<PAGE> 1
18

             MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           RESULTS OF OPERATIONS AND FINANCIAL CONDITION

-------------------------------------------------------------------------------
INTRODUCTION

A number of significant factors, which are discussed below, affected the
consolidated results of operations, financial condition and liquidity of
Earthgrains during the current fiscal year ended March 31, 1998, the prior
fiscal year ended March 25, 1997, the 12-week transition period ended March
26, 1996, and the fiscal year ended January 2, 1996. This discussion should
be read in conjunction with the Consolidated Financial Statements and notes
thereto for such periods included elsewhere in this report. Effective at the
close of business on March 26, 1996 (the Distribution Date), shares of the
Company were distributed to shareholders of Anheuser-Busch Companies, Inc.
(Anheuser-Busch) Common Stock, based upon a ratio of 1-to-25. Following the
distribution, the Company began operations as an independent, publicly held
company. Accordingly, since the Company was a wholly-owned subsidiary of
Anheuser-Busch during the periods presented prior to fiscal 1997, these
financial statements may not necessarily reflect the consolidated results of
operations or financial position of the Company or what the results of
operations would have been if the Company had been an independent public
company during those periods.


OVERVIEW AND OUTLOOK

Earthgrains' operating results in its second fiscal year as an independent
company demonstrate further accomplishments from elements of a fundamental
strategy of improving revenues, enhancing cost-effectiveness, gaining
efficiencies, and taking advantage of industry consolidation. This strategy,
which has been facilitated through enhanced information made available
through the Company's investment in systems technology, has enabled
Earthgrains to focus its sales force and business plans in markets with the
greatest growth opportunities and on products that offer higher margins. A
renewed effort to provide better-quality products and services to customers
is paying off. Customer partnering has become a fundamental way of doing
business. New product initiatives and increased advertising for these
offerings as well as for core brands have contributed to the Company's
strategy to build branded business.

     Since its inception as an independent company, Earthgrains has stated
that taking advantage of acquisition opportunities in its core fresh
baked-goods business line is key to enhancing the Company's ability to
compete successfully in this industry. Earthgrains has taken an active role
in the consolidation process of the packaged bakery products industry that
remains in a condition of excess capacity and underutilization. Acquisitions
are contributing to Earthgrains' success and more benefits are expected in
fiscal 1999. The integration of the fourth-quarter acquisition of
CooperSmith, Inc. (CooperSmith) is on schedule. Related plant consolidations
have taken place, and route consolidation and handheld computer rollouts are
under way, as well as transition onto the Company's management information
systems. While CooperSmith will be a significant contributor to Earthgrains,
it is expected to be slightly dilutive to earnings through the first quarter
of fiscal 1999. San Luis Sourdough, Inc., the specialty superpremium baker in
San Luis Obispo, Calif., also acquired in the fourth quarter, is expected to
make an immediate positive contribution to results. The acquisition of
Heiner's Bakery, Inc. (Heiner's) in November 1996, which was additive to
earnings from the outset, has been a big success and continues to exceed
expectations. The Company will continue to seek opportunities to participate
in industry consolidation that are a good fit with its strategy to enhance
revenues, profitability and return on capital.

     Along with strengthening core business and growth through acquisition,
emphasis has been placed on driving gains through efficiencies. Operating
improvements from the Company's restructuring and consolidation program aimed
at reducing excess capacity and withdrawal from unprofitable markets and
lower-margin accounts continued into the current year. Results are showing
from the emphasis on product quality and operating and distribution
efficiencies. Additionally, a positive impact has resulted from the
stabilization of commodity costs. Commodity costs, which represent
approximately 22-25% of the Company's cost of products sold, have continued
to decrease from the first half of fiscal 1997 after reaching record levels
in that year and during the 1996 transition period.

     Earthgrains has made significant achievements since the spinoff.
Benefits are expected to continue from these actions and the impact of
acquisitions. The Company is poised for continued fundamental improvement in
its existing operations and participation in industry consolidation
opportunities. While strong progress has been demonstrated in improving
underlying performance, certain market areas of the fresh baked-goods
business continue to exhibit lower margins due to regional differences in
price levels, product mix and input costs. These effects will be monitored
and continuing efforts will be made to maximize manufacturing, distribution
and administrative efficiencies and to strive for even better operating
results.


RESTRUCTURING AND CONSOLIDATION PROVISIONS

Beginning in late 1993, the Company established a restructuring and
consolidation program designed to reduce costs and maximize operating
efficiencies. The Company recorded

THE EARTHGRAINS COMPANY


<PAGE> 2
                                                                            19

$12.7 million and $27.5 million charges in fiscal 1997 and 1995, respectively,
covering estimated expenses in conjunction with closing certain domestic bakery
operations and one refrigerated dough plant.

     The Company believes continued improvements in the current fiscal year's
operating results reflect further benefits achieved through the restructuring
and consolidation program. The Company will continue to review its operations
for opportunities to improve efficiencies. See Note 5 in the Notes to the
Consolidated Financial Statements for additional information concerning the
details of the Company's restructuring charges, including a reconciliation of
the balance sheet reserve relating thereto.


RESULTS OF OPERATIONS

FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997

     Net sales for the 53-week fiscal year ended March 31, 1998, of $1,719.0
million increased from sales of $1,662.6 million for the comparable 52-week
fiscal year ended March 25, 1997. Sales added through the acquisition of
CooperSmith since January 17, 1998, and a full year of Heiner's, acquired in
November 1996, combined with the additional week were partially offset by the
unfavorable impact of foreign-exchange rates during the year. Improved
pricing and favorable product mix shift across all businesses also
contributed to the increase in sales. After adjustment for the additional
week and effect of foreign-exchange rates, sales for fiscal 1998 increased by
$79.7 million or 4.8%.

     Gross margin increased significantly to 42.9% in the current year from
40.5% in fiscal 1997. Profit-margin improvements were experienced across
fresh bakery and refrigerated dough operations both domestically and
internationally. These solid margin improvements can be attributed to focus
on branded and superpremium product categories, favorable pricing, and
improved manufacturing efficiencies. Domestic refrigerated dough operations
demonstrated the strongest margin-performance improvement, through
efficiencies gained from closing its Indianapolis, Ind., plant in March 1997
and a positive mix shift. Additionally, flour costs continued to decrease
since the first half of fiscal 1997 after reaching record highs thereby
resulting in margin improvements.

     Agricultural commodity costs represented 22-25% of cost of products sold
during the 1998 fiscal year, which is down from prior years. Costs of
products sold includes agricultural commodities whose prices are influenced
by weather conditions, government regulations and economic conditions. The
Company utilized futures contracts or options to hedge approximately 55-65%
of such agricultural commodity costs or 12-16% of cost of products sold
during the 1998 fiscal year. As of March 31, 1998, the amount of the
Company's aggregate obligation to purchase commodities under such contracts
was $20.4 million.

     Marketing, distribution and administrative expenses increased in 1998
from 38.1% to 39.0% on a percentage-of-sales basis. A primary factor is the
increased spending in marketing and advertising to focus on building core
brands as well as supporting new premium product introductions.

     The prior-year charge of $12.7 million for restructuring and consolidation
covered expenses in conjunction with closing one bakery and one refrigerated
dough plant. Excluding the prior-year charge, operating income for fiscal
1998 increased $26.9 million. This significant increase in operating results
reflects a strong contribution from Heiner's, benefits of lower ingredient
costs, and the continued focus on cost-effectiveness combined with an
improvement in product mix.

     The effective tax rate for fiscal 1998 represents a more typical tax
rate expected for the Company on an on-going basis but will likely increase
slightly with the effect of nondeductible goodwill amortization from
current-year acquisitions. The lower effective tax rate for fiscal 1997 is a
direct result of $5.3 million in one-time Spanish tax incentives and credits
associated principally with investments made in the Canary Islands. The
Company substantially completed the expansion of its Canary Islands bakery in
that year.

     The $1.8 million net-of-tax charge for the change in accounting
principle in the current year represents the effect of compliance with a new
accounting interpretation related to the recognition of costs associated with
business process re-engineering. See Note 3 for additional information.
Net earnings for fiscal 1998 were $36.0 million or $1.70 per diluted share,
compared to $16.2 million, or $0.79 per diluted share for fiscal 1997. The
marked increase in net earnings for the current year is a result of the
factors noted above.


FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1995

     Net sales for the fiscal year ended March 25, 1997, of $1,662.6 million
were consistent with sales of $1,664.6 million for the comparable 52-week
period ended January 2, 1996 (fiscal 1995). The decrease in sales attributed
to the closing or sale of underperforming and noncore businesses as part of
the planned consolidation and restructuring was partially offset by the
effect of price increases taken early in the year and favorable product-mix
shift. Sales contributed through the acquisition of Heiner's, as of November
30, 1996, were more than offset by the unfavorable impact of foreign exchange
rates near the end of the year. After adjustment for the closed or sold
facilities in both periods presented, sales for fiscal 1997 increased by
$88.8 million or 5.6%, represented across fresh bakery and refrigerated dough
operations both domestically and internationally.

     Gross margin increased to 40.5% in 1997 from 37.8% in fiscal 1995.
Profit-margin improvements were experienced by domestic fresh bakery
operations and both international bakery and refrigerated dough operations.
Margins for domestic refrigerated dough operations were down slightly from
fiscal 1995. These margin improvements can be attributed to the achieved
price increases, benefits of the restructuring and consolidation process, and
improved operating efficiencies. Additionally, flour costs which began to
increase dramatically in the last half of fiscal 1995 have decreased, thereby
resulting in improved margins from 1995.
                                                            1998 ANNUAL REPORT


<PAGE> 3
20

     Agricultural commodity costs represented 25-30% of cost of products sold
during the 1997 fiscal year, which is consistent with prior years. The
Company utilized futures contracts or options to hedge approximately 45-55%
of such agricultural commodity costs or 11-17% of cost of products sold
during the 1997 fiscal year. As of March 25, 1997, the amount of the
Company's aggregate obligation to purchase commodities under such contracts
was $11.4 million.

     Marketing, distribution and administrative expenses increased by $6.0
million in 1997 and from 37.7% to 38.1% on a percentage-of-sales basis. The
elimination of costs through the closing or sale of facilities and the effect
of the charge for the Spanish work force reduction program reflected in 1995
were more than offset by the costs of operating as a stand-alone public
company.

     The prior-year charge of $27.5 million for restructuring and
consolidation was netted with an $18.4 million gain on the sale of
businesses, resulting in the net charge of $9.1 million. Excluding the
current-year charge of $12.7 million and the 1995 net charge of $9.1 million
to consolidate certain inefficient facilities, operating income for fiscal
1997 increased $37.9 million compared to the prior year. This significant
increase in operating results reflects benefits from our consolidation and
restructuring program and our continued focus on cost-effectiveness combined
with an improvement in product mix.

     The lower effective tax rate for fiscal 1997 is a direct result of $5.3
million in one-time Spanish tax incentives and credits associated principally
with investments made in the Canary Islands. The Company substantially
completed the expansion of its Canary Islands bakery during 1997. Typically,
the Company's effective income tax rate is higher primarily due to the
relative impact of the nondeductible fixed goodwill amortization on the
respective earnings level.

     Net earnings for fiscal 1997 were $16.2 million or $0.79 per diluted
share, compared with a loss of $6.6 million, or a $0.33 loss per diluted
share, computed on the basis of pro forma average shares outstanding for
fiscal 1995.

     The historical statement of earnings for the year-ago period does not
reflect interest expense related to long-term debt assumed by the Company
upon the distribution at March 26, 1996, and certain administrative expenses
associated with operating as an independent, stand-alone company.


TWELVE-WEEK PERIOD ENDED MARCH 26, 1996, COMPARED WITH TWELVE-WEEK PERIOD
ENDED MARCH 28, 1995

     For the 12-week period ended March 26, 1996, sales declined $4.1 million
or 1.1% from the comparable prior-year period. The decrease can be attributed
to the planned consolidation and restructuring that resulted in the closing
or sale of underperforming and noncore businesses. This decrease in sales was
partially offset by increased volume in refrigerated dough products, a $4.9
million increase in international sales and a $5.6 million favorable effect
of exchange-rate fluctuations. After adjustment for the closed or sold
facilities in both periods presented, sales increased by $19.8 million.

     Gross margin for the March 1996 period of 37.8% compared unfavorably
with the prior-year period's 39.2%. As expected, margins were adversely
affected by the dramatic increases in prices for ingredients, specifically
flour costs, which increased to record levels.

     The increase in marketing, distribution and administrative expenses to
$146.0 million from $140.9 million in the comparable period is the result of
one-time charges of $7.6 million, including $6.3 million related to a
settlement agreement in a case that involved alleged price-fixing and
antitrust violations in the state of Texas.

     In the comparable period, $6.1 million of the fiscal 1995 provision for
restructuring and consolidation was recorded to cover estimated expenses
arising from the consolidation of certain domestic bakery operations
identified at that date.

     The variance in the effective income-tax rate reflects the relative
impact of the nondeductible fixed goodwill amortization on the respective
earnings levels.

     As a result of the March 1996 charge for the legal settlement and other
factors discussed above, the Company incurred a loss of $5.1 million, or
$0.25 per diluted share, computed on the basis of pro forma average shares
outstanding, compared with a loss of $0.3 million, or $0.02 per diluted share
in the prior year's comparable period.

FISCAL YEAR 1995 COMPARED WITH FISCAL YEAR 1994

     Net sales in 1995 decreased $55.9 million or 3.2% compared with the same
period in the prior year. Domestic fresh baked-goods sales decreased by $89.6
million in part as a result of the planned consolidation and restructuring,
including the withdrawal from underperforming territories. Lower domestic
fresh baked-goods volume was partially offset by higher net prices, higher
international sales of $32.5 million, and a $13.7 million favorable effect of
foreign currency exchange rate fluctuations. Excluding the sales of the
closed facilities and divested businesses, foreign currency exchange-rate
fluctuations and the extra week in the 1994 fiscal year, net sales decreased
$6.5 million on a comparable basis.

     Gross profit decreased $19.6 million or 3.0% versus fiscal 1994. As a
percentage of sales, gross profit remained constant at 37.8%. Margins for the
1995 fiscal year would have improved but were adversely affected by the
dramatic increases in commodity prices for ingredients in the last half of
the year.

     Marketing, distribution, and administrative expenses in 1995 increased
$3.6 million compared to the prior year. As a percent of sales, these
expenses increased to 37.7% in 1995 versus 36.3% in 1994, as the reduction in
volume-related selling expenses was more than offset by increases in other
costs, including the Spanish work force reduction program and domestic
employee relocation expenses.

     Excluding the 1995 charge of $27.5 million to consolidate certain
inefficient domestic bakery facilities, operating income for the 1995 fiscal
year decreased $23.2 million compared with the prior year. This decrease in
operating results was primarily attributable to the impact of commodity
prices for ingredients and the work force reduction in Spain.

THE EARTHGRAINS COMPANY


<PAGE> 4
                                                                            21

     The increase in the effective tax rate primarily reflects the relative
effect of the nondeductible fixed goodwill amortization on a reduced earnings
level.


LIQUIDITY AND CAPITAL RESOURCES

Concurrent with the Distribution on March 26, 1996, the Company used
borrowings under a $215 million unsecured revolving credit facility with
several financial institutions to pay $80 million to Anheuser-Busch as a
partial payment of its net intercompany payable, to fund working capital
needs and for general corporate purposes. Prior to the Distribution, as a
subsidiary, the Company obtained funds for its capital needs, including
working capital, from Anheuser-Busch, primarily through a
non-interest-bearing intercompany account.

     The Company's primary source of liquidity is cash flow from operations,
which was $125.9 million for the current fiscal year ended March 31, 1998.
Improved operating efficiencies, continued favorable product-mix shift,
favorable ingredient costs and stable pricing have contributed to the strong
cash flows from operations for the current year. Net working capital,
excluding cash and cash equivalents, was $48.6 million at March 31, 1998, up
from $37.5 million a year ago, primarily attributable to the effect of
acquisitions.

     In conjunction with the acquisition of CooperSmith in the fourth quarter
of fiscal 1998, the existing credit facility was renegotiated to $450 million
with a maturity date of September 2002. The Company's primary routine cash
requirements will continue to consist of funding capital expenditures and
interest payments pursuant to the credit facility. The Company invested $79.6
million in capital expenditures during the current fiscal year and expects to
fund capital investments of approximately $80-90 million in the upcoming
year.

     The consolidated capital expenditure plan for fiscal 1999 includes
completion of the new bakery in northern Portugal, continued rollout of new
handheld computers for route sales drivers and CooperSmith equipment
upgrades. The Company will also continue ongoing investments in systems
technology along with modernization and expansion plans for various domestic
and international bakeries.

     Additionally, a favorable IRS tax ruling was received during the year on
the stock repurchase program authorized by the Company's Board of Directors
in March 1997. The program authorizes the repurchase of up to 1 million
shares of common stock as the Company determines. At March 31, 1998, 168,600
shares had been purchased for the treasury at a cost of $7.0 million.

     On both a short-term and long-term basis, management believes that its
cash flows from operations, together with its available borrowings under the
Credit Facility, will provide it with sufficient resources to meet its
seasonal working capital needs, to finance its projected capital
expenditures, and to meet its foreseeable liquidity requirements.


YEAR 2000

Many computer systems process dates in application software and data files
based upon two digits for the year of a transaction rather than a full four
digits. Therefore these systems may not be able to properly process dates in
the year 2000. The Company has developed plans to address this issue and has
identified its significant systems and software applications that are
date-sensitive for key accounting, processing and operating systems. In the
past few and upcoming years, several new information technologies have been
and are being installed to achieve further productivity and cost
improvements. Such systems will be year 2000 compliant. The Company believes
that all systems necessary to manage the business effectively will be
replaced, modified or upgraded before the year 2000. Because of the
significant system replacement and business re-engineering investments under
way, the Company believes the costs to modify current systems to be year 2000
compliant will not be material to the Company's results of operations.


ENVIRONMENTAL MATTERS

The operations of Earthgrains, like those of similar businesses, are subject
to various Federal, state and local laws and regulations with respect to
environmental matters, including air and water quality, underground
fuel-storage tanks, and other regulations intended to protect public health
and the environment. Earthgrains has been identified as a potentially
responsible party ("PRP") at certain locations under the Comprehensive
Environmental Responses, Compensation and Liability Act, and may be required
to share in the cost of cleanup with respect to two sites. While it is
difficult to quantify with certainty the financial impact of actions related
to environmental matters, based on the information currently available it is
management's opinion that the ultimate liability arising from such matters
taking into consideration established reserves should not have a material
effect on Earthgrains' results of operations or financial position.

FORWARD-LOOKING STATEMENTS

Matters discussed in this Annual Report (particularly in this section and the
Letter to Shareholders), contain forward-looking information, as defined in
the Private Securities Litigation Reform Act of 1995. All such
forward-looking information in this report involves risks and uncertainties,
including, but not limited to, variations in income levels of consumers,
fluctuations in currency exchange rates for the Spanish peseta and French
franc versus the U.S. dollar, the costs of raw materials, the ability of the
Company to realize projected savings from productivity and product quality
improvements, the ability of the Company to continue to participate in
industry consolidation and to successfully integrate acquired businesses,
legal proceedings to which the Company may become a party, and other risks
indicated in filings by the Company with the Securities and Exchange
Commission.

                                                            1998 ANNUAL REPORT


<PAGE> 5
22

<TABLE>
                         CONSOLIDATED BALANCE SHEETS

<CAPTION>
------------------------------------------------------------------------------
                                                   MARCH 31,         March 25,
(In millions, except share data)                        1998              1997
------------------------------------------------------------------------------
<S>                                                 <C>               <C>
ASSETS
Current assets:
  Cash and cash equivalents                         $   43.7          $   43.1
  Accounts receivable, net                             156.5             141.5
  Inventories, net                                      68.9              66.4
  Deferred income taxes                                 30.4              29.9
  Other current assets                                  26.8              15.7
------------------------------------------------------------------------------
    Total current assets                               326.3             296.6

Other assets                                            35.0              28.8
Goodwill, net                                          311.0             140.0
Plant and equipment, net                               722.0             706.7
------------------------------------------------------------------------------
    Total assets                                    $1,394.3          $1,172.1
==============================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                  $  132.1          $  121.4
  Accrued salaries, wages and benefits                  56.5              46.6
  Accrual for restructuring and consolidation            6.1              15.4
  Other current liabilities                             39.3              32.6
------------------------------------------------------------------------------
    Total current liabilities                          234.0             216.0

Postretirement benefits                                115.3             118.8
Long-term debt                                         266.7             103.0
Deferred income taxes                                   99.5             103.8
Other noncurrent liabilities                            72.2              48.1
Commitments and contingencies                             --                --

Shareholders' equity:
Common stock, $.01 par value, 50,000,000
    authorized, 21,498,864 and 10,778,050
    (pre-split) shares issued in 1998
    and 1997, respectively                               0.2               0.1
  Additional paid-in capital                           608.1             604.4
  Retained earnings                                     47.1              14.7
  Unearned ESOP shares                                 (14.1)            (15.1)
  Treasury stock                                        (7.0)               --
  Unearned portion of restricted stock                  (3.3)             (4.2)
  Cumulative translation adjustment                    (24.4)            (17.5)
------------------------------------------------------------------------------
    Total shareholders' equity                         606.6             582.4
------------------------------------------------------------------------------
    Total liabilities and equity                    $1,394.3          $1,172.1
==============================================================================

See accompanying Notes to Consolidated Financial Statements.
</TABLE>

THE EARTHGRAINS COMPANY


<PAGE> 6
                                                                            23

<TABLE>
                                                CONSOLIDATED STATEMENTS OF EARNINGS

<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                               For the
                                                                  For the years ended           twelve        For the
                                                               ------------------------    weeks ended     year ended
                                                               MARCH 31,      March 25,      March 26,     January 2,
(In millions, except per-share data)                            1998<Fa>           1997           1996           1996
---------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>            <C>              <C>          <C>
Net sales                                                       $1,719.0       $1,662.6         $367.7       $1,664.6
Cost of products sold                                              981.6          988.8          228.8        1,034.7
---------------------------------------------------------------------------------------------------------------------
Gross profit                                                       737.4          673.8          138.9          629.9
Marketing, distribution and
  administrative expenses                                          670.2          633.5          146.0          627.5
Provision for restructuring and
  consolidation, net                                                  --           12.7             --            9.1
---------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                             67.2           27.6           (7.1)          (6.7)
Other income and expenses:
  Interest (expense)                                                (8.2)          (6.3)          (0.1)          (1.9)
  Other income (expense), net                                        3.0            1.4           (0.1)           4.7
---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                   62.0           22.7           (7.3)          (3.9)
Provision (benefit) for income taxes                                24.2            6.5           (2.2)           2.7
---------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect
  of change in accounting principle                                 37.8           16.2           (5.1)          (6.6)

Cumulative effect of change in accounting
  principle, net of tax                                              1.8             --             --             --
---------------------------------------------------------------------------------------------------------------------
Net income (loss)                                               $   36.0       $   16.2         $ (5.1)      $   (6.6)
=====================================================================================================================

Earnings per share:<Fb>
  Basic
    Earnings before cumulative effect
      of change in accounting principle                         $   1.86       $   0.80
    Cumulative effect of accounting change                          0.09             --
---------------------------------------------------------------------------------------
    Net earnings per share                                      $   1.77       $   0.80
=======================================================================================
    Weighted average shares outstanding                             20.3           20.3
=======================================================================================
  Diluted
    Earnings before cumulative effect
      of change in accounting principle                         $   1.78       $   0.79
    Cumulative effect of accounting change                          0.08             --
---------------------------------------------------------------------------------------
    Net earnings per share                                      $   1.70       $   0.79
=======================================================================================
    Weighted average shares outstanding                             21.2           20.6
=======================================================================================

<FN>
<Fa> Fiscal year contains 53 weeks.

<Fb> Prior-year shares and per-share amounts have been restated to reflect the
     two-for-one stock split effective July 28, 1997.

See accompanying Notes to Consolidated Financial Statements.
</TABLE>

                                                            1998 ANNUAL REPORT


<PAGE> 7
24

<TABLE>
                                        CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                               For the
                                                                  For the years ended     twelve weeks        For the
                                                               ------------------------          ended     year ended
                                                               MARCH 31,      March 25,      March 26,     January 2,
(In millions)                                                   1998<Fa>           1997           1996           1996
---------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>            <C>            <C>            <C>
Cash flows from operating activities:
  Net income (loss)                                              $  36.0        $  16.2        $  (5.1)       $  (6.6)
  Adjustments to reconcile earnings to
    net cash flow provided by operations:
      Depreciation and amortization                                 84.6           84.5           17.4           79.5
      Deferred income taxes                                          6.7            1.7           (6.2)           2.5
      Provision for restructuring and consolidation
       ($12.7 million, less cash payments of $0.2;
       $27.5 million, less cash payments of $3.7 million)             --           12.5             --           23.8
      Gain on disposal of businesses                                  --             --             --          (18.4)
      (Gain) loss on disposal of fixed assets                       (1.3)          (0.2)          (0.4)           0.5
      (Increase) decrease in noncash working capital               (15.3)          (6.9)          17.1            5.6
      Other, net                                                    15.2           (6.0)          (5.3)          14.7
---------------------------------------------------------------------------------------------------------------------
      Net cash flow from operations                                125.9          101.8           17.5          101.6
---------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
  Capital expenditures                                             (79.6)         (71.2)         (22.5)        (109.3)
  Acquisitions, net of cash acquired                              (206.6)         (38.5)            --             --
  Proceeds from sale of property                                     7.8            4.5           (4.7)          31.9
---------------------------------------------------------------------------------------------------------------------
      Net cash used by investing activities                       (278.4)        (105.2)         (27.2)         (77.4)
---------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
  Proceeds from (payments on) long-term borrowings, net            163.7           10.4           91.1          (10.1)
  Dividends to shareholders                                         (3.6)          (1.5)            --             --
  Purchases of treasury stock                                       (7.0)            --             --             --
  Payments on short-term borrowings                                   --           (1.3)          (1.6)          (0.2)
  Net transactions with Anheuser-Busch                                --             --          (74.3)           5.1
---------------------------------------------------------------------------------------------------------------------
      Net cash provided by (used by) financing activities          153.1            7.6           15.2           (5.2)
---------------------------------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                            0.6            4.2            5.5           19.0
Cash and cash equivalents, beginning of year                        43.1           38.9           33.4           14.4
---------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, end of year                           $  43.7        $  43.1        $  38.9        $  33.4
=====================================================================================================================

<FN>
<Fa> Fiscal year contains 53 weeks.

See accompanying Notes to Consolidated Financial Statements.
</TABLE>

THE EARTHGRAINS COMPANY


<PAGE> 8
                                                                            25

<TABLE>
                                          CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY

<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                        Common Stock            Additional                     Unearned
                                                  -------------------------        Paid-In       Retained          ESOP
(In millions, except share data)                      Shares         Amount        Capital       Earnings        Shares
------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>                  <C>          <C>             <C>           <C>
Balance January 3, 1995                                   --           $ --         $   --          $  --         $   --
Net (loss)
Translation adjustments
Net transactions with A-B
------------------------------------------------------------------------------------------------------------------------
Balance January 2, 1996
Net (loss)
Translation adjustments
Net transactions with A-B
------------------------------------------------------------------------------------------------------------------------
Balance March 26, 1996
Shares issued upon
  distribution                                    10,092,133            0.1          582.0
Net income                                                                                           16.2
Dividends
  ($.15 per share)                                                                                   (1.5)
Shares issued under
  stock plan                                         166,551                           5.1
Amortization of
  restricted stock
Shares issued to ESOP                                513,114                          16.8                         (16.8)
Shares allocated
  under ESOP                                                                           0.3                           1.7
Translation adjustments
Other                                                  6,252                           0.2
------------------------------------------------------------------------------------------------------------------------
Balance March 25, 1997                            10,778,050            0.1          604.4           14.7          (15.1)
Net income                                                                                           36.0
Dividends
  ($.175 per share)                                                                                  (3.6)
Two-for-one stock split                           10,778,050            0.1           (0.1)
Shares issued under
  stock plan and
  related tax benefits                               106,336                           2.3
Amortization of
  restricted stock
Shares allocated
  under ESOP                                                                           1.3                           1.0
Purchases of treasury stock                         (168,600)
Translation adjustments
Other                                                  5,028                           0.2
------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1998                            21,498,864           $0.2         $608.1          $47.1         $(14.1)
========================================================================================================================

<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                                Anheuser-
                                                                   Unearned     Cumulative          Busch
                                                    Treasury     Restricted    Translation         Equity
(In millions, except share data)                       Stock          Stock     Adjustment     Investment          Total
------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>           <C>          <C>            <C>
Balance January 3, 1995                                $  --          $  --         $   --       $  684.3        $ 684.3
Net (loss)                                                                                           (6.6)          (6.6)
Translation adjustments                                                                              18.5           18.5
Net transactions with A-B                                                                             5.1            5.1
------------------------------------------------------------------------------------------------------------------------
Balance January 2, 1996                                                                             701.3          701.3
Net (loss)                                                                                           (5.1)          (5.1)
Translation adjustments                                                                               2.0            2.0
Net transactions with A-B                                                                          (116.1)        (116.1)
------------------------------------------------------------------------------------------------------------------------
Balance March 26, 1996                                                                              582.1          582.1
Shares issued upon
  distribution                                                                                     (582.1)            --
Net income                                                                                                          16.2
Dividends
  ($.15 per share)                                                                                                  (1.5)
Shares issued under
  stock plan                                                           (5.1)                                          --
Amortization of
  restricted stock                                                      0.9                                          0.9
Shares issued to ESOP                                                                                                 --
Shares allocated
  under ESOP                                                                                                         2.0
Translation adjustments                                                              (17.5)                        (17.5)
Other                                                                                                                0.2
------------------------------------------------------------------------------------------------------------------------
Balance March 25, 1997                                   --            (4.2)         (17.5)            --          582.4
Net income                                                                                                          36.0
Dividends
  ($.175 per share)                                                                                                 (3.6)
Two-for-one stock split                                                                                               --
Shares issued under
  stock plan and
  related tax benefits                                                                                               2.3
Amortization of
  restricted stock                                                      0.9                                          0.9
Shares allocated
  under ESOP                                                                                                         2.3
Purchases of treasury stock                             (7.0)                                                       (7.0)
Translation adjustments                                                               (6.9)                         (6.9)
Other                                                                                                                0.2
------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1998                                 $(7.0)         $(3.3)        $(24.4)      $     --        $ 606.6
========================================================================================================================

See accompanying Notes to Consolidated Financial Statements.
</TABLE>

                                                            1998 ANNUAL REPORT


<PAGE> 9
26

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


-------------------------------------------------------------------------------
1.  BASIS OF PRESENTATION

Effective March 26, 1996, one share of The Earthgrains Company (the Company
or Earthgrains) $.01 par value common stock was distributed to holders of
Anheuser-Busch Companies, Inc. (Anheuser-Busch) common stock for every 25
shares of Anheuser-Busch common stock owned at the established record date
(the Distribution). At the time of the Distribution, Earthgrains began
operations as a separate publicly owned company.

     The financial results presented in the financial statements for periods
prior to fiscal year 1997 are not necessarily indicative of results that would
have occurred if the Company had been an independent public company during the
periods presented.



2.  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES

This summary of the Company's significant accounting principles and policies
is presented to assist in evaluating the Company's financial statements
included in this report. These principles and policies conform to generally
accepted accounting principles and are applied on a consistent basis among
years, except for a change in the Company's method of accounting for business
process re-engineering costs in fiscal year 1998, as discussed in Note 3.

PRINCIPLES OF CONSOLIDATION

     These consolidated financial statements include the Company and all its
subsidiaries. All significant intercompany transactions are eliminated.

FISCAL YEAR END

     The Company has a 52- or 53-week year. Concurrent with the Distribution,
the Company changed its fiscal year end from the Tuesday closest to December
31 to the last Tuesday in March. The change resulted in a transition period
of 12 weeks beginning January 3, 1996, and ending March 26, 1996. The
following table summarizes the periods covered in each of the three fiscal
years and in the transition period presented in these financial statements
and footnotes thereto unless otherwise stated:

<TABLE>
--------------------------------------------------------------------------
<CAPTION>
Fiscal Year/Period                                          Period Covered
--------------------------------------------------------------------------
<S>                                   <C>
1998                                   53-week period ended March 31, 1998
1997                                   52-week period ended March 25, 1997
1996 Transition Period                 12-week period ended March 26, 1996
1995                                  52-week period ended January 2, 1996
</TABLE>

FOREIGN CURRENCY TRANSLATION

     Adjustments resulting from foreign currency transactions are recognized
in income, whereas adjustments resulting from the translation of financial
statements are reflected within shareholders' equity.

GOODWILL

     Goodwill is amortized on a straight-line basis over a period of 40
years. Accumulated amortization at March 31, 1998, and March 25, 1997, was
$76.6 million and $70.6 million, respectively. $120.0 million of the goodwill
balance at March 31, 1998, relates to the acquisition of the Company by
Anheuser-Busch in 1982.

CASH AND CASH EQUIVALENTS

     Cash and cash equivalents include cash on hand and temporary investments
purchased with an initial maturity of three months or less.

INVENTORIES AND PRODUCTION COSTS

     Inventories are valued at the lower of cost or market. Cost is
determined under the first-in, first-out method. Inventories include the cost
of materials, direct labor and manufacturing overhead. Obsolete or unsaleable
inventories are reflected at their estimated realizable values. The Company
uses commodity futures and option contracts to hedge certain of its commodity
purchases as considered necessary to reduce the inherent risk associated with
market-price fluctuations. Such contracts are accounted for as hedges; and
accordingly, gains and losses on hedges of future commodity purchases are
recognized as a component of inventory in the same period as the related
purchase transaction. For any contracts that expire or are terminated, any
related gains or losses are recognized in income or expense during the same
period. The effect of any realized or deferred gains or losses is immaterial
to the financial position or results of operations of the Company.

PLANT AND EQUIPMENT

     Plant and equipment is carried at cost and includes expenditures for new
facilities and expenditures that substantially increase the useful lives of
existing facilities. Maintenance, repairs and minor renewals are expensed as
incurred. When plant and equipment is retired or otherwise disposed, the
related cost and accumulated depreciation are eliminated and any gain or loss
on disposition is reflected in income or expense.

     Depreciation is provided principally on the straight-line method over
the estimated useful lives of the assets, resulting in depreciation rates on
buildings ranging from 2-10% and

THE EARTHGRAINS COMPANY


<PAGE> 10
                                                                            27

on machinery and equipment ranging from 5-25%.

     In conjunction with the acquisition of the Company by Anheuser-Busch in
1982, a portion of the purchase price was associated with reflecting the
property, plant and equipment at fair value through purchase accounting.
Additionally, the effect of the adoption of Statement of Financial Accounting
Standards No. 109 (SFAS 109) in fiscal 1992 was applied to these assets. Such
amounts are being amortized on a straight-line basis over 40 years. The
remaining unamortized purchase price assigned to fixed assets amounted to
$208.8 million, with related deferred taxes of $79.3 million, at March 31,
1998.

CAPITALIZATION OF INTEREST

     Interest relating to the cost of acquiring certain fixed assets is
capitalized. The capitalized interest is included as part of the cost of the
related asset and is amortized over its estimated useful life.

INCOME TAXES

     The provision for income taxes is based on the income and expense
amounts as reported in the Consolidated Statements of Earnings. Deferred
income taxes are recognized for the effect of temporary differences between
financial and tax reporting in accordance with the requirements of SFAS 109.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF CREDIT
RISK

     The Company is a party to certain financial instruments with
off-balance-sheet risk incurred in the normal course of business. These
financial instruments include forward and option contracts designated as
hedges. Derivative financial instruments are used solely as hedges to manage
existing risks or exposure. The Company's exposure to credit loss in the
event of nonperformance by the counterparties to these financial instruments
(either individually or in the aggregate) is not material to the financial
condition or results of operations of the Company.

     Derivative financial instruments, which are used by the Company in the
management of commodity exposures, are accounted for on an accrual basis.
Income and expense are recognized in the same category as that of the related
asset or liability. The fair value of derivative instruments is monitored
based on the estimated amounts the Company would receive or pay to terminate
the contracts.

     In fiscal 1998, the Company entered into a forward-starting interest
rate swap transaction, in order to hedge its exposure to interest rate
fluctuations on $100 million of existing floating rate borrowings under the
credit facility. Through this swap transaction, the Company is obligated at a
future date up to one year to make payments based upon a fixed rate while
receiving a LIBOR-based floating rate. Any gains or losses on the swap
agreement would be recognized as an adjustment to interest expense on the
underlying debt instrument. The impact of the swap transaction on interest
expense was immaterial to the Company's results of operations. The Company
does not have a material concentration of accounts receivable or credit risk.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     As of March 31, 1998, and March 25, 1997, the fair value of long-term
debt was approximately equal to its recorded value of $266.7 million and
$103.0 million, respectively. The fair value of long-term debt was estimated
based on the quoted market values for the same or similar debt issues, or
rates currently available for debt with similar terms.

RESEARCH AND DEVELOPMENT AND ADVERTISING AND PROMOTIONAL COSTS

     Research and development and advertising and promotional costs are
expensed in the year in which these costs are incurred.

IMPAIRMENT OF LONG-LIVED ASSETS

     The Company reviews long-lived assets and goodwill for impairment
whenever events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable. The Company
performs nondiscounted cash-flow analyses to determine whether an impairment
exists. Impairment losses, if any, would be determined based on the present
value of the cash flows using discount rates that reflect the inherent risk
of the underlying business.

SYSTEMS DEVELOPMENT COSTS

     The Company defers certain systems development costs as allowed in
accordance with established criteria. Amounts deferred are amortized over a
five-year period.

EARNINGS PER SHARE

     Earnings per share for the current year and fiscal 1997 have been
calculated and presented to comply with the new accounting pronouncement,
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share." Earnings per share are based on the weighted average number of shares
of common stock outstanding during the year. The difference in the weighted
average shares outstanding used in the basic and dilutive earnings-per-share
calculations represents the assumed conversion of stock options.
Earnings-per-share figures have been omitted for prior periods presented
because the Company was a wholly-owned subsidiary of Anheuser-Busch during
this time.

STOCK-BASED COMPENSATION

     Effective with its adoption in the 1996 transition period, the Company
elected to disclose the pro forma effects of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation." SFAS 123 allows companies to continue to apply Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." Under APB 25, the Company applies the intrinsic value method of
accounting and therefore does not recognize compensation expense for options
granted, because options are only granted at a price equal to market value on
the date of grant. See Note 10 for additional discussion and pro forma
disclosures as if the fair value method had been utilized.

                                                            1998 ANNUAL REPORT


<PAGE> 11
28

USE OF ESTIMATES

     In conformity with generally accepted accounting principles, the
preparation of financial statements requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on our knowledge of
current events and the actions that we may undertake in the future, they may
ultimately differ from actual results.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income" and SFAS No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information." The adoption of SFAS 130
will modify the format the Company uses to report noncash changes in
shareholders' equity. These changes will be shown together with net income in
a new financial statement category titled "comprehensive income." SFAS 131
will require the Company to reconsider its industry segments for reporting
under the new standard. In February 1998, the FASB issued SFAS No. 132 (SFAS
132), "Employers' Disclosure about Pensions and Other Postretirement
Benefits." SFAS 132 will revise the required disclosures about pension and
other postretirement benefit plans.

     These new accounting standards will become effective for fiscal 1999
financial reporting. Based upon preliminary reviews of the provisions of
these standards, the Company believes that they will not have an impact on
its financial position or results of operations or have a material effect on
its financial statement reporting.



3.  CHANGE IN ACCOUNTING PRINCIPLE

In November 1997, the Emerging Issues Task Force (EITF), a subcommittee of
the FASB, reached a consensus requiring that costs of business process
re-engineering be expensed as those costs are incurred. Any such unamortized
costs that were previously capitalized must be written off as a cumulative
adjustment in the quarter containing November 20, 1997. Accordingly, in the
third quarter of fiscal 1998, the Company recorded a $1.8 million, net of
tax, (or $0.08 per diluted share) charge against earnings to comply with the
new required accounting interpretation. The charge is presented as a separate
cumulative effect of accounting change line item in the Consolidated
Statement of Earnings. Most of Earthgrains' system development costs affected
by the accounting change are associated with implementation of the Company's
new integrated SAP systems.



4.  ACQUISITIONS

Effective January 17, 1998, the Company completed the acquisition of all of
the stock of CooperSmith, Inc. (CooperSmith) of Atlanta, Ga., for a purchase
price of $193 million. CooperSmith operated eight bakeries producing bread,
buns and rolls in the South, Southeast and Northeast United States. On March
11, 1998, the Company acquired the assets of San Luis Sourdough, Inc. of San
Luis Obispo, Calif. San Luis Sourdough produces sourdough, French and
specialty hearth breads that are marketed in Central and Northern California
and parts of Arizona. Both acquisitions were purchased for cash and will be
accounted for using the purchase method. Accordingly, the results of
operations are reflected in the Consolidated Statement of Earnings from the
respective dates of acquisition. The estimated purchase price has been
preliminarily allocated to the assets acquired and liabilities assumed based
upon their estimated fair market value, and the excess costs over net
tangible assets are being amortized over 40 years. Had these purchases taken
place on March 27, 1996, unaudited pro forma consolidated net sales would
have been $1,933.2 million and $1,920.3 million for fiscal years 1998 and
1997, respectively. Consolidated net earnings and earnings per share would
not have been significantly different from the amounts reflected in the
accompanying financial statements.

     On November 30, 1996, the assets of Heiner's Bakery, Inc. of Huntington,
W.Va., were purchased for cash. Heiner's is a wholesale manufacturer and
distributor of branded bread, buns and rolls with marketing territory
throughout West Virginia and in portions of Ohio and Kentucky. This
acquisition has also been accounted for using the purchase method.
Accordingly, the results of operations are reflected in the Consolidated
Statement of Earnings from the date of acquisition. The acquisition agreement
contains a provision for additional payments over the two years subsequent to
the transaction date if certain minimum earnings requirements are met. The
amount earned in fiscal 1998 under the terms of the agreement was recorded as
an increase in the excess of the total acquisition cost over the fair value
of the net assets acquired. Had the purchase taken place on January 4, 1995,
unaudited pro forma consolidated results of operations would have been as
follows (in millions, except for per share data):

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                              Fiscal    Transition     Fiscal
                                                Year        Period       Year
                                                1997          1996       1995
-----------------------------------------------------------------------------
<S>                                         <C>             <C>      <C>
Net sales                                   $1,691.1        $376.3   $1,700.7
Net income                                      17.7          (5.0)      (5.8)
Earnings per diluted share                      0.86
</TABLE>

     Pro forma data do not purport to be indicative of the results that would
have been obtained had these events actually occurred at the beginning of the
periods presented and such data are not intended to be a projection of future
results.

THE EARTHGRAINS COMPANY


<PAGE> 12
29

5.  PROVISIONS FOR RESTRUCTURING AND CONSOLIDATION, NET

During fiscal 1997, the Company recorded a provision of $12.7 million
primarily in conjunction with closing one bakery and one refrigerated dough
plant to achieve manufacturing and administrative efficiencies. During fiscal
1995, the Company recorded a $27.5 million provision to cover estimated costs
arising from the closing of eight domestic bakery facilities. Production was
transferred to other facilities. Both provisions reflect costs of writing off
certain fixed assets, employee severance benefits and other related closing
costs. The Company's fiscal 1995 net provision of $9.1 million for
restructuring and consolidation is comprised of the $27.5 million provision
for restructuring and consolidation and an $18.4 million gain on the sale of
businesses.

     Costs for the respective-year provisions are categorized as follows (in
millions):

<TABLE>
<CAPTION>
------------------------------------------------------------------------
                                                      Fiscal      Fiscal
                                                        Year        Year
                                                        1997        1995
------------------------------------------------------------------------
<S>                                                    <C>         <C>
Noncash asset write-offs                               $ 8.8       $19.5
Other, primarily severance                               3.9         8.0
------------------------------------------------------------------------
                                                       $12.7       $27.5
========================================================================
</TABLE>

     Additionally, a reserve of $4.7 million was established in conjunction with
the CooperSmith acquisition related to closure of certain of that company's
plants. The reserve is primarily for severance and equipment removal and
relocation. In accordance with generally accepted accounting principles, this
reserve was recorded as an increase to goodwill and no provision was
reflected.

     A reconciliation of activity with respect to the Company's restructuring
and consolidation of domestic operations is as follows (in millions):

<TABLE>
------------------------------------------------------------------------
<S>                                                               <C>
Provision, 1995                                                   $ 27.5
Noncash asset write-offs                                            (5.9)
Cash payments associated with severance                             (3.4)
Other miscellaneous items, net                                      (0.3)
------------------------------------------------------------------------
Ending balance, January 2, 1996                                     17.9
Noncash asset write-offs                                            (0.3)
Cash payments associated with severance                             (1.9)
Other miscellaneous items, net                                      (0.3)
------------------------------------------------------------------------
Ending balance, March 26, 1996                                      15.4
Provision, 1997                                                     12.7
Noncash asset write-offs                                           (11.5)
Cash payments associated with severance                             (1.1)
Other miscellaneous items, net                                      (0.1)
------------------------------------------------------------------------
Ending balance, March 25, 1997                                      15.4
Acquisition-related plant closings                                   4.7
Noncash asset write-offs                                           (11.3)
Cash payments associated with severance                             (1.8)
Other miscellaneous items, net                                      (0.9)
------------------------------------------------------------------------
ENDING BALANCE, MARCH 31, 1998                                    $  6.1
========================================================================
</TABLE>

6.  LONG-TERM DEBT

Long-term debt is as follows (in millions):

<TABLE>
<CAPTION>
------------------------------------------------------------------------
                                                   MARCH 31,   March 25,
                                                        1998        1997
------------------------------------------------------------------------
<S>                                                   <C>         <C>
Revolving Credit Facility due 2002                    $265.2      $100.5
Note Payable, 9.375%, due 1998                           0.9         1.0
Industrial Development Bonds
  9.5%, due 2001                                         1.5         1.5
------------------------------------------------------------------------
                                                       267.6       103.0
Less current portion                                     0.9          --
------------------------------------------------------------------------
                                                      $266.7      $103.0
                                                    ====================
</TABLE>

     Concurrent with the Distribution, the Company used borrowings under a
$215 million unsecured revolving credit facility (the Credit Facility) with
several financial institutions to pay $80 million to Anheuser-Busch as a
settlement on its net intercompany payable, to fund working capital needs and
for general corporate purposes. During fiscal 1998, the credit agreement was
increased to $450 million with a maturity date of September 30, 2002, and
interest on the borrowings is based on the rate for Eurodollar deposits. The
credit facility also contains customary covenants, including maintenance of
an interest coverage ratio and certain other restrictions. As of March 31,
1998, $75.9 million in letters of credit were also outstanding under this
credit facility, principally related to self-insurance requirements.



7.  RELATED-PARTY TRANSACTIONS

The following describes transactions with Anheuser-Busch prior to the
Distribution on March 26, 1996. Anheuser-Busch utilized a centralized cash
management system to finance its domestic operations. Cash deposits from the
Company were transferred to Anheuser-Busch on a daily basis and
Anheuser-Busch funded the Company's disbursement bank accounts as required.
No interest was charged on transactions with Anheuser-Busch.

     Anheuser-Busch provided certain general and administrative services to
the Company, including tax, treasury, risk management and insurance, legal,
research and development, information systems and human resources. These
expenses were allocated to the Company based on actual usage or other methods
which management believed to be reasonable. These allocations were $0.9
million for the 1996 transition period and $10.7 million in fiscal year 1995.
These costs could have been different had the Company operated on its own
during these periods presented.

     The Company was included in the combined Federal and certain state
income tax returns of Anheuser-Busch through March 26, 1996. The provision
for income taxes and related tax payments or refunds reflected in the
Company's financial statements prior to fiscal year 1997 are computed as if a
separate return had been filed for the Company, using those elements of
income and expense as reported in the Consolidated Statements of Earnings.

                                                            1998 ANNUAL REPORT


<PAGE> 13
30

8.  RETIREMENT BENEFITS

PENSION PLANS

     Earthgrains has pension plans covering substantially all of its regular
employees. In conjunction with the Distribution, Anheuser-Busch assumed
responsibility for the vested portion of all benefits as of March 26, 1996.
Accordingly, all pension assets and liabilities as of that date were retained
by Anheuser-Busch.

     Net pension expense (benefit) for single-employer defined benefit plans
was comprised of the following for the three fiscal years and the transition
period (in millions):

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                    FISCAL     Fiscal   Transition     Fiscal
                                      YEAR       Year       Period       Year
                                      1998       1997         1996       1995
-----------------------------------------------------------------------------
<S>                                  <C>        <C>          <C>       <C>
Service cost (benefits
  earned during the year)            $ 3.2      $ 2.8        $ 1.0     $  3.8
Interest cost on projected
  benefit obligation                   1.1        0.9          2.0        8.4
Actual return on assets               (0.6)      (0.2)        (4.4)     (17.5)
Amortization of actuarial
  gains (losses), prior service
  cost, and the excess of
  market value of plan assets
  over projected benefit
  obligation at January 1, 1986        1.0        1.1         (0.7)      (2.8)
-----------------------------------------------------------------------------
Net pension expense (benefit)        $ 4.7      $ 4.6        $(2.1)    $ (8.1)
=============================================================================
</TABLE>

     The key actuarial assumptions used in determining pension expense (benefit)
for single-employer defined benefit plans were as follows for each of the
three fiscal years and the transition period:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                    FISCAL     Fiscal   Transition     Fiscal
                                      YEAR       Year       Period       Year
                                      1998       1997         1996       1995
-----------------------------------------------------------------------------
<S>                                  <C>        <C>          <C>        <C>
Discount rate                         7.5%       7.5%         7.5%       8.0%

Long-term rate of
  return on plan assets              10.0%      10.0%        10.0%      10.0%

Weighted-average rate of
  compensation increase               4.5%       4.5%         5.5%       5.5%
</TABLE>

     The actual gain on pension assets was $0.6 million in
fiscal 1998, $0 in fiscal 1997, $4.4 million in the 1996
transition period, and $30.1 million in fiscal year 1995.

     The following tables set forth the funded status of
all Company single-employer defined benefit plans as of
(in millions):

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                                         MARCH 31,  March 25,
                                                              1998       1997
-----------------------------------------------------------------------------
<S>                                                         <C>        <C>
Plan assets at fair market value -
  primarily corporate equity securities
  and publicly traded bonds                                 $  9.5     $  6.3
Accumulated benefit obligation:
  Vested benefits                                             (9.9)      (6.0)
  Nonvested benefits                                          (1.1)      (0.8)
-----------------------------------------------------------------------------
Accumulated benefit obligation                               (11.0)      (6.8)
Effect of projected compensation increases                    (8.9)      (7.9)
-----------------------------------------------------------------------------
Projected benefit obligation                                 (19.9)     (14.7)

Plan assets (less than) projected benefit obligation        $(10.4)    $ (8.4)
=============================================================================

Plan assets (less than) projected benefit obligation
  consist of the following components:
    Unamortized excess of market value
      of plan assets over projected benefit
      obligation at January 1, 1986,
      being amortized over 15 years                         $  0.4     $  0.4
    Unrecognized net actuarial (losses) gains                 (1.3)       0.1
    Prior service costs                                       (6.4)      (7.5)
    Pension liability                                         (3.1)      (1.4)
-----------------------------------------------------------------------------
Plan assets (less than) projected benefit obligation        $(10.4)    $ (8.4)
=============================================================================
</TABLE>

     The assumptions used in determining the funded status of these plans
were as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                                              1998       1997
-----------------------------------------------------------------------------
<S>                                                          <C>         <C>
Discount rate                                                7.25%       7.5%

Weighted-average rate of compensation increase                4.5%       4.5%
</TABLE>

     Contributions to multiple and multi-employer plans in which the Company
participates are determined in accordance with the provisions of negotiated
labor contracts. Contributions to these plans were $24.4 million, $23.2
million, $5.7 million, and $23.8 million for fiscal 1998, 1997, the 1996
transition period, and fiscal year 1995, respectively.


THE EARTHGRAINS COMPANY


<PAGE> 14
                                                                            31

POSTRETIREMENT BENEFITS

     The Company provides certain health care and life insurance benefits to
eligible retired employees. Salaried and bargaining unit employees generally
become eligible for retiree health care benefits after reaching age 55 with
15 years of service.

     The following table sets forth the accumulated postretirement benefit
obligation (APBO) and the total postretirement benefit liability for all
single-employer defined benefit plans in the Company's Consolidated Balance
Sheets as of (in millions):

<TABLE>
<CAPTION>
------------------------------------------------------------------------
                                                   MARCH 31,   March 25,
                                                        1998        1997
------------------------------------------------------------------------
<S>                                                   <C>         <C>
Retirees                                              $ 45.0      $ 50.5
Fully eligible active plan participants                 13.9        17.0
Other active plan participants                          23.4        26.8
------------------------------------------------------------------------
Accumulated postretirement benefit
  obligation (APBO)                                     82.3        94.3
Unrecognized prior service benefits                     40.2        38.9
Unrecognized net actuarial gains (losses)                1.0        (8.7)
------------------------------------------------------------------------
Total postretirement benefit liabilities              $123.5      $124.5
========================================================================
</TABLE>

     As of March 31, 1998, and March 25, 1997, $115.3 million and $118.8
million of this obligation was classified as a long-term liability,
respectively, and $8.2 million and $5.7 million was classified as a current
liability, respectively.

     Net periodic postretirement benefits expense for single-employer defined
benefit plans for the following periods was comprised of the following (in
millions):

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                    FISCAL     Fiscal   Transition     Fiscal
                                      YEAR       Year       Period       Year
                                      1998       1997         1996       1995
-----------------------------------------------------------------------------
<S>                                  <C>        <C>          <C>        <C>
Service cost (benefits attributed
  to service during the year)        $ 4.2      $ 3.3        $ 0.8      $ 2.7
Interest cost on accumulated
  postretirement benefit
  obligation                           5.9        6.7          1.5        6.4
Amortization of prior
  service benefit                     (4.7)      (6.4)        (1.5)      (6.4)
Amortization of actuarial gain        (1.9)        --           --         --
-----------------------------------------------------------------------------
Net periodic postretirement
  benefits expense                   $ 3.5      $ 3.6        $ 0.8      $ 2.7
=============================================================================
</TABLE>

     In measuring the APBO, an 8.8% annual trend rate for health care costs
was assumed for fiscal year 1998, 10% for fiscal 1997 and 12.5% was used for
prior periods presented. This rate is assumed to decline ratably over the
next 9-12 years to 5.0% and remain at that level thereafter. The
weighted-average discount rate used in determining the APBO was 8.0% at March
31, 1998, and March 25, 1997.

     If the assumed health care cost rate changed by 1%, the APBO as of the
end of fiscal year 1998 would change by 9.0%. The effect of a 1% change in
the cost-trend rate on the service and interest cost components of net
periodic postretirement benefits expense would be a change of 10.7%.



9.  EMPLOYEE STOCK OWNERSHIP PLAN

Substantially all domestic regular salaried and hourly employees are eligible
for participation in the company-sponsored Employee Stock Ownership Plan
(ESOP) that became effective July 1, 1996. The ESOP borrowed $16.8 million
from the Company for a term of 10 years at an interest rate of 8.0% and used
the proceeds to buy 1,026,228 shares of common stock from the Company. ESOP
shares are being allocated to participants over the 10-year period, as
contributions are made to the plan. At March 31, 1998, 169,188 shares have
been allocated to participants.
     The ESOP cash contributions and ESOP expense accrued during the plan
year are determined by several factors, including the market price and number
of shares allocated to participants, ESOP debt service, dividends on
unallocated shares and the Company's 401(k) matching contribution. Over the
10-year life of the ESOP, total expense recognized will equal the total cash
contributions made by the Company.

     The ESOP is based on a June 30 plan year with cash contributions made
monthly. Cash contributions and dividends on unallocated ESOP shares for
fiscal 1998 and 1997 were $1.7 million and $0.2 million, and $1.9 million and
$0.1 million, respectively.



10. STOCK OPTIONS AND RESTRICTED STOCK

In connection with its spinoff from Anheuser-Busch, Earthgrains adopted and
Anheuser-Busch, then the sole shareholder of the Company, approved The
Earthgrains Company 1996 Stock Incentive Plan (the 1996 Incentive Plan). The
1996 Incentive Plan authorized the issuance of up to 2,260,000 shares of
Earthgrains Common Stock pursuant to the grant of restricted stock and the
exercise of incentive stock options, nonqualified stock options and stock
appreciation rights. Grants under the 1996 Incentive Plan are made at the
market price on the date of the grant. Options granted pursuant to the 1996
Incentive Plan vest over a three-year period from the date of grant and, once
vested, are generally exercisable over 10 years from the anniversary of the
grant date. The plan also provides for the granting of stock appreciation
rights (SARs) in tandem with stock options. The exercise of a SAR cancels the
related option and the exercise of an option cancels the related SAR. At
March 31, 1998, there were no SARs outstanding under the plan.

     Under the 1996 Incentive Plan, 333,102 restricted shares of Earthgrains
Common Stock were issued to certain officers of the Company. Restricted share
awards vest one-half each after 54 and 66 months following the date of the
award. Compensation cost is recognized over the vesting period. No further
shares of restricted stock are authorized under the 1996 Incentive Plan.

                                                            1998 ANNUAL REPORT


<PAGE> 15
32

     The Company applies Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees," in accounting for its stock
option plans. Accordingly, because the grant price equals the market price on
the date of grant, no compensation expense is recognized for stock option
grants. Had compensation cost for the Company's stock options been determined
based upon the fair value at the grant date consistent with the methodology
prescribed under FAS 123, the Company's net income and earnings per share for
the years ended March 31, 1998, and March 25, 1997, would have been affected
as follows (in millions except shares, per grant and per share amounts):

<TABLE>
<CAPTION>
------------------------------------------------------------------------
                                                 FISCAL YEAR Fiscal Year
                                                        1998        1997
------------------------------------------------------------------------
<S>                                                    <C>         <C>
Reported net income                                    $36.0       $16.2
Pro forma net income                                   $33.6       $14.4
Reported earnings per diluted share                    $1.70       $0.79
Pro forma earnings per diluted share                   $1.59       $0.71
</TABLE>

     The weighted-average fair value of options granted (which is amortized
to expense over the option vesting period in determining the pro forma
impact), is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
------------------------------------------------------------------------
                                                        1998        1997
------------------------------------------------------------------------
<S>                                                   <C>         <C>
Risk-free interest rate                                 6.3%        6.4%
Expected life of option                               4 Yrs.      4 Yrs.
Expected volatility of Earthgrains stock                 25%         25%
Expected dividend yield on Earthgrains stock           0.75%        0.7%
</TABLE>

     The weighted-average fair value of options granted during 1998 and 1997
is as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------
                                                        1998        1997
------------------------------------------------------------------------
<S>                                                  <C>       <C>
Fair value of each option granted                     $12.64       $5.12
Number of options granted                            257,185   1,603,546
------------------------------------------------------------------------
Total fair value of all options granted               $  3.3       $ 8.2
</TABLE>

     In accordance with FAS 123, the weighted-average fair value of stock
options granted is required to be based on a theoretical statistical model in
accord with assumptions noted above. In actuality, because employee stock
options do not trade on a secondary exchange, employees receive no benefit
and derive no value from holding stock options under these plans without an
increase in the market price of Earthgrains stock. Such an increase in stock
price would benefit all stockholders.

     The following table summarizes the stock option transactions under the
Earthgrains 1996 Incentive Plan:

<TABLE>
<CAPTION>
------------------------------------------------------------------------
                                             Option            Wtd. Avg.
                                             Shares       Exercise Price
------------------------------------------------------------------------
<S>                                       <C>                     <C>
Outstanding, March 26, 1996                       0                   --
  Granted                                 1,659,290               $18.69
  Exercised                                      --                   --
  Cancelled                                  55,744               $15.32
------------------------------------------------------------------------
Outstanding, March 25, 1997               1,603,546               $18.80
  Granted                                   257,185               $43.47
  Exercised                                 106,336               $15.56
  Cancelled                                  30,585               $19.96
------------------------------------------------------------------------
OUTSTANDING, MARCH 31, 1998               1,723,810               $22.66
========================================================================
</TABLE>

     The following table summarizes information for options currently
outstanding at March 31, 1998:

<TABLE>
<CAPTION>
------------------------------------------------------------------------
                             Options Outstanding
------------------------------------------------------------------------
                                          Wtd. Avg.            Wtd. Avg.
Range                                     Remaining             Exercise
of Prices               Number                 Life                Price
------------------------------------------------------------------------
<S>                  <C>                    <C>                   <C>
$15-26               1,466,625               9 Yrs.               $19.01
    43                 257,185              10 Yrs.                43.47
------------------------------
$15-43               1,723,810               9 Yrs.               $22.66
</TABLE>

     At March 31, 1998, 488,875 options outstanding were exercisable and
696,752 shares of Earthgrains Common Stock were available for future awards
under the 1996 Incentive Plan. No options were exercisable at the end of
fiscal 1997. The plan provides for acceleration of exercisability of
outstanding options and the vesting of restricted shares upon the occurrence
of certain events relating to a change of control, merger, sale of assets or
liquidation of the Company.


THE EARTHGRAINS COMPANY


<PAGE> 16
                                                                            33

11.  CAPITAL STOCK

On February 26, 1996, the Board of Directors of Anheuser-Busch declared a
distribution (the Distribution) of one share of Earthgrains common stock,
$.01 par value, for every 25 shares of Anheuser-Busch common stock
outstanding. On March 26, 1996, Earthgrains was spun off from Anheuser-Busch,
and 20,184,266 shares of Earthgrains Common Stock were distributed to
Anheuser-Busch shareholders. Effective March 29, 1996, 2,260,000 shares were
authorized for the issuance under the 1996 Stock Incentive Plan. Of those
shares, 333,102 were issued as restricted share grants to certain Earthgrains
Officers. Additionally, 1,026,228 shares were authorized for the Employee
Stock Ownership Plan, activated on July 1, 1996, of which 169,188 shares have
been allocated to participants. 7,800 shares have been granted as restricted
shares and 9,132 shares issued as compensation to members of the Board of
Directors.

     During the first quarter of fiscal 1998, a favorable IRS tax ruling was
received on the stock repurchase program approved by the Company's Board of
Directors. The program authorizes the repurchase of up to 1 million shares of
common stock. 168,600 shares have been repurchased into the treasury as of
March 31, 1998. As of March 31, 1998, 21,498,864 shares of Earthgrains Common
Stock and no shares of Earthgrains Preferred Stock were issued and
outstanding.

     All share and per-share amounts have been adjusted to reflect the
two-for-one common stock split effective July 28, 1997.



12.  INCOME TAXES

The provision (benefit) for income taxes consists of the
following amounts for the periods ended (in millions):

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                    FISCAL     Fiscal   Transition     Fiscal
                                      YEAR       Year       Period       Year
                                      1998       1997         1996       1995
-----------------------------------------------------------------------------
<S>                                  <C>        <C>          <C>        <C>
Current tax provision (benefit):
  Federal                            $13.3      $ 2.0        $ 1.9      $(5.0)
  State and foreign                    4.2        2.8          2.1        5.2
-----------------------------------------------------------------------------
                                      17.5        4.8          4.0        0.2
-----------------------------------------------------------------------------
Deferred tax provision (benefit):
  Federal                              2.6       (0.8)        (5.7)       0.6
  State and foreign                    4.1        2.5         (0.5)       1.9
-----------------------------------------------------------------------------
                                       6.7        1.7         (6.2)       2.5
-----------------------------------------------------------------------------
Provision (benefit)
  for income taxes                   $24.2      $ 6.5        $(2.2)     $ 2.7
=============================================================================
</TABLE>

    The deferred tax assets and deferred tax liabilities as of the end of each
period are comprised of the following (in millions):

<TABLE>
<CAPTION>
------------------------------------------------------------------------
                                                   MARCH 31,   March 25,
                                                        1998        1997
------------------------------------------------------------------------
<S>                                                   <C>         <C>
Deferred tax liabilities:
  Depreciation and property differences               $142.2      $139.1
  Deferred systems development costs                     7.9         8.0
  Pension plan                                           4.9         4.2
  Other                                                 13.2        15.9
------------------------------------------------------------------------
    Deferred tax liabilities                           168.2       167.2
------------------------------------------------------------------------
Deferred tax assets:
  Postretirement benefits other
    than pensions                                      (46.4)      (47.8)
  Self-insurance reserves                              (21.7)      (20.3)
  Reserve for restructuring
    and consolidation                                   (1.9)       (5.1)
  Accrued liabilities                                  (11.7)       (9.8)
  Deductible goodwill                                   (8.7)         --
  Other                                                 (8.7)      (10.3)
------------------------------------------------------------------------
    Deferred tax (assets)                              (99.1)      (93.3)
------------------------------------------------------------------------
    Net deferred tax liabilities                      $ 69.1      $ 73.9
========================================================================
</TABLE>

     A reconciliation between the statutory rate and the
effective rate is presented below:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                      1998       1997         1996       1995
-----------------------------------------------------------------------------
<S>                                  <C>        <C>          <C>        <C>
Tax at statutory rate                $21.7      $ 7.9        $(2.5)     $(1.4)
State income taxes,
  net of Federal benefit               1.4         --         (0.2)       0.5
Amortization of goodwill               2.0        1.9          0.4        2.9
Foreign tax credits and other         (1.6)      (4.4)          --         --
Other, net                             0.7        1.1          0.1        0.7
-----------------------------------------------------------------------------
Provision (benefit)
  for income taxes                   $24.2      $ 6.5        $(2.2)      $2.7
=============================================================================
</TABLE>
                                                            1998 ANNUAL REPORT


<PAGE> 17
34

13.  CASH FLOWS

Supplemental information with respect to the Consolidated Statements of Cash
Flows for each of the periods is presented below (in millions):

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                    FISCAL     Fiscal   Transition     Fiscal
                                      YEAR       Year       Period       Year
                                      1998       1997         1996       1995
-----------------------------------------------------------------------------
<S>                                 <C>        <C>          <C>        <C>
Interest paid, net of
  capitalized interest              $  6.4     $  5.4       $  --      $  2.0
Income taxes paid (refunded)          19.4        3.4          --        (6.0)
Changes in noncash working
  capital, net of effect of
  acquisitions:
Decrease (increase) in
  noncash current assets:
    Accounts receivable, net        $  4.6     $ (2.9)      $  0.1     $ 10.8
    Inventories, net                   1.9        2.1          2.6        8.0
    Other current assets             (13.0)      (0.3)        (6.3)       5.8
Increase (decrease) in
  current liabilities:
    Accounts payable                   2.3       23.1          3.9      (15.4)
    Accrued salaries,
      wages and benefits              (5.4)      (2.1)         5.3       (5.6)
    Accrual for restructuring
      and consolidation                 --      (12.5)        (2.5)      (8.0)
    Other current liabilities         (5.7)     (14.3)        14.0       10.0
-----------------------------------------------------------------------------
(Increase) decrease in
  noncash working capital           $(15.3)    $ (6.9)      $ 17.1     $  5.6
=============================================================================
</TABLE>


14.  COMMITMENTS AND CONTINGENCIES

The Company and certain of its subsidiaries are involved in certain claims
and legal proceedings in which monetary damages and other relief are sought.
These proceedings, arising in the normal course of business, are in varying
stages and may proceed for protracted periods of time.

     Although it is impossible to predict the outcome of any legal
proceeding, the Company believes that it has meritorious defenses or
insurance coverage to meet the proceedings pending against it and that the
outcome of such proceedings should not, individually or in the aggregate,
have a material adverse effect on the results of operations or financial
condition of the Company.

     The operations of Earthgrains, like those of similar businesses, are
subject to various Federal, state and local laws and regulations with respect
to environmental matters, including air and water quality, underground fuel
storage tanks, and other regulations intended to protect public health and
the environment. Earthgrains has been identified as a potentially responsible
party ("PRP") at certain locations under the Comprehensive Environmental
Responses, Compensation and Liability Act, and the Company may be required to
share in the cost of cleanup with respect to two sites. Although it is
difficult to quantify with certainty the financial impact of actions related
to environmental matters, based on the information currently available it is
management's opinion that the ultimate liability arising from such matters,
taking into consideration established reserves, should not have a material
effect on the Company's results of operations or financial position.

     Future rental commitments under noncancelable operating leases in effect
as of the end of fiscal year 1998 were, in millions: 1999 - $11.4; 2000 -
$9.7; 2001 - $6.5; 2002 - $3.8; 2003 - $2.2; thereafter - $1.4.



15.  GEOGRAPHIC INFORMATION

The Company operates in the United States and Europe. The foreign information
below is comprised primarily of the Company's Spanish subsidiary.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                                                          Consolidated
(In millions)                     Domestic     Foreign           Total
-------------------------------------------------------------------------------
<S>                               <C>           <C>           <C>
Net sales
  1998<Fa>                        $1,400.4      $318.6        $1,719.0
  1997                             1,297.1       365.5         1,662.6
  1996 (twelve weeks)                284.9        82.8           367.7
  1995                             1,308.1       356.5         1,664.6

Operating income (loss)
  1998<Fa>                        $   48.8      $ 18.4        $   67.2
  1997                                 2.4 <Fb>   25.2            27.6 <Fb>
  1996 (twelve weeks)                (11.0)        3.9            (7.1)
  1995                               (18.9)<Fc>   12.2<Fd>        (6.7)<Fc><Fd>

Identifiable assets
  1998                            $  898.9      $184.4        $1,083.3
  1997                               849.8       182.3         1,032.1
  1996                               863.1       184.2         1,047.3
  1995                               886.7       178.9         1,065.6

<FN>
<Fa> Fiscal 1998 includes 53 weeks.

<Fb> 1997 operating income was reduced by the $12.7 million pre-tax
     provision for restructuring and consolidation.

<Fc> 1995 operating income was reduced by the $27.5 million pre-tax
     provision for restructuring and consolidation and increased by the
     $18.4 million gain on sale of businesses.

<Fd> 1995 operating income was reduced by $7.8 million, pre-tax for the
     Spanish work force reduction program.
</TABLE>


THE EARTHGRAINS COMPANY


<PAGE> 18
                                                                            35

16.  QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for each of the fiscal years appear below
(each quarter represents a period of twelve weeks except for the December
quarter, which includes sixteen weeks):

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                Selected Quarterly Financial Data (Unaudited)
                                                  -----------------------------------------------------------------------
                                                     June      September       December          March         Fiscal
(In millions, except per share data)              Quarter        Quarter        Quarter        Quarter           Year
-------------------------------------------------------------------------------------------------------------------------
1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>            <C>            <C>            <C>          <C>
Net sales                                          $377.4         $382.5         $514.7         $444.4<Fa>   $1,719.0<Fb>
Gross profit                                        162.7          164.0          218.9          191.8<Fa>      737.4<Fb>
Income before cumulative effect
  of accounting change                                6.9            9.3           14.1            7.5<Fa>       37.8<Fb>
Cumulative effect of accounting change                 --             --            1.8<Ff>         --            1.8
-------------------------------------------------------------------------------------------------------------------------
Net income                                            6.9            9.3           12.3            7.5           36.0
-------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Earnings before cumulative effect
  of accounting change                             $ 0.34         $ 0.46         $ 0.69         $ 0.37<Fa>   $   1.86<Fb>
Cumulative effect of accounting change                 --             --           0.09             --           0.09
-------------------------------------------------------------------------------------------------------------------------
Net earnings per share                             $ 0.34         $ 0.46         $ 0.60         $ 0.37       $   1.77
-------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Earnings before cumulative effect
  of accounting change                             $ 0.33         $ 0.44         $ 0.66         $ 0.35<Fa>   $   1.78<Fb>
Cumulative effect of accounting change                 --             --           0.08             --           0.08
-------------------------------------------------------------------------------------------------------------------------
Net earnings per share                             $ 0.33         $ 0.44         $ 0.58         $ 0.35       $   1.70
=========================================================================================================================


-------------------------------------------------------------------------------------------------------------------------
1997
-------------------------------------------------------------------------------------------------------------------------
Net sales                                          $370.5         $381.8         $522.7         $387.6       $1,662.6
Gross profit                                        145.2          156.6          211.8          160.2          673.8
Net income                                            0.7            4.5            9.1            1.9<Fe>       16.2

Basic earnings per share:<Fc>
Net earnings per share                             $ 0.03         $ 0.22         $ 0.45         $ 0.09<Fe>   $   0.80<Fd>
-------------------------------------------------------------------------------------------------------------------------

Diluted earnings per share:<Fc>
Net earnings per share<Fd>                         $ 0.03         $ 0.22         $ 0.44         $ 0.09<Fe>   $   0.79<Fd>
=========================================================================================================================

<FN>
<Fa> March 1998 quarter includes 13 weeks.

<Fb> Fiscal 1998 contains 53 weeks.

<Fc> Prior-year earnings per-share amounts have been restated to reflect the
     two-for-one stock split effective July 28, 1997.

<Fd> Earnings per share is computed independently for each of the periods
     presented, therefore, the sum of the earnings per-share amounts for the
     quarters may not equal the total for the year.

<Fe> Quarter's results include the $11.7 million pre-tax provision for
     restructuring and consolidation and $5.3 million in one-time Spanish tax
     incentives and credits.

<Ff> See Note 3 in the Notes to the Consolidated Financial Statements
     describing the required change in accounting principle in the third
     quarter of fiscal 1998.
</TABLE>


                                                            1998 ANNUAL REPORT


<PAGE> 19
36

17.  SUPPLEMENTAL BALANCE SHEET INFORMATION

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                                      MARCH 31,     March 25,
(In millions)                                              1998          1997
-----------------------------------------------------------------------------
<S>                                                    <C>           <C>
Receivables:
  Trade                                                $  162.7      $  147.5
  Allowance for doubtful accounts                           6.2           6.0
-----------------------------------------------------------------------------
                                                       $  156.5      $  141.5
=============================================================================

Inventories:
  Raw materials                                        $   53.5      $   51.6
  Finished goods                                           15.4          14.8
-----------------------------------------------------------------------------
                                                       $   68.9      $   66.4
=============================================================================

Plant and equipment:
  Land                                                 $   68.9      $   65.1
  Buildings                                               459.6         460.7
  Machinery and equipment                                 757.7         718.3
  Construction in progress                                 51.8          37.0
-----------------------------------------------------------------------------
                                                        1,338.0       1,281.1
  Less accumulated depreciation                          (616.0)       (574.4)
-----------------------------------------------------------------------------
                                                       $  722.0      $  706.7
=============================================================================

Accrued salaries, wages and benefits:
  Accrued payroll                                      $   23.0      $   16.9
  Accrued vacation                                         16.6          15.3
  Accrued group benefits                                   16.9          14.4
-----------------------------------------------------------------------------
                                                       $   56.5      $   46.6
=============================================================================

Other current liabilities:
  Current portion of self-insurance reserves           $   18.6      $   17.0
  Accrued taxes, other than income taxes                    8.1           9.0
  Other items                                              12.6           6.6
-----------------------------------------------------------------------------
                                                       $   39.3      $   32.6
=============================================================================

Other noncurrent liabilities:
  Self-insurance reserves                              $   39.3      $   36.4
  Other items                                              32.9          11.7
-----------------------------------------------------------------------------
                                                       $   72.2      $   48.1
=============================================================================

<CAPTION>
-----------------------------------------------------------------------------
                                    FISCAL     Fiscal   Transition     Fiscal
                                      YEAR       Year       Period       Year
                                      1998       1997         1996       1995
-----------------------------------------------------------------------------
<S>                                  <C>        <C>          <C>        <C>
Allowance for doubtful accounts
    Balance, beginning
      of period                      $ 6.0      $ 6.8        $ 6.4      $ 5.5
    Provision charged
      to expense                       0.8        0.2          0.7        1.8
    Write-offs, less recoveries       (0.6)      (1.0)        (0.3)      (0.9)
-----------------------------------------------------------------------------
Balance, end of period               $ 6.2      $ 6.0        $ 6.8      $ 6.4
=============================================================================
</TABLE>


18.  QUARTERLY COMMON STOCK PRICE

RANGES AND DIVIDENDS

     The Earthgrains Company Common Stock is listed and traded on the New York
Stock Exchange under the ticker symbol "EGR." The table below presents the
high and low market for the stock and cash dividend information for each
quarter of fiscal 1998.

<TABLE>
<CAPTION>
------------------------------------------------------------------
FISCAL 1998                           High         Low   Dividends
------------------------------------------------------------------
<S>                                <C>        <C>            <C>
June Quarter                       $31        $24 5/8        $.025
September Quarter                  $44 3/8    $30 13/16        .05
December Quarter                   $47 1/2    $37 1/2          .05
March Quarter                      $47 1/4    $40 1/2          .05
</TABLE>

     Earthgrains Common Stock began trading on the New York Stock Exchange
March 27, 1996, following the spinoff from Anheuser-Busch. Earthgrains' first
dividend to shareholders as an independent public company was declared in the
June quarter and paid in the September quarter of fiscal 1997.




19.  SUBSEQUENT EVENT (UNAUDITED)

On May 26, 1998, Earthgrains announced a two-for-one stock split for
shareholders of record as of July 10, 1998. The split is effective July 20,
1998.


THE EARTHGRAINS COMPANY


<PAGE> 20
                                                                            37


                  RESPONSIBILITY FOR FINANCIAL STATEMENTS


-------------------------------------------------------------------------------
The management of The Earthgrains Company is responsible for the preparation
and integrity of the consolidated financial statements appearing in this
annual report. The financial statements were prepared in conformity with
generally accepted accounting principles appropriate in the circumstances
and, accordingly, include certain amounts based on our best judgments and
estimates.

     We are responsible for maintaining a system of internal accounting
controls and procedures which we believe are adequate to provide reasonable
assurance, at an appropriate cost/benefit relationship, that assets are
safeguarded against loss from unauthorized use or disposition and financial
records provide a reliable basis for preparation of the financial statements.
The internal accounting control system is augmented by a program of internal
audits and appropriate reviews by management, written policies and
guidelines, careful selection and training of qualified personnel and a
written Code of Business Conduct adopted by our Company's Board of Directors,
applicable to all management employees of our Company.

     The Audit and Finance Committee of our Company's Board of Directors,
composed solely of directors who are not officers of our Company, meets with
the independent auditors, management and internal auditors periodically to
discuss internal accounting controls and auditing and financial reporting
matters. The Committee reviews with the independent auditors the scope and
results of the audit effort. The Committee also meets with the independent
auditors and the chief internal auditor without management present to ensure
that the independent auditors and the chief internal auditor have free access
to the Committee.

     Price Waterhouse LLP is engaged to audit the consolidated financial
statements of The Earthgrains Company and conduct such tests and related
procedures as it deems necessary in conformity with generally accepted
auditing standards. The opinion of the independent auditors, based upon their
audits of the consolidated financial statements, is shown below.


                 REPORT OF INDEPENDENT ACCOUNTANTS


-------------------------------------------------------------------------------
To the Shareholders and Board of Directors
of The Earthgrains Company

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of earnings, of cash flows, and of
shareholders' equity present fairly, in all material respects, the financial
position of The Earthgrains Company at March 31, 1998 and March 25, 1997, and
the results of its operations and its cash flows for the fiscal years ended
March 31, 1998 and March 25, 1997, the 12-week period ended March 26, 1996,
and the fiscal year ended January 2, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

     As discussed in Note 3 to the financial statements, the Company changed
its method of accounting for business process re-engineering costs in fiscal
year 1998.


     /s/ Price Waterhouse LLP

     PRICE WATERHOUSE LLP
     St. Louis, Missouri
     May 1, 1998


                                                            1998 ANNUAL REPORT


<PAGE> 21
38

<TABLE>
                                                   FIVE-YEAR FINANCIAL HIGHLIGHTS


<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                     For the twelve
                                                Fiscal Years            weeks ended                     Fiscal Years
                                           ----------------------         March 26,      ------------------------------------------
(In millions, except per-share data)           1998<Fb>      1997              1996<Fa>      1995<Fa>        1994<Fa><Fb>  1993<Fa>
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>               <C>           <C>             <C>           <C>
STATEMENT OF EARNINGS DATA:
Net sales                                  $1,719.0      $1,662.6          $  367.7      $1,664.6        $1,720.5      $1,740.6
Cost of products sold                         981.6         988.8             228.8       1,034.7         1,071.0       1,039.4
-----------------------------------------------------------------------------------------------------------------------------------
Gross profit                                  737.4         673.8             138.9         629.9           649.5         701.2
Marketing, distribution and
  administrative expenses                     670.2         633.5             146.0         627.5           623.9         616.9
Provision for restructuring
  and consolidation, net                         --          12.7                --           9.1              --         114.6
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                        67.2          27.6              (7.1)         (6.7)           25.6         (30.3)
Other income and expenses:
  Interest (expense)                           (8.2)         (6.3)             (0.1)         (1.9)           (1.9)         (3.4)
  Other income (expense), net                   3.0           1.4              (0.1)          4.7             2.6           2.2
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes              62.0          22.7              (7.3)         (3.9)           26.3         (31.5)
Provision (benefit) for income taxes           24.2           6.5              (2.2)          2.7            15.0          (4.5)
Net income (loss) before cumulative
  effect of accounting change                  37.8          16.2              (5.1)         (6.6)           11.3         (27.0)
Cumulative effect of change in accounting
  principle, net of tax                         1.8<Fc>        --                --            --              --            --
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                          $   36.0      $   16.2<Fd>      $   (5.1)     $   (6.6)<Fe>   $   11.3      $  (27.0)<Fe>
====================================================================================================================================

<CAPTION>
EARNINGS PER SHARE:<Ff>
<S>                                              <C>          <C>
  Basic
    Earnings before cumulative
      effect of change in
      accounting principle                       $1.86        $0.80
    Cumulative effect of
      accounting change                           0.09           --
-------------------------------------------------------------------
    Net earnings per share                       $1.77        $0.80
===================================================================
    Weighted average shares outstanding           20.3         20.3
===================================================================
  Diluted
    Earnings before cumulative
      effect of change in
      accounting principle                       $1.78        $0.79
    Cumulative effect of
      accounting change                           0.08           --
-------------------------------------------------------------------
    Net earnings per share                       $1.70        $0.79
===================================================================
    Weighted average shares outstanding           21.2         20.6
===================================================================
</TABLE>

THE EARTHGRAINS COMPANY


<PAGE> 22
                                                                            39

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                     For the twelve
                                                Fiscal Years            weeks ended                   Fiscal Years
                                           ----------------------         March 26,     -----------------------------------------
(In millions)                                  1998<Fb>      1997              1996<Fa>     1995<Fa>     1994<Fa><Fb>    1993<Fa>
---------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>               <C>          <C>          <C>             <C>
BALANCE SHEET DATA:
---------------------------------------------------------------------------------------------------------------------------------
Working capital                            $   92.3      $   80.6          $   74.0     $   63.1     $   69.3        $   15.6
---------------------------------------------------------------------------------------------------------------------------------
Current ratio                                  1.4x          1.4x              1.4x         1.3x         1.4x            1.1x
---------------------------------------------------------------------------------------------------------------------------------
Plant and equipment, net                   $  722.0      $  706.7          $  723.2     $  713.6     $  706.2        $  708.0
---------------------------------------------------------------------------------------------------------------------------------
Long-term debt                             $  266.7      $  103.0          $   92.6     $    1.5     $    1.6        $   12.0
---------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes, net                 $   69.1      $   73.9          $   72.2     $  109.4     $  106.9        $   86.8
---------------------------------------------------------------------------------------------------------------------------------
Anheuser-Busch equity investment           $     --      $     --          $  582.1     $  701.3     $  684.3        $  636.3
---------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity                       $  606.6      $  582.4          $     --     $     --     $     --              --
---------------------------------------------------------------------------------------------------------------------------------
Total assets                               $1,394.3      $1,172.1          $1,177.6     $1,197.2     $1,177.2        $1,208.4
---------------------------------------------------------------------------------------------------------------------------------

<FN>
<Fa> Earthgrains was a wholly-owned subsidiary of Anheuser-Busch Companies,
     Inc., until March 27, 1996. Accordingly, statements for prior periods do
     not include costs associated with being an independent public company.

<Fb> Fiscal years 1998 and 1994 contain 53 weeks.

<Fc> See Footnote 3 in the Notes to the Consolidated Financial Statements
     describing the required change in accounting principle in the third
     quarter of fiscal 1998.

<Fd> Reflects the effect of the provision for restructuring and consolidation
     and one-time Spanish tax incentives and credits. See "Management's
     Discussion and Analysis of Results of Operations and Financial
     Condition" and Note 5 in the Notes to the Consolidated Financial
     Statements.

<Fe> Reflects the effect of the provision for restructuring and consolidation.
     See "Management's Discussion and Analysis of Results of Operations and
     Financial Condition."

<Ff> Prior-year shares and per-share amounts have been restated to reflect
     the two-for-one stock split effective July 28, 1997.
</TABLE>


                                                            1998 ANNUAL REPORT