the payment of dividends. The DIP Facility also contains financial covenants, requiring minimum Consolidated EBITDA (as defined in the DIP Facility), restricting Capital Expenditures (as defined in the DIP Facility), and limiting the amount of periodic cash restructuring charges (as defined in the DIP Facility). There can be no assurance that we will be able to consistently comply with these obligations, financial covenants and other restrictive obligations in our DIP Facility.

We are highly reliant on suppliers and vendors to continue to provide capital and materials for our ongoing operations. Any interruptions in our capital and materials could have a material adverse effect on our operations.

In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other restructuring costs in connection with the Chapter 11 process and the restructuring of our business operations and expect that we will continue to incur significant professional fees and restructuring costs. As of May 31, 2008, we had approximately $25.1 million in available cash and $53.0 million available for borrowing under the DIP Facility. This compares to the $67.2 million in available cash and $90.3 million available for borrowing under the DIP Facility as of June 2, 2007. These amounts of available cash exclude $28.4 and $32.9 million at May 31, 2008 and June 2, 2007, respectively, related to checks written in excess of recorded balances included in accounts payable on our consolidated balance sheets. As a result of an amendment to our DIP Facility, we have approximately $80.0 million available for borrowing as of the date of this filing. We cannot assure you that the amounts of cash from operations together with our DIP Facility will be sufficient to fund operations until such time as a plan of reorganization is proposed that will receive the requisite acceptance by creditors, equity holders and parties in interest and be confirmed by the Bankruptcy Court. In the event that cash flows and available borrowings under the DIP Facility are not sufficient to meet our liquidity requirements, we may be required to seek additional financing. We can provide no assurance that additional financing would be available or, if available, offered on acceptable terms. Failure to secure additional financing would have a material adverse impact on our operations.

As a result of the Chapter 11 process and the circumstances leading to the bankruptcy filing, our access to additional financing is, and for the foreseeable future will likely continue to be, very limited. Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time and ultimately cannot be determined until a plan of reorganization has been developed and is confirmed by the Bankruptcy Court in the Chapter 11 process.

The maturity date of the DIP Facility has been extended to February 9, 2009. We may need to negotiate an additional extension of the maturity date and increase in commitment or refinance the DIP Facility to provide adequate time to complete a plan of reorganization or sale of the Company. There can be no assurance that we will be successful in extending, increasing or refinancing the DIP Facility or that we can extend or refinance the DIP Facility on terms favorable to us.

Terms of collective bargaining agreements and labor disruptions could adversely impact our results of operations.

We employ more than 22,000 people, approximately 82% of whom are covered by one of approximately 410 union contracts. Most of our employees are members of either the IBT or the BCTGM. Because a substantial portion of our workers are unionized, our costs are generally higher and our ability to implement productivity improvements and effect savings with respect to health care, pension and other retirement costs is more restricted than in many nonunion operations as a result of various restrictions specified in our collective bargaining agreements. Terms of

collective bargaining agreements that prevent us from competing effectively could adversely affect our financial condition, results of operations and cash flows. In addition, our Chapter 11 filing and restructuring activities, including changes to our benefit programs and labor negotiations in connection with our efforts to lower our cost structure and our operational restructuring process, have strained relations with certain employee groups and labor unions. We are committed to working with those groups to attempt to resolve conflicts that may arise. However, there can be no assurance that these efforts will be successful. Conflicts that result in work stoppages or disruptions could adversely affect our financial condition and results of operation.

The Chapter 11 process and the DIP Facility impose restrictions on the conduct of our business.

We are operating our business as a debtor-in-possession pursuant to the Bankruptcy Code. Under applicable bankruptcy law, during the pendency of the Chapter 11 process, we will be required to obtain the approval of the Bankruptcy Court prior to engaging in any transaction outside the ordinary course of business. In connection with seeking an approval, creditors and parties in interest may raise objections to the request for approval and may appear and be heard at any hearing with respect to the approval. Accordingly, although we may sell assets and settle liabilities (including for amounts other than those reflected on our financial statements) with the approval of the Bankruptcy Court, there can be no assurance that the Bankruptcy Court will approve any sales or proposed settlements. The Bankruptcy Court also has the authority to oversee and exert control over our ordinary course operations.

The DIP Facility contains both affirmative and negative covenants pursuant to which we agree to take, or refrain from taking, certain actions. The primary on-going affirmative obligation that we are required to perform is the scheduled periodic delivery of a Borrowing Base Certificate (as defined in the DIP Facility), which reflects the components of and reserves against the Borrowing Base (as defined in the DIP Facility), establishes borrowing availability pursuant to an agreed formula, certifies as to the accuracy and completeness of the information presented and includes any documentation necessary or appropriate to support the information presented. Additionally, we are required to deliver periodic operating budgets and cash flow forecasts, as set forth in the DIP Facility.

The DIP Facility also contains several restrictive covenants that are typical for a debtor-in-possession credit facility of this type. The DIP Facility contains certain financial covenants requiring minimum Consolidated EBITDA (as defined in the DIP Facility), restricting Capital Expenditures (as defined in the DIP Facility), and limiting the amount of periodic cash restructuring charges (as defined in the DIP Facility). In addition, the DIP Facility also imposes restrictions relating to, among other things, incurrence of liens, our ability to consolidate or merge with or into another entity, incurrence or guarantee of debt, payment of dividends, making of investments, and the disposition of assets.

Failure to satisfy any of these covenants could result in an event of default that could cause, absent the receipt of appropriate waivers, an interruption in cash and letter of credit availability, which could cause an interruption of our normal operations. As a result of the restrictions described above, our ability to respond in a timely fashion to changing business and economic conditions may be significantly restricted and, absent approval by the requisite number of lenders, we may be prevented from engaging in transactions that might otherwise be considered beneficial to us.

Our financial statements assume we can continue as a “going concern”.

Our consolidated financial statements included elsewhere in this Annual Report on Form 10-K have been prepared assuming we can continue as a going concern. Because of the Chapter 11 process and our recurring losses from operations, negative working capital, downward sales trends, and the potential lack of liquidity should we be unable to successfully reorganize under Chapter 11, there is substantial doubt that we can continue as a going concern.

Our continuation as a going concern is dependent upon, among other things, our ability to evaluate and execute various alternatives including the sale of some or all of our assets, infusion of capital, debt restructuring and the development, confirmation and implementation of a new or revised plan of reorganization, our ability to comply with the terms of the DIP Facility, our ability to negotiate an extension of, and increase in the amount available under, our DIP Facility, if needed, or refinance our DIP Facility at its maturity, our ability to implement our restructuring activities, our ability to obtain concessions from our labor unions, our ability to obtain financing upon

exit from bankruptcy, our ability to implement the Second Amended Plan, if confirmed by the Bankruptcy Court, and the transactions contemplated thereby and our ability to generate sufficient cash from operations to meet our obligations and any combination of these factors. In the event our restructuring activities are not successful and we are required to liquidate, additional significant adjustments would be necessary in the carrying value of assets and liabilities, the revenues and expenses reported and the balance sheet classifications used. Further, the value of debt, liability and equity interests may be significantly or completely impaired in the event of a liquidation or conversion to a Chapter 7 proceeding.

In addition, the amounts reported in the consolidated financial statements included in this Annual Report on Form 10-K do not reflect adjustments to the carrying value of assets or the amount and classification of liabilities that ultimately may be necessary as the result of a plan of reorganization.

Our reorganization will require substantial effort by management and may impact our ability to attract, retain and compensate key personnel.

Our senior management has been, and will be, required to expend a substantial amount of time and effort structuring a plan of reorganization, as well as evaluating various restructuring alternatives including, but not limited to, the sale of some or all of our assets, infusion of capital and debt restructuring, or any combination of these options, which could have a disruptive impact on management’s ability to focus on the operation of our business. In addition, we have had and continue to have difficulty attracting, retaining and compensating key executives and employees and retaining personnel generally as a result of the Chapter 11 process. Because of the uncertainty caused by our bankruptcy, we have had to fill a number of key management positions with consultants providing services pursuant to short term consulting agreements. There can be no assurance we can retain the services of these individuals beyond the terms of their agreements or that we can retain the services of other key executives and employees.

The inability to completely withdraw from the ABA Plan while operating under the provisions of Chapter 11 of the Bankruptcy Code could jeopardize our ability to emerge from bankruptcy and threaten our viability if we emerge.

Based upon the most recent available actuarial estimates using statutory termination discount rates, our portion of the underfunding of the ABA Plan could be approximately $15 to $20 million, assuming the plan was characterized as a multiple employer plan. Conversely, if the plan was characterized as an aggregate of single employer plans, it is likely that the single employer plan attributable to us would have to be terminated, in which event, our portion of the underfunding could be approximately $65 to $80 million. Since January 2006, we have been notified of $35.5 million of required contributions, which we have not paid.

Any liability resulting from our withdrawal from the ABA Plan (if it is determined to be a multiple employer plan) or the termination of the single employer plan attributable to us (if it is determined to be an aggregate of single employer plans) while operating under the provisions of Chapter 11 of the Bankruptcy Code would be a claim in our Chapter 11 case and would be treated in accordance with the terms of any plan of reorganization or as may otherwise be provided by the Bankruptcy Code, as opposed to being a post emergence liability. Conversely, if the ABA Plan was determined to be a multiple employer plan and we were to withdraw from the ABA Plan post emergence or if the ABA Plan were determined to be an aggregate of single employer plans and the single employer plan that was attributable to us was terminated post emergence, any liability resulting from our withdrawal from the ABA Plan or the termination of the single employer plan attributable to us would be a post emergence liability.

In light of this exposure, we (1) withdrew our active nonunion employees from the plan effective April 18, 2008 and (2) are working with the applicable unions to effect similar action with respect to our active union employees while we are operating under the provisions of Chapter 11 of the Bankruptcy Code. This withdrawal would result in present plan benefit obligations remaining with the ABA Plan, while future benefits for active ABA Plan participants would be provided under a Company-sponsored plan or multi-employer plan. In addition, the PBGC has issued an opinion that the ABA Plan is a multiple employer plan and not an aggregate of single employer plans. Accordingly, we expect that the ABA Plan will be determined to be a multiple employer plan and that we will successfully withdraw from the ABA Plan while operating under the provisions of Chapter 11 of the Bankruptcy Code.

We may have difficulty in maintaining relationships and material contracts with our suppliers.

Although we have not had significant difficulty, in the future we may have difficulty in maintaining existing relationships with our suppliers or creating new relationships with suppliers as a result of the Chapter 11 process. Our suppliers may stop providing materials to us or provide materials on a “cash on delivery” or “cash on order” basis, or on other terms that could have an adverse impact on our short-term cash flow. Our ability to maintain arrangements with our suppliers that are critical to our operations may be adversely impacted due to supplier uncertainty regarding our cash-flow resources and the outcome of the Chapter 11 process. Failure to maintain these arrangements could have a material and immediate adverse impact on our ability to operate as a going concern.

Increases in prices and shortages of raw materials, fuels and utilities could cause our costs to increase.

The principal raw materials used to bake our fresh bread and sweet goods, including flour, sugar and edible oils, and the paper, films and plastics used to package our products, are subject to substantial price fluctuations. The prices for raw materials are influenced by a number of factors, including the weather, crop production, transportation and processing costs, government regulation and policies, worldwide market supply and demand and alternative demand for raw materials, such as the demand for corn for use in the production of ethanol. Many commodities have recently been at record levels, and commodity markets are experiencing unprecedented volatility. Any substantial increase in the prices of raw materials may adversely affect our financial condition, results of operations and cash flows. We enter into contracts to be performed in the future, generally with a term of one year or less, to purchase raw materials at fixed prices to protect us against price increases. These contracts could cause us to pay higher prices for raw materials than are available in the spot markets.

We rely on utilities to operate our business. For example, our bakeries and other facilities use natural gas, propane and electricity to operate. In addition, our distribution operations use gasoline and diesel fuel to deliver our products. For these reasons, substantial future increases in prices for, or shortages of, these fuels or electricity could adversely affect our financial condition, results of operations and cash flows.

Price increases and other factors could reduce demand for our products and declining demand for our products could have adverse effects on our financial results.

According to data from Information Resources Incorporated (IRI), an independent market research concern that reports sales trends in most supermarkets (excluding mass merchandisers, club stores and discount stores), our total unit volume for branded sweet goods declined by 8.0% during fiscal 2008 from the comparable fiscal 2007 period, and revenues from our branded sweet good products declined 0.8% from fiscal 2007 to fiscal 2008. Our total unit volume of branded bread products declined by 11.3% during fiscal 2008 from the comparable fiscal 2007 period. During fiscal 2008, revenues related to our branded bread products declined 6.5% from the comparable fiscal 2007 period. A significant portion of the decline was the result of our exit from the bread market in Southern California. Removing the effect of this withdrawal, our decline in total branded bread units was 7.2% in fiscal 2008 compared to fiscal 2007 and the decline in branded bread revenue was 1.1%. Data from IRI also indicates that the declining unit trend in branded bread and sweet goods products was evident in the industry during fiscal 2008. We believe that we will continue to experience reduced demand for our products.

Dietary guidelines also could result in reduced demand for our bread and sweet good products. The Department of Health and Human Services and Department of Agriculture’s Dietary Guidelines for Americans provide dietary advice aimed at promoting health and reducing the risk for major chronic diseases, and serve as the basis for federal food and nutrition education programs. The guidelines recommend limiting the intake of saturated and trans fats, cholesterol, added sugar, salt and alcohol. Although virtually all of our bread products and such key iconic Hostess sweet goods as Twinkies and Ho Hos have the “0 grams” trans fat label under the Food and Drug Administration’s labeling regulations that became effective January 1, 2006, certain of our products, primarily those that are fried or Kosher, contain trans fat, which is declared on the products’ labels. With respect to our new product offerings, we intend to introduce only those new products that can properly be labeled with the “0 grams” trans fat declaration to assist those consumers concerned about their trans fat consumption. There can be no assurance that these and other actions that we may take will offset the effect, if any, of the guidelines’ recommendation to reduce the intake of saturated and trans fats and added sugar. The guidelines recognize that whole grains are an important source of fiber and nutrients and recommend an increased consumption of whole grain products by substituting whole grain

products for some enriched bread products. We have a number of whole grain products among our product offerings. However, the substantial majority of our bread revenues are from the sale of white bread and other refined grain bread products. There can be no assurance that, if consumers increase their consumption of whole grain products as a result of the guidelines, they will increase consumption of our whole grain product offerings.

In addition, increasing the prices we charge for our bread and sweet goods products could result in reduced demand for these products. In fiscal 2007 and fiscal 2008, we implemented significant price increases for many of our products. Rising commodity costs could necessitate additional price increases. Any increase in our prices could have a negative effect on consumer demand for our products and our sales and profits.

We are limited by our cost structure in responding to reduced demand for our products. Our labor costs are relatively fixed. We employ over 22,000 people, approximately 82% of whom are covered by one of approximately 410 union contracts. Because a substantial portion of our workers are unionized, our costs are generally higher and our ability to implement productivity improvements and effect savings with respect to health care, pension and other retirement costs is more restricted than in many nonunion operations as a result of various restrictions specified in our collective bargaining agreements.

We are no longer listed on the New York Stock Exchange and the market in our common stock is highly speculative and may not continue.

Our common stock was delisted from the New York Stock Exchange, or the NYSE, on September 23, 2004. Our common stock now trades on the over-the-counter bulletin board under the symbol “IBCIQ.” Our delisting has reduced the market and liquidity of our common stock and consequently may adversely affect the ability of our stockholders and brokers/dealers to purchase and sell our shares in an orderly manner or at all. Trading in our common stock through market makers and quotation on the over-the-counter bulletin board entails other risks. Due in part to the decreased trading price of our common stock and the elimination of analyst coverage, the trading price of our common stock may change quickly, and market makers may not be able to execute trades as quickly as they could when the common stock was listed on the NYSE.

In addition, as a result of pre-petition indebtedness and the availability of the “cram-down” provisions of the Bankruptcy Code described in “Item 1. Business — Proceedings Under Chapter 11 of the Bankruptcy Code” in this Annual Report on Form 10-K, the holders of our common stock may not receive value for their interests under a plan of reorganization. Because of this possibility, the value of our common stock is highly speculative and any investment in our common stock would pose an extremely high degree of risk. In connection with a motion filed in the Bankruptcy Court in November 2006, we described our view that, based on then-existing financial performance, it is difficult (if not impossible) to derive a current enterprise value for the Company that would result in value for the equity interests after first taking into consideration the amount of creditor claims against the Company. Potential investors in our common stock should consider the highly speculative nature of our common stock prior to making any investment decision with respect to our common stock.

Implementation of various information technology systems could disrupt our business and adversely affect our financial condition and results of operations.

We have implemented a new human resources management and payroll system across the Company. Additionally, we intend to upgrade and modernize other information technology systems, including an investment in new handheld computer technology that we believe is critical for the implementation of our proposed distribution system. As a result, we may experience disruptions and delays in our business, which could adversely affect our financial condition, results of operations and cash flows.

Our internal control over financial reporting was not effective as of May 31, 2008 and weaknesses in our internal controls and procedures could adversely affect our financial condition.

As discussed in Item 9A, management assessed our internal control over financial reporting as of May 31, 2008, the end of our most recent fiscal year, and concluded that material weaknesses existed and our internal control over financial reporting was not effective.

We are continuing our efforts to improve our internal control over financial reporting and disclosure controls and procedures related to substantially all areas of our financial statements and disclosures. The remediation efforts are continuing and are expected to continue throughout fiscal 2009. There remains a risk that we will fail to prevent or detect a material misstatement of our annual or interim financial statements. In addition, if we are unsuccessful in our remediation efforts, our financial condition, our ability to report our financial condition and results of operations accurately and in a timely manner and our ability to earn and retain the trust of our shareholders, employees, and customers, could be adversely affected.

Increases in employee and employee-related costs could have adverse effects on our financial results.

Historically, we have seen our health care and workers’ compensation costs increase, in some instances substantially. Our ability to pass along any cost increase in health care to our employees is limited by our collective bargaining agreements, which cover approximately 82% of our employees. Any substantial increase in health care or workers’ compensation costs may adversely affect our financial condition, results of operations and cash flows. In addition, a shortage of qualified employees or a substantial increase in the cost of qualified employees could adversely affect our financial condition, results of operations and cash flows.

Competition could adversely impact our results of operations.

The baking industry is highly competitive. Competition is based on product quality, price, customer service, brand recognition and loyalty, effective promotional activities, access to retail outlets and sufficient shelf space and the ability to identify and satisfy consumer preferences. We compete with large national bakeries, smaller regional operators, small retail bakeries, supermarket chains with their own bakeries, grocery stores with their own in-store bakery departments or private label products and diversified food companies. Some of these competitors are more diversified and many have greater financial resources than we do. Customer service, including responsiveness to delivery needs and maintenance of fully stocked shelves, is an important competitive factor and is central to the competition for retail shelf space. From time to time, we experience price pressure in certain of our markets as a result of our competitors’ promotional pricing practices. Excess industry capacity could also result in price pressure in certain markets. As a result, we may need to reduce the prices for some of our products to respond to competitive and customer pressures and to maintain market share. Such pressures also may restrict our ability to increase prices in response to raw material and other cost increases. Any reduction in prices as a result of competitive pressures, or any failure to increase prices when raw material costs increase, would harm profit margins and, if our sales volumes fail to grow sufficiently to offset any reduction in margins, our results of operations will suffer.

In order to protect our existing market share or capture increased market share in this highly competitive retail environment, we continue to promote our products, advertise and introduce and establish new products. Due to inherent risks in the marketplace associated with advertising and new product introductions, including uncertainties about trade and consumer acceptance, our actions may not prove successful in maintaining or enhancing our market share and could result in lower sales and profits. In addition, we may incur increased credit and other business risks as a result of competing for customers in a highly competitive retail environment.

We may be obligated to make additional contributions, or incur withdrawal liability, to multi-employer pension plans.

We have collective bargaining agreements with our unions that stipulate the amount of contributions that we must make to union-sponsored, multi-employer pension plans in which our employees participate. Multi-employer pension plans generally are managed by trustees, who are appointed by management of the employers participating in the plans (including our Company, in some cases) and the affiliated unions and who have fiduciary obligations to act prudently and in the best interests of the plan’s participants.

Under our collective bargaining agreements, we are obligated to make contributions to a number of multi-employer plans which cover the majority of our employees. Benefits under these plans generally are based on a specified amount for each year of service. We contributed $109.3 million, $115.7 million and $125.8 million to all of our multi-employer plans in fiscal 2008, 2007, and 2006, respectively. Based on the most recent information available to us, we believe that certain of the multi-employer pension plans to which we contribute are substantially underfunded. While we expect contributions to these plans to continue to increase as they have in recent years, the

amount of increase will depend upon the outcome of collective bargaining, actions taken by trustees, the actual return on assets held in these plans, the impact of new government regulations and the rate of employer withdrawals from the plans, as discussed below.

Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur withdrawal liability to the plan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer pursuant to complex actuarial and allocation rules under the Employee Retirement Income Security Act of 1974 (ERISA). Current information regarding the funding status and potential withdrawal liability allocable to the Company is not routinely made available by multi-employer pension plans. However, based on publicly available information and limited information available from the plans, both of which are often dated and not subject to independent verification, we believe that our total contingent liability in the event of our complete withdrawal from all multi-employer plans to which we contribute would be in a range from $850 million to $1 billion. This range does not reflect recent investment returns or losses on plan assets or actuarial experience of the plans, both of which could materially impact the amount of withdrawal liability on a given date. This range also does not reflect a potential increase in our liability as the result of the partial or complete withdrawal of other employers participating in the plans. If employers that withdraw or partially withdraw from a multi-employer pension plan are not able or fail to pay their withdrawal liability to the plan, by reason of bankruptcy or otherwise, the remaining participating employers in the plan must meet the plan’s funding obligations and are responsible for an increased portion of the plan’s underfunding. The decline in the value of assets held by certain of the multi-employer pension plans to which we contribute, coupled with the high level of benefits generally provided by the plans and the inability or failure of withdrawing employers to pay their withdrawal liability, has dramatically increased the underfunding of these plans in recent years. As a result, and in light of pension reform legislation at the federal level, we expect that our contributions to these plans will continue to increase and the plans’ benefit levels, underfunding and related issues will continue to create challenges for us and other employers in the bakery and trucking industries.

When we close bakeries, distribution centers and retail outlets, we may incur withdrawal liabilities with respect to underfunded multi-employer pension plans. Since fiscal 2004, we have closed 14 bakeries, and in connection with our restructuring activities, we may close additional bakeries, routes, bakery outlets and distribution centers. Any assessments for any withdrawal liability that we might incur by future closures will be recorded when the affected plans determine that it is probable that a liability exists and that the amount of the withdrawal liability can be reasonably estimated.

Additionally, ERISA and the Internal Revenue Code and related regulations establish minimum funding requirements for multi-employer pension plans. The Pension Protection Act of 2006, or the PPA, imposes minimum stricter funding requirements on multi-employer pension plans for plan years commencing on or after January 1, 2008. Under the PPA, plans that fail to meet certain funding standards are categorized as being in critical or endangered status. The trustees for critical or endangered plans must adopt a rehabilitation or funding improvement plan designed to improve the plan’s funding within a prescribed period of time. Rehabilitation and funding improvement plans may include increased employer contributions, reductions in benefits or a combination of the two. Unless otherwise agreed upon, any requirement to increase employer contributions will not take effect until the current collective bargaining agreements expire. However, an immediate five percent surcharge (increasing to ten percent for the following and subsequent years) is imposed on contributions to critical plans and remains in effect until the bargaining parties agree on modifications imposed by the rehabilitation plan adopted by the trustees. In addition the failure of a plan to meet funding improvement targets provided in its rehabilitation or funding improvement plan could result in the imposition of an excise tax on contributing employers. To date, we have received notice that five plans to which we contribute have been designated in critical status and an additional four plans to which we contribute have been designated in endangered status. If excise taxes were imposed on us, or we are required to make additional contributions, it could adversely affect our financial condition, results of operations and cash flows.

For the forgoing reasons, we are unable to determine the amount of actual future contributions, excise taxes or withdrawal liabilities, if any, for which we may be responsible or whether an adverse affect on our financial condition, results of operations and cash flows could result from our participation in these plans.

We rely on the value of our brands, and the costs of maintaining and enhancing the awareness of our brands are increasing.

We believe that maintaining our brands via marketing and other brand-building efforts is an important aspect of our efforts to attract and expand our consumer base. However, the costs associated with maintaining and enhancing consumer awareness of our brands are increasing. We may not be able to successfully maintain or enhance consumer awareness of our brands and, even if we are successful in our branding efforts, such efforts may not be cost-effective. In addition, our Chapter 11 filing may have an adverse impact on the reputation of our brands with consumers. If we are unable to maintain or enhance consumer awareness of our brands in a cost effective manner, it would adversely affect our financial condition, results of operations and cash flows.

Economic downturns could cause consumers to shift their food purchases from our branded products to lower priced items.

The willingness of consumers to purchase premium branded food products depends in part on national and local economic conditions. In periods of economic downturns or uncertainty, consumers tend to purchase more private label or other lower priced products. In fact, as a result of the recent economic downturn, our sales volume of higher margin branded products has suffered, adversely affecting our financial condition, results of operations and cash flows.

Inability to anticipate changes in consumer preferences may result in decreased demand for products.

Our success depends in part on our ability to anticipate the tastes and dietary habits of consumers and to offer products that appeal to their preferences. Consumer preferences change, and our failure to anticipate, identify or react to these changes could result in reduced demand for our products, which could in turn adversely affect our financial condition, results of operations and cash flows. We have introduced several new products over the last few years and improved products in order to achieve and retain market share and have incurred significant development and marketing costs in connection therewith. If our products fail to meet consumer preferences, then our strategy to maintain and grow sales and profits with new products will be less successful.

Our intellectual property rights are valuable and any inability to protect them could dilute our brand image and adversely affect our business.

We regard our trademarks, including “Wonder^®,” “Hostess^®,” “Home Pride^®,” “Butternut^®,” “Dolly Madison^®,” “Drake’s^®,” and
“Merita^®,” as well as our trade secrets and similar intellectual property, as important to our success. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. In the event that any of our proprietary information is misappropriated, our business could be seriously harmed. For example, if we are unable to protect our trademarks from unauthorized use, our brand image may be harmed. Other parties may take actions that could impair the value of our proprietary rights or the reputation of our products. Any impairment of our brand image could cause our enterprise value to decline. Also, we may not be able to timely detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights. In the event we are unable to enforce our intellectual property rights, it could adversely affect our financial condition, results of operations and cash flows. In addition, protecting our intellectual property and other proprietary rights can be expensive. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and could adversely affect our financial condition, results of operations and cash flows. A number of our brands are also manufactured and produced pursuant to licensing agreements. Our ability to renew these licensing agreements as they come due may be made more difficult by the Chapter 11 process, which could also adversely affect our financial condition, results of operations and cash flows.

Further consolidation in the retail food industry may adversely impact profitability.

As supermarket chains continue to consolidate and as mass merchants gain scale, our larger customers may seek more favorable terms for their purchases of our products, including increased spending on promotional programs. Sales to our larger customers on terms less favorable than our current terms could adversely affect our financial condition, results of operations and cash flows.

Future product recalls or safety concerns could adversely impact our business and financial condition and results of operations.

We may be required to recall certain of our products should they become contaminated or be damaged. We may also become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products causes injury, illness or death. A product recall or an adverse result in any such litigation could adversely affect our financial condition, results of operations and cash flows.

We could be adversely affected if consumers in our principal markets lose confidence in the safety and quality of our products. Adverse publicity about the safety and quality of certain food products, such as the publicity about foods containing genetically modified ingredients, whether or not valid, may discourage consumers from buying our products or cause production and delivery disruptions.

A number of our brand names are owned, and products are produced and sold under these brand names, by third parties outside the U.S. Product recalls or adverse publicity about the safety and quality of these products could discourage consumers from buying our products, which could adversely affect our financial condition, results of operations and cash flows.

Costs associated with environmental compliance and remediation could adversely impact our operations.

We are subject to numerous environmental laws and regulations that impose environmental controls on us or otherwise relate to environmental protection and health and safety matters, including, among other things, the discharge of pollutants into the air and water, the handling, use, treatment, storage and cleanup of solid and hazardous wastes, and the investigation and remediation of soil and groundwater affected by regulated substances. We have underground storage tanks at various locations throughout the U.S. that are subject to federal and state regulations establishing minimum standards for these tanks and, where necessary, remediation of associated contamination. We are presently in the process of or have completed remediating any known contaminated sites. In addition, we have reached an agreement in principle with the Environmental Protection Agency, or EPA, and Department of Justice, or DOJ, to settle a claim in our bankruptcy related to our handling of regulated refrigerants. We have also received notices from the EPA, state agencies, and/or private parties seeking contribution, that we have been identified as a potentially responsible party, or PRP, under CERCLA, arising out of the alleged disposal of hazardous substances at certain disposal sites on properties owned or controlled by others. Because liability under CERCLA may be imposed retroactively without regard to fault, we may be required to share in the cleanup cost of six “Superfund” sites. Our ultimate liability may depend on many factors, including (i) the volume and types of materials contributed to the site, (ii) the number of other PRPs and their financial viability, and (iii) the remediation methods and technology to be used.

It is difficult to quantify the potential financial impact of actions involving environmental matters, particularly fines, remediation costs at waste disposal sites and future capital expenditures for environmental control equipment at these or other presently unknown locations. We believe the ultimate liability arising from such environmental matters, taking into account established accruals for estimated liabilities, should not be material to our overall financial position, but could be material to our results of operations or cash flows for a particular quarter or fiscal year.

Government regulation could adversely impact our operations.

Our operations and properties are subject to regulation by federal, state and local government entities and agencies. As a baker of fresh baked bread and sweet goods, our operations are subject to stringent quality, labeling and traceability standards, including under the Federal Food and Drugs Act of 1906 and Bioterrorism Act of 2002, and rules and regulations governing trade practices, including advertising. Our operations are also subject to federal, state and local workplace laws and regulations, including the federal Fair Labor Standards Act of 1938 and the federal Occupational Safety and Health Act of 1970. Future compliance with or violation of such regulations, and future regulation by various federal, state and local government entities and agencies, which could become more stringent, may adversely affect our financial condition, results of operations and cash flows. We could also be subject to litigation or other regulatory actions arising out of government regulations, which could adversely affect our financial condition, results of operations and cash flows.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES

Bakeries

We currently own and operate 41 bakeries in the following locations:


Birmingham, Alabama	Indianapolis, Indiana	Rocky Mount, North Carolina
Anchorage, Alaska	Waterloo, Iowa	Akron, Ohio
Los Angeles, California (2)	Emporia, Kansas	Cincinnati, Ohio
Oakland, California	Lenexa, Kansas	Columbus, Ohio
Sacramento, California	Alexandria, Louisiana	Defiance, Ohio
Denver, Colorado	Biddeford, Maine	Northwood, Ohio
Jacksonville, Florida	Boonville, Missouri	Tulsa, Oklahoma
Orlando, Florida	Springfield, Missouri	Philadelphia, Pennsylvania
Columbus, Georgia	St. Louis, Missouri	Knoxville, Tennessee
Decatur, Illinois	Billings, Montana	Memphis, Tennessee
Hodgkins, Illinois	Henderson, Nevada	Ogden, Utah
Peoria, Illinois	Wayne, New Jersey	Salt Lake City, Utah
Schiller Park, Illinois	Jamaica, New York	Seattle, Washington
Columbus, Indiana

Other Properties

As of August 15, 2008, we operate approximately 600 distribution centers and approximately 740 bakery outlets in approximately 1,000 locations throughout the United States. The majority of our bakery outlets and distribution centers are leased. Over the past few years, we have been able to realize operating synergies through consolidation of redundant bakeries and distribution centers.

ITEM 3. LEGAL PROCEEDINGS

On September 22, 2004, or the Petition Date, we and each of our wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the Western District of Missouri, or the Bankruptcy Court (Case Nos. 04-45814, 04-45816, 04-45817, 04-45818, 04-45819, 04-45820, 04-45821 and 04-45822). On September 24, 2004, the official committee of unsecured creditors was appointed in our Chapter 11 cases. Subsequently, on November 29, 2004, the official committee of equity security holders was appointed in our Chapter 11 cases. On January 14, 2006, Mrs. Cubbison’s, a subsidiary of which we are an eighty percent owner, filed a voluntary petition for relief under the Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). We are continuing to operate our business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. As a result of the filing, our pre-petition obligations, including obligations under debt instruments, may not be generally enforceable against us, and any actions to collect pre-petition indebtedness and most legal proceedings are automatically stayed, unless the stay is lifted by the Bankruptcy Court. For more information about the filing, see “Item 1. Business — Proceedings Under Chapter 11 of the Bankruptcy Code.”

exemption from registration pursuant to Rule 506 of Regulation D promulgated by the SEC. The convertible notes were purchased by Highbridge International LLC, Isotope Limited, AG Domestic Convertibles LP, AG Offshore Convertibles LTD, Shepherd Investments International, Ltd., and Stark Trading. Between the dates of September 2 and September 21, 2004, we received written correspondence from all of the initial purchasers of the convertible notes stating that it was their position that we had made certain misrepresentations in connection with the sale of the notes. No legal action has been filed by any of the purchasers with regard to their claims and we will aggressively defend any such action in the event it is filed. On December 6, 2004, U.S. Bank National Association, as indenture trustee, filed proofs of claim in our bankruptcy case on behalf of the noteholders in the amount of $100.7 million, plus any other amounts owing pursuant to the terms of the indenture and reimbursement of the trustee’s fees and expenses. In addition, on March 18, 2005, R2 Investments, LDC filed a proof of claim in the amount of $70.4 million plus interest, fees and expenses based on its holdings of 70% of the notes, which were acquired through secondary trading.

We are named in two wage and hour cases in New Jersey that have been brought under state law, one of which has been brought on behalf of a putative class of route sales representatives. The case involving the putative class is captioned Ruzicka, et al. v. Interstate Brands Corp., et al., No. 03-CV 2846 (FLW) (Sup. Ct., Ocean City, N.J.), and the other case is captioned McCourt, et al. v. Interstate Brands Corp., No. 1-03-CV-00220 (FLW) (D.N.J.). As a result of our Chapter 11 filing, these cases were automatically stayed. However, the automatic stay was lifted, and as a result of a mediation in late July 2008, the parties have reached agreement in principle to settle these cases through an allowed, pre-petition general unsecured claim in the amount of $2.0 million, which is subject to Bankruptcy Court and New Jersey Federal Court approval.

As previously disclosed and as last updated in our fiscal 2008 first quarter Form 10-Q, the EPA has made inquiries into the refrigerant handling practices of companies in our industry. In September 2000, we received a request for information from the EPA relating to our handling of regulated refrigerants, which we historically have used in equipment in our bakeries for a number of purposes, including to cool the dough during the production process. The EPA has entered into negotiated settlements with two companies in our industry, and has offered a partnership program to other members of the bakery industry that offered amnesty from fines if participating companies converted their equipment to eliminate the use of ozone-depleting substances. Because we had previously received an information request from the EPA, the EPA/Department of Justice (DOJ) policies indicated that we were not eligible to participate in the partnership program. Nevertheless, we undertook our own voluntary program to convert our industrial equipment to reduce the use of ozone-depleting refrigerants. Prior to our Chapter 11 filing, we had undertaken negotiations with the EPA to resolve issues that may have existed regarding our historic management of regulated refrigerants. The DOJ, on behalf of the United States of America, filed a proof of claim in our bankruptcy case on March 21, 2005 based upon our refrigerant handling practices. Although the proof of claim does not set forth a specific amount, the claimants allege more than 3,400 violations during the period from 1998 through 2002 and assert that each violation is subject to penalties of up to $27,500 per day. We re-opened settlement negotiations with the DOJ and EPA, and as a result of those negotiations, we have reached an agreement in principle to settle the DOJ and EPA’s claims through an allowed, pre-petition, general unsecured claim in the amount of approximately $1.1 million, which is subject to Bankruptcy Court approval.

As previously disclosed and as last updated in our fiscal 2008 second quarter Form 10-Q, the South Coast Air Quality Management District in California, or SCAQMD, issued a Notice of Violation on June 11, 2003 alleging that we had failed to operate catalytic oxidizers on bakery emissions at our Pomona, California facility in accordance with the conditions of that facility’s Clean Air Act Title V Permit. Among other things, that permit requires that the operating temperatures of the catalytic oxidizers be at least 550 degrees Fahrenheit. Under the South Coast Air Quality Management District rules, violations of permit conditions are subject to penalties of up to $1,000 per day, for each day of violation. The Notice of Violation alleges we were in violation of the permit through temperature deviations on more than 700 days from September 1999 through June 2003. Since that time, four additional instances of alleged violations, some including more than one day, have been cited by the SCAQMD. We are cooperating with the SCAQMD, have taken steps to remove the possible cause of the deviations alleged in the Notice of Violation, applied for and received a new permit, and have replaced the oxidizers with a single, more effective oxidizer. The SCAQMD filed a proof of claim dated December 8, 2004 in our bankruptcy case for $0.2 million in civil penalties. We have reached an agreement in principle to settle the SCAQMD claim through an allowed, pre-petition, general unsecured claim in the amount of $150,000, which is awaiting finalization of a stipulation to be filed with the Bankruptcy Court.

As previously disclosed and as last updated in our fiscal 2008 first quarter Form 10-Q, we are involved in a dispute regarding the proper characterization of the American Bakers Association Retirement Plan, or ABA Plan. We believe that the ABA Plan has been historically administered as a multiple employer plan under ERISA and tax rules and should be treated as such. The ABA Plan contends it should be treated as an aggregate of single employer plans under ERISA, which is also how it is reflected in our financial statements. We have reflected our interest in the ABA Plan as an aggregate of single employer plans despite our position on the proper characterization of the ABA Plan due to representations we received from the ABA Plan and a 1979 determination issued by the Pension Benefit Guaranty Corporation (PBGC) (as discussed below). However, the PBGC, which is the federal governmental agency that insures and supervises defined benefit pension plans, revisited its 1979 determination that the ABA Plan was an aggregate of single employer plans and after reviewing the status of the ABA Plan, on August 8, 2006, made a final determination that the ABA Plan is a multiple employer plan under ERISA. On August 9, 2006, we filed a lawsuit in Bankruptcy Court seeking enforcement of the PBGC’s determination, but there can be no assurance as to whether we will obtain such enforcement or the amount of any reduction to our net benefit obligation liability. Accordingly, due to the lack of a definitive resolution of this uncertainty prior to the end of the fiscal periods presented herein, as noted above we have continued to reflect our interests in the ABA Plan as an aggregate of single employer plans.

On May 3, 2006, Sara Lee Corporation instituted proceedings against the ABA Plan and the Board of Trustees of the Plan (the “Board of Trustees”) in the United States District Court for the District of Columbia. Sara Lee Corporation v. American Bakers Ass’n Retirement Plan, et al., Case No. 1:06-cv-00819-HHK (D.D.C.) (the “Sara Lee Litigation”). The relief Sara Lee seeks includes, among other things, a mandatory injunction that would compel the ABA Plan and the Board of Trustees to (i) require all participating employers in the ABA Plan with negative asset balances — which would include the Company — to make payments to the Plan in order to maintain a positive asset balance and (ii) cut off the payment from the ABA Plan of benefits to employee-participants of the Company and other participating employers with negative asset balances, to the extent such employers did not maintain a positive balance. However, the Sara Lee Litigation is premised on the notion that the ABA Plan is an aggregate of single employer plans, which is inconsistent with the PBGC’s determination dated August 8, 2006 that the ABA Plan is a multiple employer plan. On September 29, 2006, Sara Lee filed an amended complaint adding the PBGC as a defendant and challenging the PBGC’s August 8, 2006 determination. In order to obtain a resolution of these matters without litigation over the proper forum, we have voluntarily stayed our lawsuit in Bankruptcy Court seeking enforcement of the August 8, 2006 determination upon the agreement by the ABA Plan and its Board of Trustees to join IBC as a party to the Sara Lee Litigation.

On December 4, 2006, the ABA Plan and the Board of Trustees served a summons upon us as a third party defendant to a Third Party Complaint filed in the Sara Lee Litigation against Sara Lee and the other participating employers in the ABA Plan. The Third Party Complaint seeks a declaratory judgment as to the nature of the ABA Plan and further asserts that the August 8, 2006 determination was arbitrary and capricious and should be rescinded. At this time, we believe all relevant parties have been joined to the Sara Lee Litigation and the District Court for the District of Columbia will review the PBGC’s determination.

On November 22, 2006, the ABA Plan and the Board of Trustees filed a motion in the bankruptcy court seeking an order requiring IBC to file an application with the Internal Revenue Service requesting a waiver of the minimum funding requirements applicable to the ABA Plan or, in the alternative, make $3.9 million of contributions to the ABA Plan no later than June 15, 2007. On December 8, 2006, the Bankruptcy Court denied the ABA motion.

On April 4, 2007, the PBGC filed a motion for summary judgment in the Sara Lee case asking the court to enforce the PBGC’s August 8, 2006 determination that the ABA Plan is a multiple employer plan. Briefing on the PBGC’s motion for summary judgment concluded on June 8, 2007, and oral argument was heard on July 2, 2007. On September 11, 2007, the District Court issued a partial ruling on the PBGC’s motion for summary judgment. In its opinion, the District Court agreed with the PBGC and IBC as to the requisite standard for its review, but declined to review the PBGC’s August 8, 2006 determination until after it could decide whether the administrative record filed by the PBGC was complete. On August 27, 2008, the District Court ruled that the administrative record was complete. We now await the District Court’s ruling on the PBGC’s August 8, 2006 determination.

We record accruals for contingencies, such as legal proceedings, in accordance with SFAS No. 5, Accounting for Contingencies. See Note 2. Description of Business and Significant Accounting Policies to our consolidated

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Prior to our bankruptcy filing, our common stock was listed on the New York Stock Exchange, or NYSE, and was traded under the symbol “IBC.” As a result of our bankruptcy filing, our common stock was delisted from the NYSE immediately in accordance with Section 802.00 of the NYSE Listed Company Manual. Our common stock now trades on the over-the-counter market under the symbol “IBCIQ.”

As of August 15, 2008, we had issued and outstanding 45,202,826 shares of our common stock, which were held of record by 2,776 persons (excluding account holders in our 1991 Employee Stock Purchase Plan). Giving effect to our senior subordinated convertible notes, common stock equivalents, we had issued and outstanding 55,101,267 shares of our common stock as of August 15, 2008.

The table below presents the range of high and low sales prices of our common stock by quarter for each fiscal quarter in fiscal 2008 and 2007:

Stock Price


Fiscal Year	Quarter		High		Low
2008		1	$	3.00	$	1.00
		2		1.25		0.04
		3		0.07		0.01
		4		0.12		0.02

2007		1	$	8.45	$	4.60
		2		5.20		2.50
		3		3.60		2.11
		4		4.00		2.55

Under the DIP Facility, we are prohibited from paying dividends on our common stock. As a result, no dividends were paid in fiscal 2008 or fiscal 2007.

On August 12, 2004, we issued $100.0 million aggregate principal amount of our 6.0% senior subordinated convertible notes due August 15, 2014 in a private placement to six institutional accredited investors under an exemption from registration pursuant to Rule 506 of Regulation D promulgated by the SEC. Purchasers received an option to purchase in the aggregate up to $20.0 million in additional notes for a period of 60 days following the closing, which was not exercised. The convertible notes were purchased by Highbridge International LLC, Isotope Limited, AG Domestic Convertibles LP, Shepherd Investments International, Ltd., AG Offshore Convertibles LTD, and Stark Trading. The notes are convertible at the option of the holder under certain circumstances into shares of our common stock at an initial conversion rate of 98.9854 shares per $1,000 principal amount of notes (an initial conversion price of $10.1025 per share), subject to adjustment. We used the net proceeds of the offering to prepay our principal payments due under our senior secured credit facility over the course of the next four quarters and for general corporate purposes, improving our near-term liquidity and financial flexibility.

See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” below for a further discussion regarding equity compensation plan information.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Issuer Purchases of Equity Securities (A)


					*Total Number of*		*Maximum Number (or*
					*Shares (or Units)*		*Approximate Dollar*
					*Purchased as Part*		*Value) of Shares (or*
	*Total Number of*		*Average Price*		*of Publicly*		*Units) that May Yet Be*
	*Shares (or Units)*		*Paid per Share*		*Announced Plans*		*Purchased Under the*
*Period*	**Purchased(B)**		*(or Unit)*		*or Programs*		*Plans or Programs*
Period 1 June 3-June 30, 2007		4	$	2.90		4		7,396,627
Period 2 July 1-July 28, 2007		3	$	2.30		3		7,396,624
Period 3 July 29-Aug 25, 2007		2	$	1.30		2		7,396,622
Period 4 Aug 26-Sept 22, 2007		4	$	1.14		4		7,396,618
Period 5 Sept 23-Oct 20, 2007		2	$	0.50		2		7,396,616
Period 6 Oct 21-Nov 17, 2007		—		—		—		7,396,616
Period 7 Nov 18-Dec 15, 2007		—		—		—		7,396,616
Period 8 Dec 16, 2006-Jan 12, 2008		—		—		—		7,396,616
Period 9 Jan 13-Feb 9, 2008		—		—		—		7,396,616
Period 10 Feb 10-March 8, 2008		—		—		—		7,396,616
Period 11 March 9-April 5, 2008		—		—		—		7,396,616
Period 12 April 6-May 3, 2008		—		—		—		7,396,616
Period 13 May 4-May 31, 2008		—		—		—		7,396,616


Total		15	$	1.77		15		7,396,616


(A)		Since May 11, 1999, our Board has authorized the purchase of approximately 11.0 million shares of our common stock. Prior to the Chapter 11 filing, management had the discretion to determine the number of the shares to be purchased, as well as the timing of any such purchases, with the pricing of any shares repurchased to be at prevailing market prices. As of May 31, 2008, 7,396,616 shares of our common stock were available to be purchased under this stock repurchase program. As a result of our Chapter 11 filing and restrictions imposed by the DIP Facility, however, the program has effectively been suspended since the filing.

(B)		Repurchases resulted from the repurchase of fractional shares upon issuance of certificates representing stock held in the Employee Stock Purchase Plan. This plan was terminated in conjunction with the Bankruptcy filing in September 2004.

ITEM 6. SELECTED FINANCIAL DATA

INTERSTATE BAKERIES CORPORATION
FIVE-YEAR SUMMARY OF FINANCIAL DATA


	Fifty-Two						Fifty-Three			Fifty-Two
	Weeks Ended						Weeks Ended			Weeks Ended
	May 31,			June 2,			June 3,			May 28,			May 29,
	2008			2007			2006			2005			2004
	(1)			(3)(4)			(5)			(7)(8)			(9)
				*(dollars and shares in thousands, except per share data)*
Statements of Operations

Net sales	$	2,798,337		$	2,917,268		$	3,060,473		$	3,403,505		$	3,467,562

Cost of products sold (exclusive of depreciation and amortization) (2)		1,440,609			1,489,019			1,552,731			1,724,054			1,733,303

Operating income (loss)		(64,572	)		(39,641	)		(56,368	)		(335,536	)		(18,326	)
% of net sales		(2.3	)%		(1.4	)%		(1.8	)%		(9.8	)%		(0.5	)%

Income (loss) before cumulative effect of accounting change	$	(143,684	)	$	(112,848	)	$	(127,300	)	$	(379,280	)	$	(33,370	)
Cumulative effect of accounting change (6)		—			—			(1,017	)		—			—


Net income (loss)	$	(143,684	)	$	(112,848	)	$	(128,317	)	$	(379,280	)	$	(33,370	)
% of net sales		(5.1	)%		(3.9	)%		(4.2	)%		(11.1	)%		(1.0	)%

Income (loss) per share before cumulative effect of accounting change:
Basic and diluted	$	(3.18	)	$	(2.50	)	$	(2.82	)	$	(8.43	)	$	(0.74	)

Common stock dividends per share		—			—			—			—			0.21

Weighted average common shares outstanding:
Basic and diluted		45,195			45,171			45,124			45,010			44,868

Balance Sheets

Total assets	$	958,357		$	1,081,392		$	1,253,055		$	1,398,650		$	1,673,797
Long-term debt, excluding current maturities (10)		—			—			—			—			10,362
Stockholders’ equity (deficit)		(461,714	)		(318,741	)		(240,583	)		(116,924	)		261,708


(1)		Fiscal 2008 operating loss includes net restructuring charges of approximately $5.7 million relating to a sales reorganization to improve the structure and efficiency of the sales and route delivery of our baked goods and the closure of four bakeries and the consolidation of related depots and routes in conjunction with exiting the Southern California bread market; and property and equipment impairment of approximately $10.5 million related to the closing of the four bakeries.

(2)		Depreciation and amortization excluded from cost of products sold amounted to approximately $50.4 million, $51.0 million, $59.7 million, $70.2 million, and $71.6 million in fiscal 2008, 2007, 2006, 2005, and 2004, respectively.

(3)		Fiscal 2007 operating loss includes net restructuring credits of approximately $4.1 million relating to gains realized on the sale of restructuring related assets partially offset by costs related to certain closings and restructurings of bakeries, depots and bakery outlets; and a machinery and equipment impairment of approximately $1.4 million.

(4)		Fiscal 2007 stockholders’ deficit reflects a reduction of approximately $33.4 million related to a change in accounting for pension and other postretirement obligations due to our adoption of the recognition and disclosure requirements of Statement of Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

(5)		Fiscal 2006 operating loss includes net restructuring credits of approximately $27.2 million relating to gains realized on the sale of restructuring related assets partially offset by costs related to certain closings and restructurings of bakeries, depots and bakery outlets; and a machinery and equipment impairment of approximately $4.8 million.

(6)		In fiscal 2006, as a result of adopting FIN 47, we recorded a cumulative effect of an accounting change of approximately $1.0 million, or $0.02 per share, and a liability of the same amount as the related asset values were fully depreciated as of June 3, 2006.


(7)		Fiscal 2005 operating loss includes goodwill and other intangible asset impairments of approximately $229.5 million; restructuring charges of approximately $54.3 million relating to the closures of five bakeries, a general workforce reduction and other cost reductions; settlement of class action litigation of approximately $8.7 million; and a net curtailment loss from the suspension of our Supplemental Employee Retirement Plan of $10.3 million.

(8)		Fiscal 2005 net loss includes a tax valuation allowance adjustment of $5.6 million related to deferred tax assets originating in prior years.

(9)		Fiscal 2004 operating loss includes restructuring charges of approximately $12.1 million relating to the closures of three bakeries, severance costs in connection with the centralization of certain finance and data maintenance administrative functions and the relocation of certain key management employees in conjunction with our new more centralized organizational structure and settlement of class action litigation of approximately $3.0 million.

(10)		At May 31, 2008, we included our Senior Secured Credit Facility in liabilities subject to compromise. See Note 7. Debt to our consolidated financial statements regarding this reclassification. In all prior years presented, we have reflected the total amount due under our Senior Secured Credit Facility as amounts payable within one year due to our default under this facility. See Note 1. Voluntary Chapter 11 Filing to our consolidated financial statements regarding going concern considerations.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMPANY OVERVIEW

Interstate Bakeries Corporation is one of the largest wholesale bakers and distributors of fresh baked bread and sweet goods in the United States, producing, marketing, distributing and selling a wide range of breads, rolls, croutons, snack cakes, donuts, sweet rolls and related products. Our various brands are positioned across a wide spectrum of consumer categories and price points. We operate 41 bakeries and approximately 740 bakery outlets located in strategic markets throughout the United States. Our sales force delivers baked goods from approximately 600 distribution centers on approximately 6,000 delivery routes.

Our net sales are affected by various factors, including our marketing programs, our pricing actions, competitors’ activities and consumer preferences. We recognize sales, net of estimated credits for dated and damaged products, when our products are delivered to our customers.

Our cost of products sold consists of labor costs, ingredients, packaging, energy and other production costs. The primary ingredients used in producing our products are flour, sweeteners, edible oils, yeast, cocoa and the ingredients used to produce our extended shelf life products.

Our selling, delivery and administrative expenses include the employee costs and transportation costs of delivering our product to our customers; the employee costs, occupancy and other selling costs of our bakery outlets; the costs of marketing our products and other general sales and administrative costs not directly related to production.

We end our fiscal year on the Saturday closest to the last day of May. Consequently, most years contain 52 weeks of operating results while every fifth or sixth year includes 53 weeks. In addition, each quarter of our fiscal year represents a period of 12 weeks, except the third quarter, which covers 16 weeks, and the fourth quarter of any 53-week year, which covers 13 weeks.

Our financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Because of the Chapter 11 process and our recurring losses from operations, negative working capital, downward sales trends, and the potential lack of liquidity should we be unable to successfully reorganize under Chapter 11, there is substantial doubt that we can continue as a going concern. Our continuation as a going concern is dependent upon, among other things, our ability to evaluate and execute various alternatives including the sale of some or all of our assets, infusion of capital, debt restructuring and the development, confirmation and implementation of a new or revised plan of reorganization, our ability to comply with the terms of the DIP Facility, our ability to negotiate an extension of, and increase in the amount available under, our DIP Facility, if needed, or refinance our DIP Facility at its maturity, our ability to implement our restructuring activities, our ability to obtain concessions from our labor unions, our ability to obtain financing upon exit from bankruptcy, our ability to implement the Second Amended Plan, if confirmed by the Bankruptcy Court, and the transactions contemplated thereby and our ability to generate sufficient cash from operations to meet our obligations and any combination of these factors. In the event our restructuring activities are not successful and we are required to liquidate, additional significant adjustments would be necessary in the carrying value of assets and liabilities, the revenues and expenses reported and the balance sheet classifications used.

Further, a plan of reorganization could materially change the amounts and classifications reported in the consolidated financial statements, which do not give effect to any adjustments to the carrying value or the classification of assets or liabilities that might be necessary as a consequence of a plan of reorganization.

OVERVIEW OF CERTAIN TRENDS AND EVENTS AFFECTING OPERATIONS, FINANCIAL POSITION AND LIQUIDITY

The demand for our products has declined in recent years. During fiscal 2008, our revenues and total unit volumes of branded bread and sweet goods declined. We continue to experience reduced demand for our products, and we expect that this trend will continue. Data from IRI indicates that the declining trend in bread and sweet goods was evident in the industry in fiscal 2008.

In light of our declining revenue and the significant upward cost pressure we are experiencing, discussed in more detail below, we have undertaken a detailed review of the competitive environment in all of our markets and for all of our product lines, including sweet goods, bread and buns and rolls, and implemented a significant price increase in many of our products and across virtually all markets in fiscal 2008. We cannot assure you that these steps will be effective in addressing declines in our revenues or maintaining our operating margins or will fully offset the cost pressure we are experiencing.

We believe that the recent national awareness regarding obesity trends in children and adults and related issues has had an impact on the eating habits of many consumers and, as a result, consumers have changed and will continue to change their consumption of bread products and sweet goods. While the long-term impact of consumers concerned about eating habits, including consumption of carbohydrates, calories, and fat is still unclear, changes in consumption habits could impact demand for our products going forward. As a result of the awareness regarding childhood obesity, Congress ordered the Federal Trade Commission (FTC) to gather information from certain food manufacturers related to advertising to children. On August 7, 2007, the FTC issued an Order To File Special Report to 44 food manufacturers, including the Company. The Order required the Company to provide detailed information on its snack cake marketing activities during calendar 2006. The Company submitted its response as requested by the FTC.

In addition, dietary guidelines could result in further reduced demand for our products. The Department of Health and Human Services and Department of Agriculture’s guidelines provide dietary advice aimed at promoting health and reducing the risk for major chronic diseases, and serve as the basis for federal food and nutrition education programs. The guidelines recommend limiting the intake of saturated and trans fats, cholesterol, added sugar, salt and alcohol. Although virtually all of our bread products and such key iconic Hostess sweet goods as Twinkies and Ho Hos have the “0 grams” trans fat label under the Food and Drug Administration’s labeling regulations that became effective January 1, 2006, certain of our products, primarily those that are fried or Kosher, contain trans fat, which is declared on the products’ labels. With respect to our new product offerings, we intend to introduce only those new products that can properly be labeled with the “0 grams” trans fat declaration to assist those consumers concerned about their trans fat consumption. There can be no assurance that these and other actions that we may take will offset the effect, if any, of the guidelines’ recommendation. The guidelines also recognize that whole grains are an important source of fiber and nutrients and recommend an increased consumption of whole grain products by substituting whole grain products for some enriched bread products. We have a number of whole grain products among our product offerings. However, the substantial majority of our bread revenues are from the sale of white bread and other refined grain bread products. There can be no assurance that, if consumers increase their consumption of whole grain products as a result of the new guidelines, they will increase consumption of our whole grain product offerings or that such consumption will offset any reduced consumption of our enriched bread products.

To address these and other market trends, increase sales and grow our earnings over time, we have introduced new products. In the third quarter of fiscal 2008, we introduced the following Hostess 100 Calorie Pack products on a national basis: blueberry streusel muffins, banana streusel muffins and cinnamon streusel coffee cake.

We also face increasingly intense price competition. Declining unit sales in certain product categories (such as the premium white bread and private label segments) and more efficient production methods (including extended shelf life programs) have resulted in excess industry capacity. This and retail channel consolidation have increased the bargaining leverage of wholesale customers and resulted in increasingly intense price competition. Given the nature of the bakery market, the success of our price increases is highly dependent on the response of consumers and our competitors.

Our production and distribution facilities represent substantial and largely fixed costs. Relatively robust utilization is needed to break even, and past this break even point, an increasing volume of production is normally increasingly profitable. The combined effects of net sales and unit volume declines and the success of our extended shelf life programs resulted in unused capacity in our system. As a consequence, and in connection with our comprehensive review of our operations to determine the appropriate actions necessary to restructure our business following our Chapter 11 filing, we performed an exhaustive review of each of our PCs (now referred to as business units) on an individual basis in order to address continued revenue declines and our high-cost structure. In part to address the

unused capacity in our system, we have closed 14 bakeries since fiscal 2004. We continue to examine our production capacity and may, as a result, close additional facilities in the future.

The major ingredients and energy used to produce our products, and the energy used to distribute them (primarily motor vehicle fuels), are commodities that are generally widely available and that fluctuate in price, sometimes rapidly. Although we utilize commodity hedging derivatives to protect against price increases, there can be no assurance that our hedging strategies will be successful in mitigating future fluctuations in the prices of such commodities. Numerous commodities have recently been at record levels, and commodity markets are experiencing unprecedented volatility. The increase in commodity prices has had a significant negative impact on our margins. In an effort to offset the negative impact of this trend, we have increased the prices of our products and intend to implement future price increases as warranted. Notwithstanding the impact of this trend of increasing commodity costs on the industry as a whole, we can provide no assurance that our price increases will offset the negative impact of these rising costs, that we will not experience unit volume declines as a result of our actions or that competitive pressures will allow us to implement future price increases or maintain current pricing in the future. Additionally, our current financial situation could impede our ability to manage commodity price risks.

Our largest cost is labor. As with many other highly unionized businesses, our labor costs have been rising. Since a very substantial portion of the workforce in our bakeries and distribution networks is unionized, our costs are generally higher and our ability to implement productivity improvements and effect savings with respect to health care, pension and other retirement costs is more restricted than in many nonunion operations as a result of various restrictions specified in our collective bargaining agreements. Although we received concessions from certain of our unionized employees during our profit center restructuring process, we do not believe that these concessions are sufficient to allow us to successfully emerge from bankruptcy. We engaged in discussions with representatives of the two labor organizations representing approximately 91% of our unionized employees, the Bakery Confectionery, Tobacco Workers & Grain Millers International Union and International Brotherhood of Teamsters, to achieve further concessions, including greater flexibility in the method and manner by which we distribute our products to our customers and cost reductions related to health and welfare programs. No agreement with the IBT was reached. We reached agreement with the BCTGM, which is in effect for all of its local bargaining units. We also reached agreements with all but one of the other unions representing our employees, which agreements are in effect. The collective bargaining agreements with our unions also stipulate the amount of contributions that we and other companies must make to union-sponsored, multi-employer pension plans in which our employees participate and, as a result, we may be obligated to make additional contributions or incur withdrawal liability with respect to such plans, as more fully discussed in “Item 1A. Risk Factors.”

As of May 31, 2008, we had approximately $25.1 million in available cash and $53.0 million available for borrowing under the DIP Facility. This compares to the $67.2 million in available cash and $90.3 million available for borrowing under the DIP Facility as of June 2, 2007. As a result of an amendment to our DIP Facility, we have approximately $80.0 million available for borrowing as of the date of this filing. We cannot assure you that the amount of cash available from operations and from our DIP Facility will be sufficient to fund operations until such time as we are able to propose a revised or new plan of reorganization that will receive the requisite acceptance by creditors, equity holders and parties in interest and be confirmed by the Bankruptcy Court. In the event that cash flows and available borrowings under the DIP Facility are not sufficient to meet our cash requirements, we may be required to seek additional financing. In addition, the maturity date of the DIP Facility has been extended to February 9, 2009. We can provide no assurance that we will be able to negotiate a further extension of the maturity date and increased borrowing availability with our lenders or that additional or replacement financing will be available prior to or following the DIP Facility maturity date or, if available, offered on acceptable terms. Failure to obtain such extension and increase or additional or replacement financing will have a material adverse impact on our ability to operate as a going concern.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements included herein have been prepared assuming we can continue as a going concern. Because of the Chapter 11 process and our recurring losses from operations, negative working capital, downward sales trends, and the potential lack of liquidity should we be unable to successfully reorganize under Chapter 11, it is possible that we may not be able to continue as a going concern.

Our significant accounting policies are discussed in Note 2. Description of Business and Significant Accounting Policies to our consolidated financial statements. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. These estimates and assumptions are evaluated on an on-going basis and are based upon many factors, including historical experience, consultation with outside professionals, such as actuaries, and management’s judgment. Actual results could differ from any estimates made and results could be materially different if different assumptions or conditions were to prevail.

We believe the following represents our critical accounting policies and estimates, involving those areas of financial statement preparation which are most important to the portrayal of our financial condition and results and which require management’s most difficult, subjective and complex judgments.

Accounting and Financial Reporting Under Statement of Position 90-7

The consolidated financial statements reflect adjustments in accordance with the American Institute of Certified Public Accountants’ Statement of Position 90-7 Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7), which we adopted for financial reporting for periods ending after September 22, 2004. In the Chapter 11 proceedings, substantially all pre-petition liabilities are subject to compromise except for secured debt and those other liabilities that we currently anticipate will not be impaired pursuant to a confirmed plan of reorganization. For financial reporting purposes through guidance provided by SOP 90-7, those liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Chapter 11 proceedings are segregated and classified as liabilities subject to compromise in the consolidated balance sheet. The ultimate amount of and settlement terms for our pre-petition liabilities are accordingly not presently determinable.

Reorganization items are expense or income items that we incurred or realized because we are in bankruptcy. Through guidance provided by SOP 90-7, these expense or income items which would include professional fees and similar types of expenses incurred that directly relate to the Chapter 11 proceedings, loss accruals or gains or losses resulting from activities of the reorganization process, payroll related expenses to retain key employees during our reorganization, costs and claims which stem from the rejection of leases, and interest earned on cash accumulated by us because we are not paying a substantial portion of our pre-petition liabilities are all aggregated and reported separately as reorganization charges. In addition, interest is accrued and reported as expense only to the extent that it will be paid during the Chapter 11 proceedings or that it is probable that it will be an allowed claim under the bankruptcy proceedings.

Reserves for Self-Insurance and Postretirement Benefits

We maintain insurance programs covering our exposure to workers’ compensation, general and vehicle liability and health care claims. Such programs include the retention of certain levels of risks and costs through high deductibles and other risk retention strategies. Reserves for these exposures are estimated for reported but unpaid losses, as well as incurred but not reported losses, for our retained exposures and are calculated based upon actuarially determined loss development factors and expected long-term medical cost trend rates, as well as other assumptions considered by management, including assumptions provided by our external insurance brokers, consultants and actuaries. The factors and assumptions used for estimating reserves are subject to change based upon historical experience, changes in expected cost and inflation trends, discount rates and other factors.

The reserves, including both the current and long-term portions, as well as the portion included in liabilities subject to compromise, recorded by us for these liabilities amounted to approximately $252.3 million and $264.5 million at May 31, 2008 and June 2, 2007, respectively.

Pension Obligations

We record the pension cost and the liability related to our defined benefit plan and the American Bakers Association Retirement Plan, or ABA Plan, based on actuarial valuations. These valuations include key assumptions determined by management, including discount rate and expected long-term rate of return on plan assets. The expected long-term rate of return assumption considers the asset mix of the plan portfolio, past performance of these assets and

other factors. Changes in pension cost may occur in the future due to changes in the number of plan participants, changes in discount rate, changes in the expected long-term rate of return, changes in the level of contributions to the plan and other factors, including recent pension reform legislation. We have and continue to use immediate recognition of the impact of all actuarial gains (losses) associated with the ABA Plan.

Our pension liabilities for these plans, including both the current and long-term portions, amounted to approximately $70.5 million and $68.8 million at May 31, 2008 and June 2, 2007, respectively.

Long-lived Assets

Property and equipment purchases are recorded at cost or fair market value when acquired as part of a business acquisition. These assets are depreciated based on useful lives, developed by historical experience and management’s judgment.

We periodically assess the net realizable value of our long-lived assets. The assessment of our intangible assets with indefinite lives is performed at least on an annual basis but more frequently whenever events occur which indicate that the carrying value of an asset may be impaired, as these assets are not amortized. The assessment of all other long lived assets is performed only when an event occurs which indicates the carrying value of the asset may be impaired. This assessment involves comparing the asset’s estimated fair value to its carrying value, with the impairment measured as the amount by which the carrying value exceeds the fair value of the asset.

In fiscal 2008 and 2007, we tested for impairment of our intangible assets and our long-lived asset groups. Based upon the results of our testing, we determined that the carrying value of machinery and equipment in certain of our long-lived asset groups exceed our estimate of the related fair value. Accordingly, in fiscal 2008 and 2007 we recorded impairments of approximately $10.5 million and $1.4 million, respectively. Additionally, we recorded an intangible asset impairment charge of approximately $0.6 million in fiscal 2008 related to our exit of the bread market in Southern California.

When we plan to dispose of property by sale, the asset is carried in the financial statements at the lower of the carrying amount or estimated fair value, less cost to sell, and is reclassified to assets held for sale. Additionally, after such reclassification, there is no further depreciation taken on the asset. In order for an asset to be classified as held for sale, management must approve and commit to a formal plan, the sale must be anticipated during the ensuing year and the asset must be actively marketed, be available for immediate sale, and meet certain other specified criteria.

Long-lived assets recorded in our consolidated financial statements at May 31, 2008, include approximately $464.5 million of net property and equipment, $17.6 million of assets held for sale and $158.3 million of intangible assets. At June 2, 2007, our consolidated financial statements include approximately $541.7 million of net property and equipment, $2.0 million of assets held for sale and $160.2 million of intangible assets.

Restructuring (Credits) Charges

Costs associated with an approved plan to materially change either the scope of our operations or the manner in which we conduct business are reported as restructuring charges in our consolidated statements of operations. These restructuring efforts include the closure of a bakery; the partial shut down of a bakery’s production; the closing of distribution and bakery outlet operations; relocation of bakery equipment, production or distribution to another facility; centralization of work effort and other organizational changes.

Management judgments are made with regard to the incurrence of restructuring-related liabilities including severance and related benefits, Multiemployer Pension Plan Amendments Act withdrawal liabilities, exit costs, as well as impairment of long-term assets as described above. Subsequent gains and losses on the sale of such assets are also included in restructuring (credits) charges. We incurred restructuring (credits) charges during fiscal 2008, 2007, and 2006 and anticipate additional charges in future years in connection with our restructuring efforts.

Income Taxes

We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48) on June 3, 2007. FIN 48 prescribes a recognition threshold and a measurement standard for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The recognition and measurement of tax benefits is often highly judgmental. We believe we have adequately provided for any reasonable foreseeable outcome related to these matters; however determinations regarding the recognition and measurement of a tax benefit can change as additional developments occur relative to an issue. Accordingly, our future results may include favorable or unfavorable adjustments to our unrecognized tax benefits.

We provide a valuation allowance against deferred tax assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes if, based on management’s assessment of operating results and other available evidence, it is more likely than not that some or all of the deferred tax assets in each of the jurisdictions in which we operate will not be realized.

Legal Reserves

We are periodically involved in various legal actions. We are required to assess the probability of any adverse judgments as well as the potential range of loss. We determine the required accruals based on management’s judgment after a review of the facts of each legal action and the opinions of outside counsel.

Environmental Liabilities

Our environmental liabilities typically result from the remediation of soil contamination caused by hydraulic lift and underground storage tank leakage and fuel spills at and around depot refueling stations. To manage and assess our environmental related liabilities, we utilize our own employees and outside environmental engineering consultants. We estimate future costs for known environmental remediation requirements and accrue for environmental related liabilities on an undiscounted basis when it is probable that we have incurred a liability and the related costs can be reasonably estimated. The regulatory and government management of these projects is complex, which is one of the primary factors that make it difficult to assess the cost of potential and future remediation of contaminated sites. Adjustments to the liabilities are made when additional information becomes available that affects the estimated remediation costs.

NEWLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note 2. Description of Business and Significant Accounting Policies to our consolidated financial statements for further information regarding newly adopted and recently issued accounting pronouncements.

RESULTS OF OPERATIONS

The following table sets forth the relative percentages that certain income and expense items bear to net sales:


	Fifty-Two			Fifty-Two			Fifty-Three
	Weeks Ended			Weeks Ended			Weeks Ended
	May 31,			June 2,			June 3,
	2008			2007			2006
Net sales		100.0	%		100.0	%		100.0	%
Cost of products sold (exclusive of items shown below)		51.5			51.0			50.7
Selling, delivery and administrative expenses		47.7			47.7			49.1
Restructuring charges (credits)		0.2			(0.1	)		(0.9	)
Depreciation and amortization		2.4			2.5			2.5
Loss on sale or abandonment of assets		0.1			0.3			0.2
Property and equipment impairment		0.4			—			0.2


Operating income (loss)		(2.3	)		(1.4	)		(1.8	)
Interest expense		1.7			1.7			1.7
Reorganization charges, net		1.5			1.1			1.2
Other (income) loss		—			—			—


Income (loss) before income taxes and cumulative effect of accounting change		(5.5	)		(4.2	)		(4.7	)
Provision (benefit) for income taxes		(0.4	)		(0.3	)		(0.5	)


Income (loss) before cumulative effect of accounting change		(5.1	)		(3.9	)		(4.2	)
Cumulative effect of accounting change		—			—			—


Net income (loss)		(5.1)	%		(3.9)	%		(4.2)	%

Reportable Segments

We initiated changes in our reporting system effective for the beginning of fiscal 2008, which resulted in the identification of three distinct reportable segments. The three reportable segments were determined by type of customer and distribution method. Management continues to maintain the wholesale operations and retail operations as reporting segments, but renamed them as route sales and outlet sales, respectively. The third reporting segment, direct sales, was established by segregating certain operations previously reported within wholesale operations that deliver products exclusively through warehouse channels. Our reportable segments are strategic business units that are managed separately using different distribution and marketing strategies. For fiscal 2007 and 2006, to the extent our accounting systems permitted, prior years’ amounts have been revised to reflect the current fiscal year’s segment reporting presentation.

Our route sales, formerly wholesale operations, consist of an aggregation of our operations that manufacture, distribute, and sell fresh baked goods utilizing our direct store delivery system.

Our outlet sales, formerly retail operations, consist of four regions that sell our baked goods and other food items directly to consumers through company-operated outlet locations.

Our direct sales consist of our direct warehouse shipment program, which ships bulk packaged sweet goods and dry products, such as croutons and stuffing mix, directly to customer-owned distribution centers and public warehouses for distribution.

Fiscal 2008 Compared to Fiscal 2007

Net Sales
(dollars in thousands)


	Fifty-Two Weeks Ended					Fifty-Two Weeks Ended					%
	May 31, 2008					June 2, 2007					Increase /
	Amount		%			Amount		%			(Decrease)
Route sales	$	2,425,611		86.7	%	$	2,544,777		87.2	%		(4.7)	%
Outlet sales		296,659		10.6			322,860		11.1			(8.1	)
Direct sales		76,067		2.7			49,631		1.7			53.3


Total net sales	$	2,798,337		100.0	%	$	2,917,268		100.0	%		(4.1	)

Consolidated Net Sales

Net sales for fiscal 2008 were approximately $2,798.3 million, representing a decrease of approximately $118.9 million, or 4.1%, from net sales of approximately $2,917.3 million for fiscal 2007.

Route net sales. Route net sales for fiscal 2008 were approximately $2,425.6 million, representing a decrease of approximately $119.2 million, or 4.7%, from fiscal 2007 net sales of approximately $2,544.8 million. In the second quarter of fiscal 2008, we exited the bread market in Southern California. Included in our reduction in net sales for fiscal 2008 as compared to the prior year is a reduction in net sales of approximately $88.1 million related to our exit of this bread market. To a lesser extent, the reduction in net sales also reflects the transfer of business from our route to our direct sales operations as described below. The decrease in net sales for fiscal 2008 as compared to fiscal 2007 further reflects a unit volume decline, adjusted for our exit of the bread market in Southern California, of 8.3%. Our net sales decrease also was the result of reduced demand for our products principally related to price increases, changes to the depth and frequency of our promotional activities and market actions by our competitors. Our sales declines were partially offset by a unit value increase adjusted for our exit of the bread market in Southern California of 7.6% in fiscal 2008 as compared to the prior year which resulted primarily from selling price increases and product mix changes.

Outlet net sales. Outlet net sales for fiscal 2008 were approximately $296.7 million, representing a decrease of approximately $26.2 million, or 8.1% from fiscal 2007 net sales of approximately $322.9 million. The decline in revenue is attributable to the closing of retail outlets in conjunction with our restructuring efforts. Same store sales were down 1.4% with volume declines related to the effects of retail price increases, exceeding the favorable impact of these increases.

Direct net sales. Direct net sales for fiscal 2008 were approximately $76.1 million, an increase of approximately $26.5 million from net sales of approximately $49.6 million in fiscal 2007. Substantially all of this increase in sales is primarily attributable to a transfer in business from our route operations.

Gross Profit (Exclusive of Depreciation and Amortization)

Gross profit was approximately $1,357.7 million, or 48.5% of net sales, for fiscal 2008, compared to approximately $1,428.2 million, or 49.0%, of net sales in fiscal 2007. Total cost of products sold decreased by approximately $48.4 million, against a decrease in net sales of approximately $118.9 million when compared to fiscal 2007. We continue to experience sharp increases in our commodity costs, as well as in our other components of production. These direct component costs, when compared on a cost per pound of production, increased 14.0% when compared to fiscal 2007, including increases of 11.0% for ingredients, 2.3% for labor and 0.7% for packaging. These cost increases were only partially offset by the effects of our strategic pricing actions and improved levels of product

returns. These lower costs resulted from our decreased distribution of lower margin products, as well as volume declines due to our bakery and outlet closings. The net effect of these changes resulted in a decrease in our gross profit margin percentage of 0.5% as compared to fiscal 2007.

Selling, Delivery and Administrative Expenses

Selling, delivery and administrative expenses were approximately $1,334.4 million, or 47.7% of net sales, for fiscal 2008, representing a decrease of approximately $57.0 million from fiscal 2007’s selling, delivery and administrative expenses of approximately $1,391.4 million, or 47.7% of net sales. As a percent of net sales, selling, delivery and administrative expense remained constant between fiscal 2008 and 2007. This resulted primarily from a 0.4% decrease in labor and labor-related costs as a percent of net sales, which included (1) our exit of the bread market in Southern California during the second quarter of fiscal 2008 and (2) a favorable reduction in net pension expense when compared to fiscal 2007. This labor cost decrease was completely offset by an increase in our energy costs of 0.3% as a percentage of net sales centered principally in our delivery and distribution system for route sales and a 0.1% increase in all other selling and administrative expenses combined as a percent of net sales when compared with the prior year.

Restructuring Charges

During fiscal 2008, we realized net restructuring charges related principally to restructuring activities initiated in fiscal 2008 of approximately $5.7 million, which was composed of severance and related benefit costs of approximately $7.2 million and other exit costs of approximately $2.0 million including facility closure costs such as cleanup, security, relocation, utilities, and taxes. These charges were partially offset by net gains of approximately $3.5 million recognized on the sale of machinery, equipment and real estate. See Note 14. Restructuring Charges (Credits) to our consolidated financial statements for further information.

During fiscal 2007, we realized a net restructuring credit of approximately $4.1 million, which was composed of net gains on the sale of assets of approximately $7.8 million and severance credits of approximately $0.4 million related to accrual adjustments for previously estimated employee terminations. These gains were partially offset by asset impairment charges of approximately $2.3 million and other exit costs of approximately $1.8 million. The other exit costs include facility closure costs such as cleanup, security, relocation, utilities, and taxes.

Property and Equipment Impairment

In fiscal 2008 and 2007, we tested our long-lived assets for recoverability and determined that the carrying value of certain of our asset groups exceeded our estimate of the related fair value. Accordingly we recorded impairment losses of approximately $10.5 million and $1.4 million in fiscal 2008 and 2007, respectively.

Operating Income (Loss)
(dollars in thousands)


	Fifty-Two Weeks Ended						Fifty-Two Weeks Ended						%
	May 31, 2008						June 2, 2007						Increase /
	Amount			%			Amount			%			(Decrease)
Segment Income (Loss)
Route sales	$	11,060			(17.1)	%	$	28,798			(72.6)	%		(61.6)	%
Outlet sales		21,007			(32.5	)		10,902			(27.5	)		92.7
Direct sales		6,773			(10.5	)		3,595			(9.1	)		88.4


Total segment income (loss)		38,840			(60.1	)		43,295			(109.2	)		(10.3	)
Corporate		(103,412	)		160.1			(82,936	)		209.2			(24.7	)


Total operating income (loss)	$	(64,572	)		100.0	%	$	(39,641	)		100.0	%		(62.9	)

Consolidated Operating Income (Loss)

Based upon the above factors, the operating loss for fiscal 2008 was approximately $64.6 million, representing an increase in our operating loss of approximately $25.0 million from the prior year’s operating loss of approximately $39.6 million. The operating loss for fiscal 2008 and 2007 includes net charges of approximately $20.6 million and $4.6 million, respectively, for restructuring activities, loss on sale or abandonment of assets and property and equipment impairment charges.

Route operating income. Route operating income for fiscal 2008 was approximately $11.1 million, representing a decrease of approximately $17.7 million over operating income for fiscal 2007 of approximately $28.8 million. The decrease in operating profit was attributable to a 4.7% decrease in net route sales of approximately $119.2 million, which was only partially offset by a 4.0% decrease in route operating costs of approximately $101.5 million. The decline in route segment profitability is primarily attributable to unit volume declines along with direct component cost increases, principally ingredients and labor.

Outlet operating income. Outlet operating income for fiscal 2008 was approximately $21.0 million representing an improvement of approximately $10.1 million over operating income for fiscal 2007 of approximately $10.9 million. This gain was attributable to an 8.1% reduction in net outlet sales of approximately $26.2 million, which was more than offset by an 11.6% decrease in outlet operating costs of approximately $36.3 million. This improvement is attributable to our continued efforts to identify and close less profitable outlet locations, as well as our strategy to rationalize outlet pricing.

Direct operating income. Direct operating income for fiscal 2008 was approximately $6.8 million representing an improvement of approximately $3.2 million over operating income for fiscal 2007 of approximately $3.6 million. This gain resulted from an increase in net direct sales of approximately $26.5 million, substantially all of which was attributable to a transfer of business from our route operations, partially offset by an increase in direct operating costs of approximately $23.2 million.

Reorganization Charges

In fiscal 2008, we incurred a net reorganization charge of approximately $42.7 million. This charge related to expense or income items that we incurred or realized because we are in reorganization under Chapter 11 of the Bankruptcy Code. The cost of these activities included (1) professional fees and similar types of expenses incurred directly related to the Chapter 11 proceedings of approximately $39.9 million; (2) payroll related expenses to retain key employees during our reorganization of approximately $0.1 million; (3) losses realized as we rejected certain of our lease agreements of approximately $0.5 million; and (4) debt fees written off of approximately $5.3 million (see Note 7. Debt to our consolidated financial statements for further information); partially offset by (5) interest earned of approximately $1.5 million on cash accumulated by us because we are not paying a substantial portion of our pre-petition liabilities; and (6) gains realized on the sale of our excess properties of approximately $1.6 million.

In fiscal 2007, we incurred a net reorganization charge of approximately $32.6 million. The cost of these activities included (1) professional fees and similar types of expenses incurred directly related to the Chapter 11 proceedings of approximately $35.3 million; (2) payroll related expenses to retain key employees during our reorganization of approximately $1.0 million; and (3) losses realized as we rejected certain of our lease agreements of approximately $0.2 million; partially offset by (4) interest earned of approximately $3.1 million on cash accumulated by us because we are not paying a substantial portion of our pre-petition liabilities; and (5) gains realized on the sale of our excess properties of approximately $0.8 million.

Interest Expense

Interest expense for fiscal 2008 was approximately $46.4 million, representing a decrease of approximately $3.2 million from fiscal 2007 expense of approximately $49.6 million. The net decrease in interest expense was primarily attributable to a decrease in interest rates offset by (1) an increase of approximately $0.3 million in amortized debt fees associated with the pre-petition and post-petition debt facilities and (2) an increase of approximately $0.7 million in interest cost associated with an increase in DIP Facility borrowings.

Provision (Benefit) for Income Taxes

The effective income tax benefit rate for fiscal 2008 and 2007 was 6.5%, reflecting valuation allowances we have recorded against deferred tax assets originating in those years. We adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 on June 3, 2007. FIN 48 prescribes a recognition threshold and a measurement standard for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The recognition and measurement of tax benefits is often highly judgmental. We believe we have adequately provided for any reasonable foreseeable outcome related to these matters; however determinations regarding the recognition and measurement of a tax benefit can change as additional developments occur relative to an issue. Accordingly, our future results may include favorable or unfavorable adjustments to our unrecognized tax benefits. See Note 16. Income Taxes to our consolidated financial statements for further information.

Fiscal 2007 Compared to Fiscal 2006

Net Sales
(dollars in thousands)


	Fifty-Two Weeks Ended					Fifty-Three Weeks Ended					%
	June 2, 2007					June 3, 2006					Increase /
	Amount		%			Amount		%			(Decrease)
Route sales	$	2,544,777		87.2	%	$	2,661,465		87.0	%		(4.4)	%
Outlet sales		322,860		11.1			358,722		11.7			(10.0	)
Direct sales		49,631		1.7			40,286		1.3			23.2


Total net sales	$	2,917,268		100.0	%	$	3,060,473		100.0	%		(4.7	)

Consolidated Net Sales

Net sales for fiscal 2007 were approximately $2,917.3 million, representing a decrease of approximately $143.2 million, or 4.7%, from net sales of approximately $3,060.5 million for fiscal 2006.

Route net sales. Route net sales for fiscal 2007 were approximately $2,544.8 million, representing a decrease of approximately $116.7 million, or 4.4% from fiscal 2006 net sales of approximately $2,661.5 million. In fiscal 2006, we had a 53^rd week of operations which resulted in estimated additional net sales of approximately $53.5 million which contributed to the decline in net sales for fiscal 2007 when compared with fiscal 2006. The decrease in net sales additionally reflected a total unit volume decline of 7.4%, partially offset by a unit value increase of 6.0% in fiscal 2007 as compared to the prior year. The unit value increase resulted primarily from selling price increases and product mix changes.

Outlet net sales. Outlet net sales for the 52 weeks ended June 2, 2007 were approximately $322.9 million, representing a decrease of approximately $35.9 million, or 10.0% from fiscal 2006. In fiscal 2006, we had a 53^rd week of operations which resulted in estimated additional net sales of approximately $6.9 million which contributed to the decline in net sales for fiscal 2007 when compared with fiscal 2006. However, the decline in net sales is primarily attributable to the closing of lower performing retail outlets.

Direct net sales. Direct net sales for fiscal 2007 were approximately $49.6 million, an increase of approximately $9.3 million from net sales of approximately $40.3 million in fiscal 2006. In fiscal 2006, we had a 53^rd week of operations, which resulted in estimated additional net sales of approximately $0.8 million that reduced the reported increase in sales when comparing fiscal 2007 to 2006. The increase in net sales is primarily attributable to an increase in direct net sales of our dry products.

Gross Profit (Exclusive of Depreciation and Amortization)

Gross profit was approximately $1,428.2 million, or 49.0% of net sales, for fiscal 2007, compared to approximately $1,507.7 million, or 49.3%, of net sales in fiscal 2006. Total cost of products sold decreased by approximately $63.7 million when compared to fiscal 2006. On a cost per pound basis, direct component costs per pound increased 6.8% when compared to fiscal 2006, including 5.4% for ingredients, 0.8% for labor and 0.6% for packaging. Overhead and administrative costs as a percent of net sales decreased 0.2% compared to fiscal 2006. The net effect of these increases in direct per pound costs partially offset by favorable overhead and administrative costs when compared to our net sales declines resulted in a decrease in our gross profit margin percentage of 0.3% compared to fiscal 2006.

Selling, Delivery and Administrative Expenses

Selling, delivery and administrative expenses were approximately $1,391.4 million, or 47.7% of net sales, for fiscal 2007, representing a decrease of approximately $112.6 million from fiscal 2006’s selling, delivery and administrative expenses of approximately $1,504.0 million, or 49.1% of net sales. The 1.4% decrease in selling, delivery, and administrative expenses as a percent of net sales is attributable to: (1) a 1.1% decrease in labor and labor related costs as a percent of net sales due principally to the benefits realized from our consolidation of routes, depots and retail outlets; (2) a 0.2% decrease in advertising costs as a percent of net sales; and (3) a 0.1% decrease in all other selling and administrative expenses as a percent of net sales.

Restructuring Charges

During fiscal 2007, we realized a net credit of approximately $4.1 million which was composed of net gains on the sale of assets of approximately $7.8 million and severance credits of approximately $0.4 million related to accrual adjustments for previously estimated employee terminations. These gains were partially offset by asset impairment charges of approximately $2.3 million and other exit costs of approximately $1.8 million. The other exit costs include facility closure costs such as cleanup, security, relocation, utilities, and taxes. See Note 14. Restructuring Charges (Credits) to our consolidated financial statements for further information.

During fiscal 2006, we realized a net credit of approximately $27.2 million which included net gains on the sale of assets of $58.0 million and benefit plan credits of $0.7 million, partially offset by asset impairment charges of $19.4 million, severance costs of $6.1 million and other exit costs of $6.0 million. The other exit costs include facility closure costs such as cleanup, security, relocation, utilities, and taxes.

Property and Equipment Impairment

In fiscal 2007 and 2006, we tested our long-lived assets for recoverability and determined that the carrying value of certain of our asset groups exceeded our estimate of the related fair value. Accordingly we recorded an impairment loss of approximately $1.4 million and $4.8 million in fiscal 2007 and 2006, respectively.

Operating Income (Loss)
(dollars in thousands)


	Fifty-Two Weeks Ended						Fifty-Three Weeks Ended						%
	June 2, 2007						June 3 2006						Increase /
	Amount			%			Amount			%			(Decrease)
Segment Income (Loss)
Route sales	$	28,798			(72.6)	%	$	(11,747	)		20.8	%		345.2	%
Outlet sales		10,902			(27.5	)		10,682			(18.9	)		2.1
Direct sales		3,595			(9.1	)		4,394			(7.8	)		(18.2	)


Total segment income (loss)		43,295			(109.2	)		3,329			(5.9	)		1,200.5
Corporate		(82,936	)		209.2			(59,697	)		105.9			(38.9	)


Total operating income (loss)	$	(39,641	)		100.0	%	$	(56,368	)		100.0	%		29.7

Consolidated Operating Income (Loss)

The operating loss for fiscal 2007 was approximately $39.6 million, representing a reduction of approximately $16.8 million from the prior year’s operating loss of approximately $56.4 million. Included in the operating loss for fiscal 2007 is restructuring income of approximately $4.1 million and property and equipment impairment charges of approximately $1.4 million. The fiscal 2006 operating loss included restructuring income of approximately $27.2 million and property and equipment impairment of approximately $4.8 million.

Route operating income. Route operating income for fiscal 2007 was approximately $28.8 million, representing an improvement of approximately $40.5 million over the prior year. The improvement was attributable to an approximately $157.2 million, or 5.9%, decrease in route operating costs partially offset by an approximately $116.7 million, or 4.4%, reduction in route net sales.

Outlet operating income. Outlet operating income for fiscal 2007 was approximately $10.9 million representing an improvement of approximately $0.2 million over the prior year. This gain was attributable to an approximately $36.1 million, or 10.4%, decline in operating costs which was offset by an approximately $35.9 million, or 10.0% reduction in outlet net sales. This improvement is attributable to the closing of less profitable outlet locations in conjunction with our restructuring efforts.

Direct operating income. Direct operating income for fiscal 2007 was approximately $3.6 million representing a decrease of approximately $0.8 million from operating income for fiscal 2006 of approximately $4.4 million. This decrease in operating profit is principally related to an increase in operating costs of approximately $10.1 million, which was partially offset by an increase in sales of approximately $9.3 million.

Reorganization Charges

In fiscal 2007, we incurred a net reorganization charge of approximately $32.6 million. This charge relates to expense or income items that we incurred or realized because we are in reorganization under our bankruptcy proceedings. The cost of these activities includes (1) professional fees and similar types of expenses incurred directly related to the Chapter 11 proceedings of approximately $35.3 million; (2) payroll related expenses to retain key employees during our reorganization of approximately $1.0 million; (3) losses realized as we rejected certain of our real estate lease agreements of approximately $0.2 million; (4) interest earned on cash accumulated by us because we are not paying a substantial portion of our pre-petition liabilities of approximately $3.1 million; and (5) gains realized on the sale of our excess properties of approximately $0.8 million.

In fiscal 2006, we incurred a net reorganization charge of $37.0 million. The cost of these activities includes such items as (1) professional fees and similar types of expenses incurred directly related to the Chapter 11 proceedings

of $35.1 million; (2) payroll related expenses to retain key employees during our reorganization of $6.0 million; (3) losses realized as we rejected certain of our real estate lease agreements of $0.9 million; (4) interest earned on cash accumulated by us because we are not paying a substantial portion of our pre-petition liabilities of $4.5 million; and (5) gains realized on the sale of our excess properties of $0.5 million.

Interest Expense

Interest expense for fiscal 2007 was approximately $49.6 million, representing a decrease of approximately $2.9 million from fiscal 2006 expense of approximately $52.5 million. The decrease in interest expense is primarily attributable to an approximately $4.0 million decline in amortized debt fees associated with the pre-petition and post-petition debt facilities partially offset by higher interest costs resulting from higher interest rates on lower outstanding funded debt and an increase in other banking related fees. Interest expense also decreased due to the capitalization of interest costs of approximately $0.5 million associated with software development.

Provision (Benefit) for Income Taxes

The effective income tax benefit rate for fiscal 2007 was 6.5% compared to an effective income tax benefit rate of 10.9% for fiscal 2006. The lower effective income tax benefit rate relates principally to recording a valuation allowance against a greater portion of our tax assets originating in 2007 relative to tax assets originating in 2006. The incremental unfavorable impact of the valuation allowances on our 2007 tax rate is due to a decrease in the portion of our net operating losses eligible for carryback and changes to the reversal patterns of our deferred tax liabilities. See Note 16. Income Taxes to our consolidated financial statements for further information.

CASH RESOURCES AND LIQUIDITY

CASH FLOWS

During the fiscal year-ended May 31, 2008, the Company used approximately $42.1 million of cash, which was the net impact of approximately $76.1 million in cash used in operating activities, approximately $16.5 million in cash used in investing activities, and approximately $50.5 million in cash from financing activities.

Cash Provided By (Used In) Operating Activities

Cash used in operating activities for fiscal 2008 was approximately $76.1 million, which represents an increase of approximately $44.4 million from cash used in the same period in fiscal 2007 of approximately $31.7 million. While we posted a net loss of approximately $143.7 million in fiscal 2008, some items contributing to the loss were non-cash items, including approximately $67.2 million related to depreciation and amortization, $9.8 million in losses on the sale, write-down or abandonment of assets, and approximately $5.3 million write-off of reorganization expense for the Silver Point Finance L.L.C. commitment fees and related debt costs. Changes in working capital components used approximately $19.0 million in cash during fiscal 2008 primarily due to (1) a decrease in accounts receivable of approximately $15.8 million; (2) a reduction in inventories of approximately $3.8 million offset by (3) a decrease in accounts payable and accrued expense of approximately $33.7 million; and (4) other items totaling approximately $4.9 million. The decrease in accounts receivable and inventory were largely driven by our exit from the Southern California bread market while the decrease in accounts payable and accrued expense generally reflected a reduction in the reclassification of negative cash balances to accounts payable. For fiscal 2007, changes in working capital components generated cash of approximately $6.3 million.

Cash Provided By (Used In) Investing Activities

Cash used in investing activities during fiscal 2008 was approximately $16.5 million, a reduction of approximately $82.3 million from the cash generated during fiscal 2007 of approximately $65.8 million. This significant decrease was primarily attributable to the release, pursuant to the eighth amendment to the DIP Facility, of restricted cash previously held as collateral and unavailable to the Company in the amount of approximately $89.2 million (excluding interest earned) at August 25, 2006, the effective date of the eighth amendment to the DIP Facility. During fiscal 2008, we received approximately $11.3 million in asset sale proceeds and made deposits to the

restricted cash account in accordance with the DIP Facility in the amount of approximately $5.6 million (excluding interest earned). We used approximately $22.2 million to acquire property, equipment and software assets. During the same period in fiscal 2007, we received asset sale proceeds in the amount of approximately $25.1 million and made deposits to the restricted cash account in accordance with the DIP Facility in the amount of approximately $18.7 million. During the same period in fiscal 2007, purchases of property, equipment and software assets totaled approximately $30.1 million.

Cash Provided By (Used In) Financing Activities

Cash from financing activities in fiscal 2008 was approximately $50.5 million, approximately $95.5 million more than the cash used during the same period in fiscal 2007 of approximately $45.0 million. The cash used during 2007 was primarily due to a payment of our pre-petition secured debt of approximately $45.4 million. The previously discussed eighth amendment to the DIP Facility released restricted cash plus accumulated interest in the amount of approximately $90.7 million effective August 25, 2006 and required that approximately $45.4 million of such amount be used to reduce the outstanding balance of the Pre-Petition Senior Secured Debt. The cash from financing activities in fiscal 2008 of approximately $50.5 million consisted primarily of DIP Facility borrowings of approximately $67.6 million and an increase in our Pre-Petition Senior Secured Revolving Credit Facility of approximately $2.5 million due to letter of credit draws offset by a reduction in our DIP Facility and long-term debt of approximately $4.3 million and $0.9 million, respectively, and $14.4 million in debt fees, including approximately $5.3 million for the Silver Point Finance L.L.C. commitment fees and related debt costs.

SOURCES OF LIQUIDITY AND CAPITAL

We have historically maintained two primary sources for debt capital: (1) bank lines of credit; and (2) capital and operating lease financing to support the acquisition and lease of our bakery outlets, depots, route trucks, tractors, trailers and computer equipment. In addition, on August 12, 2004, we issued in a private placement $100.0 million aggregate principal amount of our 6.0% senior subordinated convertible notes due August 15, 2014. Purchasers had an option to purchase in the aggregate up to $20.0 million in additional notes for a period of 60 days following the closing, which purchase option was not exercised. Under certain circumstances, the notes are convertible at the option of the holder into shares of our common stock at an initial conversion rate of 98.9854 shares per $1,000 principal amount of notes (an initial conversion price of $10.1025 per share), subject to adjustment.

At May 31, 2008, under our pre-petition Senior Secured Credit Facility, we owed $374.1 million in term loans and $76.1 million in a revolver loan. In addition, at May 31, 2008, we had issued $85.1 million in letters of credit under our revolver commitment.

On September 22, 2004 (the Petition Date), due to significantly limited liquidity, we and each of our wholly-owned subsidiaries filed voluntary petitions for reorganization relief under Chapter 11 of the Bankruptcy Code. On January 14, 2006, a subsidiary of which we are an eighty percent owner, Mrs. Cubbison’s Foods, Inc., also filed a voluntary petition for reorganization relief under Chapter 11 of the Bankruptcy Code. These filings were made in order to facilitate the restructuring of our business operations, trade liabilities, debt, and other obligations. We are currently operating our business as a debtor-in-possession under the supervision of the Bankruptcy Court.

The foregoing commitments regarding our pre-petition senior secured term and revolving credit facilities and our 6% senior subordinated convertible notes due August 15, 2014 include significant obligations that occurred prior to our bankruptcy filing. Under the Bankruptcy Code, actions to collect pre-petition indebtedness are stayed and our other contractual obligations may not be enforced against us.

As a result of the Chapter 11 filing, our principal sources of liquidity used in funding short-term operating expenses, supplies and employee obligations include cash balances, operating and investing cash flows and the $313.0 million debtor-in-possession Revolving Credit Agreement (as amended and restated, the DIP Facility) (as discussed below).

DIP Facility

Subsequent to the Petition Date, the Company and a syndicate of lenders, including JPMorgan Chase Bank, entered into the DIP Facility to provide post-petition financing. The DIP Facility has been amended numerous times, including most recently on September 12, 2008. Following the most recent amendment, the DIP Facility provides for borrowings of up to $313.0 million in the aggregate, the Commitment, and expires on the occurrence of an event that constitutes a termination date as defined in the DIP Facility or, if no such event has occurred on February 9, 2009. The Commitment provides for additional funding of $16.0 million based on the occurrence of certain events. Additionally, the Commitment is to be permanently reduced by an amount equal to the net proceeds from any asset sales, as defined under the DIP Facility, that are required to be remitted to the lenders for repayment of outstanding borrowings. All outstanding borrowings under the DIP Facility, if any, are due and payable on the termination date. The obligations under the DIP Facility are secured by a superpriority lien against our assets in favor of the DIP lenders. The DIP Facility may be utilized for the issuance of letters of credit up to an aggregate amount equal to $180.0 million, which amount was increased from the original limitation of $75.0 million as a result of prior amendments. In connection with entering into the DIP Facility, we also make periodic adequate protection payments to our pre-petition senior secured lenders in the form of interest, fees and expenses based on amounts owed under the pre-petition Senior Secured Credit Facility.

The DIP Facility subjects us to certain obligations, including, but not limited to, the delivery of financial statements and certifications, cash flow forecasts, and operating budgets at specified intervals and cumulative minimum EBITDA requirements. Furthermore, we are subject to certain limitations on the payment of indebtedness, entering into investments, the payment of capital expenditures, the incurrence of cash restructuring charges and the payment of dividends. Failure to comply with these obligations could lead to an event of default under the DIP Facility and acceleration of payments thereunder.

In addition, payment under the DIP Facility may be accelerated following certain events of default, including, but not limited to, (1) the conversion of any of the bankruptcy cases to a case under Chapter 7 of the Bankruptcy Code or the appointment of a trustee pursuant to Chapter 11 of the Bankruptcy Code; (2) our making certain payments of principal or interest on account of pre-petition indebtedness or payables; and (3) a change of control (as defined in the DIP Facility).

At May 31, 2008, we were in compliance with all financial covenants, terms and conditions of the DIP Facility.

On September 12, 2008, the Bankruptcy Court approved the first amendment to the Second Amended and Restated Revolving Credit agreement (the First DIP Amendment). The First DIP Amendment, among other things, (1) increased the aggregate principal amount available to $313.0 million with a provision for additional funding of $16.0 million based on the occurrence of certain events; (2) extended the maturity date to February 9, 2009; (3) established minimum percentage amounts for Adjusted LIBOR Rate (as defined in the First DIP Amendment) and Alternate Base Rate (as defined in the First DIP Amendment) used in the interest rate calculations; (4) changed the borrowing base formula; and (5) changed or extended certain covenants set forth in the DIP Facility. Fees and expenses of approximately $7.2 million were incurred on the effectiveness of the First DIP Amendment.

Since the Petition Date, we have been actively engaged in restructuring our operations and selling assets no longer necessary to our operations. We continue to analyze our business based on a number of factors including, but not limited to, historical sales results, expected future sales results, cash availability, production costs, utilization of resources, and manufacturing and distribution efficiencies. As part of our restructuring efforts, we are evaluating

various alternatives including, but not limited to, the sale of some or all of our assets, infusion of capital, debt restructuring, filing a new plan of reorganization, amending the plan of reorganization previously filed with the Bankruptcy Court, or any combination of these options. We may need to seek additional extensions of the maturity date of the DIP Facility or an increase in borrowing availability under any debtor-in-possession credit facility. There can be no assurance that we will be successful in extending or increasing the borrowing availability under the debtor-in-possession credit facility or that we can do so on terms favorable to us. Failure to obtain any such extension or increase in borrowing availability or replacement financing, if needed, would have a material adverse impact on our liquidity and ability to operate as a going concern.

Our future capital requirements will depend on many factors, including our evaluation of various alternatives in connection with our restructuring, the ultimate form of our plan of reorganization, if any, the aggregate amount to be distributed to creditors to satisfy claims, the amount of any unknown claims or contingent claims from creditors or equity holders, the outcome of litigation and the costs of administering the Chapter 11 process, including legal and other fees. At this time it is not possible to predict the exact amount or nature of such future capital requirements. In addition, there can be no guarantee that additional capital will be available to us, or that such capital will be available on favorable terms. Failure to maintain adequate sources of capital would have a material adverse impact on our liquidity and ability to continue as a going concern.

Our financial statements are prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, because of the Chapter 11 filing process and our recurring losses from operations, negative working capital, and downward sales trends, along with our potential lack of liquidity should we be unable to successfully reorganize under Chapter 11, there is substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent upon, among other things, our ability to evaluate and execute various alternatives including the sale of some or all of our assets, infusion of capital, debt restructuring and the development, confirmation and implementation of a new or revised plan of reorganization, our ability to comply with the terms of the debtor-in-possession credit facility, our ability to negotiate an extension of, and increase in the amount available under, our DIP Facility, if needed, or refinance our DIP Facility at its maturity, our ability to implement our restructuring activities, our ability to obtain concessions from our labor unions, our ability to obtain financing upon exit from bankruptcy, our ability to implement the Second Amended Plan, if confirmed by the Bankruptcy Court, and the transactions contemplated thereby and our ability to generate sufficient cash from operations to meet our obligations and any combination of these factors. In the event our restructuring activities are not successful and we are required to liquidate, additional significant adjustments would be necessary in the carrying value of assets and liabilities, the revenues and expenses reported and the balance sheet classifications used. Further, the value of debt and equity interests may be significantly or completely impaired in the event of a liquidation or conversion to a Chapter 7 proceeding.

OFF-BALANCE SHEET FINANCING

We do not participate in, nor secure financings for, any unconsolidated, special purpose entities.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO FINANCIAL STATEMENTS


			Page
			Number
Report of Independent Registered Public Accounting Firm				50

Consolidated Balance Sheets at May 31, 2008 and June 2, 2007				52

Consolidated Statements of Operations for the 52 weeks ended May 31, 2008, 52 weeks ended June 2, 2007, and 53 weeks ended June 3, 2006				53

Consolidated Statements of Cash Flows for the 52 weeks ended May 31, 2008, 52 weeks ended June 2, 2007, and 53 weeks ended June 3, 2006				54

Consolidated Statements of Stockholders’ Deficit for the 52 weeks ended May 31, 2008, 52 weeks ended June 2, 2007, and 53 weeks ended June 3, 2006				55

Notes to Consolidated Financial Statements				56

	1.	Voluntary Chapter 11 Filing		56
	2.	Description of Business and Significant Accounting Policies		59
	3.	Property and Equipment		68
	4.	Assets Held for Sale		68
	5.	Lease Obligations		69
	6.	Intangible Assets		69
	7.	Debt		70
	8.	Accrued Expenses and Other Liabilities		73
	9.	Derivative Instruments		73
	10.	Liabilities Subject to Compromise		74
	11.	Employee Benefit Plans		74
	12.	Key Employee Retention Plan		82
	13.	Stock-Based Compensation		82
	14.	Restructuring Charges (Credits)		84
	15.	Reorganization Charges		89
	16.	Income Taxes		89
	17.	Commitments and Contingencies		91
	18.	Stock Repurchases		95
	19.	Stockholder Rights Plan		95
	20.	Earnings (Loss) per Share		95
	21.	Comprehensive Loss		96
	22.	Segment Information		97
	23.	Subsequent Event		98

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Interstate Bakeries Corporation
Kansas City, Missouri

We have audited the accompanying consolidated balance sheets of Interstate Bakeries Corporation (Debtor-in-Possession) and subsidiaries, (the “Company”) as of May 31, 2008 and June 2, 2007, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three fiscal years in the period ended May 31, 2008. Our audits also included the schedule of valuation and qualifying accounts listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2008 and June 2, 2007, and the results of its operations and its cash flows for each of the three fiscal years in the period ended May 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company has filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such consolidated financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses from operations, negative working capital, downward sales trends, short-term expiration of debtor-in-possession financing, a potential lack of liquidity should the Company be unable to successfully reorganize under its Chapter 11 bankruptcy filing, and the need to completely withdraw from the American Bakers Association Retirement Plan in order to successfully reorganize under its Chapter 11 bankruptcy filing, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 16 to the consolidated financial statements, the Company changed its method of accounting for uncertain tax positions to conform to Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” as of the beginning of the year ended May 31, 2008. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for the funded status of its defined benefit pension plans, supplemental retirement plan and postretirement health and life plans with the adoption of FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)


	May 31,			June 2,
	2008			2007
ASSETS

Current assets
Cash	$	25,071		$	67,212
Restricted cash		21,052			15,085
Accounts receivable, less allowance for doubtful accounts of $2,050 and $2,315, respectively		136,627			152,175
Inventories		61,837			65,682
Assets held for sale		17,562			2,032
Other current assets		43,995			49,649


Total current assets		306,144			351,835

Property and equipment, net		464,455			541,725
Intangible assets		158,285			160,239
Other assets		29,473			27,593


Total assets	$	958,357		$	1,081,392


LIABILITIES AND STOCKHOLDERS’ DEFICIT

Liabilities not subject to compromise
Current liabilities
Pre-petition debt	$	2,759		$	451,515
Post-petition debt		63,358			—
Accounts payable		108,288			129,137
Accrued expenses		205,411			217,373


Total current liabilities		379,816			798,025

Other liabilities		219,288			236,766
Deferred income taxes		69,475			74,789


Total liabilities not subject to compromise		668,579			1,109,580


Liabilities subject to compromise		751,492			290,553


Stockholders’ deficit
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued		—			—
Common stock, $0.01 par value, 120,000,000 shares authorized, 81,579,000 shares issued, 45,202,000 and 45,249,000 shares outstanding, respectively		816			816
Additional paid-in capital		584,485			584,503
Accumulated deficit		(403,038	)		(255,559	)
Treasury stock, 36,377,000 and 36,330,000 shares at cost, respectively		(678,740	)		(678,721	)
Accumulated other comprehensive income		34,763			30,220


Total stockholders’ deficit		(461,714	)		(318,741	)


Total liabilities and stockholders’ deficit	$	958,357		$	1,081,392

See accompanying notes.

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)


	Fifty-Two			Fifty-Two			Fifty-Three
	Weeks Ended			Weeks Ended			Weeks Ended
	May 31,			June 2,			June 3,
	2008			2007			2006
Net sales	$	2,798,337		$	2,917,268		$	3,060,473


Cost of products sold (exclusive of items shown below)		1,440,609			1,489,019			1,552,731
Selling, delivery and administrative expenses		1,334,432			1,391,388			1,504,038
Restructuring charges (credits)		5,674			(4,073	)		(27,187	)
Depreciation and amortization		67,226			71,949			77,795
Loss on sale or abandonment of assets		4,495			7,266			4,671
Property and equipment impairment		10,473			1,360			4,793


		2,862,909			2,956,909			3,116,841


Operating income (loss)		(64,572	)		(39,641	)		(56,368	)


Other (income) expense
Interest expense (excluding unrecorded contractual interest expense of $5,983, $5,983, and $6,033, respectively)		46,374			49,591			52,504
Reorganization charges, net		42,719			32,625			37,015
Other (income) expense		(17	)		(1,132	)		(2,994	)


		89,076			81,084			86,525

Loss before income taxes and cumulative effect of accounting change		(153,648	)		(120,725	)		(142,893	)
Provision (benefit) for income taxes		(9,964	)		(7,877	)		(15,593	)


Loss before cumulative effect of accounting change		(143,684	)		(112,848	)		(127,300	)
Cumulative effect of accounting change, net of income taxes of $0 (See Note 2)		—			—			(1,017	)


Net income (loss)	$	(143,684	)	$	(112,848	)	$	(128,317	)


Basic and diluted income (loss) per share
Income (loss) before cumulative effect of accounting change	$	(3.18	)	$	(2.50	)	$	(2.82	)
Cumulative effect of accounting change		—			—			(0.02	)


Total	$	(3.18	)	$	(2.50	)	$	(2.84	)

See accompanying notes.

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)


	Fifty-Two			Fifty-Two			Fifty-Three
	Weeks Ended			Weeks Ended			Weeks Ended
	May 31,			June 2,			June 3,
	2008			2007			2006
Operating activities
Net income (loss)	$	(143,684	)	$	(112,848	)	$	(128,317	)
Depreciation and amortization		67,226			71,949			77,795
Provision (benefit) for deferred income taxes		(3,031	)		(841	)		(1,681	)
Reorganization charges, net		42,719			32,625			37,015
Cash reorganization items		(36,549	)		(36,092	)		(35,384	)
Non-cash bankruptcy-related (credits) charges		2,847			1,512			(713	)
Non-cash interest expense — deferred debt fees		3,466			3,167			6,724
Non-cash restricted stock compensation (benefit) expense		(37	)		341			944
Non-cash cumulative effect of accounting change		—			—			1,017
Loss (gain) on sale, write-down or abandonment of assets		9,836			2,199			(30,473	)
Change in operating assets and liabilities
Accounts receivable		15,844			(1,035	)		26,274
Inventories		3,845			(251	)		4,000
Other current assets		1,335			13,215			5,541
Accounts payable and accrued expenses		(33,661	)		(10,894	)		(22,313	)
Long-term portion of self insurance reserves		2,951			(721	)		15,591
Other		(9,241	)		5,958			(13,743	)


Net cash provided by (used in) operating activities		(76,134	)		(31,716	)		(57,723	)


Investing activities
Purchases of property and equipment		(21,447	)		(27,880	)		(32,328	)
Proceeds from sale of assets		11,324			25,143			90,367
Restricted cash deposit		(5,550	)		(18,673	)		(85,458	)
Restricted cash release		—			89,222			—
Acquisition and development of software assets		(895	)		(2,244	)		—
Other		35			224			56


Net cash provided by (used in) investing activities		(16,533	)		65,792			(27,363	)


Financing activities
Reduction of long-term debt		(882	)		(46,306	)		(1,067	)
Increase in pre-petition debt		2,490			3,298			13,415
Reduction of post-petition debt		(4,277	)		—			—
Increase in post-petition debt		67,635			—			—
Stock option exercise proceeds		—			—			101
Acquisition of treasury stock		—			—			(1	)
Debt fees		(14,440	)		(2,034	)		(742	)


Net cash provided by (used in) financing activities		50,526			(45,042	)		11,706


Net increase (decrease) in cash		(42,141	)		(10,966	)		(73,380	)

Cash at beginning of period		67,212			78,178			151,558


Cash at end of period	$	25,071		$	67,212		$	78,178


Cash payments (received)
Interest	$	40,161		$	47,169		$	47,260
Income taxes		(6,153	)		(14,094	)		(15,705	)
Non-cash investing and financing activities
Long-term debt reduction from lease rejections		116			359			890
Asset disposals from lease rejections		93			271			705
Convertible note conversion		—			1			—
Interest earned on restricted cash deposits		417			774			895

See accompanying notes.

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(dollars and shares in thousands, except per share data)




	Common																Unearned			Accumulated
	Stock Issued				Additional						Treasury Stock						Restricted			Other			Total
	*Number*		Par		Paid-in			Accumulated			*Number of*						Stock			Comprehensive			Stockholders’
	*of Shares*		Value		Capital			Deficit			*Shares*			Cost			Compensation			Income (Loss)			Deficit
Balance May 28, 2005		81,579	$	816	$	586,089		$	(14,394	)		(36,242	)	$	(678,379	)	$	(3,521	)	$	(7,535	)	$	(116,924	)
Comprehensive loss (a)		—		—		—			(128,317	)		—			—			—			3,657			(124,660	)
Stock options exercised		—		—		(86	)		—			10			187			—			—			101
Restricted share compensation expense		—		—		—			—			—			—			1,486			—			1,486
Restricted share surrenders		—		—		(372	)		—			(52	)		(379	)		166			—			(585	)
Treasury stock acquired		—		—		—			—			—			(1	)		—			—			(1	)


Balance June 3, 2006		81,579		816		585,631			(142,711	)		(36,284	)		(678,572	)		(1,869	)		(3,878	)		(240,583	)
Comprehensive loss (a)		—		—		—			(112,848	)		—			—			—			650			(112,198	)
Cumulative effect of change in accounting for pension and other postretirement obligations pursuant to SFAS No. 158		—		—		—			—			—			—			—			33,448			33,448
Reclassification due to change in accounting for stock-based compensation pursuant to SFAS No. 123R		—		—		(1,869	)		—			—			—			1,869			—			—
Convertible note conversion		—		—		(1	)		—			—			2			—			—			1
Restricted share compensation expense		—		—		1,147			—			—			—			—			—			1,147
Restricted share surrenders		—		—		(405	)		—			(46	)		(151	)		—			—			(556	)


Balance June 2, 2007		81,579		816		584,503			(255,559	)		(36,330	)		(678,721	)		—			30,220			(318,741	)
Comprehensive loss (a)		—		—		—			(143,684	)		—			—			—			4,510			(139,174	)
Cumulative effect of change in accounting for uncertainty in income taxes pursuant to FIN No. 48		—		—		—			(3,649	)		—			—			—			—			(3,649	)
Cumulative effect of change in measurement date for pension and other postretirement obligations pursuant to SFAS No. 158
Service cost, interest cost, and expected return on plan assets		—		—		—			(113	)		—			—			—			—			(113	)
Amortization of prior service cost and net actuarial gain		—		—		—			(33	)		—			—			—			33			—
Restricted share compensation expense		—		—		622			—			—			—			—			—			622
Restricted share surrenders		—		—		(640	)		—			(47	)		(19	)		—			—			(659	)


Balance May 31, 2008		81,579	$	816	$	584,485		$	(403,038	)		(36,377	)	$	(678,740	)	$	—		$	34,763		$	(461,714	)


(a)		See Note 21. Comprehensive Loss to these consolidated financial statements for the reconciliations of net loss to comprehensive loss.

See accompanying notes.

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Voluntary Chapter 11 Filing

On September 22, 2004, or the Petition Date, we and each of our wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the Western District of Missouri, or the Bankruptcy Court (Case Nos. 04-45814, 04-45816, 04-45817, 04-45818, 04-45819,04-45820, 04-45821 and 04-45822). On September 24, 2004, the official committee of unsecured creditors was appointed in our Chapter 11 cases. On November 29, 2004, the official committee of equity security holders was appointed in our Chapter 11 cases. Mrs. Cubbison’s Foods, Inc., or Mrs. Cubbison’s, a subsidiary of which we are an eighty percent owner, was not originally included in the Chapter 11 filing. However, on January 14, 2006, Mrs. Cubbison’s filed a voluntary petition for relief under the Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). The respective $3.0 million and $2.7 million minority interest in Mrs. Cubbison’s is reflected in other liabilities at May 31, 2008 and June 2, 2007, respectively, and the minority interest impact on the statement of operations is insignificant for all periods presented. We are continuing to operate our business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. In general, as a debtor-in-possession, we are authorized under the Bankruptcy Code to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.

On September 23, 2004, we entered into a debtor-in possession Revolving Credit Agreement (as amended, the DIP Facility) with JPMorgan Chase Bank, or JPMCB, and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party thereto, together with JPMCB, the Lenders, J.P. Morgan Securities Inc., as lead arranger and book runner, and JPMCB, as administrative and collateral agent for the Lenders. The Revolving Credit Agreement received interim approval by the Bankruptcy Court on September 23, 2004 and final approval on October 22, 2004. We most recently amended the DIP Facility on September 12, 2008 to reflect certain modifications. The Revolving Credit Agreement provides for a $313.0 million commitment, or the Commitment, of debtor-in-possession financing to fund our post-petition operating expenses, supplier and employee obligations. The Commitment provides for additional funding of $16.0 million based on the occurrence of certain events. The maturity date of the DIP Facility has been extended to February 9, 2009. See Note 7. Debt to these consolidated financial statements for further discussion regarding the DIP Facility.

In conjunction with the commencement of the Chapter 11 process, we sought and obtained several orders from the Bankruptcy Court that were intended to enable us to operate in the normal course of business during the Chapter 11 process. The most significant of these orders:

	•		authorize us to pay pre-petition and post-petition employee wages and salaries and related benefits during our restructuring under Chapter 11;

	•		authorize us to pay trust fund taxes in the ordinary course of business, including pre-petition amounts; and

	•		authorize the continued use of our cash management systems.

Pursuant to the Bankruptcy Code, our pre-petition obligations, including obligations under debt instruments, generally may not be enforced against us. In addition, any actions to collect pre-petition indebtedness are automatically stayed unless the stay is lifted by the Bankruptcy Court.

breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 process unless such claims had been secured on a pre-petition basis. As of August 15, 2008, we have rejected approximately 540 unexpired leases and have accrued charges for our estimated liability related thereto in the applicable periods. We are in the process of reviewing our executory contracts and remaining unexpired leases to determine which, if any, we will reject. For these executory contracts and remaining unexpired leases, we cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting these contracts or leases, and no provisions have yet been made for these items.

On June 28, 2007, we submitted our business plan to our various constituents in the bankruptcy, including representatives of our lender syndicates and official committees of creditors and equity security holders. In order to secure rational financing required to implement this business plan; however, we believed additional concessions from our unionized employees were required. As a result, in June of 2007, we initiated talks with representatives of the two labor organizations, the Bakery Confectionery, Tobacco Workers & Grain Millers International Union (BCTGM) and International Brotherhood of Teamsters (IBT), representing approximately 91% of our unionized employees to achieve further concessions, including greater flexibility in the method and manner by which we distribute our products to our customers and cost reductions related to health and welfare programs.

Our exclusive period within which to file a plan of reorganization expired on November 8, 2007. Our exclusive period within which to solicit acceptances of our plan of reorganization expired on January 7, 2008.

See Note 14. Restructuring Charges (Credits) to these consolidated financial statements for related or additional disclosures.

Our financial statements are prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, because of the Chapter 11 filing process and our recurring losses from operations, negative working capital, and downward sales trends, along with our potential lack of liquidity should we be unable to successfully reorganize under Chapter 11, there is substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent upon, among other things, our ability to evaluate and execute various alternatives including the sale of some or all of our assets, infusion of capital, debt restructuring and the development, confirmation and implementation of a new or revised plan of reorganization, our ability to comply with the terms of the DIP Facility, our ability to negotiate an extension of, and increase in the amount available under, our DIP Facility, if needed, or refinance our DIP Facility at its maturity, our ability to implement our restructuring activities, our ability to obtain concessions from our labor unions, our ability to obtain financing upon exit from bankruptcy, our ability to implement the Second Amended Plan, if confirmed by the Bankruptcy Court, and the transactions contemplated thereby and our ability to generate sufficient cash from operations to meet our obligations and any combination of these factors. In the event our restructuring activities are not successful and we are required to liquidate, additional significant adjustments would be necessary in the carrying value of assets and liabilities, the revenues and expenses reported and the balance sheet classifications used. Further, the value of debt and equity interests may be significantly or completely impaired in the event of a liquidation or conversion to a Chapter 7 proceeding.

The consolidated financial statements reflect adjustments in accordance with American Institute of Certified Public Accountants’ Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7), which was adopted for financial reporting in periods ending after September 22, 2004, assuming that we will continue as a going concern. In the Chapter 11 proceedings, substantially all unsecured liabilities except payroll and benefit related charges as of the Petition Date are subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Chapter 11 proceedings are segregated and classified as Liabilities Subject to Compromise in the consolidated balance sheet under SOP 90-7. The ultimate amount of and settlement terms for our pre-bankruptcy liabilities are dependent on the outcome of the Chapter 11 proceedings and, accordingly, are not presently determinable. Pursuant to SOP 90-7, professional fees associated with the Chapter 11 proceedings, and certain gains and losses resulting from a reorganization of our business are reported separately as reorganization items. In addition, interest expense is reported only to the extent that it will be paid during the Chapter 11 proceedings or that it is probable that it will be an allowed claim under the bankruptcy proceedings.

2. Description of Business and Significant Accounting Policies

Description of Business

Interstate Bakeries Corporation is one of the largest wholesale bakers and distributors of fresh bakery products in the United States. Any reference, unless otherwise noted, to “IBC,” “us,” “we” and “our” refers to Interstate Bakeries Corporation and its subsidiaries, taken as a whole.

Fiscal Year End

Our fiscal year is a 52 or 53-week period ending on the Saturday closest to the last day of May. Fiscal years 2008 and 2007 were 52-week periods and fiscal year 2006 was a 53-week period.

Principles of Consolidation

The consolidated financial statements include the accounts of IBC and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Additionally, included in accounts payable are checks written in excess of bank balances totaling approximately $11.5 million and $32.9 million at May 31, 2008 and June 2, 2007, respectively. Restricted cash represents cash held as collateral pursuant to our debtor-in-possession financing agreement and is not considered a cash equivalent in the consolidated statement of cash flows. See Note 7. Debt to these consolidated financial statements for related disclosures.

Inventories

Inventories are stated at the lower of cost or market. Specific first-in first-out invoiced costs are used with respect to ingredients and packaging and average costs are used for finished goods.

The components of inventories are as follows:


	May 31,		June 2,
	2008		2007
	*(dollars in thousands)*
Ingredients and packaging	$	38,986	$	43,279
Finished goods		22,851		22,403


	$	61,837	$	65,682

Property and Equipment

Property and equipment are recorded at cost and depreciated over estimated useful lives of 4 to 35 years, using the straight-line method for financial reporting purposes. In order to maximize the efficiency of our operations, we remove and relocate equipment between bakeries. Such removal and relocation costs are expensed as incurred. Reinstallation costs are capitalized if the useful life is extended or the equipment is significantly improved. Otherwise, reinstallation costs are expensed as incurred.

Assets Held for Sale

Lease Obligations

We lease office space and real property used both for outlets for retail distribution of our bakery products and as depots and warehouses in our distribution system. All leases are accounted for under the guidance provided by Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases. These leases are classified as either capital leases or operating leases as appropriate. The amortization of assets under capital lease is included with depreciation expense.

Software Costs

Costs associated with computer software projects during the preliminary project stage are expensed as incurred. Once management authorizes and commits to funding a project, appropriate application development stage costs are capitalized. Capitalization ceases when the project is substantially complete and the software is ready for its intended use. Training and maintenance costs associated with software applications are expensed as incurred. As of May 31, 2008 and June 2, 2007, approximately $15.9 million and $19.9 million, respectively, of capitalized software costs were included in other assets in the consolidated balance sheets. Interest cost capitalized as part of the development stage was approximately zero, $0.5 million, and zero in fiscal 2008, 2007, and 2006, respectively. Software costs are amortized over estimated useful lives of five to seven years commencing when such assets are ready for their intended use, resulting in approximately $4.8 million, $2.3 million, and $2.0 million of amortization expense in fiscal 2008, 2007, and 2006, respectively. At May 31, 2008 all capitalized software was in use and being amortized.

Intangible Assets

Intangible assets, such as trademarks and trade names, are defined as purchased assets that lack physical substance, but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability.

Intangible assets with indefinite useful lives are not amortized, and are required to be tested for impairment at least annually and more frequently if an event occurs which indicates the intangible asset may be impaired. Intangible assets which have finite lives are amortized over their estimated useful lives and are subject to impairment testing when certain factors are evident. We perform our annual impairment tests of intangible assets with indefinite useful lives at the end of our fiscal third quarter. The performance of our impairment testing requires us to determine the fair value of our intangible assets, principally trademarks and trade names, for which we utilized a relief from royalty approach.

Impairment of Long-Lived Assets

Our long-lived assets are aggregated in eight business units (asset groups) that permit us to identify cash flows from such asset groups that are largely independent from other asset groups. We review and evaluate our asset groups for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis or other indicated fair value are less than the carrying amount of the related asset group.

Environmental Liabilities

In fiscal 2008, 2007, and 2006, charges to income were approximately $0.9 million, $1.4 million and $2.0 million, respectively, for the cost of future remediation of contaminated sites. Accruals totaling approximately $4.2 million and $5.0 million were recorded at May 31, 2008 and June 2, 2007, respectively, for environmental related liabilities. The current portion of the accrual, which was recorded in accrued expenses, was approximately $1.5 million and $2.0 million at May 31, 2008 and June 2, 2007, respectively. Additionally, we classified approximately $1.8 million and $1.3 million at May 31, 2008 and June 2, 2007, respectively, as liabilities subject to compromise, with the remaining balance of the accrual recorded in other liabilities.

Asset Retirement Obligations

In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143 (FIN 47). We adopted FIN 47 on June 3, 2006. This interpretation clarified the term “conditional asset retirement obligation” as used in FASB Statement No. 143 Accounting for Asset Retirement Obligations and required a liability to be recorded once the fair value of the obligation could be reasonably estimated. Asset retirement obligations covered by this interpretation include those for which an entity had a legal obligation to perform an asset retirement activity.

We have known conditional asset retirement obligations for asbestos remediation in many of our bakery buildings, ovens, and depots. Environmental regulations require us to handle and dispose of asbestos in a specific manner if the building or oven undergoes major renovations or is demolished. Otherwise, we are not required to remove the asbestos. We have determined that our practice of maintenance and improvements to our buildings and ovens has created indeterminate lives for the purpose of estimating asset retirement obligations. At May 31, 2008, we operated three bakeries in excess of one hundred years old with the average age of all bakeries in operation being 59 years. We cannot estimate the fair value of our asset retirement obligations for our bakeries, ovens, and distribution centers that we have determined contain asbestos due to the fact that information is not available for us to reasonably estimate a date or range of dates over which these settlements may occur. A liability for these obligations will be recorded in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability’s fair value.

We also have conditional asset retirement obligations for the removal of underground storage tanks (USTs) utilized for refined petroleum products. Environmental laws require that unused USTs be removed within certain periods of time after the USTs no longer remain in service, usually six months to three years depending on the jurisdiction in which the USTs are located. As a result of adopting FIN 47, we recorded a cumulative effect of an accounting change of approximately $1.0 million for the retirement obligations of our USTs.

The following table sets forth the changes in the aggregate carrying amount of our asset retirement obligations for the year ended May 31, 2008.


	*(dollars in thousands)*
Balance June 2, 2007	$	1,013
Obligations incurred		120
Obligations settled		(604	)
Accretion expense and adjustments		168


Balance May 31, 2008	$	697

Liabilities Subject to Compromise

Under bankruptcy law, actions by creditors to collect amounts we owe prior to the Petition Date are stayed and certain other pre-petition contractual obligations may not be enforced against us. All pre-petition obligations, except for secured debt and those other liabilities that we currently anticipate will not be impaired pursuant to a confirmed plan of reorganization, have been classified as liabilities subject to compromise in the fiscal 2008 and 2007 consolidated balance sheets.

Pension Obligations

We record the pension costs and the liabilities related to our defined benefit plan and American Bakers Association Retirement Plan, or ABA Plan, based upon actuarial valuations. These valuations include the key assumptions determined by management, including discount rate and expected long-term rate of return on plan assets. The expected long-term rate of return assumption considers the asset mix of the plan portfolio, past performance of these assets and other factors. Changes in pension cost may occur in the future due to changes in the number of plan participants, changes in discount rate, changes in the expected long-term rate of return, changes in the level of contributions to the plan and other factors. We have and continue to use immediate recognition of the impact of all actuarial gains (losses) associated with the ABA Plan.

We also have a Supplemental Executive Retirement Plan (SERP), which provides retirement benefits to certain officers and other select employees. The SERP is an unfunded, non-tax qualified mechanism, which was used to enhance our ability to retain the services of certain employees. The operation of this plan was suspended as of November 11, 2004.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). We adopted the recognition and disclosure requirements of SFAS 158 in the fourth quarter of fiscal 2007. Additionally, SFAS 158 requires companies to measure plan assets and obligations at their fiscal year-end balance sheet date. In fiscal 2008, we early adopted the measurement date requirements of SFAS 158 for the Defined Benefit Pension Plan and the SERP, which were the only plans not using a fiscal year-end measurement date. The impact on the consolidated financial statements related to this measurement date change was not material.

See Note 11. Employee Benefit Plans to these consolidated financial statements for related disclosures.

Reserves for Self-Insurance and Postretirement Benefits

We maintain insurance programs covering our exposure to workers’ compensation, general and vehicle liability and health care claims. Such programs include the retention of certain levels of risks and costs through high deductibles and other risk retention strategies. Reserves for our retained exposures are estimated for reported but unpaid losses, as well as incurred but not reported losses, and are calculated based upon actuarially determined loss development factors, expected long-term medical cost trend rates and other assumptions considered by management, including assumptions provided by our external insurance brokers, consultants and actuaries. The factors and assumptions used for estimating reserves are subject to change based upon historical experience, changes in expected cost and inflation trends, discount rates and other factors.

Derivative Instruments

Derivative instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value. Changes in the fair value of derivatives are recorded each period in earnings or comprehensive income, to the extent effective, depending on whether the derivative is designated and qualifies for hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) during the current period. Changes in the fair value of derivative instruments recorded to accumulated other comprehensive income (loss)(AOCI) are reclassified to earnings in the period affected by the underlying hedged item. Any portion of the change in fair value of a derivative instrument determined to be ineffective under the rules is recognized in current earnings. We record the fair market value of our derivatives based on widely available market quotes, as well as information supplied by independent third parties. See Note 9. Derivative Instruments to these consolidated financial statements regarding our derivative hedging activities.

Accumulated Other Comprehensive Income (Loss)

AOCI relates to revenue, expenses, gains and losses which we reflect in stockholders’ equity but exclude from net income. We reflect the effect of accounting for derivative instruments which qualify for cash flow hedge accounting and the effect of the accounting for pension and other postretirement obligations pursuant to SFAS No. 158 in AOCI. See Note 21. Comprehensive Loss to these consolidated financial statements for related disclosures.

Revenue Recognition

We recognize our route and direct sales upon delivery of our products to the customer, net of estimated credits for dated and damaged products. These estimated credits are based upon historical experience and some actual return data. Our outlet sales are recognized upon purchase of products by customers at our retail stores. Sales tax collected from customers is excluded from sales. Collected but unremitted sales tax is included as part of accrued expenses in our consolidated balance sheets.

Sales Incentives

We record sales incentives such as discounts, coupons and rebates, as a reduction of net sales in our consolidated statements of operations.

Consideration Given to a Customer

We record certain costs incurred by us to benefit the reseller of our products, such as costs related to improved shelf space, improved shelf position and in-store marketing programs, as a reduction to net sales in our consolidated statements of operations.

Cost of Products Sold

Our cost of products sold consists of labor costs, ingredients, packaging, energy and other production costs. The primary ingredients used in producing our products are flour, sweeteners, edible oils, yeast, cocoa and the other ingredients used to produce our extended shelf life products.

Advertising and Promotion Costs

We record advertising and promotion costs in selling and delivery expenses. Advertising and promotion costs, through both national and regional media, are expensed in the period in which the costs are incurred. Such costs amounted to approximately $25.6 million, $27.7 million, and $35.8 million for fiscal 2008, 2007, and 2006, respectively. At May 31, 2008 and June 2, 2007, prepaid advertising assets were $0.4 million and $0.3 million, respectively.

Shipping and Handling Costs

We record shipping and handling costs in selling, delivery and administrative expenses. Such costs amounted to approximately $626.2 million, $628.2 million, and $695.6 million for fiscal 2008, 2007, and 2006, respectively.

Restructuring (Credits) Charges

Long-term asset impairments related to restructurings are determined and recorded as described in the section above entitled, “Impairment of long-lived assets.” Subsequent gains and losses on the sale of such assets are also included in restructuring (credits) charges.

Reorganization Charges

Reorganization items are expense or income items that we incurred or realized because we are in bankruptcy. These items include professional fees and similar types of expenses incurred directly related to the Chapter 11 proceedings, loss accruals or gains or losses resulting from activities of the reorganization process, payroll related expenses to retain key employees during our reorganization, costs and claims which stem from the rejection of leases, and interest earned on cash accumulated by us because we are not paying a substantial portion of our pre-petition liabilities. See Note 15. Reorganization Charges to these consolidated financial statements for related disclosures.

Income Taxes

We account for income taxes using an asset and liability approach that is used to recognize deferred tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting and tax carrying amounts of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

We adopted FIN No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 in fiscal year 2008, which addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we recognize the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authority, based on the technical merits of the position. We include our reserve for unrecognized tax benefits, as well as related accrued penalties and interest, in other long term liabilities on our consolidated balance sheets and in provision for income taxes in our consolidated statements of earnings.

We provide a valuation allowance against deferred tax assets in accordance with SFAS No. 109, Accounting for Income Taxes if, based on management’s assessment of operating results and other available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. See Note 16. Income Taxes to these consolidated financial statements for related disclosures.

Stock-Based Compensation

Effective June 4, 2006, we adopted the provisions of SFAS No. 123R (Revised 2004), Share-Based Payment (SFAS 123R), which amended SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and superseded Accounting Principles Board Opinion (APB Opinion) No. 25, Accounting for Stock Issued to Employees (APB Opinion 25). SFAS 123R generally requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value and to recognize the cost over the requisite service period. Prior to the adoption of SFAS 123R, we used the intrinsic value method prescribed in APB Opinion 25, and related interpretations in accounting for our 1996 Stock Incentive Plan, and therefore, no compensation expense was recognized for stock options issued under the Plan.

See Note 13. Stock-Based Compensation to these consolidated financial statements for related disclosures.

Earnings per Share

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the effect of all potential dilutive common shares, primarily stock options outstanding under our stock compensation plan and the impact of our 6% senior subordinated convertible notes. See Note 20. Earnings (Loss) Per Share to these consolidated financial statements for related disclosures.

Related Party Transactions

On July 18, 2005, we entered into a supplemental letter agreement with A&M (the Incentive Fee Agreement), which sets forth the manner in which A&M’s incentive compensation is to be calculated under the Letter Agreement. Pursuant to the Bankruptcy Court’s October 25, 2004 order, notice of the Incentive Fee Agreement was provided to certain interested parties in our bankruptcy. Upon agreement of such parties, the time to object to the Incentive Fee Agreement has been extended indefinitely. Therefore, absent consent of such parties, the Incentive Fee Agreement remains subject to Bankruptcy Court approval and, accordingly, its terms will not become effective until such consent or approval has been obtained. Pursuant to the Incentive Fee Agreement, A&M is entitled to incentive compensation to be based on five percent of our Total Enterprise Value (as defined in the Incentive Fee Agreement) in excess of $723 million. Total Enterprise Value consists of two components: (1) our total cash balance as of the effective date of our plan of reorganization, less the normalized level of cash required by us in the ordinary course of business, plus (2) either (a) the midpoint enterprise value set forth in the disclosure statement with respect to our plan of reorganization as confirmed by the Bankruptcy Court or (b) the aggregate consideration received by us in a sale. Under all circumstances other than a liquidation of our Company (in which case A&M will have no guaranteed incentive compensation), A&M’s incentive compensation will be a minimum of $3.9 million, if approved by the Bankruptcy Court. The incentive compensation would, if approved, be payable upon the consummation of our plan of reorganization.

In October 2006, The Andersons, Inc. was the successful bidder in a live auction we held to sell a purchase option we controlled as to 89 railcars we leased. Michael J. Anderson, a current director, is the President and Chief Executive Officer of The Andersons, Inc. We issued Request for Bids to eight railcar lessors, one of which was The Andersons, Inc. Seven bidders submitted bids. In the arms-length bidding process, each of the seven bidders was required to submit a bid that included specific terms, including buying our purchase option, immediately exercising the purchase option, purchasing the railcars, and thereafter leasing the railcars to our flour suppliers for a specified period of time. We held a live identity-preserved auction with the top three bidders, and The Andersons, Inc. was the highest bidder. The auction process and results were approved by the Bankruptcy Court in November 2006. The Andersons, Inc. paid IBC approximately $1.2 million for the right to exercise the purchase option with the lessor, all of which IBC recorded as other income in the second quarter of fiscal 2007.

Contingencies

Various lawsuits, claims and proceedings are pending against us. In accordance with SFAS No. 5, Accounting for Contingencies, we record accruals for such contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. See Note 17. Commitments and Contingencies to these consolidated financial statements for related disclosures.

Newly Adopted Accounting Pronouncements

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. We adopted the provisions of FIN 48 on June 3, 2007. FIN 48 clarifies the way that companies account for uncertainty in income taxes by prescribing a consistent recognition threshold and measurement attribute, as well as establishing criteria for subsequently recognizing, derecognizing, and measuring such tax positions for financial statement purposes. The interpretation also requires expanded disclosure with respect to uncertain income tax positions. See Note 16. Income Taxes to these consolidated financial statements for related disclosures.

In September 2006, the FASB issued SFAS 158. We adopted the recognition and disclosure requirements of SFAS 158 in the fourth quarter of fiscal 2007. Additionally, SFAS 158 requires companies to measure plan assets and obligations at their fiscal year-end balance sheet date. In fiscal 2008, we early adopted the measurement date requirements of SFAS 158 for the Defined Benefit Pension Plan and the SERP, which were the only plans not using a fiscal year-end measurement date. The impact on the consolidated financial statements related to this measurement date change was not material.

Recently Issued Accounting Pronouncements

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This Statement is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We believe the adoption of SFAS 162 will have no impact on our consolidated results of operations, cash flows, and financial position.

In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. FSP 142-3 expands the disclosure requirements of SFAS 142 and is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. This Statement is effective for us in the first quarter of fiscal 2010. The guidance for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The adoption of FSP 142-3 will have an impact on our accounting for future acquisitions of intangible assets and our disclosures of

intangible assets as a whole on a prospective basis once adopted; however, the materiality of that impact cannot be determined.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities— an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires enhanced disclosures about derivative and hedging activities. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, and is effective for us at the beginning of the third quarter of fiscal 2009. Early application is encouraged.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (SFAS 160). SFAS 160 requires all entities to report noncontrolling interest in subsidiaries as equity in the consolidated financial statements. Additionally, SFAS 160 requires that all accounting transactions between an entity and noncontrolling interests to be treated as equity transactions. SFAS 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008, and is effective for us at the beginning of fiscal 2010. Earlier adoption is prohibited. We are currently in the process of evaluating the effects of the adoption of SFAS 160 on our consolidated results of operations, cash flows, and financial position.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R), which revised SFAS 141. SFAS 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction and any noncontrolling interest in the acquiree; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires the acquirer to disclose all information needed to evaluate and understand the nature and financial effect of the business combination; and requires the acquirer to expense acquisition-related costs in the periods in which the costs are incurred and the services are received except for the costs to issue debt or equity securities. SFAS 141R is to be applied 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, and is effective for us at the beginning of fiscal 2010. Earlier adoption is prohibited. The adoption of SFAS 141R would have an impact on our accounting for future business combinations on a prospective basis once adopted; however, the materiality of that impact cannot be determined.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (SFAS 159). SFAS 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007, and is effective for us at the beginning of fiscal 2009. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value that are not currently required to be measured at fair value. Accordingly, companies would then be required to report unrealized gains and losses on these items in earnings at each subsequent reporting date. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. We do not plan to elect the fair value treatment for any financial asset or liability under SFAS 159 as of the beginning of fiscal 2009.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. This statement applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007. However, FASB Staff Position No. FAS 157-2 defers the Statement’s effective date for certain non-financial assets and liabilities to fiscal years beginning after November 15, 2008, and will be effective for us in the first quarter of fiscal 2010. We are currently in the process of evaluating the effects of the adoption of SFAS 157 on our consolidated results of operations, cash flows, and financial position.

3. Property and Equipment

Property and equipment consists of the following:


	May 31,			June 2,
	2008			2007
	*(dollars in thousands*)
Land and buildings (lives ranging from 10 to 35 years)	$	359,133		$	390,147
Machinery and equipment (lives ranging from 4 to 15 years)		820,484			865,398


		1,179,617			1,255,545
Less accumulated depreciation		(715,162	)		(713,820	)


	$	464,455		$	541,725

On October 20, 2007, we exited the bread market in Southern California, which entailed the closure of four bakeries and the consolidation of routes and distribution centers. In connection with this process, we recorded a net impairment charge of approximately $9.8 million for the planned disposal of related machinery and equipment. Additionally, we incurred an impairment charge of approximately $0.7 million to adjust the carrying value of two of our distribution centers to net realizable value that we classified as assets held for sale.

In fiscal 2007, based upon our historical results of operations and the availability of newly projected financial information, we tested our long-lived assets for recoverability. The results of our testing indicated that the fair value of our long-lived assets exceeded the carrying value of the related assets. However, based upon planned usage, we recorded an adjustment to the carrying value of one facility which resulted in an impairment loss of approximately $1.4 million.

In fiscal 2006, the results of our testing for recoverability of our long-lived assets indicated that the carrying value of one of our asset groups exceeded our estimate of related fair value. Accordingly, we recorded an impairment loss of approximately $4.8 million related to the machinery and equipment in that asset group.

Depreciation expense was approximately $62.4 million, $69.5 million, and $75.7 million for fiscal 2008, 2007, and 2006, respectively.

Included in depreciation and amortization expense is approximately $50.4 million, $51.0 million, and $59.7 million in fiscal 2008, 2007, and 2006, respectively that relates to property and equipment used in our production process.

4. Assets Held for Sale

We have classified certain long-lived assets as held for sale in the consolidated balance sheets in accordance with the guidance provided by SFAS 144. Assets classified as held for sale reflect our ongoing effort to address revenue declines, cost structure and productive capacity in our physical facilities. Total assets held for sale at June 2, 2007 were approximately $2.0 million. These properties were all sold during fiscal 2008. During fiscal 2008, approximately $20.9 million in assets were classified as assets held for sale, which substantially represents the net assets related to the Southern California restructuring activities conducted in the second quarter of fiscal 2008. At May 31, 2008, total assets held for sale were approximately $17.6 million, all of which are expected to be sold within 12 months of classification as held for sale.

Net gains realized on the sale of our assets held for sale amounted to approximately $4.6 million, $7.9 million and $59.1 million for fiscal years 2008, 2007 and 2006, respectively. The majority of the gains realized on our asset sales relate to our restructuring activities and are classified as long-lived asset credits to our restructuring charges. See Note 14. Restructuring Charges (Credits) to these consolidated financial statements for related disclosures.

5. Lease Obligations

In the normal course of business, we enter into leases for office, transportation and delivery equipment as well as real estate used for both our retail outlets and as depots and warehouses in our distribution system. Future minimum lease payments under both operating and capital leases (exclusive of taxes, insurance, and all leases rejected as part of our reorganization process under our Chapter 11 proceedings as of May 31, 2008) are as follows:


Fiscal Years Ending	Capital Leases			Operating Leases
	*(dollars in thousands)*
2009	$	915		$	14,514
2010		778			7,526
2011		663			4,605
2012		478			3,229
2013		211			2,331
Thereafter		557			2,852


Total minimum lease payments		3,602		$	35,057


Amounts representing interest		(843	)


Present value of minimum lease payments		2,759
Less: Capital lease obligations, short-term		(2,759	)


Capital lease obligations, long-term	$	—

Net rental expense under operating leases was approximately $41.3 million, $46.4 million, and $54.4 million for fiscal 2008, 2007, and 2006, respectively. Some of the operating leases contain renewal options for varying periods. Certain leases provide us with an option to acquire the related equipment at a fair market value during or at the end of the lease term.

We have in place various operating leases on equipment for which we have guaranteed a buyout price or residual value at the end of the lease term. Substantially all such leases expire during fiscal 2009. At May 31, 2008, the maximum potential liability for all guaranteed lease residual values was approximately $3.2 million. At May 31, 2008 and June 2, 2007, there was an inconsequential unamortized liability remaining for the fair value originally recorded for these guaranteed lease residual values.

Certain of our leases for retail outlets and depots and warehouses in our distribution system are classified as capital leases. We had approximately $7.4 million and $9.0 million of asset cost under capital lease and related accumulated depreciation of approximately $5.3 million and $6.0 million at May 31, 2008 and June 2, 2007, respectively, included in land and buildings.

6. Intangible Assets

In fiscal 2008 and 2007, our annual impairment testing of our intangible assets indicated that no reduction in our carrying value was required.

Intangible assets consist of the following:


	May 31,			June 2,
	2008			2007
	*(dollars in thousands)*
Intangible assets with indefinite lives (generally trademarks and trade names)	$	157,471		$	157,471


Intangible assets with finite lives
Gross carrying amount	$	3,491		$	13,854
Less: Accumulated amortization		(2,677	)		(11,086	)


Net carrying amount	$	814		$	2,768

In fiscal 2008, 2007 and 2006 intangible amortization expense was approximately $0.9 million for each fiscal year. These amounts were primarily recorded as a reduction of net sales. Intangible amortization is estimated at $58,000 for each of the years from 2009 through 2013.

In connection with our exit of the bread market in Southern California during fiscal 2008, we cancelled a private label fresh baked goods supply agreement. The decrease in the gross carrying amount of our intangible assets with finite lives and the related accumulated amortization primarily represents a reduction of approximately $8.0 million and $6.4 million, respectively, due to this contract cancellation. The unamortized intangible asset reduction of approximately $1.6 million resulted from asset transfers of approximately $1.0 million and an asset impairment charge of approximately $0.6 million.

7. Debt

Long-term debt consists of the following:


	May 31,		June 2,
	2008		2007
	*(dollars in thousands)*
Secured
Post-petition debt	$	63,358	$	—
Pre-petition debt		450,248		447,757
Unsecured
6% senior subordinated convertible notes — pre-petition		99,999		99,999
Capital lease converted to pre-petition debt		6,125		6,125
Capital leases
Real estate		2,759		3,758


	$	622,489	$	557,639

Balance Sheet classification:
Pre-petition debt	$	2,759	$	451,515
Post-petition debt		63,358		—
Liabilities subject to compromise		556,372		106,124


	$	622,489	$	557,639

Post-Petition Debt

On September 23, 2004, we entered into the DIP Facility to fund our post-petition operating expenses, supplier and employee obligations. The DIP Facility has been amended numerous times, most recently on September 12, 2008. At May 31, 2008, the DIP Facility provided for an aggregate principle amount of approximately $245.5 million (the “Commitment”). Pursuant to amendment, our Commitment has been increased to $313.0 million, and also provides for additional funding of $16.0 million based on the occurrence of certain events. The maturity date of the Commitment as of May 31, 2008 was September 30, 2008, which has been extended by amendment to February 9, 2009. At May 31, 2008, the Commitment included (1) a Tranche A loan commitment in the amount of approximately $85.5 million and (2) a Tranche B loan commitment in the amount

of approximately $160.0 million. Pursuant to amendment, Tranche A and Tranche B commitments have been restated to $78.0 million and $235.0 million, respectively. This Commitment is to be permanently reduced by an amount equal to the net proceeds from any asset sales as defined under the DIP Facility that are required to be remitted to the lenders for repayment of outstanding borrowings. Any reduction in the Commitment resulting from the remittance of proceeds from asset sales to the lenders will first be applied to Tranche A and when Tranche A has been reduced to zero, then to Tranche B. The Commitment additionally provides with certain restrictions, for the issuance of letters of credit in the aggregate amount up to $180.0 million of which $129.1 million was utilized at May 31, 2008. At May 31, 2008, the borrowings and letters of credit were partially collateralized by approximately $21.1 million of restricted cash, as required by the DIP Facility. We pay fees under the DIP Facility on the balance of all letters of credit outstanding under Tranche A and Tranche B of 3.0% and 4.5 %, respectively. The Commitment is subject to the maintenance of a satisfactory Borrowing Base as defined by the DIP Facility. Obligations under the DIP Facility are secured by a superpriority lien in favor of the Lenders over virtually all of our assets. At May 31, 2008, we had outstanding borrowings of approximately $20.0 million and $43.3 million under Tranche A and Tranche B, respectively. Interest on borrowings is at either the Alternate Base Rate (ABR) (as defined in the amended DIP Facility, which sets the ABR at a minimum of 4.25%) plus 2.0% and 3.5% for Tranche A and Tranche B, respectively, or at our option, the adjusted London Interbank Offered Rate (Adjusted LIBOR) (as defined in the amended DIP Facility, which sets the Adjusted LIBOR at a minimum of 3.25%) plus 3.0% and 4.5% for Tranche A and Tranche B, respectively. Interest on the outstanding borrowings at May 31, 2008 was 6.0% and 7.7% for Tranche A and Tranche B, respectively. We also pay a commitment fee of 0.50% on the unused portion of the DIP Facility. Interest is payable monthly in arrears. As of May 31, 2008, we had $53.0 million available under the DIP Facility (of which up to $50.9 million could be used for the issuance of additional letters of credit).

The DIP Facility subjects us to certain obligations, including, but not limited to, the delivery of financial statements, cash flow forecasts and operating budgets at specified intervals and cumulative minimum EBITDA covenants. Furthermore, we are subject to certain limitations on the payment of indebtedness, entering into investments, the payment of capital expenditures, the incurrence of cash restructuring charges and the payment of dividends. In addition, payment under the DIP Facility may be accelerated following certain events of default including, but not limited to, (1) the conversion of any of the bankruptcy cases to cases under Chapter 7 of the Bankruptcy Code or the appointment of a trustee pursuant to Chapter 11 of the Bankruptcy Code; (2) our making certain payments of principal or interest on account of pre-petition indebtedness or payables; (3) a change of control (as defined in the DIP Facility); (4) an order of the Bankruptcy Court permitting holders of security interests to foreclose on the debt on any of our assets which have an aggregate value in excess of $0.3 million; and (5) the entry of any judgment in excess of $0.3 million against us, the enforcement of which remains unstayed. At May 31, 2008, we were in compliance with all financial covenants, terms and conditions of the DIP Facility.

Pre-Petition Debt

During fiscal year 2002, we entered into a $900.0 million Senior Secured Credit Facility agreement with a syndicate of banks and institutional lenders which includes (1) a five-year $375.0 million Tranche A term loan, repayable in quarterly installments; (2) a six-year $125.0 million Tranche B term loan, repayable in quarterly installments; (3) a six-year $100.0 million Tranche C term loan, repayable in quarterly installments; and (4) a five-year $300.0 million revolving loan, or the revolver, which allowed for up to $215.0 million for letters of credit. At May 31, 2008, we had outstanding borrowings of $173.4 million, $111.0 million, $89.7 million and $76.1 million under the Tranche A, Tranche B, Tranche C and the revolver, respectively. During the year ended May 31, 2008, the outstanding debt under the revolver was increased by $2.5 million resulting from draws against certain letters of credit. At May 31, 2008, outstanding letters of credit aggregated $85.1 million and there was no availability for additional borrowing or issuance of letters of credit under the revolver. The Senior Secured Credit Facility is secured by all accounts receivable and a majority of owned real property, intellectual property and equipment, which lien is subordinated to the superpriority lien of the DIP Facility. Interest on borrowings is at either the ABR (as defined in the Senior Secured Credit Facility) plus 3.0%, 3.25%, 3.0%, and 2.5% for Tranche A, Tranche B, Tranche C, and the revolver, respectively, or at our option LIBOR plus 4.0%, 4.25%, 4.0%, and 3.5% for Tranche A, Tranche B, Tranche C, and the revolver, respectively. Interest on the outstanding borrowings at May 31, 2008 was 6.8%, 7.1%, 6.8% and 6.3% for Tranche A, Tranche B, Tranche C, and the revolver, respectively. We also pay a facility fee of 0.50% on the

revolving credit facility commitment (currently in the amount of $161.2 million) and fees ranging from 3.625% to 4.0% on the balance of all letters of credit outstanding under the revolver.

The Senior Secured Credit Facility agreement contains covenants that, among other things, (1) limit our ability to incur indebtedness, merge, consolidate and acquire, dispose of or incur liens on assets; and (2) limit aggregate payments of cash dividends on common stock and common stock repurchases.

Claims of the senior secured lenders would be impaired under the terms of the proposed Second Amended Plan. Due to the uncertainty of the impairment of these claims, amounts due under the Senior Secured Credit Facility are included in liabilities subject to compromise as of May 31, 2008. We continue to accrue and pay contractual interest and fees under this facility in accordance with the existing Bankruptcy Court order. See Note 1. Voluntary Chapter 11 Filing to these consolidated financial statements for related disclosures. As of June 2, 2007, all of our debt under the Senior Secured Credit Facility was classified as payable within one year due to various defaults under the related credit agreement including our Chapter 11 filing on September 22, 2004.

6% Senior Subordinated Convertible Notes

On August 12, 2004, we issued $100.0 million aggregate principal amount of our 6.0% senior subordinated convertible notes due August 15, 2014 in a private placement. The notes are convertible at the option of the holder under certain circumstances into shares of our common stock at an initial conversion rate of 98.9854 shares per $1,000 principal amount of notes (an initial conversion price of $10.1025 per share), subject to adjustment.

We have classified the 6% senior subordinated convertible notes and certain capital leases which were converted to pre-petition debt, all of which are unsecured, as liabilities subject to compromise and, in accordance with the guidance provided by SOP 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, we have and continue to suspend the accrual of interest on this debt.

Other Matters

Under the bankruptcy code, actions to collect pre-petition indebtedness are stayed and our other contractual obligations may not be enforced against us. Therefore, such commitments may not reflect actual cash outlays in the future period.

We believe, based upon the variable nature of our interest terms, that the carrying value of our DIP Facility as of May 31, 2008 and our Senior Secured Credit Facility as of June 2, 2007 approximated fair value. Due to the inclusion of the Senior Secured Credit Facility at May 31, 2008 in liabilities subject to compromise, there is no reasonable method to determine fair value of the debt as of that date. Since our 6% Subordinated Convertible Notes are classified as liabilities subject to compromise, there is no reasonable method to determine the fair value of these notes at May 31, 2008 and June 2, 2007.

During fiscal 2007, we incurred approximately $2.0 million in debt fees associated with the eighth and ninth amendments of the DIP Facility. In the second and third quarters of fiscal 2008, we incurred approximately $1.2 million associated with the first and third amendments to the amended and restated DIP Facility. Additionally, in the second quarter of fiscal 2008, we incurred a fee of $5.0 million to secure an exit financing commitment related to our Chapter 11 proceedings. We incurred additional related expenses of $0.3 million in the third quarter of fiscal 2008. Based upon our inability to meet the terms of the Facility Commitment Letter, the deferred debt fees and expenses of $5.3 million were written off as reorganization expense in the third quarter of fiscal 2008. On May 9, 2008, in conjunction with the execution of our second amended and restated DIP Facility, we incurred bank fees and other third party expenses which aggregated approximately $7.9 million. Our deferred debt fees are classified as other assets and are being amortized as interest expense over the term of the respective debt agreements.

8. Accrued Expenses and Other Liabilities

Included in accrued expenses are the following:


	May 31,		June 2,
	2008		2007
	*(dollars in thousands)*
Self-insurance reserves	$	71,857	$	76,500
Payroll, vacation and other compensation		60,418		68,760
Current portion of obligations under pension and postretirement plans (See Note 11. Employee Benefit Plans)		39,377		40,166

Included in other liabilities are the following:


	May 31,		June 2,
	2008		2007
	*(dollars in thousands)*
Self-insurance reserves	$	127,926	$	128,487
Obligations under pension, postretirement and SERP plans (See Note 11. Employee Benefit Plans)		82,461		94,893

9. Derivative Instruments

We are exposed to market risks relative to commodity price fluctuations. To manage the volatility associated with this exposure, we utilize commodity derivative instruments to manage certain commodity prices. All financial instruments are used solely for hedging purposes and are not issued or held for speculative reasons.

Commodities we use in the production of our products are subject to wide price fluctuations, depending upon factors such as weather, crop production, worldwide market supply and demand and government regulation. Our objective is to utilize commodity hedging derivatives, including exchange traded futures and options on wheat, corn, soybean oil and certain fuels, to reduce our exposure to commodity price movements for future ingredient and energy needs. The strategy is to purchase futures and options to hedge the variability of cash flows related to the underlying commodity. The terms of such instruments, and the hedging transactions to which they relate, generally do not exceed one year. Our current financial condition could impede our ability to manage commodity price risk.

We enter into commodity derivatives, principally wheat, corn, soybean oil, and heating oil, in which we do not elect to apply hedge accounting. Realized and unrealized gains or losses on these positions are recorded in the consolidated statements of operations in cost of products sold or selling, delivery and administrative expenses, as appropriate.

Derivative commodity instruments accounted for under SFAS 133 are subject to mark-to-market accounting, under which changes in the market value of outstanding commodities are recognized as unrealized gains or losses in the consolidated statements of operations or AOCI in the period of change. We record the fair market value of our derivatives based on widely available market quotes, as well as information supplied by independent third parties.

During fiscal 2008 and 2007, we did not elect to apply hedge accounting for any of our derivative commodity purchases and all such derivatives were marked-to-market through cost of products sold or selling, delivery and administrative expenses, as appropriate. At May 31, 2008 and June 2, 2007, the fair value of our commodity derivatives was de minimis based upon widely available market quotes. There was no derivative activity in AOCI for fiscal 2008 and 2007.

We are exposed to credit losses in the event of nonperformance by counterparties on commodity derivatives.

10. Liabilities Subject to Compromise

Under bankruptcy law, actions by creditors to collect amounts we owe prior to the petition date are stayed and certain other pre-petition contractual obligations may not be enforced against us. All pre-petition amounts have been classified as liabilities subject to compromise in the fiscal 2008 and 2007 consolidated balance sheets except for secured debt and those other liabilities that we expect will not be impaired pursuant to a confirmed plan of reorganization.

On December 14, 2004, the Court entered an Order establishing March 21, 2005 as the last date for all persons and entities holding or wishing to assert bankruptcy claims against the Company or one of its subsidiaries to file a proof of claim form. As of August 14, 2008, we have received approximately 9,350 claims, some of which have been filed after the deadline established by the court. We continue to evaluate all claims asserted in the bankruptcy proceedings and file periodic motions with the court to reject, modify, liquidate or allow such claims. In addition, we may receive additional claims resulting from, among other things, the future rejection of executory contracts since the deadline to file a claim resulting from a contract rejection is a function of when such contracts are formally rejected. Amounts that we have recorded may, in certain instances, be different than amounts asserted by our creditors and remain subject to reconciliation and adjustment.

We received approval from the Court to pay or otherwise honor certain of our pre-petition obligations, including employee salaries and wages, benefits and certain tax and other claims. We also have suspended the accrual of interest on the unsecured 6% senior subordinated convertible notes in the aggregate principle amount of $100.0 million that we issued August 12, 2004. The cumulative contractual unrecorded interest at May 31, 2008 on these obligations was approximately $22.2 million. The unrecorded interest expense on these obligations was approximately $6.0 million for fiscal 2008, 2007, and 2006. See Note 7. Debt to these consolidated financial statements for a discussion of the credit arrangements we entered into subsequent to the Chapter 11 filing.

The following table summarizes the components of the liabilities subject to compromise in our consolidated balance sheet:


	May 31,		June 2,
	2008		2007
	*(dollars in thousands*)
Accounts payable	$	130,828	$	130,732
Taxes payable		4,637		5,741
Retirement obligations (SERP and deferred compensation)		20,200		15,063
Legal reserve		14,424		13,819
Interest bearing debt and capital leases		556,372		106,124
Other		25,031		19,074


	$	751,492	$	290,553

Claims of the senior secured lenders would be impaired under the terms of the Second Amended Plan. Due to the uncertainty of the impairment of these claims, amounts due under the Senior Secured Credit Facility are included in liabilities subject to compromise at May 31, 2008. See Note 7. Debt to these consolidated financial statements for related disclosures.

Liabilities subject to compromise for taxes payable decreased during fiscal 2008 principally due to the adoption of FIN 48. The increase in retirement obligations in fiscal 2008 primarily represents the classification of additional deferred compensation arrangements to liabilities subject to compromise, while the increase in other liabilities subject to compromise primarily reflects the settlement of various insurance claims.

11. Employee Benefit Plans

obligations at their fiscal year-end balance sheet date. In the fourth quarter of fiscal 2008, we early adopted the measurement date requirements of SFAS 158 for the Defined Benefit Pension Plan and the Supplemental Executive Retirement Plan (SERP), which were the only plans not using a fiscal year-end measurement date. The impact on the consolidated financial statements related to this measurement date change was not material.

American Bakers Association Retirement Plan

We participate in the American Bakers Association Retirement Plan, or ABA Plan, and believe that the ABA Plan has been historically administered as a multiple employer plan under ERISA and tax rules and should be treated as such. However, the amounts reflected in our financial statements were calculated on the basis of treating the ABA Plan as an aggregate of single employer plans under ERISA and tax rules, which is how the ABA Plan contends it should be treated. We have reflected our interest in the ABA Plan as an aggregate of single employer plans, despite our position on the proper characterization of the ABA Plan, due to representations we received from the ABA Plan and a 1979 determination issued by the Pension Benefit Guaranty Corporation (PBGC) (as discussed below). As of May 31, 2008, our net pension benefit obligation liability was approximately $69.1 million representing our respective interest in the ABA Plan, reflecting its characterization as an aggregate of single employer plans. We have and continue to use immediate recognition of the impact of all actuarial gains (losses) associated with the ABA Plan. When considering the unique circumstances surrounding the ABA Plan and the uncertainty of its status (as discussed below), we do not expect to realize any future economic benefits from retrospective plan amendments. Accordingly, we have and continue to immediately recognize the impact of all amounts associated with plan amendments for the ABA Plan.

As a result of a request made by us and the Kettering Baking Company, another participating employer in the ABA Plan, the PBGC, which is the federal governmental agency that insures and supervises defined benefit pension plans, revisited its 1979 determination that the ABA Plan was an aggregate of single employer plans and after reviewing the status of the ABA Plan, on August 8, 2006, made a final determination that the ABA Plan is a multiple employer plan under ERISA. On August 9, 2006, we filed a lawsuit in Bankruptcy Court seeking enforcement of the PBGC’s determination, but there can be no assurance as to whether we will obtain such enforcement or the amount of any reduction to our net benefit obligation liability. Accordingly, due to the lack of a definitive resolution of this uncertainty prior to the end of the fiscal periods presented herein, as noted above we have continued to reflect our interests in the ABA Plan as an aggregate of single employer plans.

We believe that treatment of the ABA Plan as a multiple employer plan will result in a significant reduction in our net pension benefit obligation with respect to our employee participants. The ultimate outcome of this uncertainty cannot presently be determined.

Since January 2006, we have not made required quarterly minimum funding contributions in the amount of approximately $20.8 million to the ABA Plan and have filed the necessary reports with the PBGC reporting such non-payment. In addition, since June 2006, we have received notice of corrective contributions under the single employer plan assumption totaling approximately $14.7 million, which we do not believe is correct. We have not made such contributions pending the resolution of the uncertainties surrounding the ABA Plan. However, we expect that the amount of such contributions would be significantly less if the ABA Plan is ultimately determined to be a multiple employer plan than the amounts assessed by the ABA Plan on their assumption that the plan was an aggregate of single employer plans.

The ABA Plan’s net benefit obligation liability is recorded in other liabilities except for the current portion of $35.5 million for both May 31, 2008 and June 2, 2007, which is recorded in accrued expenses. The current portion at those respective dates represents unpaid requested amounts.

We believe that the inability to completely withdraw from the ABA Plan could jeopardize our ability to emerge from bankruptcy and threaten our viability if we emerge. As a result, we (1) withdrew our active nonunion employees from the plan effective April 18, 2008 and (2) are working with the applicable unions to effect similar action with respect to our active union employees. This withdrawal would result in present plan benefit obligations remaining with the ABA Plan, while future benefits for active ABA Plan participants would be provided under a Company-sponsored plan or multi-employer plan.

The following tables detail our respective interest in the ABA Plan, reflecting its characterization as an aggregate of single employer plans.

Using an actuarial measurement date of May 31, selected financial information for the ABA Plan is as follows:


	May 31,			June 2,
	2008			2007
	*(dollars in thousands)*
Change in Benefit Obligation
Benefit obligation at beginning of year	$	60,465		$	55,543
Service cost		1,016			1,131
Interest cost		3,573			3,364
Actuarial (gain) loss		(3,812	)		4,251
Benefits paid and expenses		(4,117	)		(3,824	)
Curtailment gain		(302	)		—


Benefit obligation at end of year	$	56,823		$	60,465


Change in Fair Value of Negative Plan Assets
Fair value of plan assets at beginning of year	$	(7,715	)	$	(2,750	)
Actual return on plan assets		(816	)		(1,586	)
Employer contributions		377			445
Benefits paid and expenses		(4,117	)		(3,824	)


Fair value of negative plan assets at end of year	$	(12,271	)	$	(7,715	)


Funded Status	$	(69,094	)	$	(68,180	)


Amounts Recognized in the Balance Sheet
Accrued liabilities	$	(35,468	)	$	(35,468	)
Other liabilities		(33,626	)		(32,712	)


Net amount recognized	$	(69,094	)	$	(68,180	)


Amounts Recognized in Accumulated Other Comprehensive Income (Loss)	$	—		$	—

The following table provides the weighted-average assumptions used to determine projected benefit liability and benefit expense for the ABA Plan:


	Fifty-Two			Fifty-Two			Fifty-Three
	Weeks			Weeks			Weeks
	Ended			Ended			Ended
	May 31,			June 2,			June 3,
	2008			2007			2006
Weighted-average actuarial assumptions
Liability discount rate		6.7	%		6.1	%		6.3	%
Expense discount rate (immediate recognition)		6.7	%		6.1	%		6.3	%
Expected return on plan assets		7.5	%		7.5	%		7.5	%

The components of the pension (credit) expense for the ABA Plan as an aggregate of single employer plans are as follows:


	Fifty-Two			Fifty-Two		Fifty-Three
	Weeks			Weeks		Weeks
	Ended			Ended		Ended
	May 31,			June 2,		June 3,
	2008			2007		2006
	*(dollars in thousands)*
Service cost	$	1,016		$	1,131	$	1,579
Interest cost		3,573			3,364		3,208
Expected return on negative plan assets		732			365		248
Recognition of Actuarial (gain) loss		(3,727	)		5,473		(5,555	)


Total periodic pension (credit) cost		1,594			10,333		(520	)
Curtailment gain		(302	)		—		(1,176	)


Net pension (credit) expense	$	1,292		$	10,333	$	(1,696	)

Fiscal 2008 and 2007 net pension expense, reflected in the table above, includes fourth quarter annual actuarial adjustments totaling $4.0 million and $5.5 million, respectively.

The ABA Plan is invested in a diversified portfolio of securities. The plan asset categories as of May 31, 2008 are as follows: domestic equities 61.5%, fixed income 38.0% and cash and cash equivalents 0.5%.

Based upon historical returns, current asset mix and the target asset allocation as determined by the plan’s trustees, we have used a weighted average expected return on plan assets of 7.5%.

The status of future employer contributions is currently unknown. Our estimated future benefit payments required under the ABA Plan are as follows:


Fiscal Years Ending	*(dollars in thousands*)

Benefit payments
2009	$	3,872
2010		3,917
2011		3,942
2012		3,993
2013		4,094
2014-2018		21,459

Defined Benefit Pension Plan, Postretirement Health and Life Plans, and Supplemental Executive Retirement Plan

Defined Benefit Pension Plan

In addition to the ABA Plan, we maintain a defined benefit pension plan to benefit certain union and nonunion employee groups, with participation generally resulting from business acquisitions.

Postretirement Health and Life Plans

In addition to providing retirement pension benefits, we provide health care and life insurance benefits for certain eligible retired employees.

Most union employees who have bargained into our company-sponsored postretirement health care and life plans are generally eligible for coverage under the plan beginning between ages 55 to 60, with 10 to 20 years of service. Most of the plans require contributions by retirees and spouses and a limited number of participants have supplemental benefits after Medicare eligibility.

Supplemental Executive Retirement Plan

We established a SERP effective June 2, 2002, which provided retirement benefits to certain officers and other select employees. The SERP is a non-tax qualified mechanism, which was intended to enhance our ability to retain the services of certain employees. The benefits were limited to a maximum of 1.8% of a participant’s final average salary multiplied by the years of credited service up to twenty years. In fiscal 2003, we entered into a rabbi trust agreement to hold the assets of the SERP for our participating employees. Included in other assets on the

consolidated balance sheet as of May 31, 2008 and June 2, 2007 is approximately $6.5 million and $6.2 million, respectively, of restricted assets held in the rabbi trust.

We suspended the SERP as of November 11, 2004. Approximately $12.1 million and $11.1 million representing the portion of the SERP liability, at May 31, 2008 and June 2, 2007, respectively, attributable to retired participants has been reclassified to liabilities subject to compromise.

Selected Financial Information

Selected financial information using an actuarial measurement date of May 31 for the Defined Benefit Pension Plan, SERP, and Postretirement Health and Life Plans is as follows:


	Pension						Postretirement						SERP
	May 31,			June 2,			May 31,			June 2,			May 31,			June 2,
	2008			2007			2008			2007			2008			2007
							*(dollars in thousands)*
Change in Benefit Obligation
Benefit obligation at beginning of year	$	68,924		$	70,490		$	54,241		$	58,345		$	23,063		$	23,822
Service cost		986			924			905			1,069			—			—
Interest cost		4,709			3,968			2,700			3,374			1,614			1,370
Participant contributions		69			55			1,512			1,776			—			—
Actuarial (gain) loss		(3,797	)		(1,723	)		(13,205	)		(3,929	)		(2,554	)		(2,129	)
Benefits paid and expenses		(5,625	)		(4,790	)		(4,816	)		(6,394	)		—			—
Plan amendment		446			—			—			—			—			—


Benefit obligation at end of year	$	65,712		$	68,924		$	41,337		$	54,241		$	22,123		$	23,063


Change in Fair Value of Plan Assets
Fair value of plan assets at beginning of year	$	68,260		$	65,971		$	—		$	—		$	—		$	—
Actual return on plan assets		1,651			7,024			—			—			—			—
Employer contributions		—			—			—			—			—			—
Participant contributions		69			55			—			—			—			—
Benefits paid and expenses		(5,625	)		(4,790	)		—			—			—			—


Fair value of plan assets at end of year	$	64,355		$	68,260		$	—		$	—		$	—		$	—


Reconciliation of Funded Status
Funded Status	$	(1,357	)	$	(664	)	$	(41,337	)	$	(54,241	)	$	(22,123	)	$	(23,063	)
Unrecognized net actuarial (gain) loss		—			—			—			—			—			—
Unrecognized prior service cost		—			—			—			—			—			—


Net pension liability	$	(1,357	)	$	(664	)	$	(41,337	)	$	(54,241	)	$	(22,123	)	$	(23,063	)


Amounts Recognized in the Balance Sheet
Accrued liabilities	$	—		$	—		$	(3,909	)	$	(4,698	)	$	—		$	—
Other liabilities		(1,357	)		(664	)		(37,428	)		(49,543	)		(10,050	)		(11,974	)
Liabilities subject to compromise		—			—			—			—			(12,073	)		(11,089	)


Net amount recognized	$	(1,357	)	$	(664	)	$	(41,337	)	$	(54,241	)	$	(22,123	)	$	(23,063	)


Amounts Recognized in Accumulated Other Comprehensive Income (Loss)
Net actuarial gain (loss)	$	(5,033	)	$	(3,958	)	$	(2,205	)	$	(15,598	)	$	5,266		$	2,795
Prior service credit (cost)		(1,843	)		(1,714	)		41,089			48,480			—			—


Total	$	(6,876	)	$	(5,672	)	$	38,884		$	32,882		$	5,266		$	2,795

The following table provides the weighted-average assumptions used to determine projected benefit liability and benefit expense for the plans:

Pension

Postretirement

SERP

Fifty-

Two

Three

Two

Three

Two

Three

Weeks

Ended

May 31,

June 2,

June 3,

May 31,

June 2,

June 3,

May 31,

June 2,

June 3,

2008

2007

2006

2008

2007

2006

2008

2007

2006

(dollars in thousands)

Weighted-average actuarial assumptions

Liability discount rate

6.7

6.0

5.8

6.5

6.1

6.3

6.7

6.0

5.8

Expense discount rate

6.0

5.8

6.0

6.1

6.3

5.5

6.0

5.8

6.0

Expected return on plan assets

8.5

N/A

The components of net periodic benefit cost (credit) are as follows:


	Pension									Postretirement									SERP
	Fifty-			Fifty-			Fifty-			Fifty-			Fifty-			Fifty-			Fifty-			Fifty-		Fifty-
	Two			Two			Three			Two			Two			Three			Two			Two		Three
	Weeks			Weeks			Weeks			Weeks			Weeks			Weeks			Weeks			Weeks		Weeks
	Ended			Ended			Ended			Ended			Ended			Ended			Ended			Ended		Ended
	May 31,			June 2,			June 3,			May 31,			June 2,			June 3,			May 31,			June 2,		June 3,
	2008			2007			2006			2008			2007			2006			2008			2007		2006
	*(dollars in thousands)*
Service cost	$	845		$	924		$	904		$	905		$	1,069		$	1,444		$	—		$	—	$	—
Interest cost		4,037			3,968			4,038			2,700			3,374			3,391			1,384			1,370		1,354
Expected return on plan assets		(5,591	)		(5,402	)		(4,885	)		—			—			—			—			—		—
Amortization of prior service cost (credit)		272			275			285			(7,392	)		(7,392	)		(7,392	)		—			—		—
Recognized net actuarial loss		—			32			542			187			990			1,308			(72	)		—		—


Net periodic benefit cost (credit)	$	(437	)	$	(203	)	$	884		$	(3,600	)	$	(1,959	)	$	(1,249	)	$	1,312		$	1,370	$	1,354

The estimated amount that will be amortized from AOCI into net periodic benefit cost in fiscal 2009 is as follow:


	Pension		Postretirement			SERP
	*(dollars in thousands)*
Net actuarial (gain) loss	$	—	$	—		$	(501	)
Prior service cost (credit)		330		(6,928	)		—


Total estimated 2008 amortization	$	330	$	(6,928	)	$	(501	)

Future Funding and Benefit Payments

Our estimated future cash flows are as follows:


Fiscal Years Ending	Pension		Postretirement		SERP
	*(dollars in thousands)*
Employer contributions (reduced by expected participant contributions)
2009	$	—	$	3,909		(A	)

Benefit payments
2009	$	4,783	$	5,211		(A	)
2010		4,799		4,827		(A	)
2011		4,850		4,739		(A	)
2012		4,915		4,562		(A	)
2013		4,990		4,395		(A	)
2014-2018		25,722		21,170		(A	)

(A) Due to the suspension of the SERP, we are not currently contributing funds to the rabbi trust or paying benefits to retirees. Future contributions and benefit payments are dependent on the disposition of the plan in conjunction with the bankruptcy reorganization plan.

Defined Benefit Pension Plan Assets

The defined benefit pension plan is invested in a diversified portfolio of securities. The plan asset allocation as of the plan measurement date and target asset allocations are as follows:


				Percentage of Plan Assets
				at the Measurement Date
	Target			May 31,			June 2,
	Allocation			2008			2007
Equity securities		78.0	%		77.0	%		77.6	%
Debt securities		22.0			21.0			21.2
Cash and cash equivalents		—			2.0			1.2


Total		100.0	%		100.0	%		100.0	%

Postretirement Health Care Cost Trend Rates

The assumed health care cost trend rate, used in determining postretirement benefits, at the measurement date is as follows:


	May 31,			June 2,
	2008			2007
Health care cost trend rate for next year		10.0	%		10.0	%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)		6.0	%		6.0	%
Year the rates reach the ultimate trend rate		2016			2015

Assumed health care cost trend rates affect the amounts reported for the postretirement life and health plan. A one-percentage-point change in the assumed health care cost trend rate would have the following effect:


	1%		1%
	Increase		Decrease
	*(dollars in thousands)*
Effect on total of service and interest cost	$	393	$	(347	)
Effect on postretirement benefit obligation		3,689		(3,310	)

Employee Stock Purchase Plan

On September 21, 2004, in conjunction with our bankruptcy filing, we terminated our 1991 Employee Stock Purchase Plan. The Plan was noncompensatory, which allowed all eligible employees to purchase our common stock.

Defined Contribution Retirement Plans

We sponsor defined contribution retirement plans for eligible employees not covered by union plans. The union plan provides for matching and unmatched company contributions as required by collective bargaining agreements for certain union groups which have bargained into the plan. The nonunion plan generally provides for voluntary employee contributions, matching company contributions (based on voluntary employee salary reductions) plus a discretionary company profit-driven contribution. We did not, nor do we intend to, make the discretionary company contribution under our nonunion defined contribution retirement plan for calendar years 2008, 2007 and 2006. Retirement expense related to this plan was approximately $3.8 million, $4.3 million and $5.2 million for fiscal 2008, 2007, and 2006, respectively.

Negotiated Multi-Employer Pension Plans

Approximately 82% of our employees are covered by collective bargaining agreements. We contribute to 42 multi-employer pension plans on behalf of employees covered by our collective bargaining agreements. The Bakery and Confectionery Union and Industry International Pension Fund, which covers the largest number of our union employees, provides retirement benefits to approximately 9,100 of our total employees. Our collective bargaining agreements determine the amount of annual contributions we are required to make to the multi-employer pension plans in which our union employees participate. The pension plans provide defined benefits to retired participants and, in some cases, their beneficiaries. The multi-employer plans are managed by trustees, who are appointed by management of the employers participating in the plans (including our company, in some cases) and the affiliated unions, who have fiduciary obligations to act prudently and in the best interests of the plan’s participants. We recognize as net pension cost contractually required contributions and special periodic assessments, and recognize as a liability any contribution due or unpaid. Expense for these plans was approximately $109.3 million, $115.7 million and $125.8 million for fiscal 2008, 2007, and 2006, respectively. Based on the most recent information available to us, we believe that certain of the multi-employer pension plans to which we contribute are substantially underfunded and that our contribution obligations to such plans may increase due to pension reform legislation enacted in August 2006.

Under current law regarding multi-employer pension plans, a termination, withdrawal or significant partial withdrawal from any such plan, which was underfunded, would render us liable for our proportionate share of that underfunding. This potential unfunded pension liability also applies ratably to other contributing employers, including our unionized competitors. Information regarding underfunding is generally not provided by plan administrators and trustees on a current basis and when provided, is difficult to independently validate. Any public information available relative to multi-employer pension plans is often dated as well.

Multi-Employer Postretirement Health Care Benefit Plans

We also participate in a number of multi-employer plans which provide postretirement health care benefits to substantially all union employees not covered by our plans. Amounts reflected as benefit cost and contributed to

such plans, including amounts related to health care benefits for active employees, totaled approximately $171.3 million, $180.5 million, and $195.0 million in fiscal 2008, 2007, and 2006, respectively.

12. Key Employee Retention Plan

On February 17, 2005, the Bankruptcy Court approved a Key Employee Retention Plan, or the KERP, which was designed to provide incentives to retain key employees of IBC during our reorganization and restructuring period. The plan provides first for a retention bonus which would compensate senior participants to remain with IBC during and throughout the reorganization and restructuring process. Second, for the fiscal year 2005, there was a performance bonus element of the plan which rewards key management employees for successfully meeting or exceeding a predetermined range of earnings before interest, taxes, depreciation, amortization and restructuring (EBITDAR). The performance bonus was fully paid in fiscal 2007 under the terms of the plan. Retention and performance bonus amounts were calculated using varying percentages of annual compensation based upon management positions held within IBC and, in the case of the performance bonus component, the degree to which the financial goal of EBITDAR was met or exceeded.

Expense under the KERP for fiscal 2008, 2007 and 2006 is classified as employee retention expense and is included in reorganization expense, see Note 15. Reorganization Charges to these consolidated financial statements. The aggregate expense incurred under the KERP was approximately $12.7 million all of which was paid or accrued by the end of fiscal 2008.

13. Stock-Based Compensation

Effective June 4, 2006, we adopted the provisions of SFAS No. 123R, Share-Based Payment (SFAS 123R), which generally requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value and to recognize the cost over the requisite service period. Prior to the adoption of SFAS 123R, we used the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for our 1996 Stock Incentive Plan, and therefore, no compensation expense was recognized for stock options issued under the Plan.

We adopted SFAS 123R using the modified prospective method. In accordance with the modified prospective transition method, our consolidated financial statements for prior periods have not been restated to reflect the impact of SFAS 123R. The cumulative impact of adopting SFAS 123R on the unvested equity-based awards, which were granted prior to 2007, was inconsequential to the consolidated statement of operations. Additionally, in conjunction with the adoption of SFAS 123R, the unearned restricted stock compensation balance of approximately $1.9 million was reclassified within the consolidated statement of stockholders’ equity (deficit) for fiscal 2007 to additional paid-in capital.

1996 Stock Incentive Plan

The 1996 Stock Incentive Plan (the Plan) allows us to grant to employees and directors various stock awards including stock options, which are granted at prices not less than the fair market value at the date of grant, and restricted and deferred shares. A maximum of approximately 18.7 million shares was approved by our stockholders to be issued under the Plan. On May 31, 2008, shares totaling approximately 10.0 million were authorized but not awarded under the Plan. The stock options may be granted for a period not to exceed ten years and generally vest from one to three years from the date of grant. Our current practice is to settle awards out of treasury stock.

An analysis of our stock option activity is as follows:


						Weighted
				Weighted		Average
				Average		Remaining
				Exercise Price		Contractual
	Shares			Per Share		Term
	*(in thousands)*
Outstanding, as of June 3, 2006		4,099		$	16.41		4.6
Granted		—			—
Surrendered		(835	)		19.22
Exercised		—			—


Outstanding, as of June 2, 2007		3,264			15.69		4.2
Granted		—			—
Surrendered		(704	)		19.64
Exercised		—			—


Outstanding, as of May 31, 2008		2,560			14.61		3.4


Exercisable at May 31, 2008		2,560			14.61		3.4

The total intrinsic value of options exercised during fiscal 2006 was approximately $71,000. There were no stock options exercised in fiscal 2008 and 2007. In addition, there were no stock options granted in fiscal 2008, 2007, and 2006. The exercisable stock options have no aggregate intrinsic value at May 31, 2008.

On January 23, 2004, we exchanged outstanding options to purchase shares of our common stock with exercise prices of $25.00 or greater held by certain eligible employees for shares of restricted stock. The offer resulted in the exchange of options representing the right to purchase an aggregate of approximately 3.5 million shares of our common stock for approximately 0.5 million shares of restricted stock. The restricted stock, which vested ratably over a four-year term, was granted, and the eligible options were granted, under the Plan. We used approximately 0.5 million shares of treasury stock for the award and recorded approximately $7.4 million of unearned compensation as a reduction to stockholders’ equity. The unearned compensation was charged to expense over the vesting period. During the third quarter of fiscal 2008, the final vesting occurred and a majority of the restricted stock was forfeited. Accordingly, virtually all of the unearned compensation expense of approximately $0.5 million was reversed, which reduced the fiscal 2008 expense to an insignificant amount. For fiscal 2007 and 2006, the unearned compensation expense was approximately $1.1 million and $1.4 million, respectively. In addition, there were no restricted stock grants in fiscal 2008, 2007, and 2006.

The table below summarizes the nonvested restricted stock transactions:


				Weighted
				Average
				Fair Value at
	Shares			Grant Date
	*(in thousands)*
Nonvested, as of June 2, 2007		73		$	14.46
Granted		—			—
Vested		(27	)		14.80
Surrendered		(46	)		14.26


Nonvested, as of May 31, 2008		—			—

On May 31, 2008, approximately 12.7 million total shares of common stock were reserved for issuance under various employee benefit plans.

Pro Forma Employee Stock-Based Compensation Expense

Prior to June 3, 2006, we used the intrinsic value method to account for stock-based employee compensation in accordance with the provisions and related interpretations of APB Opinion 25. As required by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123, the following table is a reconciliation of the estimated pro forma net income and earnings per share had the stock-based employee compensation cost been determined based on the fair value method for fiscal 2006:


	Fifty-Three
	Weeks
	Ended
	June 3,
	2006
	*(dollars in thousands,*
	*except per share data)*
Net loss, as reported	$	(128,317	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		944
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,375	)


Pro forma net loss	$	(128,748	)


Basic and diluted loss per share
As reported	$	(2.84	)
Pro forma		(2.85	)

14. Restructuring Charges (Credits)

The following table summarizes the restructuring charges (credits) incurred in fiscal 2008, 2007, and 2006 for plans initiated in fiscal 2008 and prior:


	Fifty-Two			Fifty-Two			Fifty-Three
	Weeks			Weeks			Weeks
	Ended			Ended			Ended
	May 31,			June 2,			June 3,
	2008			2007			2006
	*(dollars in thousands)*
Severance costs	$	7,181		$	(414	)	$	6,101
Long-lived asset (credits) charges		(3,512	)		(5,511	)		(38,570	)
Curtailment gain on a benefit plan		—			—			(706	)
Other exit costs		2,005			1,852			5,988


Total	$	5,674		$	(4,073	)	$	(27,187	)

Fiscal 2008 Restructuring Plans

During fiscal 2008 we received approval for two additional restructuring plans, including the Southern California restructuring plan whereby we exited the bread market in Southern California and closed four bakeries and consolidated routes and distribution centers. We also initiated a sales reorganization restructuring plan to improve the structure and efficiency of the route delivery and sales of our baked goods.

We incurred severance and related benefit costs of approximately $5.3 million for the elimination of approximately 1,300 employee positions in connection with our Southern California restructuring efforts and approximately $1.1

million for the elimination of approximately 200 sales manager positions as part of the restructuring of our sales organization.

During fiscal 2008 we recognized gains of approximately $3.6 million for the sale of machinery, equipment and real estate related to the Southern California restructuring. We incurred an impairment of a deferred asset of approximately $0.6 million which was related to our operations in the bread market of Southern California.

We continue to incur ongoing expenses related to our real estate that is held for sale, which would include utilities, security, maintenance, cleanup and costs for the relocation of employees during the closure of certain of our facilities. These costs aggregated approximately $1.5 million and $0.4 million for our restructuring activities in Southern California and our sales reorganization activities, respectively.

Fiscal 2006 Restructuring Plans

In fiscal 2006, we continued our review of the operations in our various profit centers (now referred to as business units), which was started in fiscal 2005 (discussed below). As a result of this continued review process, we closed an additional four bakeries and consolidated routes, depots and retail stores in the remaining seven PCs including Northern California, Southern California, the Pacific Northwest, North Central, South Central, Southeast and the Upper Midwest. These restructuring activities resulted in a net restructuring credit of approximately $5.2 million during fiscal 2006. We terminated approximately 2,080 employee positions for which we incurred approximately $6.2 million in severance charges and incurred other exit costs of approximately $3.0 million, principally related to cleanup, taxes, security, utilities and equipment removal charges. Offsetting these costs, we realized gains on the sale of certain real property during the year of approximately $31.5 million, which was partially offset by equipment and real property impairment charges of approximately $17.1 million to reduce certain real property and equipment to fair value.

As we continued to execute this restructuring, we realized a net restructuring credit of approximately $5.8 million in fiscal 2007 comprised primarily of additional net gains on the sale of real estate and equipment of approximately $6.2 million and restructuring credits due to the expiration of certain obligations for severance payments of approximately $0.2 million, partially offset by additional other exit costs of approximately $0.6 million. In fiscal 2008, we incurred a charge of approximately $0.7 million for additional employee benefit costs.

During fiscal 2006, we also initiated activities to close several accounting offices which resulted in severance charges of approximately $0.3 million and $0.2 million in fiscal 2006 and 2007, respectively.

Fiscal 2005 Restructuring Plans

In the first three quarters of fiscal 2005, we underwent a process of consolidating operations in order to achieve production efficiencies and more effectively allocate production capacity, as well as continue to serve most of our existing customers. In conjunction with this consolidation effort, we closed three bakeries and 35 outlet stores and initiated a company-wide reduction in force, all of which resulted in a net reduction of approximately 540 employee positions. In fiscal 2006, we incurred additional restructuring charges related to this plan of approximately $0.7 million, including asset impairment charges of approximately $0.3 million and exit charges of approximately $0.4 million. Costs incurred in fiscal 2007 to complete the plan included approximately $0.2 million in other exit costs and $0.1 million in net loss on the sale of real estate and equipment.

In further reviewing the actions necessary to improve profitability and to address continuing revenue declines coupled with a high-cost structure, in late fiscal 2005 we undertook an extensive review of our ten profit centers (now referred to as business units) in order to consolidate production, delivery routes, depots and bakery outlets. This review resulted in the closure of three bakeries along with the consolidation of various delivery routes, depots, and bakery outlets as well as the shifting of production to other bakeries which in all resulted in the elimination of approximately 2,230 employee positions.

In fiscal 2006, as we continued this profit center review, we realized a net credit of approximately $12.3 million for these activities. This included severance credits of approximately $0.4 million related to adjustments of severance accruals and net restructuring credits of approximately $15.7 million related to gains on the sale of equipment and

real property offset by additional asset impairments of approximately $1.9 million. Other charges totaling approximately $2.6 million were incurred for taxes, cleanup, security and utilities, as well as certain relocation adjustments, offset by approximately $0.7 million from a curtailment gain on a pension plan.

In fiscal 2007, we realized approximately $1.2 million of net restructuring charges associated with this profit center review. The net charges include approximately $0.9 million of other exit charges related to relocation, taxes, security, utilities, and cleanup, and approximately $2.2 million of equipment impairments, offset by approximately $1.6 million from net gains on sale of property, and approximately $0.3 million in severance credits.

In fiscal 2008, we recognized a gain of approximately $0.5 million on the sale of assets and approximately $0.2 million for other exit costs in connection with this profit center review.

Fiscal 2004 Restructuring Plan

In fiscal 2004, we initiated a major company-wide project that was referred to as Program SOAR, an acronym for Systems Optimization And Re-engineering, that was to focus on re-engineering our business processes to increase efficiency and on rationalizing our investment in production, distribution and administrative functionality. In fiscal 2006, we realized a net restructuring credit of approximately $10.7 million primarily reflecting gain on the sale of a bakery, which virtually completed this plan.

Fiscal 2003 Restructuring Plan

In fiscal 2003 we initiated restructuring activities for the closure of certain of our less efficient operations which included five bakeries and 96 outlets. This restructuring effort was substantially completed during fiscal 2005.

Substantially all of our restructuring credits and charges for all plans presented relate to our wholesale operations reportable segment, although our long-lived assets have not been specifically identified by segment for management analysis and decision-making purposes.

The analysis of our restructuring costs activity is as follows:


	Severance			Long-Lived
	and Related			Asset
	Benefits			Charges (Credits)			Other			Total
	*(dollars in thousands)*
Fiscal 2003 Plan

Balance May 28, 2005	$	—		$	—		$	—		$	—

Expensed in Fiscal 2006		—			(34	)		32			(2	)
Cash Paid in Fiscal 2006		—			—			(32	)		(32	)
Noncash Utilization in 2006		—			34			—			34

Balance June 3, 2006		—			—			—			—

Expensed in Fiscal 2007		—			—			—			—
Cash Paid in Fiscal 2007		—			—			—			—
Noncash Utilization in 2007		—			—			—			—

Balance June 2, 2007		—			—			—			—

Expensed in Fiscal 2008		—			—			—			—
Cash Paid in Fiscal 2008		—			—			—			—
Noncash Utilization in 2008		—			—			—			—

Balance May 31, 2008		—			—			—			—


Fiscal 2004 Plan

Balance May 28, 2005		55			—			—			55

Expensed in Fiscal 2006		—			(10,636	)		(97	)		(10,733	)
Cash Paid in Fiscal 2006		(55	)		—			97			42
Noncash Utilization in 2006		—			10,636			—			10,636


	Severance			Long-Lived
	and Related			Asset
	Benefits			Charges (Credits)			Other			Total
	*(dollars in thousands)*
Balance June 3, 2006		—			—			—			—

Expensed in Fiscal 2007		—			(8	)		4			(4	)
Cash Paid in Fiscal 2007		—			—			(4	)		(4	)
Noncash Utilization in 2007		—			8			—			8

Balance June 2, 2007		—			—			—			—

Expensed in Fiscal 2008		—			—			—			—
Cash Paid in Fiscal 2008		—			—			—			—
Noncash Utilization in 2008		—			—			—			—

Balance May 31, 2008		—			—			—			—


Fiscal 2005 Consolidation & RIF Plan

Balance May 28, 2005		796			—			—			796

Expensed in Fiscal 2006		—			270			438			708
Cash Paid in Fiscal 2006		(597	)		—			(438	)		(1,035	)
Noncash Utilization in 2006		—			(270	)		—			(270	)

Balance June 3, 2006		199			—			—			199

Expensed in Fiscal 2007		8			84			229			321
Cash Paid in Fiscal 2007		(197	)		—			(229	)		(426	)
Noncash Utilization in 2007		—			(84	)		—			(84	)

Balance June 2, 2007		10			—			—			10

Expensed in Fiscal 2008		—			—			—			—
Cash Paid in Fiscal 2008		—			—			—			—
Noncash Utilization in 2008		(10	)		—			—			(10	)

Balance May 31, 2008		—			—			—			—



Fiscal 2005 PC Review Plan

Balance May 28, 2005		7,613			—			—			7,613

Expensed in Fiscal 2006		(407	)		(13,769	)		1,884			(12,292	)
Cash Paid in Fiscal 2006		(6,313	)		—			(2,492	)		(8,805	)
Noncash Utilization in 2006		—			13,769			706			14,475

Balance June 3, 2006		893			—			98			991

Expensed in Fiscal 2007		(341	)		632			944			1,235
Cash Paid in Fiscal 2007		(548	)		—			(1,042	)		(1,590	)
Noncash Utilization in 2007		—			(632	)		—			(632	)

Balance June 2, 2007		4			—			—			4

Expensed in Fiscal 2008		—			(493	)		156			(337	)
Cash Paid in Fiscal 2008		—			—			(156	)		(156	)
Noncash Utilization in 2008		(4	)		493			—			489

Balance May 31, 2008		—			—			—			—



Fiscal 2006 PC Review Plan

Balance May 28, 2005		—			—			—			—

Expensed in Fiscal 2006		6,163			(14,401	)		3,025			(5,213	)
Cash Paid in Fiscal 2006		(5,163	)		—			(2,980	)		(8,143	)
Noncash Utilization in 2006		—			14,401			—			14,401

Balance June 3, 2006		1,000			—			45			1,045

Expensed in Fiscal 2007		(240	)		(6,219	)		620			(5,839	)
Cash Paid in Fiscal 2007		(700	)		—			(665	)		(1,365	)
Noncash Utilization in 2007		—			6,219			—			6,219

Balance June 2, 2007		60			—			—			60

Expensed in Fiscal 2008		761			—			3			764
Cash Paid in Fiscal 2008		(10	)		—			(3	)		(13	)
Noncash Utilization in 2008		(811	)		—			—			(811	)

Balance May 31, 2008		—			—			—			—


Fiscal 2006 Accounting Office Closings

Balance May 28, 2005		—			—			—			—

Expensed in Fiscal 2006		345			—			—			345
Cash Paid in Fiscal 2006		—			—			—			—
Noncash Utilization in 2006		—			—			—			—

Balance June 3, 2006		345			—			—			345

Expensed in Fiscal 2007		159			—			55			214


	Severance			Long-Lived
	and Related			Asset
	Benefits			Charges (Credits)			Other			Total
				*(dollars in thousands)*
Cash Paid in Fiscal 2007		(461	)		—			(46	)		(507	)
Noncash Utilization in 2007		—			—			—			—

Balance June 2, 2007		43			—			9			52

Expensed in Fiscal 2008		(25	)		—			—			(25	)
Cash Paid in Fiscal 2008		(23	)		—			—			(23	)
Noncash Utilization in 2008		5			—			(9	)		(4	)

Balance May 31, 2008		—			—			—			—


FY 2008 Southern California

Balance June 2, 2007		—			—			—			—

Expensed in Fiscal 2008		5,347			(3,019	)		1,494			3,822
Cash Paid in Fiscal 2008		(5,048	)		—			(1,494	)		(6,542	)
Noncash Utilization in 2008		—			3,019			—			3,019

Balance May 31, 2008		299			—			—			299


FY 2008 Sales Reorganization

Balance June 2, 2007		—			—			—			—

Expensed in Fiscal 2008		1,098			—			352			1,450
Cash Paid in Fiscal 2008		(1,058	)		—			(232	)		(1,290	)
Noncash Utilization in 2008		—			—			—			—

Balance May 31, 2008		40			—			120			160


Consolidated

Balance May 28, 2005		8,464			—			—			8,464

Expensed in Fiscal 2006		6,101			(38,570	)		5,282			(27,187	)
Cash Paid in Fiscal 2006		(12,128	)		—			(5,845	)		(17,973	)
Noncash Utilization in 2006		—			38,570			706			39,276

Balance June 3, 2006		2,437			—			143			2,580

Expensed in Fiscal 2007		(414	)		(5,511	)		1,852			(4,073	)
Cash Paid in Fiscal 2007		(1,906	)		—			(1,986	)		(3,892	)
Noncash Utilization in 2007		—			5,511			—			5,511

Balance June 2, 2007		117			—			9			126

Expensed in Fiscal 2008		7,181			(3,512	)		2,005			5,674
Cash Paid in Fiscal 2008		(6,139	)		—			(1,885	)		(8,024	)
Noncash Utilization in 2008		(820	)		3,512			(9	)		2,683

Balance May 31, 2008	$	339		$	—		$	120		$	459

Summarized below are the cumulative restructuring charges recognized through fiscal 2008 for all plans discussed, as well as expected remaining charges through plan completion. Most of the remaining costs are expected to be incurred during fiscal 2009.

Cumulative restructuring (credits) charges by plan (dollars in thousands):


			Long-Lived
	Severance		Asset
	and Related		Charges
	Benefits		(Credits)			Other			Total
Fiscal 2003 Plan	$	4,304	$	1,474		$	6,825		$	12,603

Fiscal 2004 Plan		2,537		(8,091	)		7,006			1,452

Fiscal 2005 Consolidation & RIF Plan		5,583		6,473			2,812			14,868

Fiscal 2005 PC Review Plan		6,865		18,796			(3,928	)		21,733

Fiscal 2006 PC Review Plan		6,684		(20,620	)		3,648			(10,288	)

Fiscal 2006 Accounting Office Closings		479		—			55			534

Fiscal 2008 Southern California		5,347		(3,019	)		1,494			3,822

Fiscal 2008 Sales Reorganization		1,098		—			352			1,450

We expect to incur future other restructuring charges for the fiscal 2008 Southern California plan totaling approximately $1.9 million. This amount excludes gains expected to be realized on subsequent sales of property and equipment.

15. Reorganization Charges

Reorganization charges are as follows:


	Fifty-Two Weeks Ended						Fifty-Two Weeks Ended						Fifty-Three Weeks Ended
	May 31, 2008						June 2, 2007						June 3, 2006
	Reorganization			Cash			Reorganization			Cash			Reorganization			Cash
	Charges			Payments			Charges			Payments			Charges			Payments
	(dollars in thousands)
Professional fees	$	39,881		$	38,853		$	35,352		$	37,374		$	35,089		$	35,211
Employee retention expenses (See Note 12)		72			366			963			3,317			6,047			4,332
Lease rejections		560			33			210			20			937			—
Interest income		(1,500	)		(1,083	)		(3,075	)		(3,794	)		(4,461	)		(3,562	)
Gain on sale of assets		(1,620	)		(1,620	)		(825	)		(825	)		(597	)		(597	)
Write-off of debt fees		5,326			—			—			—			—			—


Reorganization charges, net	$	42,719		$	36,549		$	32,625		$	36,092		$	37,015		$	35,384

16. Income Taxes

The reconciliation of the provision for income taxes to the statutory federal rate is as follows:


	Fifty-Two			Fifty-Two			Fifty-Three
	Weeks Ended			Weeks Ended			Weeks Ended
	May 31,			June 2,			June 3,
	2008			2007			2006
Statutory federal tax rate		35.0	%		35.0	%		35.0	%
State income tax, net		2.6			2.6			1.1
Permanent differences		(4.7	)		(1.7	)		(0.8	)
Valuation allowance increase		(27.5	)		(30.0	)		(25.9	)
Adjustments to prior year tax reserve and refundable credits		1.0			0.8			1.8
Other		0.1			(0.2	)		(0.3	)


		6.5	%		6.5	%		10.9	%

We utilize a specific federal net operating loss provision that permits a 10-year carryback of certain qualifying losses that is applicable to a portion of our net operating losses generated in fiscal 2008, 2007, and 2006.

In fiscal 2008, 2007, and 2006, we adjusted our estimate for prior year tax accruals based upon a review of recently closed tax audits, amended filings, and the status of prior tax years relative to the statutes of limitation in the jurisdictions in which we conduct business.

The components of the provision for (benefit from) income taxes are as follows:


	Fifty-Two			Fifty-Two			Fifty-Three
	Weeks Ended			Weeks Ended			Weeks Ended
	May 31,			June 2,			June 3,
	2008			2007			2006
	*(dollars in thousands)*
Current
Federal	$	(7,077	)	$	(5,785	)	$	(9,759	)
State		144			(1,251	)		(4,153	)


		(6,933	)		(7,036	)		(13,912	)


Deferred
Federal		(2,964	)		(755	)		(1,508	)
State		(67	)		(86	)		(173	)


		(3,031	)		(841	)		(1,681	)


	$	(9,964	)	$	(7,877	)	$	(15,593	)

Temporary differences and carryforwards which give rise to the deferred income tax assets and liabilities are as follows:


	May 31,			June 2,
	2008			2007
	*(dollars in thousands)*
Deferred tax liabilities:
Property and equipment	$	(102,020	)	$	(116,988	)
Intangibles		(48,977	)		(46,257	)
Other		(7,931	)		(10,735	)


Gross deferred tax liabilities		(158,928	)		(173,980	)


Deferred tax asset:
Payroll and benefits accruals		68,168			77,362
Self-insurance reserves		82,143			81,288
Net operating loss carryforwards		106,801			71,023
Other		11,009			10,850


Gross deferred tax assets		268,121			240,523
Less: Valuation allowance		(165,627	)		(123,281	)


Net deferred tax asset		102,494			117,242


Net deferred tax liability	$	(56,434	)	$	(56,738	)

Our deferred tax assets and liabilities are included in our consolidated balance sheets as follows:


	May 31,			June 2,
	2008			2007
	*(dollars in thousands)*
Other current assets	$	13,041		$	18,051
Deferred income taxes (non-current)		(69,475	)		(74,789	)


Net deferred tax liability	$	(56,434	)	$	(56,738	)

As of May 31, 2008, we have a federal net operating loss carryforward of $273.4 million, which expires May 2025 through May 2028 and state net operating loss carryforwards which expire by May 2028. We also have a federal Alternative Minimum Tax Credit which can be carried forward indefinitely of $0.7 million.

We provide a valuation allowance against deferred tax assets, if, based on management’s assessment of operating results and other available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

During fiscal years 2008, 2007 and 2006, we recorded valuation allowances relating to deferred tax assets originating in those years. The change in valuation allowance during fiscal year 2008 was an increase of $42.3 million.

We adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, on June 3, 2007. In accordance with the recognition standards established by FIN 48, we performed a comprehensive review of potential uncertain tax positions in each jurisdiction in which we operate. As a result of our review, we adjusted the carrying amount of the liability for unrecognized tax benefits resulting in an increase to stockholders’ accumulated deficit of $3.6 million. Upon adoption, we also recorded an increase to other long-term liabilities of $2.9 million, a reduction to other current assets of $1.7 million, and a reduction to liabilities subject to compromise of $1.0 million. Our valuation allowance against deferred tax assets includes $4.6 million and $4.8 million relating to unrecognized tax benefits as of May 31, 2008 and June 3, 2007, respectively.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):


Gross unrecognized tax benefits at June 3, 2007	$	10,564
Decreases in tax positions for prior years		(3,738	)
Increases in tax positions for current year		2,027


Gross unrecognized tax benefits at May 31, 2008	$	8,853

Our total liability for unrecognized tax benefits, including interest and penalties, is $8.9 million and $10.6 million as of May 31, 2008 and June 3, 2007, respectively. The portion of these balances which will favorably impact the effective tax rate, if recognized, is $8.9 million.

We recognize accrued interest and penalties related to uncertain tax positions in income tax expense. As of May 31, 2008 and June 3, 2007, the total amount of accrued income tax-related interest and penalties included in the consolidated balance sheet was $0.3 million and $0.4 million, respectively.

Our U.S. federal income tax returns have been examined by the Internal Revenue Service through fiscal 2006. With limited exception, in accordance with bankruptcy law, we believe that any audits of our state income tax returns for years prior to fiscal 2008 would not result in additional liabilities to us. We have various income tax returns in the process of examination or administrative appeal. To the extent that these matters conclude, it is reasonably possible that the amount of our unrecognized tax benefits will increase or decrease. However, we do not currently expect resolution of these matters to result in significant changes during the next twelve months.

17. Commitments and Contingencies

On September 22, 2004, or the Petition Date, we and each of our wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the Western District of Missouri, or the Bankruptcy Court (Case Nos. 04-45814, 04-45816, 04-45817, 04-45818, 04-45819,04-45820, 04-45821 and 04-45822). On September 24, 2004, the official committee of unsecured creditors was appointed in our Chapter 11 cases. Subsequently, on November 29, 2004, the official committee of equity security holders was appointed in our Chapter 11 cases. On January 14, 2006, Mrs. Cubbison’s, a subsidiary of which we are an eighty percent owner, filed a voluntary petition for relief under the Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). We are continuing to operate our business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. As a result of the filing, our pre-petition obligations, including obligations under debt instruments, may not be generally enforceable against us and any actions to collect

pre-petition indebtedness and most legal proceedings are automatically stayed, unless the stay is lifted by the Bankruptcy Court.

On August 12, 2004, we issued $100.0 million aggregate principal amount of our 6.0% senior subordinated convertible notes due August 15, 2014 in a private placement to six institutional accredited investors under an exemption from registration pursuant to Rule 506 of Regulation D promulgated by the SEC. The convertible notes were purchased by Highbridge International LLC, Isotope Limited, AG Domestic Convertibles LP, AG Offshore Convertibles LTD, Shepherd Investments International, Ltd., and Stark Trading. Between the dates of September 2 and September 21, 2004, we received written correspondence from all of the initial purchasers of the convertible notes stating that it was their position that we had made certain misrepresentations in connection with the sale of the notes. No legal action has been filed by any of the purchasers with regard to their claims and we will aggressively defend any such action in the event it is filed. On December 6, 2004, U.S. Bank National Association, as indenture trustee, filed proofs of claim in our bankruptcy case on behalf of the note holders in the amount of $100.7 million, plus any other amounts owing pursuant to the terms of the indenture and reimbursement of the trustee’s fees and expenses. In addition, on March 18, 2005, R2 Investments, LDC filed a proof of claim in the amount of $70.4 million plus interest, fees and expenses based on its holdings of 70% of the notes, which were acquired through secondary trading.

We are named in two wage and hour cases in New Jersey that have been brought under state law, one of which has been brought on behalf of a putative class of Route Sales Representatives. The case involving the putative class is captioned Ruzicka, et al. v. Interstate Brands Corp., et al. The other case is captioned McCourt, et al. v. Interstate Brands Corp. These cases are consolidated under case No. 1-03-CV-00220 (FLW) (D.N.J.). As a result of our Chapter 11 filing, these cases were automatically stayed. However, the automatic stay was lifted, and as a result of a mediation in late July 2008, the parties have reached agreement in principle to settle these cases through an allowed, pre-petition general unsecured claim in the amount of $2.0 million, which is subject to Bankruptcy Court and New Jersey Federal Court approval. This amount is reflected in liabilities subject to compromise in the May 31, 2008 financial statements.

The EPA has made inquiries into the refrigerant handling practices of companies in our industry. In September 2000, we received a request for information from the EPA relating to our handling of regulated refrigerants, which we historically have used in equipment in our bakeries for a number of purposes, including to cool the dough during the production process. The EPA has entered into negotiated settlements with two companies in our industry, and has offered a partnership program to other members of the bakery industry that offered amnesty from fines if participating companies converted their equipment to eliminate the use of ozone-depleting substances. Because we had previously received an information request from the EPA, the EPA/Department of Justice (DOJ) policies indicated that we were not eligible to participate in the partnership program. Nevertheless, we undertook our own voluntary program to convert our industrial equipment to reduce the use of ozone-depleting refrigerants. Prior to our Chapter 11 filing, we had undertaken negotiations with the EPA to resolve issues that may have existed regarding our historic management of regulated refrigerants. The DOJ, on behalf of the United States of America, filed a proof of claim in our bankruptcy case on March 21, 2005 based upon our refrigerant handling practices. Although the proof of claim does not set forth a specific amount, the claimants allege more than 3,400 violations during the period from 1998 through 2002 and assert that each violation is subject to penalties of up to $27,500 per day. We re-opened settlement negotiations with the DOJ and EPA, and as a result of those negotiations, we have reached an agreement in principle to settle the DOJ and EPA’s claims through an allowed, pre-petition, general unsecured claim in the amount of approximately $1.1 million, which is subject to Bankruptcy Court approval.

On June 11, 2003, the South Coast Air Quality Management District in California, or SCAQMD, issued a Notice of Violation alleging that we had failed to operate catalytic oxidizers on bakery emissions at our Pomona, California facility in accordance with the conditions of that facility’s Clean Air Act Title V Permit. Among other things, that permit requires that the operating temperatures of the catalytic oxidizers be at least 550 degrees Fahrenheit. Under the South Coast Air Quality Management District rules, violations of permit conditions are subject to penalties of up to $1,000 per day, for each day of violation. The Notice of Violation alleges we were in violation of the permit through temperature deviations on more than 700 days from September 1999 through June 2003. Since that time, four additional instances of alleged violations, some including more than one day, have been cited by the SCAQMD. We are cooperating with the SCAQMD, have taken steps to remove the possible cause of the deviations alleged in the Notice of Violation, applied for and received a new permit, and have replaced the oxidizers with a single, more

effective oxidizer. The SCAQMD filed a proof of claim dated December 8, 2004 in our bankruptcy case for $0.2 million in civil penalties. We have reached an agreement in principle to settle the SCAQMD claim through an allowed, pre-petition, general unsecured claim in the amount of $150,000, which is awaiting finalization of a stipulation to be filed with the Bankruptcy Court.

We participate in the ABA Plan and believe that the ABA Plan has been historically administered as a multiple employer plan under ERISA and tax rules and should be treated as such. However, the amounts reflected in our financial statements were calculated on the basis of treating the ABA Plan as an aggregate of single employer plans under ERISA and tax rules, which is how the ABA Plan contends it should be treated. We have reflected our interest in the ABA Plan as an aggregate of single employer plans despite our position on the proper characterization of the ABA Plan due to representations we received from the ABA Plan and a 1979 determination issued by the PBGC (as discussed below). As of May 31, 2008, our net pension benefit obligation liability was approximately $69.1 million with respect to our respective interest in the ABA Plan, reflecting its characterization as an aggregate of single employer plans.

In our December 2005 submission requested by the PBGC in connection with its review of the 1979 determination referred to above, we asserted our belief based on available information that treatment of the ABA Plan as a multiple employer plan will result in a significant allocation of pension plan assets to our pension plan participants. We believe that treatment of the ABA Plan as a multiple employer plan will result in a significant reduction in our net pension benefit obligation with respect to our employee participants from that which is reflected in Note 11. Employee Benefit Plans to these consolidated financial statements. The ultimate outcome of this uncertainty cannot presently be determined.

In addition, we have received requests for additional corrective contributions since January 2006, under the single employer plan assumption, which we do not believe is correct. We have not made such contributions pending the resolution of the uncertainties surrounding the ABA Plan. However, we expect that the amount of such contributions would be significantly less than amounts assessed by the ABA Plan on their assumption that the plan was an aggregate of single employer plans.

On May 3, 2006, Sara Lee Corporation instituted proceedings against the ABA Plan and the Board of Trustees of the Plan (the “Board of Trustees”) in the United States District Court for the District of Columbia (the “District Court”). Sara Lee Corporation v. American Bakers Ass’n Retirement Plan, et al., Case No. 1:06-cv-00819-HHK (D.D.C.) (the “Sara Lee Litigation”). The relief Sara Lee seeks includes, among other things, a mandatory injunction that would compel the ABA Plan and the Board of Trustees to (i) require all participating employers in the ABA Plan with negative asset balances— which would include the Company — to make payments to the Plan in order to maintain a positive asset balance and (ii) cut off the payment from the ABA Plan of benefits to employee-participants of the Company and other participating employers with negative asset balances, to the extent such employers did not maintain a positive balance. However, the Sara Lee Litigation is premised on the notion that the ABA Plan is an aggregate of single employer plans, which is inconsistent with the PBGC’s determination dated August 8, 2006 that the ABA Plan is a multiple employer plan. On September 29, 2006, Sara Lee filed an amended complaint adding the PBGC as a defendant and challenging the PBGC’s August 8, 2006 determination. In order to obtain a resolution of these matters without litigation over the proper forum, we have voluntarily stayed our lawsuit in Bankruptcy Court seeking enforcement of the August 8, 2006 determination upon the agreement by the ABA Plan and its Board of Trustees to join IBC as a party to the Sara Lee Litigation.

On November 22, 2006, the ABA Plan and the Board of Trustees filed a motion in the Bankruptcy Court seeking an order requiring IBC to file an application with the Internal Revenue Service requesting a waiver of the minimum funding requirements applicable to the ABA Plan or, in the alternative, make $3.9 million of contributions to the ABA Plan no later than June 15, 2007. On December 8, 2006, the Bankruptcy Court denied the ABA’s motion.

On April 4, 2007, the PBGC filed a motion for summary judgment in the Sara Lee Litigation asking the District Court to enforce the PBGC’s August 8, 2006, determination that the ABA Plan is a multiple employer plan. Briefing on the PBGC’s motion for summary judgment concluded on June 8, 2007, and oral argument was heard on July 2, 2007. On September 11, 2007, the District Court issued a partial ruling on the PBGC’s motion for summary judgment. In its opinion, the District Court agreed with the PBGC and IBC as to the requisite standard for its review, but declined to review the PBGC’s August 8, 2006, determination until after it could decide whether the administrative record filed by the PBGC was complete. On August 27, 2008, the District Court ruled that the administrative record was complete. We now await the District Court’s ruling on the PBGC’s August 8, 2006 determination.

On February 16, 2007, the Bankruptcy Court approved the employment agreement of Craig D. Jung as our Chief Executive Officer and member of our Board of Directors. Under the terms of the employment agreement, Mr. Jung will receive pre-emergence cash awards upon the achievement of certain levels of Total Enterprise Value (as defined in the employment agreement) and a post-emergence equity award, all as provided in the employment agreement together with certain other payments and benefits. The post-emergence equity award will not be a liability of IBC in the event that a settlement of our liabilities subject to compromise and other matters would result in a change in control of the Company.

Effective April 25, 2007, the Bankruptcy Court approved the employment agreement of Kent B. Magill, our Executive Vice President, General Counsel and Corporate Secretary. Under the terms of the employment agreement, Mr. Magill will receive pre-emergence cash awards upon the achievement of certain levels of Total Enterprise Value (as defined in the employment agreement).

On November 2, 2007, the Pacific Southwest Teamsters Bakery Drivers Council filed a grievance under the Southern California Teamsters’ collective bargaining agreements. The grievance alleges that IBC violated the agreements by denying severance pay to Teamster-represented employees who worked under the agreements and who IBC laid-off when IBC exited the Southern California bread market. IBC’s position is that the agreements do not provide for severance pay and severance related benefits for employees in the particular circumstances. The Teamsters submitted the dispute to the arbitration procedure under the agreements. An evidentiary hearing on the matter occurred in June 2008. A decision will be rendered after the parties submit their briefs. IBC will vigorously defend its position in the arbitration.

During the second quarter of fiscal 2008, we incurred a fee of $5.0 million to secure an exit financing commitment related to our Chapter 11 proceedings. We incurred additional related expenses of $0.3 million in the third quarter

of fiscal 2008. Based upon our inability to meet the terms of the Facility Commitment Letter, the deferred debt fees and expenses of $5.3 million were written off as reorganization expense in the third quarter of fiscal 2008.

Except as noted above, the Company has not determined a loss is probable, or a liability has been incurred, and cannot estimate a range of loss or amount of liability for the items disclosed herein; however, the ultimate resolutions could have a material impact on our consolidated financial statements.

We are subject to various other routine legal proceedings, environmental actions and matters in the ordinary course of business, some of which may be covered in whole or in part by insurance. Except for the matters disclosed herein, we are not aware of any other items as of this filing which could have a material adverse effect on our consolidated financial statements.

18. Stock Repurchases

Since May 11, 1999, our Board of Directors has authorized the purchase of approximately 11.0 million shares of our common stock. Prior to the Chapter 11 filing, management had the discretion to determine the number of shares to be purchased, as well as the timing of any such purchases, with the pricing of any shares repurchased to be at prevailing market prices. As of May 31, 2008, approximately 7.4 million shares of IBC common stock were available to be purchased under this stock repurchase program. As a result of our bankruptcy filing and restrictions imposed by the DIP Facility however, the program has been effectively suspended since the filing.

19. Stockholder Rights Plan

In May 2000, our Board of Directors adopted a stockholder rights plan which provided that a dividend of one preferred stock purchase right was declared for each share of our common stock outstanding and any common shares issued thereafter. The rights are not exercisable until ten business days following either 1) a public announcement that a person or group acquired 15% or more of our common stock (provided such threshold is not exceeded solely as a result of our purchase of stock by us and corresponding reduction in the number of shares outstanding) or 2) the announcement of a tender offer which could result in a person or group acquiring 15% or more of our common stock.

Each right, if exercisable, will entitle its holder to purchase one one-thousandth of a share of our Series A Junior Participating Preferred Stock at an exercise price of $80.00, subject to adjustment. If a person or group acquires 15% or more of our outstanding common stock, the holder of each right not owned by the acquiring party will be entitled to purchase shares of our common stock (or in certain cases, preferred stock, cash or other property) having a market value of twice the exercise price of the right. In addition, after a person or group has become an acquiring person, if we are acquired in a merger or other business combination or 50% or more of its consolidated assets or earning power are sold, each right will entitle its holder to purchase at the exercise price of the right, a number of the acquiring party’s common shares valued at twice the exercise price of the right.

The Board of Directors may redeem the rights at any time before they become exercisable for $0.001 per right and, if not exercised or redeemed, the rights will expire on May 25, 2010.

20. Earnings (Loss) Per Share

Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period including the effect of all potential dilutive common shares, primarily stock options outstanding under our stock compensation plan and the impact of our 6% senior subordinated convertible notes.

The following is the reconciliation between basic and diluted weighted average shares outstanding used in our earnings (loss) per share computations:

Fifty-Two

Fifty-Three

Weeks Ended

May 31,

June 2,

June 3,

2008

2007

2006

(in thousands)

Weighted average common shares outstanding:

Basic and diluted

45,195

45,171

45,124

Diluted weighted average common shares outstanding exclude options on common stock, unvested restricted stock, deferred shares awarded, and our 6% senior subordinated convertible notes because their effect would have been antidilutive. These totaled approximately 12.8 million, 13.7 million, and 14.5 million for fiscal 2008, 2007, and 2006, respectively. Due to our reported net loss for fiscal 2008, 2007 and 2006, diluted loss per share amounts are not adjusted for the effect of dilutive stock awards.

Dividends per common share were zero for fiscal 2008, 2007, and 2006. In March 2004, we announced that our Board of Directors had suspended the dividend on our common stock effective for the fourth quarter of fiscal 2004. Under an August 12, 2004 amendment to our senior secured credit facility, we are prohibited from paying dividends until our senior secured bank debt is rated at least BB- by Standard & Poor’s Ratings Services and Ba3 by Moody’s Investors Service, in each case with a stable outlook or better. In addition, during the term of the DIP Facility, the payment of dividends is prohibited.

21. Comprehensive Loss

Reconciliations of net loss to comprehensive loss are as follows:


	Fifty-Two			Fifty-Two			Fifty-Three
	Weeks			Weeks			Weeks
	Ended			Ended			Ended
	May 31,			June 2,			June 3,
	2008			2007			2006
	*(dollars in thousands)*
Net loss	$	(143,684	)	$	(112,848	)	$	(128,317	)


Other comprehensive income (loss):
Commodity derivative (gains) losses reclassified to cost of products sold, net of income taxes of $0		—			—			(671	)
Minimum pension liability adjustment, net of income taxes of $2,726, $2,585 and $0		4,510			650			4,328


		4,510			650			3,657


Comprehensive loss	$	(139,174	)	$	(112,198	)	$	(124,660	)

The balance of AOCI consists of the following:


	May 31,		June 2,
	2008		2007
	*(dollars in thousands)*
Unamortized pension and other postretirement net credits (See Note 11. Employee Benefit Plans)	$	34,763	$	30,220

22. Segment Information

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires us to report information about our operating segments according to management’s approach for determining reportable segments. This approach is based on the way management organizes segments within a company for making operating decisions and assessing performance.

We initiated changes in our reporting system effective for the beginning of fiscal 2008, which resulted in the identification of three distinct reportable segments. The three reportable segments were determined by type of customer and distribution method. Management continues to maintain the wholesale operations and retail operations as reporting segments, but renamed them as route sales and outlet sales, respectively. The third reporting segment, direct sales, was established by segregating certain operations previously within wholesale operations that deliver products exclusively through warehouse channels. Our reportable segments are strategic business units that are managed separately using different distribution and marketing strategies. To the extent our accounting systems permitted, prior years’ amounts have been revised to reflect the current fiscal year’s segment reporting presentation.

Route sales (formerly wholesale operations) — Our route sales accounted for approximately 86.7%, 87.2%, and 87.0% of our net sales for the fiscal 2008, 2007 and 2006, respectively, and consists of an aggregation of our operations that manufacture, distribute, and sell fresh baked goods utilizing our direct store delivery system.

Outlet sales (formerly retail operations) — Our outlet sales generated approximately 10.6%, 11.1%, and 11.7% of our net sales for the fiscal 2008, 2007, and 2006, respectively, and consists of four regions that sell our baked goods and other food items directly to consumers through company-operated outlet locations.

Direct sales — Our direct sales generated approximately 2.7%, 1.7%, and 1.3% of our net sales for the fiscal 2008, 2007, and 2006, respectively, and consists of our direct warehouse shipment program, which ships bulk packaged sweet goods and dry products, such as croutons and stuffing mix, directly to customer-owned distribution centers and public warehouses for distribution.

During fiscal 2008, 2007, and 2006, one major customer included in our route and direct sales reporting segments accounted for approximately $456.3 million, $439.8 million, and $410.3 million or 16.3%, 15.1%, and 13.4% of our consolidated net sales, respectively. No other customer accounted for 10% or more of our consolidated net sales.

Our management evaluates reportable segment performance based on profit or loss from operations before other income, interest expense, and income taxes. Because of our integrated business structure, operating costs often benefit all reportable segments and must be allocated between segments. However, we do not identify or allocate fixed assets and the related depreciation, intangible assets and the related amortization, and capital expenditures for long-lived assets by reportable segment. Additionally, we transfer fresh goods between segments at cost without recognizing intersegment sales on these transfers. Intersegment transfers of products at cost from route sales to outlet sales aggregated approximately $94.6 million, $108.0 million, and $120.7 million for fiscal 2008, 2007, and 2006, respectively. Intersegment transfers of products at cost from route sales to direct sales aggregated approximately $50.7 million, $33.2 million, and $24.6 million for fiscal 2008, 2007, and 2006, respectively.

Our products within our reportable segments are fresh baked goods. All of our revenues from external customers and all of our long—lived assets are in the United States of America.

The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies in Note 2. Description of Business and Significant Accounting Policies to these consolidated financial statements.

The measurement of reportable segment results is generally consistent with the presentation of the consolidated statement of operations.


	Fifty-Two			Fifty-Two			Fifty-Three
	Weeks Ended			Weeks Ended			Weeks Ended
	May 31, 2008			June 2, 2007 (A)			June 3, 2006 (A)
	*(dollars in thousands)*
Net Sales
Route sales	$	2,425,611		$	2,544,777		$	2,661,465
Outlet sales		296,659			322,860			358,722
Direct sales		76,067			49,631			40,286


Total net sales	$	2,798,337		$	2,917,268		$	3,060,473


Segment Income (Loss)
Route sales	$	11,060		$	28,798		$	(11,747	)
Outlet sales		21,007			10,902			10,682
Direct sales		6,773			3,595			4,394


Total segment income (loss)		38,840			43,295			3,329
Corporate (B)		(103,412	)		(82,936	)		(59,697	)


Total operating loss		(64,572	)		(39,641	)		(56,368	)


Interest expense		46,374			49,591			52,504
Reorganization charges		42,719			32,625			37,015
Other income		(17	)		(1,132	)		(2,994	)

		89,076			81,084			86,525

Loss before income taxes and cumulative effect of accounting change		(153,648	)		(120,725	)		(142,893	)
Provision (benefit) for income taxes		(9,964	)		(7,877	)		(15,593	)


Loss before cumulative effect of accounting change		(143,684	)		(112,848	)		(127,300	)
Cumulative effect of accounting change		—			—			(1,017	)


Net loss	$	(143,684	)	$	(112,848	)	$	(128,317	)


(A)		Prior year’s amounts have been revised to reflect the current fiscal year’s segment reporting presentation.

(B)		The corporate operating loss for the fiscal years 2008 and 2007 includes net charges of approximately $20.6 million and $4.6 million, respectively, for restructuring activities, loss on sale or abandonment of assets, and property and equipment impairment. For fiscal year 2006 we had a net credit of approximately $17.7 million related to restructuring credits, loss on sale or abandonment of assets, and property and equipment impairment.

23. Subsequent Event

On September 12, 2008, the Bankruptcy Court approved the first amendment to the Second Amended and Restated Revolving Credit agreement (the First DIP Amendment). The First DIP Amendment, among other things, (1) increased the aggregate principal amount available to $313.0 million with a provision for additional funding of $16.0 million based on the occurrence of certain events; (2) extended the maturity date to February 9, 2009; (3) established minimum percentage amounts for Adjusted LIBOR Rate and Alternate Base Rate used in the interest rate calculations; (4) changed the borrowing base formula; and (5) changed or extended certain covenants set forth in the DIP Facility. Fees and expenses of approximately $7.2 million were incurred on the effectiveness of the First DIP Amendment.

In addition, on September 12, 2008, we entered into a Commitment Letter with Investors setting forth the principal terms of the Second Amended Joint Plan of Reorganization. See Note 1. Voluntary Chapter 11 Filing to these consolidated financial statement for additional disclosure concerning this matter.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Control and Procedures

Management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are not effective as a result of the material weaknesses in internal control over financial reporting discussed below.

Notwithstanding the assessment that our internal control over financial reporting was not effective and that there were material weaknesses as identified in this report, we believe that our consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended May 31, 2008 fairly present our financial condition, results of operations and cash flows for the fiscal years covered thereby in all material respects. To address the material weaknesses in our internal control over financial reporting described below, we performed additional manual procedures and analysis and other post-closing procedures in order to prepare the consolidated financial statements included in this Annual Report on Form 10-K.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management, under the supervision of the CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States (“GAAP”) and includes those policies and procedures that:

	•		pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

	•		provide reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

	•		provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of May 31, 2008, the end of the fiscal period covered by this report. Management’s assessment efforts undertaken in fiscal 2008 were conducted using the framework established in Internal Control — Integrated Framework issued by the

Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management concluded that the Company’s internal control over financial reporting was not effective as of May 31, 2008. As a result of its continuing efforts to emerge from the Chapter 11 proceedings, management was unable to take necessary corrective actions to remediate the following identified material weaknesses as of May 31, 2008:

Insufficient Resources: We continue to have an inadequate number of personnel with requisite expertise in the key functional areas of finance, accounting, information technology and benefits. Specifically, the unsustainable nature of current resources paired with the ongoing challenge of recruiting and retaining talent is the direct result of the Company’s Chapter 11 proceedings.

Use of Third Party Specialists: We did not maintain effective controls over data provided to third party specialists. Specifically, our ineffective controls included the failure to review and evaluate all data provided to third party specialists for their services and eventual inclusion in our financial statements.

Management has discussed the material weaknesses noted above with the Audit Committee of the Board of Directors and our independent registered public accounting firm. Due to the nature of these material weaknesses, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We are continuing our efforts to improve our internal control over financial reporting and disclosure controls and procedures related to many areas of our financial statements and disclosures. However, none of the material weaknesses identified by management as of June 2, 2007 have been remediated as of the fourth quarter of fiscal 2008.

While we still believe that the material weaknesses noted as of May 31, 2008 continue to exist as of the date of this filing, we have taken the following actions:

	•		service providers continue to be utilized to address shortfalls in staffing and assist us with accounting, finance and benefits responsibilities; and

	•		we continue to improve controls over the review and accuracy of data provided to third party specialists.

Efforts to remediate our internal control over financial reporting are continuing and are expected to continue throughout fiscal 2009. There remains a risk that we will fail to identify weaknesses or adequately correct any identified weaknesses in our internal control over financial reporting or to prevent or detect a material misstatement of our annual or interim financial statements.

ITEM 9B. OTHER INFORMATION

Not applicable.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Board of Directors

Set forth below is the name, age, date first elected and present principal occupation or employment, five-year employment history, and other directorships of each member of our Board of Directors. Pursuant to a Bankruptcy Court order, our directors will serve until further order of the Bankruptcy Court.


			Director
Name	Age		Since		Principal Occupations and Employment During the Past Five Years and Directorships

Michael J. Anderson ¹		57		1998	Chairman of the Board of IBC since January 2007; President and Chief Executive Officer of The Andersons, Inc., a diversified agribusiness and retailing company, for more than five years. Mr. Anderson is a director of The Andersons, Inc. and FirstEnergy Corp.
Robert B. Calhoun ^1,2		65		1991	Managing Director of Monitor Clipper Partners, a private equity investment firm, for more than five years. Mr. Calhoun is a director of The Lord Abbett Family of Funds.
Craig D. Jung		55		2007	Chief Executive Officer of IBC since February 2007; Retired, June 2004 to February 2007; Attended Harvard University, August 2003 to June 2004, where he received a Master in Public Administration degree.
William P. Mistretta¹		52		2006	President and Chief Executive Officer of American Baked Ingredients, a company that supplies baked ingredients to the ice cream manufacturing industry, January 2008 to present; Senior Operations Executive for a division of the U.S. operations of Compass Group PLC, a company specializing in providing food, vending and related services, March 2006 to January 2008; Vice President of Operations of Aramark Uniform and Career Apparel, Inc., a company that provides both rental and direct marketing of uniforms and career apparel, May 2004 to April 2005; Senior Vice President of Operations of The B. Manishewitz Company, the nation’s largest manufacturer of processed kosher food products, May 2003 to May 2004.
David I. Pauker^2,3		49		2007	Managing Director of Goldin Associates, LLC, a financial advisory and turnaround consulting firm specializing in underperforming businesses and distressed situations, for more than five years.
Terry R. Peets^2,3		63		2007	Director of the following public company: Winn-Dixie Stores, Inc.,and the following non-public companies: World Kitchens, Inc., City of Hope National Cancer Center and the Beckman Research Institute, Ruiz Foods Corp., Inmar, Inc. and Andronico’s Markets, Inc.
Philip A. Vachon³		51		2007	Retired since July 2007; Chief Executive Officer and Chairman of the Board of Liberate Technologies, a non-operating company working to resolve outstanding liabilities, prosecute and defend pending litigation and pursue other claims as appropriate, from 2006 to July 2007; President of Liberate Technologies from 2003 to July 2007.


1		Member of the Audit Committee

2		Member of the Compensation Committee

3		Member of the Nominating/Corporate Governance Committee

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Executive Officers

Set forth below is the name, age and present principal occupation or employment and five-year employment history of each of our executive officers. The executive officers serve at the pleasure of the Board of Directors. The business address of each person listed below is 12 East Armour Boulevard, Kansas City, Missouri 64111.


Name	Age		Principal Occupations and Employment During the Past Five Years

Craig D. Jung		55	Chief Executive Officer of IBC since February 2007; Retired, June 2004 to February 2007; Attended Harvard University from August 2003 to June 2004, where he received a Master in Public Administration degree.
Michael D. Kafoure		59	President Route Sales of IBC since September 2007; President and Chief Operating Officer of IBC for more than four years prior thereto.
David A. Loeser		54	Consultant, Acting Executive Vice President — Human Resources of IBC since July 2007; Consultant of IBC from May 2007 to July 2007; Senior Vice President Human Resources of Celanese Corporation, a company engaged in the manufacture of building block chemicals, from April 2005 to May 2006; Senior Vice President Human Resources of CompuCom Systems, Inc., a company offering business software applications and software management services, for more than two years prior thereto.
Kent B. Magill		55	Executive Vice President, General Counsel and Corporate Secretary of IBC since August 2005; Vice President, General Counsel and Corporate Secretary of IBC for more than two years prior thereto.
Suresh Mathews		54	Consultant, Acting Executive Vice President — Information Technology and Chief Information Officer of IBC since February 2008; President of Digital Standard Inc., a unified digital social networking company, from August 2004 to February 2008; Senior Vice President and Chief Information Officer of CompuCom Systems, Inc., a company offering business software applications and software management services, for more than one year prior thereto.
Jane S. Miller		49	Consultant, Acting Executive Vice President and Chief Customer Officer of IBC since July 2007; Consultant of IBC from March 2007 to July 2007; President of Miller Management Group, Inc. from September 2006 to present; President, UK and Ireland Division, of HJ Heinz Company, a company that manufactures an extensive line of processed food products, from May 2005 to May 2006; Chief Growth Officer of H.J. Heinz Company from September 2004 to May 2005; Attended Regis University for more than one year prior thereto.
Richard C. Seban		56	Executive Vice President and Chief Marketing Officer of IBC since August 2005; President and Chief Operating Officer of High Liner Foods, Inc., a Nova Scotia based processor and marketer of frozen seafood and pasta products, for more than two years prior thereto.
Gary K. Wandschneider		56	Consultant, Acting Executive Vice President — Operations of IBC since July 2007; Executive Vice President of Pepsi Bottling Group, Inc., the largest manufacturer and distribution of Pepsi-Cola beverages, for more than three years prior to November 2006.
J. Randall Vance		48	Senior Vice President, Chief Financial Officer and Treasurer of IBC since August 2007; Senior Vice President — Finance and Treasurer of IBC from September 2004 through July 2007; Vice President and Treasurer of Farmland Industries, Inc., a diversified agribusiness cooperative, for more than one year prior thereto.
Jimmy D. Williams		68	Senior Vice President-Direct Sales of IBC since May 2007; Senior Vice President-Sales and Trade Marketing of IBC from March 2006 to May 2007; Vice President-Special Initiatives and Merchandising of IBC from April 2005 to March 2006; Senior Vice President-Central Division South of IBC for more than 2 years prior thereto.
Melvin H. Ghearing		59	Vice President — Bakery Outlet Business Unit of IBC since June 2004; Vice President — Retail Operations of IBC for more than one year prior thereto.
Laura D. Robb		50	Vice President and Corporate Controller of IBC for more than the past 5 years.

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Involvement in Prior Bankruptcy Proceedings and/or Restructurings

Mr. Vance was an officer at Farmland Industries, Inc. during that company’s bankruptcy proceedings.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires that our executive officers and directors and persons who beneficially own more than 10% of the common stock (reporting persons) file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission (“SEC”). Executive officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of copies of such forms and amendments thereto furnished to us and written representations from the executive officers and directors, to our knowledge, all forms required to be filed by reporting persons of IBC during fiscal 2008 were timely filed pursuant to Section 16(a) of the Exchange Act, except for the late filing of a Form 4 for Melvin H. Ghearing related to disclaiming the portion of his restricted stock award that was scheduled to vest during fiscal 2008.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, including our Chief Executive Officer, Chief Financial Officer, Senior Vice President-Finance and Treasurer and Controller. The Code of Business Conduct and Ethics is posted on our website, www.interstatebakeriescorp.com. Copies are also available at no charge, upon written request, addressed to Interstate Bakeries Corporation, Corporate Secretary, 12 East Armour Boulevard, Kansas City, Missouri 64111. We intend to satisfy the disclosure requirement regarding an amendment to, or a waiver from, a provision of the Code of Business Conduct and Ethics by posting such information on our website.

Audit Committee

The Board of Directors has appointed an Audit Committee consisting of three independent directors: Michael J. Anderson, Robert B. Calhoun and William P. Mistretta. Mr. Calhoun serves as Chairman of the Audit Committee. Messrs. Anderson and Calhoun have been determined by the Board of Directors to be financial experts under applicable SEC and NYSE regulations. The Audit Committee is governed by a written charter adopted by our Board of Directors, which is available on our website at www.interstatebakeriescorp.com and available in print to any stockholder upon request.

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ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information concerning compensation received by (i) the person who served as our Chief Executive Officer during the fiscal year ended May 31, 2008 and (ii) our two other most highly compensated executive officers during the fiscal year ended May 31, 2008 (the individuals in (i) and (ii) are collectively referred to as the “Named Executive Officers”).


			Salary		Bonus		All other			Total
Name and principal position	Year		($)		($)		Compensation ($)			($)
Craig D. Jung¹		2008		900,000		—		29,544	²		929,544
CEO		2007		263,080		1,200,000		158,590			1,621,670
David A. Loeser³		2008		1,389,800		75,000		—			1,464,800
Acting EVP, HR		2007		30,000		—		—			30,000
Gary K. Wandschneider⁴		2008		1,428,500		100,000		—			1,528,500
Acting EVP, Operations		2007		112,000		—		—			112,000


1		Pursuant to Mr. Jung’s employment agreement, he is to receive a special cash award for enhancing our value during bankruptcy and an equity award (one-half capital stock and one-half options) upon our emergence from Chapter 11. At this time, the amounts are not determinable. In addition, in fiscal 2007 Mr. Jung received a signing bonus of $1,200,000 pursuant to the terms of his employment agreement. See the discussion of his employment agreement under “*Agreements with Named Executive Officers*.”

2		All other compensation for Mr. Jung for the fiscal year ended May 31, 2008 includes: (i) taxable income for a car allowance in the amount of $14,215; (ii) taxable income for financial advisory services in the amount of $1,538; (iii) imputed income for term life insurance provided by the Company in the amount of $1,247; and (iii) $12,544 related to moving expenses (including the applicable tax gross-up).

3		Mr. Loeser is a consultant serving as Acting Executive Vice President — Human Resources pursuant to a Consulting Agreement between the Company and Interim LLC. Pursuant to the terms of the initial consulting agreement, he received a $75,000 discretionary performance bonus.

4		Mr. Wandschneider is a consultant serving as Acting Executive Vice President — Operations pursuant to a Consulting Agreement between the Company and Timpanogos Consulting LLC. Pursuant to the terms of the initial consulting agreement, he received a $100,000 discretionary performance bonus.

Agreements with Named Executive Officers

We have entered into an employment agreement with Craig D. Jung and consulting agreements for the services of David A. Loeser and Gary K. Wandschneider. The descriptions below are only summaries of the agreements and are qualified in their entirety by the actual agreements, which have been filed with the SEC and are identified in the Exhibit Index to this Annual Report on Form 10-K.

Craig D. Jung

Mr. Jung serves as our Chief Executive Officer and as a director. The term of his employment agreement ends on February 16, 2010; provided, however, that the term will be automatically extended for additional one-year periods unless either we or Mr. Jung gives the other written notice at least 120 days prior to the then-scheduled date of expiration. Mr. Jung will receive an annual base salary of $900,000, which may be increased at the sole discretion of the Board, pursuant to an annual review undertaken by the Compensation Committee of the Board before May 1 of each year, beginning as of May 1, 2008. During the term, beginning with fiscal 2009, in addition to base salary, Mr. Jung shall be eligible to receive an annual performance-based cash bonus award with a target of no less than one hundred percent (100%) of his then current base salary pursuant to the terms and conditions of the Company’s Incentive Compensation Plan (the IC Plan) then in effect; provided that the actual cash bonus paid to Mr. Jung for any fiscal year shall not exceed two hundred percent (200%) of his base salary. Mr. Jung received a signing bonus in

104

fiscal 2007 of $1,200,000, which was subject to repayment if Mr. Jung left the Company within one year under certain circumstances. Mr. Jung is entitled to receive the following special cash awards:

	(1)		0.25% of Total Enterprise Value (as defined in the employment agreement) in excess of $500 million but less than $600 million, plus: (i) an additional 0.50% of Total Enterprise Value in excess of $600 million but less than $700 million, plus: (ii) an additional 0.75% of Total Enterprise Value in excess of $700 million but less than $800 million, plus: (iii) an additional 1.0% of Total Enterprise Value in excess of $800 million, not to exceed $3,000,000; and

	(2)		1.75% of Total Enterprise Value in excess of an amount equal to the sum of: (i) $700 million, plus (ii) 95% of the Triggered Contingent Claims Amount (as defined in the employment agreement).

In addition, Mr. Jung will be granted an equity interest in the Company upon the Company’s emergence from bankruptcy equal to 2% of the number of shares of capital stock issued and outstanding on the date the Company emerges from bankruptcy, 50% of which will be shares of capital stock and 50% of which will be options. Twenty five percent of the shares of capital stock and 25% of the options vest immediately upon grant. The remaining unvested shares of capital stock and options vest pro rata over 36 months (beginning with the last day of the month in which we emerge from bankruptcy) assuming Mr. Jung remains employed by us. The exercise price for the options will be the fair market value determined in accordance with the terms of the employment agreement. Mr. Jung was or will be reimbursed for all relocation costs (including brokerage commission on the sale of his home, temporary living expenses, airfare, moving expenses, storage costs, legal and closing costs on the purchase of a new home, and gross up of these amounts) and expenses (including the legal fees incurred in connection with the preparation and negotiation of the employment agreement). The employment agreement imposes upon Mr. Jung covenants, among others, related to non-disclosure of confidential information, non-solicitation and non-competition.

For a discussion of payments to Mr. Jung upon termination or a Change in Control see below under the heading “Potential Payments Upon Termination or Change in Control.”

David A. Loeser

The Company has entered into a Consulting Agreement with Interim LLC pursuant to which Interim LLC has agreed to provide the services of Mr. Loeser. Mr. Loeser is serving as our Acting Executive Vice President-Human Resources. The Company pays $650 per hour for Mr. Loeser’s services, up to a maximum of 60 hours per week. The consulting agreement will continue until terminated by either party on one day notice to the other party. Under the consulting agreement, Mr. Loeser has agreed not to (i) disclose any confidential information about the Company to others while employed by the Company and thereafter; (ii) compete with the Company for 2 years following termination of employment; and (iii) solicit for employment any employee of the Company for 1 year following termination of employment.

Gary K. Wandschneider

The Company has entered into a Consulting Agreement with Timpanogos LLC pursuant to which Timpanogos Consulting LLC has agreed to provide the services of Mr. Wandschneider. Mr. Wandschneider is serving as our Acting Executive Vice President-Operations. The Company pays $750 per hour for Mr. Wandschneider’s services, up to a maximum of 60 hours per week. The consulting agreement will continue until terminated by either party on one day notice to the other party. Under the consulting agreement, Mr. Wandschneider has agreed not to (i) disclose any confidential information about the Company to others while employed by the Company and thereafter; (ii) compete with the Company for 2 years following termination of employment; and (iii) solicit for employment any employee of the Company for 1 year following termination of employment.

Outstanding Equity Awards at Fiscal Year-End

The Named Executive Officers have no outstanding equity awards. Pursuant to Mr. Jung’s employment agreement, he is to receive an equity award (one-half capital stock and one-half options) upon our emergence from Chapter 11.

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At this time, the amount is not determinable. See the discussion of his employment agreement under “Employment Agreements with Named Executive Officers.”

Potential Payments upon Termination or Change in Control

Mr. Jung’s Employment Agreement

Mr. Jung’s employment agreement provides for payments to him in the event of his termination of employment under certain circumstances or in connection with a Change in Control (as defined below). Upon his death or disability, he or his estate or beneficiaries (in the case of his death) will receive his base salary and a pro-rata bonus through the termination date, plus full vesting of any then outstanding but unvested equity awards, continued participation for him (in the case of disability) and his dependents in any benefit programs of the Company for 12 months, and any Accrued Obligations (as defined in his employment agreement), including Special Awards (as defined in his employment agreement), and, in the case of disability, disability benefits in accordance with our policies. In the case of a termination for Cause (as defined in his employment agreement) or voluntary termination by Mr. Jung, Mr. Jung will receive only his base salary to the termination date and any Accrued Obligations. In the event of a termination without Cause, Constructive Termination Without Cause (as defined in his employment agreement) or a non-renewal of the term by the Company, Mr. Jung will receive the same payments, awards and benefits as upon disability (except that health and welfare benefits for Mr. Jung and his dependents will continue for 24 months), plus a severance payment equal to two times his base salary and bonus, plus reimbursement of reasonable relocation costs up to $50,000.

Upon a Change in Control, all of Mr. Jung’s outstanding and unvested capital stock and options and any other equity awards vest or become exercisable. If during the 2 years after a Change in Control Mr. Jung’s employment is terminated without Cause or by a Constructive Termination Without Cause or non-renewal, then he will receive the following: his base salary and a pro-rata bonus through the termination date; continued participation for him and his dependents in any benefit programs of the Company for 24 months; any Accrued Obligations, including Special Awards; a severance payment equal to 3 times his base salary and bonus (unless the change of control occurs within the first 12 months of his employment agreement, in which case he will receive 2 times his base salary and bonus); and reimbursement of reasonable relocation costs up to $50,000. Mr. Jung will also receive a tax gross-up payment if an excise tax is due as a result of the payments.

For purposes of Mr. Jung’s employment agreement, Change in Control means the occurrence of any of the following events: any person (other than a stockholder holding 15% or more of our voting stock on the date we emerge from bankruptcy) becomes a beneficial owner of 50% or more of our voting stock; a change in the majority of our Board of Directors; we adopt any plan of liquidation providing for the liquidation of all or substantially all of our assets; all or substantially all of our consolidated assets or business are disposed of pursuant to a merger or consolidation in which we are not the surviving company or are sold or otherwise transferred in another transaction; or we combine with another company and are the surviving corporation but, immediately after the combination, our stockholders hold 50% or less of the voting stock of the combined company. No “Change in Control” will occur if we emerge from bankruptcy pursuant to a “stand alone” Plan and the creditors in our bankruptcy collectively hold more than 50% of our voting stock immediately after our emergence.

Under his employment agreement, Mr. Jung has agreed not to (i) disclose any confidential information about the Company to others while employed by the Company and thereafter; (ii) compete with the Company for 1 year following termination of employment; and (iii) solicit for employment any employee of the Company for 1 year following termination of employment.

106

Compensation of Directors

The following table includes information regarding the compensation of our non-employee directors for fiscal 2008. Mr. Jung, our Chief Executive Officer, does not receive any payment for his service as a director. As a result, he is not included in the table below. All of Mr. Jung’s compensation for fiscal 2008 is reflected in the Summary Compensation Table. No stock or option awards were granted to the non-employee directors in fiscal 2008. The non-employee directors do not participate in any of our benefit plans.


	Fees Earned or Paid in Cash¹
Name	($)
Michael J. Anderson	$	193,500
Robert B. Calhoun		130,000
William P. Mistretta		120,500
David I. Pauker		119,250
Terry R. Peets		122,250
Philip A. Vachon		111,750


1		The fees include Board and Committee retainers and attendance fees (see below) earned during fiscal 2008. We also pay an orientation fee of $1,000 per day for new directors to visit one of our bakeries, ride a route and meet with senior management. During fiscal 2008, the Board met 31 times (23 of which were telephonic), the Audit Committee met 8 times (6 of which were telephonic), the Compensation Committee met 2 times (both of which were telephonic), and the Nominating/Corporate Governance Committee met 1 time (which was in person).


FORM OF COMPENSATION	AMOUNT OF COMPENSATION
Chairman of the Board Retainer	$	150,000
Annual Retainer		75,000
Annual Retainer for Audit Committee Chairman		15,000
Annual Retainer for Other Committee Chairmen		7,500
Board Attendance Fee (each meeting)
In Person		2,000
Telephonic		1,000
Committee Attendance Fee (each meeting)
In Person (same day as Board Meeting)		750
In Person (not same day as Board Meeting)		1,000
Telephonic		500

Each non-employee director held the following number of outstanding options as of May 31, 2008:


Name	Options Outstanding

Michael J. Anderson		58,000
Robert B. Calhoun		60,000

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

We have only one equity compensation plan for eligible employees under which options, rights or warrants may be granted, the 1996 Stock Incentive Plan. See Note 13. Stock-Based Compensation to our consolidated financial statements, contained herein for further information on the material terms of this plan. The following is a summary of the shares reserved for issuance pursuant to outstanding options, rights or warrants granted under our 1996 Plan as of May 31, 2008:

Equity Compensation Plan Information

Weighted-

Number of securities

average

remaining available

exercise

for

price of

future issuance under

Number of securities to be

outstanding

equity compensation

issued upon exercise of

options,

plans (excluding

outstanding options,

warrants

securities reflected in

warrants and rights

and rights

column (a))

Equity compensation plans approved by security holders

2,560,000

14.61

9,957,000

Equity compensation plans not approved by security holders

N/A

Total

2,560,000

14.61

9,957,000

Holdings of Principal Stockholders

The following table sets forth information regarding the ownership of our common stock by each person known to us to be the beneficial owner of more than 5% of our Company’s common stock as of August 1, 2008:


		(3)
		Amount and
		nature of
(1)	(2)	beneficial		(4)
Title of Class	Name and address of beneficial owner	ownership		Percent of Class
Common	QVT Financial LP ¹
	527 Madison Avenue, 8th Floor
	New York, NY 10022		3,322,495	7.320 %


1		The information concerning beneficial ownership was obtained from a Schedule 13G report of QVT Financial LP filed with the SEC on February 14, 2005.

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Holdings of Officers and Directors

The number of shares of our common stock beneficially owned as of August 15, 2008 by the directors, the Named Executive Officers, and all directors, Named Executive Officers and executive officers as a group are set forth below:


		(3)
		Amount and nature
(1)	(2)	of beneficial			(4)
Title of Class	Name of beneficial owner	ownership			Percent of Class
Common	Michael J. Anderson		54,095	^1,2		*
Common	Robert B. Calhoun		57,257	^1,2		*
Common	Craig D. Jung		0
Common	David A. Loeser		0
Common	William P. Mistretta		0
Common	David I. Pauker		0
Common	Terry R. Peets		0
Common	Philip A. Vachon		0
Common	Gary K. Wandschneider		0
Common	All Named Executive Officers, directors and executive officers as a group (18 persons)		462,456	^,2		1.01	%


*		Less than 1%

1		Of the shares indicated, 48,000 (Mr. Anderson), 50,000 (Mr. Calhoun) and 434,333 (all directors, Named Executive Officers and executive officers as a group) are attributable to currently exercisable stock options.

2		Of the shares indicated, 9,050 (4,525 for each of Messrs. Anderson and Calhoun) and 9,050 (all directors, Named Executive Officers and executive officers as a group) are attributable to phantom stock units.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

On September 21, 2004, we appointed Antonio C. Alvarez II as our Chief Executive Officer and John K. Suckow as our Executive Vice President and Chief Restructuring Officer. Messrs. Alvarez and Suckow, as employees of Alvarez & Marsal, or A&M, were designated as officers pursuant to a Letter Agreement and elected by the Board of Directors. The terms and conditions of the Letter Agreement for services to be provided by A&M were approved by the Bankruptcy Court on October 25, 2004. We have executed a supplemental letter agreement that sets forth the manner in which A&M’s incentive compensation is to be calculated under the Letter Agreement. Pursuant to the Bankruptcy Court’s October 25, 2004 order, notice of the Incentive Fee Agreement was provided to certain interested parties in our bankruptcy. Upon agreement of such parties, the time to object to the Incentive Fee Agreement has been extended indefinitely. Therefore, absent consent of such parties, the Incentive Fee Agreement remains subject to Bankruptcy Court approval and, accordingly, its terms will not become effective until such consent or approval has been obtained. Pursuant to the Incentive Fee Agreement, A&M is entitled to incentive compensation to be based on five percent of our Total Enterprise Value (as defined in the Incentive Fee Agreement) in excess of $723 million. Total Enterprise Value consists of two components: (i) our total cash balance as of the effective date of our plan of reorganization, less the normalized level of cash required by us in the ordinary course of business, plus (ii) either (a) the midpoint enterprise value set forth in the disclosure statement with respect to our plan of reorganization as confirmed by the Bankruptcy Court or (b) the aggregate consideration received by us in a sale. Under all circumstances other than a liquidation of our company (in which case A&M will have no guaranteed incentive compensation), A&M’s incentive compensation will be a minimum of $3,850,000, if approved by the Bankruptcy Court. The incentive compensation would, if approved, be payable upon the consummation of our plan of reorganization.

109

The Letter Agreement may be terminated by either party without Cause (as defined in the Letter Agreement) upon 30 days prior written notice, subject to the payment by us of any fees and expenses due to A&M. If we terminate the Letter Agreement without Cause (as defined in the Letter Agreement) or if A&M terminates the Letter Agreement for Good Reason (as defined in the Letter Agreement), A&M will also be entitled to receive the incentive fee, provided that the consummation of our restructuring occurs within 12 months of termination. If we terminate the Letter Agreement for Cause, we will be relieved of all of our payment obligations, except for the payment of fees and expenses incurred by A&M through the effective date of termination. In connection with the appointment of Craig D. Jung, Antonio C. Alvarez II resigned as our Chief Executive Officer. John K. Suckow resigned as our Executive Vice President and Chief Restructuring Officer effective August 8, 2007. However, certain A&M employees are still providing services to us.

Director Independence

We continue to maintain compliance with the listing standards of the New York Stock Exchange governing the composition of our Board of Directors, including the requirement that a majority of our directors are independent and that only independent directors serve on our Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee. Our Board of Directors has established independence standards, which are set forth in our Corporate Governance Guidelines published on our website (interstatebakeriescorp.com), to assist it in determining director independence. Our Board of Directors consists of 7 members, and it has affirmatively determined that six of the directors qualify as independent (as such term is defined in the New York Stock Exchange listing requirements) for Board and committee service: Michael J. Anderson, Robert B. Calhoun, William P. Mistretta, David I. Pauker, Terry R. Peets and Philip A. Vachon. Craig D. Jung, our CEO and seventh director, is not independent as a result of his employment with the Company. Mr. Jung does not serve on any of our Board committees. The current composition of each of our standing committees is as follows:

Audit Committee: Robert B. Calhoun, chairman, Michael J. Anderson, William P. Mistretta

Compensation Committee: David I. Pauker, chairman, Robert B. Calhoun, Terry R. Peets

Nominating/Corporate Governance Committee: Terry R. Peets, chairman, David I. Pauker, Philip A. Vachon

110

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees Paid to our Independent Registered Public Accounting Firm

For the years ended May 31, 2008 and June 2, 2007, professional services were performed by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates, or Deloitte & Touche. Total fees aggregated $3,310,000 and $3,827,000 for the years ended May 31, 2008 and June 2, 2007, respectively, and were comprised of the following:

Audit Fees. The aggregate fees incurred for the audit of our annual financial statements for the fiscal year ended May 31, 2008 and for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q were $2,600,000 (all but approximately $200,000 of which have been billed). The aggregate fees incurred for the audit of our annual financial statements for the fiscal year ended June 2, 2007 and for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q were $3,600,000.

Audit-Related Fees. The aggregate fees billed for audit-related services for the fiscal years ended May 31, 2008 and June 2, 2007 were $710,000 and $227,000, respectively. These fees relate to audits of certain of our benefit plans, some of which are paid out of plan assets.

Tax Fees. No fees were billed for tax services for the fiscal years ended May 31, 2008 or June 2, 2007.

All Other Fees: No fees for services not included above were incurred for the fiscal years ended May 31, 2008 and June 2, 2007.

Audit Committee Pre-Approval Policy

Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent auditor. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services consistent with SEC requirements. Prior to engagement of the independent auditor, management submits to the Audit Committee for approval an aggregate of services expected to be rendered during that year for each of four categories of services.

Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including comfort letters, statutory audits and attest services and consultation regarding financial accounting and/or reporting standards.

Audit-Related services for assurance and related services that are traditionally performed by the independent auditor, including due diligence related to mergers and acquisitions, employee benefit plan audits and special procedures required to meet certain regulatory requirements.

Tax services include all services performed by the independent auditor’s tax personnel, except those services specifically related to the audit of the financial statements, and include fees in the areas of tax compliance, tax planning and tax advice.

Other Fees are those associated with services not captured in the other categories. Prior to engagement, the Audit Committee pre-approves these services by category of service. The fees are budgeted and the Audit Committee requires the independent auditor and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging the independent auditor.

The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.

111

EXHIBIT INDEX


Exhibit No.		Exhibit

3.1		Restated Certificate of Incorporation of Interstate Bakeries Corporation, as amended (incorporated herein by reference to Exhibit 3.1 to Interstate Bakeries Corporation’s Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarter ended March 9, 2002, filed on April 19, 2002).

3.1.1		Certificate of Amendment to the Restated Certificate of Incorporation of Interstate Bakeries Corporation (incorporated herein by reference to Exhibit 3.1 to Interstate Bakeries Corporation’s Form 8-K filed on March 21, 2007).

3.2		Restated Bylaws of Interstate Bakeries Corporation (incorporated herein by reference to Exhibit 3.1 to Interstate Bakeries Corporation’s Quarterly Report on Form 10-Q for the quarter ended November 15, 2003 filed on December 22, 2003).

3.2.1		Amendment Number One to the Restated Bylaws of Interstate Bakeries Corporation (incorporated herein by reference to Exhibit 3.2 to Interstate Bakeries Corporation’s Form 8-K filed on March 21, 2007).

4.1		Preferred Stock Purchase Rights Agreement effective as of May 8, 2000 (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on May 16, 2000).

10.1		Employment Agreement by and among Interstate Bakeries Corporation, Interstate Brands Corporation and Craig D. Jung, dated January 30, 2007 (incorporated herein by reference to Exhibit 10.1 to Interstate Bakeries Corporation’s Form 8-K filed on January 31, 2007).

10.2		Employment Agreement, dated as of April 25, 2007, by and among Interstate Brands Corporation, Interstate Bakeries Corporation and Kent B. Magill (incorporated herein by reference to Exhibit 10.1 to Interstate Bakeries Corporation’s Form 8-K filed on June 6, 2007).

10.3		Employment Agreement dated as of March 8, 2003 by and between Michael D. Kafoure and Interstate Brands West Corporation (incorporated herein by reference to Exhibit 10.2 to Interstate Bakeries Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 8, 2003, filed April 22, 2003).

10.4		Employment Agreement dated as of March 18, 2003 by and between Richard D. Willson and Interstate Brands West Corporation (incorporated herein by reference to Exhibit 10.4 to Interstate Bakeries Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 8, 2003, filed April 22, 2003).

10.5		Amended and Restated Credit Agreement among Interstate Bakeries Corporation, as a Guarantor, Interstate Brands Corporation and Interstate Brands West Corporation, each as a Borrower, the several Lenders from time to time parties hereto, and The Chase Manhattan Bank, as Administrative Agent, dated as of April 25, 2002 (incorporated herein by reference to Exhibit 10.3 to Interstate Bakeries Corporation’s Amendment No. 2 to its Registration Statement on Form S-3, File No. 333-86560, filed May 8, 2002).

10.5.1		First Amendment, dated as of April 21, 2003, to the Amended and Restated Credit Agreement among Interstate Bakeries Corporation, as a Guarantor, Interstate Brands Corporation and Interstate Brands West Corporation, each as a Borrower, the several Lenders from time to time parties hereto, and The Chase Manhattan Bank, as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to Interstate Bakeries Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 8, 2003, filed April 22, 2003).

114


Exhibit No.		Exhibit

10.5.2		Second Amendment, dated as of May 7, 2004, to the Amended and Restated Credit Agreement among Interstate Bakeries Corporation, as a Guarantor, Interstate Brands Corporation and Interstate Brands West Corporation, each as a Borrower, the several Lenders from time to time parties hereto, and The Chase Manhattan Bank, as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on August 12, 2004).

10.5.3		Third Amendment, dated as of May 27, 2004, to the Amended and Restated Credit Agreement among Interstate Bakeries Corporation, as a Guarantor, Interstate Brands Corporation and Interstate Brands West Corporation, each as a Borrower, the several Lenders from time to time parties hereto, and The Chase Manhattan Bank, as Administrative Agent (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on August 12, 2004).

10.5.4		Fourth Amendment, dated as of June 17, 2004, to the Amended and Restated Credit Agreement among Interstate Bakeries Corporation, as a Guarantor, Interstate Brands Corporation and Interstate Brands West Corporation, each as a Borrower, the several Lenders from time to time parties hereto, and The Chase Manhattan Bank, as Administrative Agent (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on August 12, 2004).

10.5.5		Fifth Amendment, dated as of August 12, 2004, to the Amended and Restated Credit Agreement among Interstate Bakeries Corporation, as a Guarantor, Interstate Brands Corporation and Interstate Brands West Corporation, each as a Borrower, the several Lenders from time to time parties hereto, and The Chase Manhattan Bank, as Administrative Agent (incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on August 12, 2004).

10.5.6		Sixth Amendment, dated as of September 7, 2004, to the Amended and Restated Credit Agreement, dated April 25, 2002, among Interstate Bakeries Corporation, as a Guarantor, Interstate Brands Corporation and Interstate Brands West Corporation, each as a Borrower, the several Lenders from time to time parties thereto, The Bank of Nova Scotia, BNP Paribas, Cooperatieve Central Raiffeisen-Boerenleenbank B.A., “Rabobank International”, New York Branch, and SunTrust Bank, each as a co-documentation agent, Bank of America, N.A., as syndication agent and JPMorgan Chase Bank, as administrative agent (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on September 13, 2004).

10.5.7		Seventh Amendment to the Amended and Restated Credit Agreement dated as of March 18, 2005, by and among the Interstate Bakeries Corporation, Interstate Brands Corporation (the “Borrower”), the several banks and other financial institutions or entities from time to time parties thereto (the “Lenders”), The Bank of Nova Scotia, BNP Paribas, Cooperatieve Central Raiffeisen-Boerenleenbank B.A., “Rabobank International”, New York Branch, and SunTrust Bank, each as a co-documentation agent (the “Co-Documentation Agents”), Bank of America, N.A., as syndication agent (the “Syndication Agent”) and JPMorgan Chase Bank (“JPMorgan”), as administrative agent (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on March 22, 2005).

10.6		Guarantee and Collateral Agreement made by Interstate Bakeries Corporation, Interstate Brands Corporation, Interstate Brands West Corporation and certain of their Subsidiaries, in favor of The Chase Manhattan Bank, as Administrative Agent, dated as of July 19, 2001 (incorporated herein by reference to Exhibit 10.4 to Interstate Bakeries Corporation’s Annual Report on Form 10-K for the fiscal year ended June 2, 2001, filed on August 24, 2001).

10.7		Amended and Restated Interstate Bakeries Corporation 1996 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to Interstate Bakeries Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 6, 2004 filed, on April 19, 2004).

115


Exhibit No.		Exhibit

10.8		Interstate Bakeries Corporation Incentive Compensation Plan (incorporated herein by reference to Interstate Bakeries Corporation Amendment No. 2 to its Registration Statement on Form S-3, File No. 333-86560, filed on May 8, 2002).

10.9		Interstate Bakeries Corporation Amended and Restated Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.15 to Interstate Bakeries Corporation’s Annual Report on Form 10-K for the fiscal year ended May 29, 2004, filed October 6, 2006).

10.10		Interstate Bakeries Corporation Rabbi Trust Agreement (incorporated herein by reference to Exhibit 10.8 to Interstate Bakeries Corporation’s Annual Report on Form 10-K for the fiscal year ended June 1, 2002, filed on August 23, 2002).

10.10.1		First Amendment to the IBC Rabbi Trust Agreement effective August 8, 2003 (incorporated herein by reference to Exhibit 10.19.1 to Interstate Bakeries Corporation’s Annual Report on Form 10-K for the fiscal year ended May 31, 2003, filed on August 23, 2003).

10.11		Form of Award Notice and Non-Qualified Stock Option Agreement pursuant to the Interstate Bakeries Corporation 1996 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.9 to Interstate Bakeries Corporation’s Annual Report on Form 10-K for the fiscal year ended June 1, 2002, filed on August 23, 2002).

10.12		Form of Award Notice and Incentive Stock Option Agreement pursuant to the Interstate Bakeries Corporation 1996 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.10 to Interstate Bakeries Corporation’s Annual Report on Form 10-K for the fiscal year ended June 1, 2002, filed on August 23, 2002).

10.13		Form of Indenture for 6.0% Senior Subordinated Convertible Notes Due 2014 (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on August 12, 2004).

10.14		Form of Purchase Agreement for 6.0% Senior Subordinated Convertible Notes Due 2014 (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on August 12, 2004).

10.15		Form of Registration Rights Agreement for 6.0% Senior Subordinated Convertible Notes Due 2014 (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on August 12, 2004).

10.16		Letter Agreement, dated as of August 27, 2004, amended and restated as of September 21, 2004 and further amended and restated on October 14, 2004, by and between Alvarez and Marsal, Inc. and Interstate Bakeries Corporation, Armour & Main Redevelopment Corporation, Baker’s Inn Quality Baked Goods, LLC, IBC Sales Corporation, IBC Services, LLC, IBC Trucking LLC, Interstate Brands Corporation, New England Bakery Distributors, LLC and Mrs. Cubbison’s Foods, Inc (incorporated herein by reference to Exhibit 10.24 to Interstate Bakeries Corporation’s Annual Report on Form 10-K for the year ended May 29, 2004, filed October 6, 2006).

10.16.1		Letter Agreement, dated as of July 18, 2005, by and between Alvarez and Marsal, Inc. and Interstate Bakeries Corporation, Armour & Main Redevelopment Corporation, Baker’s Inn Quality Baked Goods, LLC, IBC Sales Corporation, IBC Services, LLC, IBC Trucking LLC, Interstate Brands Corporation, New England Bakery Distributors, LLC and Mrs. Cubbison’s Foods, Inc (incorporated herein by reference to Exhibit 10.24.1 to Interstate Bakeries Corporation’s Annual Report on Form 10-K for the fiscal year ended May 29, 2004, filed October 6, 2006).

10.17		Revolving Credit Agreement, dated as of September 23, 2004, among Interstate Bakeries Corporation (“Parent Borrower”), a debtor and debtor-in-possession in a case pending under

116


Exhibit No.		Exhibit

		Chapter 11 of the Bankruptcy Code, and each of the direct and indirect subsidiaries of the Parent Borrower party to this Agreement (each individually a “Subsidiary Borrower” and collectively the “Subsidiary Borrowers”; and together with the Parent Borrower, the “Borrowers”), each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code (the cases of the Borrowers, each a “Case” and collectively, the “Cases”), JPMorgan Chase Bank (“JPMCB”), and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party hereto (together with JPMCB, the “Lenders”), J.P. Morgan Securities Inc., as lead arranger and book runner, JPMorgan Chase Bank, as administrative agent (in such capacity, the “Administrative Agent”) for the Lenders, and JPMorgan Chase Bank, as collateral agent (in such capacity, the “Collateral Agent”) for the Lenders (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on September 27, 2004).

10.17.1		First Amendment, dated as of November 1, 2004, to the Revolving Credit Agreement dated as of September 23, 2004, among Interstate Bakeries Corporation (“Parent Borrower”), a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, and each of the direct and indirect subsidiaries of the Parent Borrower party to this Agreement (each individually a “Subsidiary Borrower” and collectively the “Subsidiary Borrowers”; and together with the Parent Borrower, the “Borrowers”), each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code (the cases of the Borrowers, each a “Case” and collectively, the “Cases”), JPMorgan Chase Bank (“JPMCB”), and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party hereto (together with JPMCB, the “Lenders”), J.P. Morgan Securities Inc., as lead arranger and book runner, JPMorgan Chase Bank, as administrative agent (in such capacity, the “Administrative Agent”) for the Lenders, and JPMorgan Chase Bank, as collateral agent (in such capacity, the “Collateral”) for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on November 5, 2004).

10.17.2		Second Amendment, effective as of January 20, 2005, to the Revolving Credit Agreement, dated as of September 23, 2004, among Interstate Bakeries Corporation (“Parent Borrower”), a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, and each of the direct and indirect subsidiaries of the Parent Borrower party to this Agreement (each individually a “Subsidiary Borrower” and collectively the “Subsidiary Borrowers”; and together with the Parent Borrower, the “Borrowers”), each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code (the cases of the Borrowers, each a “Case” and collectively, the “Cases”), JPMorgan Chase Bank (“JPMCB”), and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party hereto (together with JPMCB, the “Lenders”), J.P. Morgan Securities Inc., as lead arranger and book runner, JPMorgan Chase Bank, as administrative agent (in such capacity, the “Administrative Agent”) for the Lenders, and JPMorgan Chase Bank, as collateral agent (in such capacity, the “Collateral”) for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on February 1, 2005).

10.17.3		Third Amendment and Waiver, dated as of May 26, 2005, to the Revolving Credit Agreement, dated as of September 23, 2004, as amended, among Interstate Bakeries Corporation, a Delaware corporation (“Parent Borrower”), a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower (each individually a “Subsidiary Borrower” and collectively the “Subsidiary Borrowers”; and together with the Parent Borrower, the “Borrowers”), each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Credit Agreement (together with JPMCB, the “Lenders”), JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as administrative agent (the “Administrative Agent”) for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase

117


Exhibit No.		Exhibit

		Bank), as collateral agent (the “Collateral Agent”) for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on May 27, 2005).

10.17.4		Fourth Amendment and Waiver, dated as of November 30, 2005, to the Revolving Credit Agreement, dated as of September 23, 2004, as amended, among Interstate Bakeries Corporation, a Delaware corporation (“Parent Borrower”), a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower (each individually a “Subsidiary Borrower” and collectively the “Subsidiary Borrowers”; and together with the Parent Borrower, the “Borrowers”), each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Credit Agreement (together with JPMCB, the “Lenders”), JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as administrative agent (the “Administrative Agent”) for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as collateral agent (the “Collateral Agent”) for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on December 5, 2005).

10.17.5		Fifth Amendment, dated as of December 27, 2005, to the Revolving Credit Agreement, dated as of September 23, 2004, as amended, among Interstate Bakeries Corporation (“Parent Borrower”), a Delaware corporation, a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Credit Agreement (together with JPMCB, the “Lenders”), JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as administrative agent for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as collateral agent for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on December 30, 2005).

10.17.6		Sixth Amendment, dated as of March 29, 2006, to the Revolving Credit Agreement, dated as of September 23, 2004, as amended, among Interstate Bakeries Corporation (“Parent Borrower”), a Delaware corporation, a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and certain of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Credit Agreement (together with JPMCB, the “Lenders”), JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as administrative agent for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as collateral agent for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on March 29, 2006).

10.17.7		Seventh Amendment, dated as of June 28, 2006, to the Revolving Credit Agreement, dated as of September 23, 2004, as amended, among Interstate Bakeries Corporation (“Parent Borrower”), a Delaware corporation, a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Credit Agreement (together with JPMCB, the “Lenders”), JPMorgan Chase Bank, N.A., a national banking

118


Exhibit No.		Exhibit

		association (formerly known as JPMorgan Chase Bank), as administrative agent for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as collateral agent for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on June 30, 2006).

10.17.8		Eighth Amendment, dated as of August 25, 2006, to the Revolving Credit Agreement, dated as of September 23, 2004, as amended, among Interstate Bakeries Corporation (“Parent Borrower”), a Delaware corporation, a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Credit Agreement (together with JPMCB, the “Lenders”), JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as administrative agent for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as collateral agent for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on August 30, 2006).

10.17.9		Ninth Amendment, dated as of February 16, 2007, to the Revolving Credit Agreement, dated as of September 23, 2004, as amended, among Interstate Bakeries Corporation (“Parent Borrower”), a Delaware corporation, a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Credit Agreement (together with JPMCB, the “Lenders”), JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as administrative agent for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as collateral agent for the Lenders (incorporated herein by reference to the Current Report on Form 8-K of Interstate Bakeries Corporation filed on February 16, 2007).

10.17.10		First Amendment, dated as of October 1, 2007, to the Amended and Restated Revolving Credit Agreement, dated as of February 16, 2007, as amended, among Interstate Bakeries Corporation, a Delaware corporation (“Parent Borrower”), a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and certain of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Amended and Restated Revolving Credit Agreement (together with JPMCB, the “Lenders”), and JPMCB as administrative agent and collateral agent for the Lenders (incorporated by reference to Exhibit 10.1 to Interstate Bakeries Corporation’s Current Report on Form 8-K filed on October 2, 2007).

10.17.11		Second Amendment, dated as of November 29, 2007, to the Amended and Restated Revolving Credit Agreement, dated as of February 16, 2007, as amended, among Interstate Bakeries Corporation, a Delaware corporation (“Parent Borrower”), a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and certain of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Amended and Restated Revolving Credit Agreement (together with JPMCB, the “Lenders”), and JPMCB as administrative agent and collateral agent for the Lenders (incorporated

119


Exhibit No.		Exhibit

		by reference to Exhibit 10.1 to Interstate Bakeries Corporation’s Current Report on Form 8-K filed on December 3, 2007).

10.17.12		Third Amendment, dated as of December 19, 2007, to the Amended and Restated Revolving Credit Agreement, dated as of February 16, 2007, as amended, among Interstate Bakeries Corporation, a Delaware corporation (“Parent Borrower”), a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and certain of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Amended and Restated Revolving Credit Agreement (together with JPMCB, the “Lenders”), and JPMCB as administrative agent and collateral agent for the Lenders (incorporated by reference to Exhibit 10.1 to Interstate Bakeries Corporation’s Current Report on Form 8-K filed on December 19, 2007).

10.17.13		Fourth Amendment, dated as of December 19, 2007, to the Amended and Restated Revolving Credit Agreement, dated as of February 16, 2007, as amended, among Interstate Bakeries Corporation, a Delaware corporation (“Parent Borrower”), a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and certain of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Amended and Restated Revolving Credit Agreement (together with JPMCB, the “Lenders”), and JPMCB as administrative agent and collateral agent for the (incorporated herein by reference to Exhibit 10.24.1 to Interstate Bakeries Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 8, 2008, filed on April 17, 2008).

10.17.14		Second Amended and Restated Revolving Credit Agreement, dated as of May 9, 2008 (the “DIP Agreement”), by and among Interstate Bakeries Corporation, a Delaware corporation (“Parent Borrower”), a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the wholly-owned direct and indirect subsidiaries of the Parent Borrower party to the DIP Agreement, each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (“JPMCB”), and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the DIP Agreement (together with JPMCB, the “Lenders”), J.P. Morgan Securities Inc., as lead arranger and book runner, and JPMCB as administrative agent and collateral agent for the Lenders (incorporated by reference to Exhibit 10.1 to Interstate Bakeries Corporation’s Current Report on Form 8-K filed on May 12, 2008).

10.18		Offer of Employment dated July 13, 2005 between Interstate Bakeries Corporation and Mr. Richard C. Seban (incorporated herein by reference to the Current Report on Form 8-K of Interstate

120


Exhibit No.		Exhibit

		Bakeries Corporation filed on August 5, 2005).

10.19		Interstate Bakeries Corporation Key Employee Retention Plan (incorporated herein by reference to Exhibit 10.27 to Interstate Bakeries Corporation’s Annual Report on Form 10-K for the fiscal year ended May 29, 2004, filed October 6, 2006).

10.20		Consulting Agreement dated July 27, 2007 by and among Interstate Brands Corporation and Interim LLC (incorporated herein by reference to Exhibit 10.22 to Interstate Bakeries Corporation’s Quarterly Report on Form 10-Q for the quarter ended August 25, 2007, filed on October 4, 2007).

10.20.1		Extension letter dated April 16, 2008 from Interstate Bakeries Corporation to Interim LLC*

10.20.2		Extension letter dated May 5, 2008 from Interstate Bakeries Corporation to Interim LLC*

10.21		Consulting Agreement dated July 27, 2007 by and among Interstate Brands Corporation and Miller Management Group, Inc. (incorporated herein by reference to Exhibit 10.23 to Interstate Bakeries Corporation’s Quarterly Report on Form 10-Q for the quarter ended August 25, 2007, filed on October 4, 2007).

10.21.1		Extension letter dated April 16, 2008 from Interstate Bakeries Corporation to Miller Management Group, Inc.*

10.21.2		Extension letter dated May 5, 2008 from Interstate Bakeries Corporation to Miller Management Group, Inc.*

10.22		Consulting Agreement dated July 27, 2007 by and among Interstate Brands Corporation and Timpanogos Consulting LLC (incorporated herein by reference to Exhibit 10.24 to Interstate Bakeries Corporation’s Quarterly Report on Form 10-Q for the quarter ended August 25, 2007, filed on October 4, 2007).

10.22.1		Extension letter dated March 25, 2008 from Interstate Bakeries Corporation to Timpanogos Consulting LLC (incorporated herein by reference to Exhibit 10.24.1 to Interstate Bakeries Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 8, 2008, filed on April 17, 2008).

10.22.2		Extension letter dated April 16, 2008 from Interstate Bakeries Corporation to Timpanogos Consulting LLC*

10.22.3		Extension letter dated May 5, 2008 from Interstate Bakeries Corporation to Timpanogos Consulting LLC*

21.1		Subsidiaries of Interstate Bakeries Corporation*

24.1		Power of Attorney (included on signature page)

31.1		Certification of Craig D. Jung pursuant to Rule 13a-14(a)/15d-14(a)*

31.2		Certification of J. Randall Vance pursuant to Rule 13a-14(a)/15d-14(a)*

32.1		Certification of Craig D. Jung pursuant to 18 U.S.C. Section 1350*

32.2		Certification of J. Randall Vance pursuant to 18 U.S.C. Section 1350*


#		Management contracts or compensatory plans or arrangements required to be identified by Item 15(a).

*		Filed herewith

121

SIGNATURES

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


	INTERSTATE BAKERIES CORPORATION
Dated: September 15, 2008	By:	/s/ Craig D. Jung
		Craig D. Jung
		Chief Executive Officer (Principal Executive Officer)

Each person whose signature appears below hereby severally constitutes and appoints Craig D. Jung and J. Randall Vance, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K of Interstate Bakeries Corporation for the fiscal year ended May 31, 2008 all documents relating therewith, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing necessary or advisable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.


Name of Signatory	Capacities In Which Signing	Date

/s/ Craig D. Jung Craig D. Jung	Chief Executive Officer (Principal Executive Officer)	September 15, 2008

/s/ J. Randall Vance J. Randall Vance	Chief Financial Officer (Principal Financial and Accounting Officer)	September 15, 2008

/s/ Michael J. Anderson Michael J. Anderson	Non-Executive Chairman of the Board	September 15, 2008

/s/ Robert B. Calhoun Robert B. Calhoun	Director	September 15, 2008

/s/ William P. Mistretta William P. Mistretta	Director	September 15, 2008

/s/ David I. Pauker David I. Pauker	Director	September 15, 2008

/s/ Terry R. Peets Terry R. Peets	Director	September 15, 2008

/s/ Philip A. Vachon Philip A. Vachon	Director	September 15, 2008

122

INTERSTATE BAKERIES CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FIFTY-TWO WEEKS ENDED
MAY 31, 2008 AND JUNE 2, 2007
AND FIFTY-THREE WEEKS ENDED JUNE 3, 2006
(dollars in thousands)


						Adjustments to
	Balance at					other			Accounts			Balance at
	beginning		Adjustments			comprehensive			charged			end
Description	of period		to expense			income			off			of period
2008
Reserve for discounts and allowances on accounts receivable	$	8,699	$	(43	)	$	—		$	—		$	8,656
Allowance for doubtful accounts		2,315		(90	)		—			(175	)		2,050
Deferred income tax — valuation allowance		123,281		42,346			—			—			165,627

2007
Reserve for discounts and allowances on accounts receivable		8,914		(215	)		—			—			8,699
Allowance for doubtful accounts		3,400		(798	)		—			(287	)		2,315
Deferred income tax — valuation allowance		98,193		36,235			(11,147	)		—			123,281

2006
Reserve for discounts and allowances on accounts receivable		6,510		2,404			—			—			8,914
Allowance for doubtful accounts		3,492		387			—			(479	)		3,400
Deferred income tax — valuation allowance		62,165		37,424			(1,396	)		—			98,193

123


By:	/s/ Gary K. Wandschneider	Date:	4/21/08
Name: Gary K. Wandschneider


By:	/s/ Gary K. Wandschneider	Date:	5/5/08
Name: Gary K. Wandschneider


Name	Jurisdiction of Formation / Incorporation	Ownership Percentage
IBC Services, LLC	Missouri		100	%

Interstate Brands Corporation	Delaware		100	%

IBC Sales Corporation	Delaware		100	%

Mrs. Cubbison’s Foods, Inc.	California		80	%

IBC Trucking, LLC	Delaware		100	%

Baker’s Inn Quality Baked Goods, LLC	Delaware		100	%

New England Bakery Distributors, L.L.C.	Connecticut		100	%

Armour and Main Redevelopment Corporation	Missouri		100	%



	By:	/s/ J. Randall Vance
		J. Randall Vance
		Chief Financial Officer (Principal Financial and Accounting Officer)