FINANCIAL HIGHLIGHTS
--------------------


                                (In Thousands, Except Per Share Data)
                                52 Weeks      53 Weeks      52 Weeks
                                  Ended         Ended         Ended
                                 June 2,       June 3,       May 29,
                                  2001          2000          1999
                              ------------  ------------  ------------
Statement of Income

Net sales                      $3,496,482    $3,522,929    $3,459,377
Operating income                  147,103       170,398       224,477
  % of net sales                     4.2%          4.8%          6.5%
Net income                     $   61,125    $   89,388    $  126,155
  % of net sales                     1.7%          2.5%          3.6%

Per common share:
  Net income (diluted basis)   $     1.13    $     1.31    $     1.74
  Book value                         7.80          8.98          8.60
  Common stock dividends              .28           .28           .28

Average diluted shares
  outstanding                      54,296        68,356        72,483




                                 June 2,       June 3,       May 29,
                                  2001          2000          1999
                              ------------  ------------  ------------
Balance Sheet

Total assets                   $1,623,496    $1,651,925    $1,680,775
Long-term debt (1)                555,937       385,000       369,000
Stockholders' equity              392,805       591,677       603,803
Debt to total capital               58.6%         39.4%         37.9%

(1)  The June 2, 2001 amount reflects the result of the Company's debt
     refinancing completed July 19, 2001.


[This page includes 3 bar graphs which depict net sales, operating income
and earnings per share for fiscal 1999, 2000 and 2001.  All numbers presented
in these graphs are included in tabular form above.]

<PAGE>

COMMON STOCK INFORMATION
------------------------

The Company's common stock is listed on the New York Stock Exchange and is
traded under the symbol IBC.  The table below presents the high and low sales
prices for the stock and cash dividends paid during fiscal 2001 and 2000:

                                      Stock Price
        Fiscal                    ---------------------      Cash
         Year        Quarter        High         Low       Dividends
        ------      ---------     --------     --------   -----------

         2001           1          $19.63       $13.81       $.07
                        2           17.94        13.94        .07
                        3           16.78        10.81        .07
                        4           17.03        13.49        .07

         2000           1           24.81        20.50        .07
                        2           24.50        19.56        .07
                        3           19.81        11.44        .07
                        4           16.56        11.56        .07

The Company had approximately 6,500 shareholders on June 2, 2001.

                             -1-

<PAGE>

                                           INTERSTATE BAKERIES CORPORATION
                                         FIVE-YEAR SUMMARY OF FINANCIAL DATA
<TABLE>
<CAPTION>
                                                 (In Thousands, Except Per Share Data)
                                 52 Weeks        53 Weeks        52 Weeks       52 Weeks        52 Weeks
                                   Ended           Ended           Ended          Ended           Ended
                                  June 2,         June 3,         May 29,        May 30,         May 31,
                                   2001            2000            1999           1998            1997
                                ----------      ----------      ----------     ----------      ----------
 
                            <c>             <c>             <c>            <c>             <c>
 Statement of Income
  Net sales                     $3,496,482      $3,522,929      $3,459,377     $3,265,842      $3,212,431
 Operating income                  147,103         170,398         224,477        231,592         191,143
   % of net sales                     4.2%            4.8%            6.5%           7.1%            6.0%

 Net income                     $   61,125      $   89,388      $  126,155     $  127,924      $   97,177
   % of net sales                     1.7%            2.5%            3.6%           3.9%            3.0%

 Earnings per share (2):
   Basic                        $     1.13      $     1.31      $     1.76     $     1.74      $     1.30
   Diluted                            1.13            1.31            1.74           1.71            1.28

 Common stock dividends
  per share (2)                        .28             .28             .28            .28             .27
 Weighted average common
  shares outstanding (2):
   Basic                            54,110          68,156          71,662         73,512          74,928
   Diluted                          54,296          68,356          72,483         74,845          76,200

 Balance Sheet
  Total assets                  $1,623,496      $1,651,925      $1,680,775     $1,549,986      $1,493,087
  Long-term debt, excluding
   current maturities (1)          555,937         385,000         369,000        261,000         251,000
  Stockholders' equity             392,805         591,677         603,803        565,155         538,722
  Debt to total capital              58.6%           39.4%           37.9%          31.6%           31.8%


(1)  The June 2, 2001 amount reflects the result of the Company's debt refinancing completed July 19, 2001.
(2)  All per share and average shares outstanding amounts reflect a November 1997 two-for-one stock split.
</TABLE>
                             -13-

<PAGE>


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


RESULTS OF OPERATIONS

Fiscal 2001 Compared With Fiscal 2000

Net sales for the fifty-two weeks ended June 2, 2001 were $3,496,482,000, a
decrease of $26,447,000 from net sales of $3,522,929,000 for the fifty-three
weeks ended June 3, 2000.  Excluding the impact of the extra week, net sales
were up approximately 1.0%.  This slight improvement reflects selling price
increases realized in fiscal 2001, offset by unit volume declines.  The
improvement is also reflective of the impact of an eight-day work stoppage at
five Northeastern bakeries during fiscal 2000.

Fiscal 2001 gross profit was $1,843,964,000, or 52.7% of net sales, comparable
to the gross profit in fiscal 2000 which totaled $1,850,761,000, or 52.5% of
net sales.  This stable margin performance represents the effect of higher
selling prices and operational efficiencies, partially offset by higher labor
and labor-related costs, as well as higher utility costs.

Selling, delivery and administrative expenses totaled $1,585,962,000, or 45.4%
of net sales, for fiscal 2001, up from $1,568,759,000, or 44.5% of net sales,
the prior year.  This unfavorable variance was attributable to inflationary
labor and labor-related cost increases, as well as higher utility and fuel
costs, measured against only slightly increased net sales, adjusted for the
extra week in fiscal 2000.

Based upon these factors, operating income decreased to $147,103,000, or 4.2%
of net sales, from $170,398,000, or 4.8% of net sales, the previous year, a
decline of $23,295,000.

Interest expense for fiscal 2001 was $47,086,000, up $19,277,000 from fiscal
2000 interest expense of $27,809,000.  This increase reflects higher borrowing
levels resulting from the Company's repurchase of over 15,500,000 shares of
treasury stock during fiscal 2001.  Overall interest rates were also somewhat
higher in fiscal 2001 on the debt undertaken to purchase the treasury stock.

The fiscal 2001 effective income tax rate of 39.2%, as well as the fiscal 2000
rate of 37.5%, approximate the overall federal and state statutory rates.

Reflecting these factors, net income for fiscal 2001 was $61,125,000, or
1.7% of net sales, representing $1.13 per basic and diluted share.  This
represents a decline of $28,263,000 from net income of $89,388,000, or 2.5%
of net sales and $1.31 per basic and diluted share, in fiscal 2000.
<PAGE>

Fiscal 2000 Compared With Fiscal 1999

Net sales for the fifty-three weeks ended June 3, 2000 were $3,522,929,000,
increasing $63,552,000 and 1.8% over net sales for the fifty-two weeks ended
May 29, 1999 of $3,459,377,000.  Excluding the impact of the extra week, as
well as acquisitions and dispositions, net sales were down slightly,
approximately .8% for the year.  This decrease reflects an eight-day work
stoppage at five Northeastern bakeries during fiscal 2000, as well as other
slight overall unit volume declines, partially offset by selling price
increases.

Gross profit for fiscal 2000 was $1,850,761,000, representing 52.5% of net
sales, comparable to fiscal 1999's gross profit of $1,823,994,000, or 52.7%
of net sales.  Lower ingredient costs during fiscal 2000 contributed to
higher gross margins, but this favorable impact was offset by higher labor
and labor-related costs, as well as higher packaging costs principally
resulting from higher fuel prices.

Selling, delivery and administrative expenses were $1,568,759,000, or 44.5%
of net sales, for fiscal 2000 compared to $1,489,472,000, or 43.1% of net
sales, for fiscal 1999.  This unfavorable variance reflects labor and
labor-related cost increases, as well as substantially higher fuel costs,
measured against essentially flat net sales.

Reflecting these factors, operating income for fiscal 2000 was $170,398,000,
or 4.8% of net sales, down $54,079,000 from fiscal 1999's operating income
of $224,477,000, or 6.5% of net sales.

Interest expense for fiscal 2000 was $27,809,000, an increase of $4,696,000
over interest expense of $23,113,000 in fiscal 1999.  This increase reflects
higher average borrowing levels during fiscal 2000, primarily due to
acquisitions and treasury stock repurchases, higher interest rates and lower
capitalized interest.

The effective income tax rate of 37.5% for fiscal 2000 and 1999 approximates
the overall federal and state statutory rates.

Based upon these results, net income for fiscal 2000 decreased $36,767,000
to $89,388,000, or 2.5% of net sales and $1.31 per basic and diluted share,
from $126,155,000, or 3.6% of net sales and $1.76 and $1.74 per basic and
diluted share, respectively, in fiscal 1999.

                             -14-
<PAGE>

CAPITAL RESOURCES AND LIQUIDITY

The Company's primary source of liquidity is cash provided by operations
which totaled $182,212,000 for fiscal 2001, an increase of $15,521,000 from
fiscal 2000's $166,691,000.  This increase reflects favorable working capital
variances, partially offset by lower net income.  Cash generated by operations
during fiscal 2001, along with additional net borrowings described below of
$171,000,000, was used to repurchase common stock of $244,953,000, pay common
stock dividends of $15,189,000 and fund capital expenditures of $88,127,000.

In August 2000, the Company repurchased 15,498,000 shares of its common stock
from Ralston Purina Company at market rates.  To finance the purchase of these
shares, which totaled approximately $244,000,000, as well as repay all its
outstanding senior notes, the Company entered into a new unsecured
$610,000,000 364-day bank term loan and amended its existing revolving credit
agreement.  Both the 364-day bank term loan, with $565,000,000 outstanding at
June 2, 2001, and the Company's revolving credit facility, with $20,000,000
outstanding at June 2, 2001, were refinanced subsequent to year end, on
July 19, 2001.  On that date, the Company entered into a new $800,000,000
secured senior credit agreement which includes a $375,000,000 five-year term
loan, a $125,000,000 six-year term loan and a $300,000,000 revolving credit
facility with a five-year maturity (of which $55,000,000 was borrowed at
closing).  The term loans require quarterly debt repayments, including
$29,063,000 repayable in fiscal 2002, with variable interest rates from 1.25%
to 2.75% over the London Interbank Offered Rate based upon the Company's
current debt rating.  In July 2001, the Company entered into interest
rate swap agreements to offset the variable rate characteristic of a portion
of these new borrowings. Based upon the current debt rating of the Company,
the interest rate swap agreements result in fixed interest rates on
$400,000,000 from 5.74% to 6.81% with termination dates ranging from July 2002
to July 2004.

The debt outstanding at June 2, 2001 has been classified in the Company's
consolidated financial statements in accordance with the terms of this
refinancing.

For fiscal 2002, the Company anticipates cash needs of approximately
$118,163,000, consisting of $75,000,000 of planned capital expenditures,
$29,063,000 of required debt repayments and $14,100,000 of common stock
dividends.  The Company expects these cash needs to be funded by ongoing
operations.  In addition, the Company continues to evaluate its investment
alternatives including acquisition opportunities and the repurchase of common
shares under its stock repurchase program.  At June 2, 2001, approximately
7,500,000 shares were available to be repurchased under the program.
<PAGE>

LEGAL MATTERS

In July 2000, a jury in California awarded compensatory damages totaling
approximately $10,800,000 against the Company and in favor of 18 plaintiffs
who alleged various forms of racial discrimination at the Company's San
Francisco bakery.  The trial court subsequently reduced these compensatory
damages to approximately $5,800,000.  In August 2000, the jury also awarded
punitive damages totaling approximately $121,000,000.  During October 2000,
the trial court further reduced the compensatory damages to $3,000,000 and
the punitive award to $24,300,000.  In February 2001, the trial court also
awarded $2,000,000 in attorneys' fees to the plaintiffs.  The Company is
actively appealing all of the judgments awarded to the plaintiffs in the
case, asking for either a new trial or a reduction or elimination of the
damage awards, while the plaintiffs have cross-appealed the trial court's
reductions of damage awards.  Based upon the opinion of outside counsel,
although the Company feels its appeals present strong arguments, no
substantially certain outcome exists and it is not possible to estimate the
amount of a probable loss, if any, to the Company at this time.  The Company
believes it has adequate reserves for the compensatory damages and legal fees
awarded.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 1 to the Company's consolidated financial statements for discussions
regarding new accounting pronouncements relating to derivative instruments
and hedging activities, sales incentives, shipping and handling costs,
consideration paid to a reseller of a vendor's products, business combinations
and goodwill and other intangible assets.

FORWARD-LOOKING STATEMENTS

The Company or its representatives may from time-to-time provide information,
in either written or oral form, which contains forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995.  In receiving
and reviewing such information, it should be kept in mind that forward-looking
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those discussed or projected.
Factors which create these risks and uncertainties can be either internal to
the Company or related to general external market conditions.

                             -15-
<PAGE>

                         INTERSTATE BAKERIES CORPORATION
                            CONSOLIDATED BALANCE SHEET
                                                       (In Thousands)
                                                  June 2,           June 3,
                                                   2001              2000
                                                -----------       -----------
Assets
  Current assets:
    Accounts receivable, less allowance for
     doubtful accounts of $4,069,000
     ($4,638,000 in 2000)                       $  197,832        $  204,660
    Inventories                                     76,208            78,840
    Other current assets                            62,885            57,647
                                                ----------        ----------
      Total current assets                         336,925           341,147
                                                ----------        ----------
  Property and equipment:
    Land and buildings                             418,928           397,923
    Machinery and equipment                      1,038,323           989,704
                                                ----------        ----------
                                                 1,457,251         1,387,627
    Less accumulated depreciation                 (582,941)         (501,549)
                                                ----------        ----------
      Net property and equipment                   874,310           886,078
                                                ----------        ----------
  Intangibles                                      412,261           424,700
                                                ----------        ----------
                                                $1,623,496        $1,651,925
                                                ==========        ==========
<PAGE>

Liabilities and Stockholders' Equity
  Current liabilities:
    Long-term debt payable within one year      $   29,063        $   29,000
    Accounts payable                               123,872           123,461
    Accrued expenses                               194,473           177,996
                                                ----------        ----------
      Total current liabilities                    347,408           330,457
                                                ----------        ----------
  Long-term debt                                   555,937           385,000
  Other liabilities                                184,854           212,981
  Deferred income taxes                            142,492           131,810
                                                ----------        ----------
      Total long-term liabilities                  883,283           729,791
                                                ----------        ----------
  Stockholders' equity:
    Preferred stock, par value $.01 per share;
     authorized - 1,000,000 shares; issued - none        -                 -
    Common stock, par value $.01 per share;
     authorized - 120,000,000 shares;
     issued - 79,851,000 shares
     (79,837,000 in 2000)                              799               798
    Additional paid-in capital                     551,963           551,819
    Retained earnings                              373,087           327,151
    Treasury stock, at cost - 29,495,000 shares
     (13,948,000 in 2000)                         (533,044)         (288,091)
                                                ----------        ----------
      Total stockholders' equity                   392,805           591,677
                                                ----------        ----------
                                                $1,623,496        $1,651,925
                                                ==========        ==========
                    See accompanying notes.

                             -16-
<PAGE>

                          INTERSTATE BAKERIES CORPORATION
                          CONSOLIDATED STATEMENT OF INCOME


                                      (In Thousands, Except Per Share Data)
                                      52 Weeks       53 Weeks      52 Weeks
                                       Ended          Ended         Ended
                                       June 2,        June 3,       May 29,
                                        2001           2000          1999
                                     ----------     ----------    ----------
Net sales                            $3,496,482     $3,522,929    $3,459,377
                                     ----------     ----------    ----------
Cost of products sold                 1,652,518      1,672,168     1,635,383
Selling, delivery and
 administrative expenses              1,585,962      1,568,759     1,489,472
Depreciation and amortization           110,899        111,604       110,045
                                     ----------     ----------    ----------
                                      3,349,379      3,352,531     3,234,900
                                     ----------     ----------    ----------
Operating income                        147,103        170,398       224,477
                                     ----------     ----------    ----------
Other income                               (518)          (431)         (484)
Interest expense                         47,086         27,809        23,113
                                     ----------     ----------    ----------
                                         46,568         27,378        22,629
                                     ----------     ----------    ----------
Income before income taxes              100,535        143,020       201,848
Provision for income taxes               39,410         53,632        75,693
                                     ----------     ----------    ----------

Net income                           $   61,125     $   89,388    $  126,155
                                     ==========     ==========    ==========

Earnings per share:
  Basic                              $     1.13     $     1.31    $     1.76
                                     ==========     ==========    ==========
  Diluted                            $     1.13     $     1.31    $     1.74
                                     ==========     ==========    ==========

                    See accompanying notes.

                             -17-
<PAGE>

                    INTERSTATE BAKERIES CORPORATION
                  CONSOLIDATED STATEMENT OF CASH FLOWS

                                                    (In Thousands)
                                            52 Weeks    53 Weeks    52 Weeks
                                              Ended       Ended       Ended
                                             June 2,     June 3,     May 29,
                                              2001        2000        1999
                                            --------    --------    --------
Cash flows from operating activities:
  Net income                                $ 61,125    $ 89,388    $126,155
  Depreciation and amortization              110,899     111,604     110,045
  Other                                      (11,006)    (15,416)     (4,270)
  Change in operating assets
   and liabilities:
    Accounts receivable                        6,828      13,596     (10,813)
    Inventories                                2,632     (12,156)      2,860
    Other current assets                      (5,238)      8,271       3,863
    Accounts payable and accrued expenses     16,972     (28,596)    (37,805)
                                            --------    --------    --------
      Cash from operating activities         182,212     166,691     190,035
                                            --------    --------    --------

Cash flows from investing activities:
  Acquisitions                                     -      (3,259)   (106,180)
  Additions to property and equipment        (88,127)    (93,092)   (108,029)
  Sale of assets                               2,791      18,614       7,616
  Other                                         (336)     (6,667)       (556)
                                            --------    --------    --------
      Cash from investing activities         (85,672)    (84,404)   (207,149)
                                            --------    --------    --------
Cash flows from financing activities:
  Reduction of long-term debt               (394,000)    (25,000)    (92,000)
  Reduction of notes payable                 (45,000)          -           -
  Addition to long-term debt                       -      45,000     200,000
  Addition to notes payable                  610,000           -           -
  Common stock dividends paid                (15,189)    (19,044)    (20,066)
  Stock option exercise proceeds                 101       1,968       7,232
  Acquisition of treasury stock             (244,953)    (85,211)    (77,167)
  Other                                       (7,499)          -        (885)
                                            --------    --------    --------
      Cash from financing activities         (96,540)    (82,287)     17,114
                                            --------    --------    --------
Change in cash and cash equivalents                -           -           -

Cash and cash equivalents:
  Beginning of period                              -           -           -
                                            --------    --------    --------
  End of period                             $      -    $      -    $      -
                                            ========    ========    ========
Cash payments made:
  Interest                                  $ 46,962    $ 27,994    $ 24,632
  Income taxes                                23,368      46,427      58,616

                    See accompanying notes.

                             -18-
<PAGE>

                                  INTERSTATE BAKERIES CORPORATION
                           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                   (In Thousands)
                               Common
                            Stock Issued                                  Treasury Stock
                           ---------------                              ------------------
                           Number             Additional                Number
                             of       Par      Paid-in      Retained      of
                           Shares    Value     Capital      Earnings    Shares    Cost
                           ------    -----    ----------    --------    ------  ---------

                        <c>        <c>      <c>          <c>        <c>      <c>
Balance May 30, 1998       79,126     $791     $539,359     $150,718    (6,382) $(125,713)
Net income                      -        -            -      126,155         -          -
Stock options exercised
 and related tax benefits     504        5        9,721            -         -          -
Dividends paid -
 $.28 per share                 -        -            -      (20,066)        -          -
Treasury stock acquired         -        -            -            -    (3,030)   (77,167)
                           ------     ----     --------     --------    ------  ---------
Balance May 29, 1999       79,630      796      549,080      256,807    (9,412)  (202,880)
Net income                      -        -            -       89,388         -          -
Stock options exercised
 and related tax benefits     207        2        2,739            -         -          -
Dividends paid -
 $.28 per share                 -        -            -      (19,044)        -          -
Treasury stock acquired         -        -            -            -    (4,536)   (85,211)
                           ------     ----     --------     --------    ------  ---------
Balance June 3, 2000       79,837      798      551,819      327,151   (13,948)  (288,091)
Net income                      -        -            -       61,125         -          -
Stock options exercised
 and related tax benefits      14        1          144            -         -          -
Dividends paid -
 $.28 per share                 -        -            -      (15,189)        -          -
Treasury stock acquired         -        -            -            -   (15,547)  (244,953)
                           ------     ----     --------     --------    ------  ---------
Balance June 2, 2001       79,851     $799     $551,963     $373,087   (29,495) $(533,044)
                           ======     ====     ========     ========    ======  =========
</TABLE>
                     See accompanying notes.

                             -19-
<PAGE>

                    INTERSTATE BAKERIES CORPORATION
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Description of Business and Significant Accounting Policies

Description of business - Interstate Bakeries Corporation (the "Company") is
the largest baker and distributor of fresh bakery products in the United
States.

Fiscal year end - The Company has a 52-53 week year that ends on the Saturday
closest to the last day of May.

Principles of consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiaries.  All significant
intercompany accounts and transactions have been eliminated.

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

Inventories - Inventories are stated at the lower of cost or market.
Specific invoiced costs are used with respect to ingredients and average
costs are used for other inventory items.

The components of inventories are as follows:

                                      (In Thousands)
                                    June 2,    June 3,
                                     2001       2000
                                    -------    -------
    Ingredients and packaging       $46,846    $48,697
    Finished goods                   23,002     23,845
    Other                             6,360      6,298
                                    -------    -------
                                    $76,208    $78,840
                                    =======    =======

Property and equipment - Property and equipment are recorded at cost and
depreciated over estimated useful lives of 4 to 35 years, using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes.

Depreciation expense was $96,516,000, $97,547,000 and $97,024,000 for fiscal
2001, 2000 and 1999, respectively.  Interest cost capitalized as part of the
construction cost of capital assets was $1,331,000, $1,200,000 and $3,084,000
in fiscal 2001, 2000 and 1999, respectively.
<PAGE>

Intangibles - Included in intangibles, which are being amortized using the
straight-line method, are the following:

                                                      (In Thousands)
                                                   June 2,      June 3,
                                     Life           2001         2000
                                  -----------     --------     --------
    Licenses and patents            9 years       $  2,510     $  2,510
    Trademarks and tradenames     25-40 years      204,425      204,425
    Excess of purchase cost over
     net assets acquired           40 years        314,699      314,699
    Deferred financing cost         Term of
     and other-net                 agreements       14,393       13,521
                                                  --------     --------
                                                   536,027      535,155
    Accumulated amortization                      (123,766)    (110,455)
                                                  --------     --------
                                                  $412,261     $424,700
                                                  ========     ========

Long-lived assets - Impairment losses are recognized when information
indicates the carrying amount of long-lived assets, identifiable intangibles
and goodwill related to those assets will not be recovered through future
operations or disposal based upon a review of expected undiscounted cash
flows.  The Company currently expects the carrying amounts to be fully
recoverable.

Financial instruments - The Company uses financial instruments, principally
commodity derivatives and interest rate swap agreements, to manage commodity
prices and interest rate risk.  All financial instruments are used solely for
hedging purposes and are not issued or held for speculative reasons.

The Company utilizes commodity hedging derivatives, generally futures and
options on wheat, corn and soybean oil, to reduce its exposure to commodity
price movements for future raw material needs.  Gains or losses related to
these hedging transactions are deferred and recorded to cost of products sold
as the inventory produced from the related raw materials is sold.

The Company has from time to time entered into interest rate swap agreements
with major banks and institutional lenders to manage the balance of variable
versus fixed-rate debt based upon current and anticipated future market
conditions.  The differential to be paid or received is recognized over the
term of the swap agreements as a component of interest expense.

The Company is exposed to credit loss in the event of nonperformance by
counterparties on commodity derivatives and interest rate swap agreements.
This credit loss is limited to the cost of replacing these contracts at
current market rates.  Management believes that the probability of such loss
is remote.

                             -20-
<PAGE>

Revenue recognition - The Company recognizes sales upon delivery of its
products to the customer.

Advertising and promotion costs - Advertising and promotion costs, through
both national and regional media, are expensed in the year in which the costs
are incurred.

Earnings per share - Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding.
Diluted earnings per share include the effect of all potential dilutive
common shares, primarily stock options outstanding under the Company's stock
compensation plan.  Following is a reconciliation between basic and diluted
weighted average shares outstanding used in the Company's earnings per share
computations:
                                         (In Thousands)
                               52 Weeks     53 Weeks     52 Weeks
                                 Ended        Ended        Ended
                                June 2,      June 3,      May 29,
                                 2001         2000         1999
                               --------     --------     --------
Basic weighted average
 common shares outstanding      54,110       68,156       71,662

Effect of dilutive stock
 compensation                      186          200          821
                                ------       ------       ------
Diluted weighted average
 common shares outstanding      54,296       68,356       72,483
                                ======       ======       ======

Diluted weighted average common shares outstanding exclude options on common
stock of 5,506,000, 4,263,000 and 3,330,000 for fiscal 2001, 2000 and 1999,
respectively, because their effect would have been antidilutive.

Statement of cash flows - For purposes of the statement of cash flows, the
Company considers all investments purchased with an original maturity of
three months or less to be cash equivalents.

Reclassifications - Certain reclassifications have been made to the
Company's fiscal 2000 and 1999 consolidated financial statements to conform
to the fiscal 2001 presentation.

New accounting pronouncements - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes new accounting and reporting standards for
derivative instruments and hedging activities.  In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," and
in June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - An Amendment of FASB Statement
No. 133."
<PAGE>

The new rules, which will be adopted by the Company in the first quarter of
fiscal 2002, require that all derivative instruments be recognized as assets
or liabilities on the consolidated balance sheet at fair value.  Changes in
the fair value of derivatives are to be recorded each period in earnings or
other comprehensive income ("OCI"), depending on whether the derivative is
designated and is effective as a hedged transaction, and on the type of
hedging transaction.  Changes in the fair value of derivative instruments
recorded to OCI are reclassified to earnings in the period affected by the
underlying hedged item.  Any portion of the change in fair value of a
derivative instrument determined to be ineffective under the rules is
recognized in current earnings.  The transition adjustment to be recognized
by the Company in fiscal 2002 for the adoption of these new rules is not
material to the Company's financial position or net income.

Based upon the Company's review of its commodity hedging transactions, these
transactions will qualify for cash flow hedge accounting treatment under the
new rules. While the Company believes that the implementation of these
statements will not affect the overall economic hedging strategy of the
Company, the new pronouncement may affect the timing of when gains and losses
on hedging transactions are reported in net income of the Company.

In May 2000, the Emerging Issues Task Force ("EITF") of the FASB announced
that it had reached a consensus on Issue No. 00-14, "Accounting for Certain
Sales Incentives."  Issue No. 00-14 establishes requirements for the
recognition and presentation in financial statements of sales incentives
such as discounts, coupons and rebates. The consensus will be effective for
the Company as of the first quarter of fiscal 2002.  Based upon the
Company's review, it will have no impact on the Company's financial position
or net income but will require the Company to reclassify certain amounts,
which are not material, between net sales and selling, delivery and
administrative expenses for all periods presented.

In September 2000, the EITF reached final consensus on Issue No. 00-10,
"Accounting for Shipping and Handling Revenues and Costs."  The consensus
establishes requirements for the classification and disclosure of shipping
and handling costs incurred and those costs billed.  Based upon a review of
the consensus, the Company believes that no reclassifications to its
consolidated statement of income are required.  The Company includes

                             -21-
<PAGE>

shipping and handling costs in selling, delivery and administrative expenses
and such costs amounted to approximately $776,797,000, $760,299,000 and
$722,279,000 for fiscal 2001, 2000 and 1999, respectively.

In April 2001, the EITF reached consensus on Issue No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products."  This issue addresses the recognition, measurement and
classification of certain costs incurred by a vendor to benefit the reseller
of the vendor's products such as slotting fees, cooperative advertising
programs and reimbursement for lowered promotional prices.  This consensus
will require the Company to reclassify certain costs between net sales and
selling, delivery and administrative expenses and will be adopted by the
Company in the fourth quarter of fiscal 2002.  The Company has not yet
completed its analysis of Issue No. 00-25 but does not expect the
implementation to impact net income of the Company.

In June 2001, the FASB approved the issuance of SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires all business combinations to be accounted for using
the purchase method and provides guidance regarding the recognition of
intangibles separate from goodwill in a purchase transaction.  SFAS No. 142,
which can be early adopted by the Company during the first quarter of fiscal
2002, eliminates the amortization of purchased goodwill and other intangibles
with indefinite useful lives and provides guidance on the required testing of
these assets for impairment.  This impairment testing must be done at least
annually or more frequently if an event occurs which indicates the
intangible may be impaired.

The Company has not completed its evaluation of the adoption of SFAS Nos. 141
and 142 but expects a favorable impact to net income due to the elimination
of goodwill amortization.  The Company plans to early adopt SFAS No. 142
during the first quarter of fiscal 2002.

2.  Acquisitions

During fiscal 1999, the Company acquired the assets of the Drake baking
operation in Wayne, New Jersey ("Drake's").  Drake's employed over 800 people,
distributed cake product throughout the northeastern United States and had
annual net sales of approximately $115 million.

Also in fiscal 1999, the Company acquired the My Bread Baking Co. ("My Bread")
operation in New Bedford, Massachusetts, in exchange for its Grand Junction,
Colorado, bakery and an additional cash payment.  My Bread had annual net
sales of approximately $37 million and employed over 400 people.

These acquisitions were accounted for as purchases.  In addition, the My Bread
exchange included a noncash portion not reflected in investing activities on
the statement of cash flows for fiscal 1999 amounting to $14,365,000.

The proforma impact as if these acquisitions had taken place at the beginning
of the fiscal year prior to acquisition is not significant.
<PAGE>

3.  Debt

On July 19, 2001, subsequent to year end, the Company entered into a new
$800,000,000 senior credit facilities agreement with a bank and institutional
lender group, using the proceeds to repay all outstanding borrowings under
the Company's 364-day term loan and revolving credit facility.  The new
credit facilities include (1) a five-year term loan in the amount of
$375,000,000, repayable in quarterly installments of 2.50% in year one and
two, 3.75% in year three and four and 12.50% in the fifth year; (2) a
six-year term loan in the amount of $125,000,000, repayable at .25% per
quarter in the first five years and 23.75% for each quarter in the sixth year;
and (3) a five-year $300,000,000 revolving credit facility, maturing in
July 2006, which allows up to $150,000,000 for letters of credit.
Maturities on these facilities aggregate $29,063,000 in fiscal 2002,
$38,750,000 in fiscal 2003, $52,813,000 in fiscal 2004, $57,500,000 in fiscal
2005 and $155,938,000 in fiscal 2006.  The facilities are secured by all
accounts receivable and a majority of owned real property, intellectual
property and equipment.  The outstanding borrowings bear interest at variable
rates generally equal to the London Interbank Offered Rate ("LIBOR") plus
from 1.25% to 2.50% (1.75% at closing) on the $375,000,000 term loan and the
revolving credit facility and LIBOR plus from 2.25% to 2.75% (2.25% at
closing) on the $125,000,000 term loan, depending upon the Company's debt
rating.  The Company also pays a fee of between .38% and .50% (.38% at
closing) on the unused portion of the revolving credit facility.

In July 2001, the Company also entered into interest rate swap agreements
to offset the variable rate characteristic of a portion of these new
borrowings. Based upon the current debt rating of the Company, the interest
rate swap agreements result in fixed interest rates on $400,000,000 from
5.74% to 6.81% with termination dates ranging from July 2002 to July 2004.
Including the effect of these swap agreements, the weighted average interest
rate on the $555,000,000 borrowed at the date of the debt closing was 6.17%.
The Company believes these swap agreements qualify for cash flow hedge
accounting treatment and should be highly effective as defined by SFAS
Nos. 133, 137 and 138 (see Note 1 regarding discussion of these statements).

The senior credit facilities agreement contains covenants which, among other
matters (1) limit the Company's ability to incur indebtedness, merge,
consolidate and acquire, dispose of or incur liens on assets; (2) require

                             -22-
<PAGE>

the Company to satisfy certain ratios related to net worth, interest coverage
and leverage; and (3) limit aggregate payments of cash dividends on common
stock and common stock repurchases to a total of $100,000,000 plus 50% of
consolidated net income after fiscal 2001.

At June 2, 2001 and June 3, 2000 the Company had the following debt
outstanding:

                                      (In Thousands)
                                    June 2,    June 3,
                                     2001       2000
                                   --------   --------
Bank borrowings -
  Notes payable                    $565,000   $      -
  Revolving credit loans             20,000    185,000
6.43% Senior notes                        -    200,000
10.00% Senior notes                       -     29,000
                                   --------   --------
                                   $585,000   $414,000
                                   ========   ========

The debt outstanding at June 2, 2001 has been classified in the consolidated
financial statements in accordance with the terms of the July 19, 2001
refinancing.

The weighted average interest rate on the outstanding bank borrowings was
5.61% and 6.51% at June 2, 2001 and June 3, 2000, respectively.  In addition,
the Company believes, based upon applicable terms, that the carrying value of
all debt as of June 2, 2001 and June 3, 2000 approximates fair value, except
the senior notes which had a fair value of $221,361,000 as of June 3, 2000.
<PAGE>

4.  Commitments and Contingencies

Future minimum rental commitments for all noncancelable operating leases,
exclusive of taxes and insurance, are as follows:

               Fiscal Years Ending      (In Thousands)
               -------------------      --------------
                      2002                 $ 69,514
                      2003                   55,198
                      2004                   40,335
                      2005                   27,624
                      2006                   17,185
                   Thereafter                23,403
                                           --------
                                           $233,259
                                           ========

Net rental expense under operating leases was $79,152,000, $74,475,000 and
$67,568,000 for fiscal 2001, 2000 and 1999, respectively.  The majority
of the operating leases contain renewal options for varying periods.
Certain leases include purchase options during or at the end of the lease term.

In July 2000, a jury in California awarded compensatory damages totaling
approximately $10,800,000 against the Company and in favor of 18 plaintiffs
who alleged various forms of racial discrimination at the Company's San
Francisco bakery.  The trial court subsequently reduced these compensatory
damages to approximately $5,800,000.  In August 2000, the jury also awarded
punitive damages totaling approximately $121,000,000.  During October 2000,
the trial court further reduced the compensatory damages to $3,000,000 and
the punitive award to $24,300,000.  In February 2001, the trial court also
awarded $2,000,000 in attorneys' fees to the plaintiffs.  The Company is
actively appealing all of the judgments awarded to the plaintiffs in the
case, asking for either a new trial or a reduction or elimination of the
damage awards, while the plaintiffs have cross-appealed the trial court's
reductions of damage awards.  Based upon the opinion of outside counsel,
although the Company feels its appeal presents strong arguments, no
substantially certain outcome exists and it is not possible to estimate the
amount of a probable loss, if any, to the Company at this time.  The Company
believes it has adequate reserves for the compensatory damages and legal fees
awarded.

The Company is subject to various other routine legal proceedings, environmental
actions and matters in the ordinary course of business, some of which may be
covered in whole or in part by insurance.  In management's opinion, none of
these other matters will have a material adverse effect on the Company's
financial position, but could be material to net income or cash flows for a
particular quarter or annual period.
<PAGE>

5.  Income Taxes

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

                              52 Weeks    53 Weeks    52 Weeks
                                Ended       Ended       Ended
                               June 2,     June 3,     May 29,
                                2001        2000        1999
                              --------    --------    --------
Statutory federal tax           35.0%       35.0%       35.0%
State income tax                 2.1         2.6         2.2
Intangibles amortization         2.4         1.6         1.2
Other                           (0.3)       (1.7)       (0.9)
                                ----        ----        ----
                                39.2%       37.5%       37.5%
                                ====        ====        ====

                             -23-
<PAGE>

The components of the provision for income taxes are as follows:

                                       (In Thousands)
                              52 Weeks    53 Weeks    52 Weeks
                                Ended       Ended       Ended
                               June 2,     June 3,     May 29,
                                2001        2000        1999
                              --------    --------    --------
Current:
  Federal                     $31,242     $41,283     $62,227
  State                         2,609       3,814       5,829
                              -------     -------     -------
                               33,851      45,097      68,056
                              -------     -------     -------
Deferred:
  Federal                       4,527       5,963       6,702
  State                         1,032       2,572         935
                              -------     -------     -------
                                5,559       8,535       7,637
                              -------     -------     -------
                              $39,410     $53,632     $75,693
                              =======     =======     =======


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

                                        (In Thousands)
                                      June 2,       June 3,
                                       2001          2000
                                     --------      --------
Deferred tax assets, net:
  Payroll and benefits accruals      $ 21,727      $ 19,178
  Self-insurance reserves              19,293        17,216
  Other                                 9,337         8,840
  Valuation allowance                       -             -
                                     --------      --------
                                     $ 50,357      $ 45,234
                                     ========      ========
Deferred tax liabilities, net:
  Property and equipment             $143,538      $141,330
  Intangibles                          53,492        53,569
  Payroll and benefits accruals       (36,936)      (38,319)
  Self-insurance reserves             (20,711)      (25,502)
  Environmental accruals               (3,619)       (7,129)
  Other                                 6,728         7,861
                                     --------      --------
                                     $142,492      $131,810
                                     ========      ========
<PAGE>

6.  Employee Benefit Plans

The 1991 Employee Stock Purchase Plan, which is noncompensatory, allows all
eligible employees to purchase common stock of the Company.  The common stock
can be either issued by the Company at market prices or purchased on the open
market.  At June 2, 2001, 232,000 shares were authorized but not issued under
this plan.

The Company sponsors a defined contribution retirement plan for eligible
employees not covered by union plans.  Contributions are based upon a
percentage of annual compensation plus a percentage of voluntary employee
contributions.  Retirement expense related to this plan was $16,176,000,
$16,355,000 and $16,268,000 for fiscal 2001, 2000 and 1999, respectively.

The Company participates in numerous negotiated multi-employer pension plans
covering employees participating by reason of union contracts.  Expense for
these plans was $118,333,000, $112,740,000 and $107,220,000 for fiscal 2001,
2000 and 1999, respectively.

The Company also maintains a defined benefit pension plan to benefit certain
union and nonunion employee groups, with participation generally resulting
from business acquisitions.


The components of the pension income for the defined benefit pension plan are
as follows:

                                                 (In Thousands)
                                       52 Weeks     53 Weeks    52 Weeks
                                         Ended        Ended       Ended
                                        June 2,      June 3,     May 29,
                                         2001         2000        1999
                                       --------     --------    --------

     Service cost                       $   697      $   957      $ 1,025
     Interest cost                        3,707        3,498        3,100
     Expected return on plan assets      (5,596)      (4,471)      (3,784)

     Amortization:
       Unrecognized prior service cost       42           50           97
       Unrecognized net gain             (1,917)        (361)        (462)
                                        -------      -------      -------
     Net pension income                 $(3,067)     $  (327)     $   (24)
                                        =======      =======      =======

                             -24-
<PAGE>

The aggregate changes in the Company's accumulated benefit obligation ("ABO")
and plan assets, along with actuarial assumptions used, related to the defined
benefit pension plan are as follows:

                                            (In Thousands)
                                         June 2,      June 3,
                                          2001         2000
                                        --------     --------
     ABO at beginning of year           $ 47,435     $ 50,628
     Service cost                            697          957
     Interest cost                         3,707        3,498
     Amendments                                -          (73)
     Actuarial (gain) loss                 3,588       (3,685)
     Benefits paid                        (4,012)      (3,890)
                                        --------     --------
     ABO at end of year                   51,415       47,435
                                        --------     --------
     Fair value of plan assets at
       beginning of year                  71,743       57,488
     Actual return on plan assets        (12,291)      18,010
     Contributions:
       Employer                                -           13
       Employee                              110          122
     Benefits paid                        (4,012)      (3,890)
                                        --------     --------
     Fair value of plan assets at
       end of year                        55,550       71,743
                                        --------     --------
     Plan assets in excess of ABO         (4,135)     (24,308)
     Unrecognized prior service cost        (174)        (214)
     Unrecognized net gain                 3,068       26,348
                                        --------     --------
     Net ABO liability (asset) at
       end of year                      $ (1,241)    $  1,826
                                        ========     ========
     Weighted average actuarial
       assumptions:
         Discount rate                      7.5%         8.0%
         Expected return on plan assets     8.0          8.0
         Rate of compensation increase      4.5          4.5

In addition to providing retirement pension benefits, the Company provides
health care benefits for eligible retired employees.  Under the Company's
plans, all nonunion employees, with 10 years of service after age 50, are
eligible for retiree health care coverage between ages 60 and 65.
Grandfathered nonunion employees and certain union employees who have
bargained into the Company-sponsored health care plans are generally eligible
after age 55, with 10 years of service, and have only supplemental benefits
after Medicare eligibility is reached.  Certain of the plans require
contributions by retirees and spouses.
<PAGE>

The components of the net postretirement benefit expense are as follows:

                                                 (In Thousands)
                                       52 Weeks     53 Weeks     52 Weeks
                                         Ended        Ended        Ended
                                        June 2,      June 3,      May 29,
                                         2001         2000         1999
                                       -------       -------      -------
     Service cost                      $ 2,348       $ 2,343      $2,089
     Interest cost                       8,753         8,439       6,675
     Amortization:
       Unrecognized prior service cost     322           353         320
       Unrecognized net loss               334           213           -
                                       -------       -------      ------
     Net postretirement benefit
      expense                          $11,757       $11,348      $9,084
                                       =======       =======      ======

The aggregate change in the Company's accumulated postretirement benefit
obligation ("APBO"), which is unfunded, is as follows:

                                            (In Thousands)
                                         June 2,      June 3,
                                          2001         2000
                                        --------     --------
     APBO at beginning of year          $109,795     $ 98,056
     Service cost                          2,348        2,343
     Interest cost                         8,753        8,439
     Participant contributions             1,846        1,838
     Amendments                               47          197
     Actuarial loss                        2,445        9,754
     Acquisitions                              -          463
     Benefits paid                       (12,866)     (11,295)
                                        --------     --------
     APBO at end of year                 112,368      109,795
     Unrecognized prior service cost      (2,043)      (2,317)
     Unrecognized net loss               (15,897)     (13,787)
                                        --------     --------
     Accrued postretirement benefit       94,428       93,691
     Less current portion                (11,500)     (11,000)
                                        --------     --------
     APBO included in other
      liabilities                       $ 82,928     $ 82,691
                                        ========     ========

In determining the APBO, the weighted average discount rate was assumed to be
8.0% for fiscal 2001 and 2000 and 7.0% for fiscal 1999.  The assumed health
care cost trend rate for fiscal 2001 was 10.0%, declining gradually to 5.5%
over the next 5 years. A 1.0% increase in this assumed health care cost trend
rate would increase the service and interest cost components of the net
postretirement benefit expense for fiscal 2001 by approximately $1,112,000,
as well as increase the June 2, 2001 APBO by approximately $9,113,000.

                             -25-
<PAGE>

Conversely, a 1.0% decrease in this rate would decrease the fiscal 2001
expense by approximately $981,000 and the June 2, 2001 APBO by approximately
$8,079,000.

The Company also participates in a number of multi-employer plans which
provide postretirement health care benefits to substantially all union
employees not covered by Company-administered plans.  Amounts reflected as
benefit cost and contributed to such plans, including amounts related to
health care benefits for active employees, totaled $171,510,000, $162,990,000
and $154,670,000 in fiscal 2001, 2000 and 1999, respectively.

7.  Stock-Based Compensation

The 1996 Stock Incentive Plan (the "Plan") allows the Company to grant to
employees and directors various stock awards, including stock options, which
are granted at prices not less than the fair market value at the date of
grant, and restricted stock.  A maximum of 13,683,000 shares was approved to
be issued under the Plan.  On June 2, 2001, shares totaling 1,481,000 were
authorized but not awarded under the Plan.

The stock options may be granted over a period not to exceed 10 years and
generally vest from one to three years from the date of grant.  The changes
in outstanding options are as follows:

                              (In Thousands)     Weighted Average
                                  Shares          Exercise Price
                               Under Option          Per Share
                               ------------      ----------------
      Balance May 30, 1998         5,261              $24.78
      Issued                       1,030               26.60
      Surrendered                   (184)              29.81
      Exercised                     (504)              14.36
                                  ------              ------
      Balance May 29, 1999         5,603               25.89
      Issued                       2,129               18.65
      Surrendered                   (308)              28.56
      Exercised                     (207)               9.50
                                  ------              ------
      Balance June 3, 2000         7,217               24.12
      Issued                       1,348               14.16
      Surrendered                   (488)              26.67
      Exercised                      (14)               7.03
                                  ------              ------
      Balance June 2, 2001         8,063              $22.33
                                  ======              ======

<PAGE>

Stock options outstanding and exercisable on June 2, 2001 are as follows:

                                                              Weighted Average
                          (In Thousands)   Weighted Average       Remaining
Range of Exercise             Shares        Exercise Price    Contractual Life
Prices Per Share           Under Option        Per Share          In Years
-----------------          ------------    ----------------   ----------------
Outstanding:
 $ 6.25 - $14.50               2,700            $13.54              8.8
  15.13 -  27.06               3,241             22.07              6.7
  33.28 -  33.91               2,122             33.90              6.3
 ---------------               -----            ------              ---
 $ 6.25 - $33.91               8,063            $22.33              7.3
 ---------------               -----            ------              ---

Exercisable:
 $ 6.25 - $14.50                 833            $12.00
  15.13 -  27.06               2,357             21.41
  33.28 -  33.91               2,122             33.90
 ---------------               -----            ------
 $ 6.25 - $33.91               5,312            $24.93
 ---------------               -----            ------

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB25"), and related interpretations in
accounting for the Plan, and, therefore, no compensation expense has been
recognized for stock options issued under the Plan.  For companies electing
to continue the use of APB25, SFAS No. 123, "Accounting for Stock-Based
Compensation," requires proforma disclosures determined through the use of
an option-pricing model as if the provisions of SFAS No. 123 had been adopted.

The weighted average fair value at date of grant for options granted during
fiscal 2001, 2000 and 1999 was $5.49, $7.08 and $8.80 per share, respectively.
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:

                                    2001       2000       1999
                                    ----       ----       ----
Expected dividend yield              1.8%       1.9%       1.3%
Expected volatility                 41.7       36.8       28.5
Risk-free interest rate              4.6        6.3        5.4
Expected term in years               4.0        4.0        4.0

                             -26-
<PAGE>

If the Company had adopted the provisions of SFAS No. 123, the impact would
have been to reduce reported net income and earnings per share as follows:


                             52 Weeks       53 Weeks       52 Weeks
                               Ended          Ended          Ended
                              June 2,        June 3,        May 29,
                               2001           2000           1999
                             --------       --------       --------
Net income (in thousands)     $ 7,674        $12,804        $10,621
Earnings per share:
  Basic                           .09            .12            .15
  Diluted                         .09            .12            .15

During fiscal 1998, the Company also awarded 200,000 shares of restricted
stock under the Plan, with a weighted average fair value at the date of
grant of $33.91 per share.  These restricted shares vested ratably after one,
two and three years of continued employment, and are currently fully vested.
Compensation expense related to this award was $696,000, $2,260,000 and
$2,260,000 for fiscal 2001, 2000 and 1999, respectively.

On June 2, 2001, 9,976,000 total shares of common stock were reserved for
issuance under various employee benefit plans.

8.  Accrued Expenses and Other Liabilities

Included in accrued expenses are the following:

                                               (In Thousands)
                                             June 2,     June 3,
                                              2001        2000
                                            --------    --------
     Payroll, vacation and other
      compensation                          $59,093     $56,321
     Self-insurance reserves                 54,622      48,708
     Pension and welfare                     36,014      34,638
     Taxes other than income                 20,780      19,967


Included in other liabilities are the following:

                                               (In Thousands)
                                             June 2,     June 3,
                                              2001        2000
                                            --------    --------

     Self-insurance reserves                $56,917     $70,374
     Accumulated postretirement benefit
       obligation                            82,928      82,691
<PAGE>

9.  Stockholder Rights Plan

In May 2000, the Company's board of directors adopted a stockholder rights
plan which provided that a dividend of one preferred stock purchase right
was declared for each share of the Company's common stock outstanding and any
common shares issued thereafter.  The rights are not exercisable until 10
business days following either 1) a public announcement that a person or group
acquired 15% or more of the Company's common stock or 2) the announcement of a
tender offer which could result in a person or group acquiring 15% or more of
the Company's common stock.

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

The Board may redeem the rights at any time before they become exercisable
for $.001 per right and, if not exercised or redeemed, the rights will expire
on May 25, 2010.

                             -27-
<PAGE>

10. Quarterly Financial Information (Unaudited)

Summarized quarterly financial information for the fiscal years ended
June 2, 2001 and June 3, 2000 is as follows (each quarter represents a period
of twelve weeks except the third quarters, which cover sixteen weeks, and the
fourth quarter of fiscal 2000 which covers thirteen weeks):

                                (In Thousands, Except Per Share Data)
                              First       Second        Third       Fourth
                             --------    --------    ----------    --------
2001
  Net sales                  $819,694    $817,813    $1,038,969    $820,006
  Cost of products sold       384,220     391,859       492,207     384,232
  Operating income             50,106      32,676        28,989      35,332
  Net income                   26,885      11,386         7,747      15,107
  Earnings per share:
    Basic                         .41         .22           .15         .30
    Diluted                       .41         .22           .15         .30

2000
  Net sales                  $809,473    $810,600    $1,035,609    $867,247
  Cost of products sold       380,714     378,963       494,886     417,605
  Operating income             58,799      50,143        41,336      20,120
  Net income                   33,226      27,938        20,417       7,807
  Earnings per share:
    Basic                         .47         .40           .30         .12
    Diluted                       .47         .40           .30         .12

The fourth quarter of fiscal 2000 includes the impact of one-time events
totaling $23,600,000 ($.22 per basic and diluted share on an after-tax basis)
related to a work stoppage that idled five Northeast bakeries, bakery
consolidation and start-up costs in the Pacific Northwest and an adjustment
to the self-insurance reserves.
<PAGE>

INDEPENDENT AUDITORS' REPORT
----------------------------

To the Board of Directors and Stockholders
Interstate Bakeries Corporation

We have audited the accompanying consolidated balance sheets of Interstate
Bakeries Corporation and its subsidiaries (the "Company") as of June 2, 2001
and June 3, 2000 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended June 2, 2001.  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 in accordance with auditing standards generally
accepted in the United States of America.  Those standards require that we
plan and perform the audits 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.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 2, 2001
and June 3, 2000, and the results of their operations and their cash flows
for each of the three fiscal years in the period ended June 2, 2001 in
conformity with accounting principles generally accepted in the United States
of America.

/s/ Deloitte & Touche LLP

Kansas City, Missouri
July 20, 2001

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